[House Report 105-148]
[From the U.S. Government Publishing Office]



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-148
_______________________________________________________________________


 
                   REVENUE RECONCILIATION ACT OF 1997

                               ----------                              

                              R E P O R T

                                 of the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                              to accompany

                               H.R. 2014

A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SUBSECTIONS (b)(2) AND 
   (d) OF SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR 
                            FISCAL YEAR 1998

                             together with

                    ADDITIONAL AND DISSENTING VIEWS




 June 24, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed



                   REVENUE RECONCILIATION ACT OF 1997



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-148
_______________________________________________________________________


                   REVENUE RECONCILIATION ACT OF 1997

                               __________

                              R E P O R T

                                 of the

                        COMMITTEE ON THE BUDGET

                        HOUSE OF REPRESENTATIVES

                              to accompany

                               H.R. 2014

A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SUBSECTIONS (b)(2) AND 
   (d) OF SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR 
                            FISCAL YEAR 1998

                             together with

                    ADDITIONAL AND DISSENTING VIEWS





 June 24, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed


                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
DAVID L. HOBSON, Ohio,               JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
JIM BUNNING, Kentucky                  Leadership Designee
LAMAR S. SMITH, Texas                ALAN B. MOLLOHAN, West Virginia
DAN MILLER, Florida                  JERRY F. COSTELLO, Illinois
BOB FRANKS, New Jersey               PATSY T. MINK, Hawaii
NICK SMITH, Michigan                 EARL POMEROY, North Dakota
BOB INGLIS, South Carolina           LYNN C. WOOLSEY, California
SUSAN MOLINARI, New York             LUCILLE ROYBAL-ALLARD, California
JIM NUSSLE, Iowa                     LYNN N. RIVERS, Michigan
PETER HOEKSTRA, Michigan             LLOYD DOGGETT, Texas
JOHN SHADEGG, Arizona                BENNIE G. THOMPSON, Mississippi
GEORGE P. RADANOVICH, California     BENJAMIN L. CARDIN, Maryland
CHARLES F. BASS, New Hampshire       DAVID MINGE, Minnesota
MARK W. NEUMANN, Wisconsin           SCOTTY BAESLER, Kentucky
MIKE PARKER, Mississippi             KEN BENTSEN, Texas
BOB EHRLICH, Maryland                JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             BRAD SHERMAN, California
VAN HILLEARY, Tennessee              ROBERT A. WEYGAND, Rhode Island
KAY GRANGER, Texas                   EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire
JOSEPH PITTS, Pennsylvania

                           Professional Staff

                     Richard E. May, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Legislative Language.............................................     1
Report Language:
    I. Introduction..............................................   287
    II. Explanation of the Bill..................................   309
    III. Votes of the Committee..................................   670
    IV. Budget Effects of the Bill...............................   678
    V. Other Matters to be Discussed Under the Rules of the House   700
    Miscellaneous House Report Requirements......................   703
    Additional and Dissenting Views..............................   731
                                                                       



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-148
_______________________________________________________________________



PROVIDING FOR RECONCILIATION PURSUANT TO SUBSECTIONS (B)(2) AND (D) OF 
SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 
                                  1998

_______________________________________________________________________


 June 24, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Kasich, from the Committee on the Budget, submitted the following

                              R E P O R T

                             together with

                    ADDITIONAL AND DISSENTING VIEWS

                        [To accompany H.R. 2014]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Budget, to whom reconciliation 
recommendations were submitted pursuant to subsections (b)(2) 
and (d) of section 105 of House Concurrent Resolution 84, the 
concurrent resolution on the budget for fiscal year 1998, 
having considered the same, reports favorably thereon without 
amendment and recommends that the bill do pass.

A BILL To provide for reconciliation pursuant to subsections (b)(2) and 
   (d) of section 105 of the concurrent resolution on the budget for 
                           fiscal year 1998.

    Be it enacted by the Senate and House of Representatives of 
the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Revenue 
Reconciliation Act of 1997''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act 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.
    (c) Table of Contents.--The table of contents for this Act 
is as follows:
Sec. 1. Short title; amendment of 1986 Code.

TITLE I--CHILD TAX CREDIT; TAX INCENTIVES FOR DEPENDENT CARE AND HEALTH 
                            CARE FOR CHILDREN

Sec. 101. Child tax credit.
Sec. 102. Inflation adjustment of limits and other modifications of 
          dependent care credit.

                     TITLE II--EDUCATION INCENTIVES

         Subtitle A--Tax Benefits Relating to Education Expenses

Sec. 201. Hope credit for higher education tuition and related expenses.
Sec. 202. Deduction for qualified higher education expenses.
Sec. 203. Penalty-free withdrawals from individual retirement plans for 
          higher education expenses.
Sec. 204. Expenses for education which supplements elementary and 
          secondary education.

     Subtitle B--Expanded Education Investment Savings Opportunities

Sec. 211. Eligible educational institutions permitted to maintain 
          qualified tuition programs; other modifications of qualified 
          State tuition programs.
Sec. 212. Education investment accounts.

                 Subtitle C--Other Education Initiatives

Sec. 221. Extension of exclusion for employer-provided educational 
          assistance.
Sec. 222. Increase in limitation on qualified 501(c)(3) bonds other than 
          hospital bonds.
Sec. 223. Contributions of computer technology and equipment for 
          elementary or secondary school purposes.
Sec. 224. Treatment of cancellation of certain student loans.

              TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                     Subtitle A--Retirement Savings

Sec. 301. Establishment of American Dream IRA.

                        Subtitle B--Capital Gains

                    Part I--Individual Capital Gains

Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Indexing of certain assets acquired after December 31, 2000, 
          for purposes of determining gain.
Sec. 313. Exemption from tax for gain on sale of principal residence.

                    Part II--Corporate Capital Gains

Sec. 321. Reduction of alternative capital gain tax for corporations.

                TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

Sec. 401. Adjustment of exemption amounts for taxpayers other than 
          corporations.
Sec. 402. Exemption from alternative minimum tax for small corporations.
Sec. 403. Repeal of adjustment for depreciation.
Sec. 404. Minimum tax not to apply to farmers' installment sales.

      TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS

               Subtitle A--Estate and Gift Tax Provisions

Sec. 501. Cost-of-living adjustments relating to estate and gift tax 
          provisions.
Sec. 502. 20-year installment payment where estate consists largely of 
          interest in closely held business.
Sec. 503. No interest on certain portion of estate tax extended under 
          section 6166, reduced interest on remaining portion, and no 
          deduction for such reduced interest.
Sec. 504. Extension of treatment of certain rents under section 2032A to 
          lineal descendants.
Sec. 505. Clarification of judicial review of eligibility for extension 
          of time for payment of estate tax.
Sec. 506. Gifts may not be revalued for estate tax purposes after 
          expiration of statute of limitations.
Sec. 507. Termination of throwback rules for domestic trusts.
Sec. 508. Unified credit of decedent increased by unified credit of 
          spouse used on split gift included in decedent's gross estate.
Sec. 509. Reformation of defective bequests, etc., to spouse of 
          decedent.

             Subtitle B--Generation-Skipping Tax Provisions

Sec. 511. Severing of trusts holding property having an inclusion ratio 
          of greater than zero.
Sec. 512. Expansion of exception from generation-skipping transfer tax 
          for transfers to individuals with deceased parents.

   TITLE VI--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS

Sec. 601. Research tax credit.
Sec. 602. Contributions of stock to private foundations.
Sec. 603. Work opportunity tax credit.
Sec. 604. Orphan drug tax credit.

  TITLE VII--INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA

Sec. 701. Tax incentives for revitalization of the District of Columbia.
Sec. 702. Incentives conditioned on other DC reform.

                 TITLE VIII--WELFARE-TO-WORK INCENTIVES

Sec. 801. Incentives for employing long-term family assistance 
          recipients.

                   TITLE IX--MISCELLANEOUS PROVISIONS

             Subtitle A--Provisions Relating to Excise Taxes

Sec. 901. Repeal of tax on diesel fuel used in recreational boats.
Sec. 902. Continued application of tax on imported recycled Halon-1211.
Sec. 903. Uniform rate of tax on vaccines.
Sec. 904. Operators of multiple gasoline retail outlets treated as 
          wholesale distributor for refund purposes.
Sec. 905. Exemption of electric and other clean-fuel motor vehicles from 
          luxury automobile classification.

     Subtitle B--Provisions Relating to Pensions and Fringe Benefits

Sec. 911. Section 401(k) plans for certain irrigation and drainage 
          entities.
Sec. 912. Extension of moratorium on application of certain 
          nondiscrimination rules to State and local governments.
Sec. 913. Treatment of certain disability benefits received by former 
          police officers or firefighters.
Sec. 914. Portability of permissive service credit under governmental 
          pension plans.
Sec. 915. Gratuitous transfers for the benefit of employees.
Sec. 916. Treatment of certain transportation on non-commercially 
          operated aircraft as a fringe benefit excludable from gross 
          income.
Sec. 917. Minimum pension accrued benefit distributable without consent 
          increased to $5,000.
Sec. 918. Clarification of certain rules relating to employee stock 
          ownership plans of S corporations.

               Subtitle C--Revisions Relating to Disasters

Sec. 921. Authority to postpone certain tax-related deadlines by reason 
          of presidentially declared disaster.
Sec. 922. Use of certain appraisals to establish amount of disaster 
          loss.
Sec. 923. Treatment of livestock sold on account of weather-related 
          conditions.
Sec. 924. Mortgage financing for residences located in disaster areas.

           Subtitle D--Provisions Relating to Employment Taxes

Sec. 931. Clarification of employment tax status of individuals 
          distributing bakery products.
Sec. 932. Clarification of standard to be used in determining employment 
          tax status of retail securities brokers.
Sec. 933. Clarification of exemption from self-employment tax for 
          certain termination payments received by former insurance 
          salesmen.
Sec. 934. Standards for determining whether individuals are not 
          employees.

           Subtitle E--Provisions Relating to Small Businesses

Sec. 941. Waiver of penalty through 1998 on small businesses failing to 
          make electronic fund transfers of taxes.
Sec. 942. Clarification of treatment of home office use for 
          administrative and management activities.

                      Subtitle F--Other Provisions

Sec. 951. Use of estimates of shrinkage for inventory accounting.
Sec. 952. Assignment of workmen's compensation liability eligible for 
          exclusion relating to personal injury liability assignments.
Sec. 953. Tax-exempt status for certain State worker's compensation act 
          companies.
Sec. 954. Election to continue exception from treatment of publicly 
          traded partnerships as corporations.
Sec. 955. Exclusion from unrelated business taxable income for certain 
          sponsorship payments.
Sec. 956. Associations of holders of timeshare interests to be taxed 
          like other homeowners associations.
Sec. 957. Additional advance refunding of certain Virgin Island bonds.
Sec. 958. Nonrecognition of gain on sale of stock to certain farmers' 
          cooperatives.
Sec. 959. Exception from reporting of real estate transactions for sales 
          and exchanges of certain principal residences.
Sec. 960. Increased deductibility of business meal expenses for 
          individuals subject to Federal hours of service.
Sec. 961. Qualified lessee construction allowances for short-term 
          leases.
Sec. 962. Tax treatment of consolidations of life insurance departments 
          of mutual savings banks.
Sec. 963. Offset of past-due, legally enforceable State tax obligations 
          against overpayments.
Sec. 964. Exemption of the incremental cost of a clean fuel vehicle from 
          the limits on depreciation for vehicles.
Sec. 965. Tax benefits for law enforcement officers killed in the line 
          of duty.
Sec. 966. Temporary suspension of taxable income limit on percentage 
          depletion for marginal production.

Subtitle G--Extension of Duty-Free Treatment Under Generalized System of 
Preferences; Tariff Treatment of Certain Equipment and Repair of Vessels

Sec. 971. Generalized system of preferences.
Sec. 972. Equipment and repair of vessels.

     Subtitle H--United States-Caribbean Basin Trade Partnership Act

Sec. 981. Short title.
Sec. 982. Findings and policy.
Sec. 983. Definitions.
Sec. 984. Temporary provisions to provide NAFTA parity to partnership 
          countries.
Sec. 985. Effect of NAFTA on sugar imports from beneficiary countries.
Sec. 986. Duty-free treatment for certain beverages made with Caribbean 
          rum.
Sec. 987. Meetings of trade ministers and USTR.
Sec. 988. Report on economic development and market oriented reforms in 
          the Caribbean.

                            TITLE X--REVENUES

                     Subtitle A--Financial Products

Sec. 1001. Constructive sales treatment for appreciated financial 
          positions.
Sec. 1002. Limitation on exception for investment companies under 
          section 351.
Sec. 1003. Modification of rules for allocating interest expense to tax-
          exempt interest.
Sec. 1004. Gains and losses from certain terminations with respect to 
          property.
Sec. 1005. Determination of original issue discount where pooled debt 
          obligations subject to acceleration.
Sec. 1006. Denial of interest deductions on certain debt instruments.

         Subtitle B--Corporate Organizations and Reorganizations

Sec. 1011. Tax treatment of certain extraordinary dividends.
Sec. 1012. Application of section 355 to distributions followed by 
          acquisitions and to intragroup transactions.
Sec. 1013. Tax treatment of redemptions involving related corporations.
Sec. 1014. Modification of holding period applicable to dividends 
          received deduction.

                 Subtitle C--Other Corporate Provisions

Sec. 1021. Registration and other provisions relating to confidential 
          corporate tax shelters.
Sec. 1022. Certain preferred stock treated as boot.

                  Subtitle D--Administrative Provisions

Sec. 1031. Reporting of certain payments made to attorneys.
Sec. 1032. Decrease of threshold for reporting payments to corporations 
          performing services for Federal agencies.
Sec. 1033. Disclosure of return information for administration of 
          certain veterans programs.
Sec. 1034. Continuous levy on certain payments.
Sec. 1035. Modification of levy exemption.
Sec. 1036. Confidentiality and disclosure of returns and return 
          information.
Sec. 1037. Returns of beneficiaries of estates and trusts required to 
          file returns consistent with estate or trust return or to 
          notify secretary of inconsistency.

                    Subtitle E--Excise Tax Provisions

Sec. 1041. Extension and modification of Airport and Airway Trust Fund 
          taxes.
Sec. 1042. Kerosene taxed as diesel fuel.
Sec. 1043. Reduction of incentives for alcohol fuels.
Sec. 1044. Restoration of Leaking Underground Storage Tank Trust Fund 
          taxes.
Sec. 1045. Application of communications tax to long-distance prepaid 
          telephone cards.

         Subtitle F--Provisions Relating to Tax-Exempt Entities

Sec. 1051. Expansion of look-thru rule for interest, annuities, 
          royalties, and rents derived by subsidiaries of tax-exempt 
          organizations.
Sec. 1052. Limitation on increase in basis of property resulting from 
          sale by tax-exempt entity to a related person.
Sec. 1053. Modifications to exception from reporting, etc. of lobbying 
          activities.
Sec. 1054. Termination of certain exceptions from rules relating to 
          exempt organizations which provide commercial-type insurance.

                  Subtitle G--Other Revenue Provisions

Sec. 1061. Termination of suspense accounts for family corporations 
          required to use accrual method of accounting.
Sec. 1062. Modification of taxable years to which net operating losses 
          may be carried.
Sec. 1063. Expansion of denial of deduction for certain amounts paid in 
          connection with insurance.
Sec. 1064. Allocation of basis among properties distributed by 
          partnership.
Sec. 1065. Repeal of requirement that inventory be substantially 
          appreciated.
Sec. 1066. Extension of time for taxing precontribution gain.
Sec. 1067. Restrictions on availability of earned income credit for 
          taxpayers who improperly claimed credit in prior year.
Sec. 1068. Limitation on property for which income forecast method may 
          be used.
Sec. 1069. Repeal of special rule for rental use of vacation homes, 
          etc., for less than 15 days.
Sec. 1070. Expansion of requirement that involuntarily converted 
          property be replaced with property acquired from an unrelated 
          person.
Sec. 1071. Treatment of exception from installment sales rules for sales 
          of property by a manufacturer to a dealer.

      TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                     Subtitle A--General Provisions

Sec. 1101. Treatment of computer software as FSC export property.
Sec. 1102. Adjustment of dollar limitation on section 911 exclusion.
Sec. 1103. Certain individuals exempt from foreign tax credit 
          limitation.
Sec. 1104. Exchange rate used in translating foreign taxes.
Sec. 1105. Election to use simplified section 904 limitation for 
          alternative minimum tax.
Sec. 1106. Treatment of personal transactions by individuals under 
          foreign currency rules.
Sec. 1107. All noncontrolled section 902 corporations which are not 
          passive foreign investment companies in one foreign tax 
          limitation basket.

        Subtitle B--Treatment of Controlled Foreign Corporations

Sec. 1111. Gain on certain stock sales by controlled foreign 
          corporations treated as dividends.
Sec. 1112. Miscellaneous modifications to subpart F.
Sec. 1113. Indirect foreign tax credit allowed for certain lower tier 
          companies.

      Subtitle C--Treatment of Passive Foreign Investment Companies

Sec. 1121. United States shareholders of controlled foreign corporations 
          not subject to PFIC inclusion.
Sec. 1122. Election of mark to market for marketable stock in passive 
          foreign investment company.
Sec. 1123. Effective date.

    Subtitle D--Repeal of Excise Tax on Transfers to Foreign Entities

Sec. 1131. Repeal of excise tax on transfers to foreign entities; 
          recognition of gain on certain transfers to foreign trusts and 
          estates.

                    Subtitle E--Information Reporting

Sec. 1141. Clarification of application of return requirement to foreign 
          partnerships.
Sec. 1142. Controlled foreign partnerships subject to information 
          reporting comparable to information reporting for controlled 
          foreign corporations.
Sec. 1143. Modifications relating to returns required to be filed by 
          reason of changes in ownership interests in foreign 
          partnership.
Sec. 1144. Transfers of property to foreign partnerships subject to 
          information reporting comparable to information reporting for 
          such transfers to foreign corporations.
Sec. 1145. Extension of statute of limitation for foreign transfers.
Sec. 1146. Increase in filing thresholds for returns as to organization 
          of foreign corporations and acquisitions of stock in such 
          corporations.

 Subtitle F--Determination of Foreign or Domestic Status of Partnerships

Sec. 1151. Determination of foreign or domestic status of partnerships.

               Subtitle G--Other Simplification Provisions

Sec. 1161. Transition rule for certain trusts.
Sec. 1162. Repeal of stock and securities safe harbor requirement that 
          principal office be outside the United States.

                      Subtitle H--Other Provisions

Sec. 1171. Definition of foreign personal holding company income.
Sec. 1172. Personal property used predominantly in the United States 
          treated as not property of a like kind with respect to 
          property used predominantly outside the United States.
Sec. 1173. Holding period requirement for certain foreign taxes.
Sec. 1174. Penalties for failure to disclose position that certain 
          international transportation income is not includible in gross 
          income.
Sec. 1175. Denial of treaty benefits for certain payments through hybrid 
          entities.
Sec. 1176. Interest on underpayments not reduced by foreign tax credit 
          carrybacks.
Sec. 1177. Clarification of period of limitations on claim for credit or 
          refund attributable to foreign tax credit carryforward.
Sec. 1178. Miscellaneous clarifications.

    TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND 
                               BUSINESSES

             Subtitle A--Provisions Relating to Individuals

Sec. 1201. Basic standard deduction and minimum tax exemption amount for 
          certain dependents.
Sec. 1202. Increase in amount of tax exempt from estimated tax 
          requirements.
Sec. 1203. Optional methods for computing SECA tax combined.
Sec. 1204. Treatment of certain reimbursed expenses of rural mail 
          carriers.
Sec. 1205. Treatment of traveling expenses of certain Federal employees 
          engaged in criminal investigations.
Sec. 1206. Payment of tax by commercially acceptable means.

         Subtitle B--Provisions Relating to Businesses Generally

Sec. 1211. Modifications to look-back method for long-term contracts.
Sec. 1212. Minimum tax treatment of certain property and casualty 
          insurance companies.

   Subtitle C--Simplification Relating to Electing Large Partnerships

                       Part I--General Provisions

Sec. 1221. Simplified flow-through for electing large partnerships.
Sec. 1222. Simplified audit procedures for electing large partnerships.
Sec. 1223. Due date for furnishing information to partners of electing 
          large partnerships.
Sec. 1224. Returns may be required on magnetic media.
Sec. 1225. Treatment of partnership items of individual retirement 
          accounts.
Sec. 1226. Effective date.

      Part II--Provisions Related to TEFRA Partnership Proceedings

Sec. 1231. Treatment of partnership items in deficiency proceedings.
Sec. 1232. Partnership return to be determinative of audit procedures to 
          be followed.
Sec. 1233. Provisions relating to statute of limitations.
Sec. 1234. Expansion of small partnership exception.
Sec. 1235. Exclusion of partial settlements from 1-year limitation on 
          assessment.
Sec. 1236. Extension of time for filing a request for administrative 
          adjustment.
Sec. 1237. Availability of innocent spouse relief in context of 
          partnership proceedings.
Sec. 1238. Determination of penalties at partnership level.
Sec. 1239. Provisions relating to court jurisdiction, etc.
Sec. 1240. Treatment of premature petitions filed by notice partners or 
          5-percent groups.
Sec. 1241. Bonds in case of appeals from certain proceeding.
Sec. 1242. Suspension of interest where delay in computational 
          adjustment resulting from certain settlements.
Sec. 1243. Special rules for administrative adjustment requests with 
          respect to bad debts or worthless securities.

Part III--Provision Relating to Closing of Partnership Taxable Year With 
                    Respect to Deceased Partner, Etc.

Sec. 1246. Closing of partnership taxable year with respect to deceased 
          partner, etc.

    Subtitle D--Provisions Relating to Real Estate Investment Trusts

Sec. 1251. Clarification of limitation on maximum number of 
          shareholders.
Sec. 1252. De minimis rule for tenant services income.
Sec. 1253. Attribution rules applicable to tenant ownership.
Sec. 1254. Credit for tax paid by REIT on retained capital gains.
Sec. 1255. Repeal of 30-percent gross income requirement.
Sec. 1256. Modification of earnings and profits rules for determining 
          whether REIT has earnings and profits from non-REIT year.
Sec. 1257. Treatment of foreclosure property.
Sec. 1258. Payments under hedging instruments.
Sec. 1259. Excess noncash income.
Sec. 1260. Prohibited transaction safe harbor.
Sec. 1261. Shared appreciation mortgages.
Sec. 1262. Wholly owned subsidiaries.
Sec. 1263. Effective date.

    Subtitle E--Provisions Relating to Regulated Investment Companies

Sec. 1271. Repeal of 30-percent gross income limitation.

                    Subtitle F--Taxpayer Protections

Sec. 1281. Reasonable cause exception for certain penalties.
Sec. 1282. Clarification of period for filing claims for refunds.
Sec. 1283. Repeal of authority to disclose whether prospective juror has 
          been audited.
Sec. 1284. Clarification of statute of limitations.
Sec. 1285. Awarding of administrative costs.
Sec. 1286. Penalty for unauthorized inspection of tax returns or tax 
          return information.
Sec. 1287. Civil damages for unauthorized inspection of returns and 
          return information; notification of unlawful inspection or 
          disclosure.

 TITLE XIII--SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT TAXES

Sec. 1301. Gifts to charities exempt from gift tax filing requirements. 
Sec. 1302. Clarification of waiver of certain rights of recovery. 
Sec. 1303. Transitional rule under section 2056A.
Sec. 1304. Clarifications relating to disclaimers.
Sec. 1305. Increase of amount of lapse of general power of appointment 
          not treated as release for purposes of estate and gift tax (5 
          or 5 power).
Sec. 1306. Treatment for estate tax purposes of short-term obligations 
          held by nonresident aliens.
Sec. 1307. Certain revocable trusts treated as part of estate.
Sec. 1308.  Distributions during first 65 days of taxable year of 
          estate.
Sec. 1309. Separate share rules available to estates.
Sec. 1310. Executor of estate and beneficiaries treated as related 
          persons for disallowance of losses, etc.
Sec. 1311. Limitation on taxable year of estates.
Sec. 1312. Treatment of funeral trusts.
Sec. 1313. Adjustments for gifts within 3 years of decedent's death.
Sec. 1314. Clarification of treatment of survivor annuities under 
          qualified terminable interest rules.
Sec. 1315. Treatment under qualified domestic trust rules of forms of 
          ownership which are not trusts.
Sec. 1316. Opportunity to correct certain failures under section 2032A.
Sec. 1317. Authority to waive requirement of United States trustee for 
          qualified domestic trusts.

   TITLE XIV--SIMPLIFICATION PROVISIONS RELATING TO EXCISE TAXES, TAX-
                     EXEMPT BONDS, AND OTHER MATTERS

                  Subtitle A--Excise Tax Simplification

          Part I--Excise Taxes on Heavy Trucks and Luxury Cars

Sec. 1401. Increase in de minimis limit for after-market alterations for 
          heavy trucks and luxury cars.
Sec. 1402. Credit for tire tax in lieu of exclusion of value of tires in 
          computing price.

    Part II--Provisions Related to Distilled Spirits, Wines, and Beer

Sec. 1411. Credit or refund for imported bottled distilled spirits 
          returned to distilled spirits plant.
Sec. 1412. Authority to cancel or credit export bonds without submission 
          of records.
Sec. 1413. Repeal of required maintenance of records on premises of 
          distilled spirits plant.
Sec. 1414. Fermented material from any brewery may be received at a 
          distilled spirits plant.
Sec. 1415. Repeal of requirement for wholesale dealers in liquors to 
          post sign.
Sec. 1416. Refund of tax to wine returned to bond not limited to 
          unmerchantable wine.
Sec. 1417. Use of additional ameliorating material in certain wines.
Sec. 1418. Domestically produced beer may be withdrawn free of tax for 
          use of foreign embassies, legations, etc.
Sec. 1419. Beer may be withdrawn free of tax for destruction.
Sec. 1420. Authority to allow drawback on exported beer without 
          submission of records.
Sec. 1421. Transfer to brewery of beer imported in bulk without payment 
          of tax.
Sec. 1422. Transfer to bonded wine cellars of wine imported in bulk 
          without payment of tax.

                  Part III--Other Excise Tax Provisions

Sec. 1431. Authority to grant exemptions from registration requirements.
Sec. 1432. Repeal of expired provisions.

                 Subtitle B--Tax-Exempt Bond Provisions

Sec. 1441. Repeal of $100,000 limitation on unspent proceeds under 1-
          year exception from rebate.
Sec. 1442. Exception from rebate for earnings on bona fide debt service 
          fund under construction bond rules.
Sec. 1443. Repeal of debt service-based limitation on investment in 
          certain nonpurpose investments.
Sec. 1444. Repeal of expired provisions.
Sec. 1445. Effective date.

                    Subtitle C--Tax Court Procedures

Sec. 1451. Overpayment determinations of Tax Court.
Sec. 1452. Redetermination of interest pursuant to motion.
Sec. 1453. Application of net worth requirement for awards of litigation 
          costs.
Sec. 1454. Proceedings for determination of employment status.

                      Subtitle D--Other Provisions

Sec. 1461. Extension of due date of first quarter estimated tax payment 
          by private foundations.
Sec. 1462. Clarification of authority to withhold Puerto Rico income 
          taxes from salaries of Federal employees.
Sec. 1463. Certain notices disregarded under provision increasing 
          interest rate on large corporate underpayments.

TITLE XV--TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION 
                    ACT OF 1996 AND OTHER LEGISLATION

Sec. 1501. Amendments related to Small Business Job Protection Act of 
          1996.
Sec. 1502. Amendments related to Health Insurance Portability and 
          Accountability Act of 1996.
Sec. 1503. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1504. Miscellaneous provisions.

    TITLE I--CHILD TAX CREDIT; MODIFICATION OF DEPENDENT CARE CREDIT

SEC. 101. CHILD TAX CREDIT.

    (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 23 the following new 
section:

``SEC. 24. CHILD TAX CREDIT.

    ``(a) Allowance of Credit.--There shall be allowed as a 
credit against the tax imposed by this chapter for the taxable 
year an amount equal to $500 multiplied by the number of 
qualifying children of the taxpayer.
    ``(b) Limitations.--
          ``(1) Limitation based on adjusted gross income.--For 
        limitation based on adjusted gross income, see section 
        26(c).
          ``(2) Reduction for dependent care credit.--In the 
        case of taxable years beginning after December 31, 
        2001--
                  ``(A) In general.--The credit allowed by 
                subsection (a) for the taxable year (determined 
                after paragraph (1) but before paragraph (3)) 
                shall be reduced by the amount equal to 50 
                percent of the credit allowed under section 21 
                for such taxable year (determined after section 
                26(c)).
                  ``(B) No reduction for dependent care of 
                individuals incapable of self-care.--
                Subparagraph (A) shall not apply to so much of 
                the credit which would have been allowed under 
                section 21 (determined without regard to 
                section 26(c)) if only qualifying individuals 
                described in subparagraph (B) or (C) of section 
                21(b)(1) were taken into account.
          ``(3) Limitation based on amount of tax.--The credit 
        allowed by subsection (a) (determined after paragraphs 
        (1) and (2)) shall not exceed the excess (if any) of--
                  ``(A) the taxpayer's regular tax liability 
                for the taxable year reduced by the credits 
                allowable against such tax under this subpart 
                (other than this section), over
                  ``(B) the sum of--
                          ``(i) the taxpayer's tentative 
                        minimum tax for such taxable year 
                        (determined without regard to the 
                        alternative minimum tax foreign tax 
                        credit), plus
                          ``(ii) the credit allowed for the 
                        taxable year under section 32.
    ``(c) Qualifying Child.--For purposes of this section--
          ``(1) In general.--The term `qualifying child' means 
        any individual if--
                  ``(A) the taxpayer is allowed a deduction 
                under section 151 with respect to such 
                individual for the taxable year,
                  ``(B) such individual has not attained the 
                age of 17 as of the close of the calendar year 
                in which the taxable year of the taxpayer 
                begins, and
                  ``(C) such individual bears a relationship to 
                the taxpayer described in section 32(c)(3)(B).
          ``(2) Exception for certain noncitizens.--The term 
        `qualifying child' shall not include any individual who 
        would not be a dependent if the first sentence of 
        section 152(b)(3) were applied without regard to all 
        that follows `resident of the United States'.
    ``(d) Taxable Year Must Be Full Taxable Year.--Except in 
the case of a taxable year closed by reason of the death of the 
taxpayer, no credit shall be allowable under this section in 
the case of a taxable year covering a period of less than 12 
months.
    ``(e) Phasein of Credit.--In the case of taxable years 
beginning in 1998, subsection (a) shall be applied by 
substituting `$400' for `$500'.''
    (b) High Risk Pools Permitted To Cover Dependents of High 
Risk Individuals.--Paragraph (26) of section 501(c) is amended 
by adding at the end the following flush sentence:
        ``A qualifying child (as defined in section 24(c)) of 
        an individual described in subparagraph (B) (without 
        regard to this sentence) shall be treated as described 
        in subparagraph (B).''
    (c) Conforming Amendments.--
          (1) Subsection (a) of section 26 is amended by 
        inserting ``(other than the credit allowed by section 
        24)'' after ``credits allowed by this subpart''.
          (2) 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 23 the following new item:

        ``Sec. 24. Child tax credit.''

    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 102. INFLATION ADJUSTMENT OF LIMITS AND OTHER MODIFICATIONS OF 
                    DEPENDENT CARE CREDIT.

    (a) Inflation Adjustment.--
          (1) In general.--Subsection (c) of section 21 
        (relating to expenses for household and dependent care 
        services necessary for gainful employment) is amended 
        to read as follows:
    ``(c) Dollar Limit on Amount Creditable.--
          ``(1) In general.--The amount of the employment-
        related expenses incurred during any taxable year which 
        may be taken into account under subsection (a) shall 
        not exceed--
                  ``(A) $2,400 if there is 1 qualifying 
                individual with respect to the taxpayer for 
                such taxable year, or
                  ``(B) $4,800 if there are 2 or more 
                qualifying individuals with respect to the 
                taxpayer for such taxable year.
        The amount determined under subparagraph (A) or (B) 
        (whichever is applicable) shall be reduced by the 
        aggregate amount excludable from gross income under 
        section 129 for the taxable year.
          ``(2) Inflation adjustment.--In the case of taxable 
        years beginning in a calendar year after 1997, each of 
        the dollar amounts contained in paragraph (1) shall be 
        increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                1996' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $50, such amount shall be rounded 
        to the next lowest multiple of $50.''
          (2) Conforming amendment.--Paragraph (2) of section 
        21(d) is amended by striking ``(c)(1)'' and inserting 
        ``(c)(1)(A)'' and by striking ``(c)(2)'' and inserting 
        ``(c)(1)(B)''.
    (b) Reduction of Benefit Based on Adjusted Gross Income.--
          (1) In general.--Section 26 is amended by 
        redesignating subsection (c) as subsection (d) and by 
        inserting after subsection (b) the following new 
        subsection:
    ``(c) Reduction of Dependent Care Credit and Child Credit 
Based on Adjusted Gross Income.--
          ``(1) In general.--The aggregate amount which would 
        (but for subsection (a), this subsection, and 
        paragraphs (2) and (3) of section 24(b)) be allowed 
        under sections 21 and 24 shall be reduced (but not 
        below zero) by$25 for each $1,000 (or fraction thereof) 
by which the taxpayer's modified adjusted gross income exceeds the 
threshold amount. For purposes of the preceding sentence, the term 
`modified adjusted gross income' means adjusted gross income increased 
by any amount excluded from gross income under section 911, 931, or 
933.
          ``(2) Threshold amount.--For purposes of paragraph 
        (1), the term `threshold amount' means--
                  ``(A) $110,000 in the case of a joint return,
                  ``(B) $75,000 in the case of an individual 
                who is not married, and
                  ``(C) $55,000 in the case of a married 
                individual filing a separate return.
        For purposes of this paragraph, marital status shall be 
        determined under section 7703.
          ``(3) Remaining credit treated as attributable to 
        dependent care tax credit.--The aggregate amount 
        allowable under sections 21 and 24 after the 
        application of paragraph (1) shall be treated as 
        allowable solely under section 21 to the extent such 
        amount does not exceed the amount allowable under 
        section 21 (determined without regard to section 
        21(a)(3)).''
          (2) Conforming amendments.--
                  (A) Subsection (a) of section 21 is amended 
                by adding at the end the following new 
                paragraph:
          ``(3) Limitation based on adjusted gross income.--

          ``For limitation based on adjusted gross income, see section 
        26(c).''

                  (B) The section heading for section 26 is 
                amended by inserting before the period ``; 
                PHASEOUT OF CERTAIN CREDITS BASED ON INCOME''.
                  (C) The item relating to section 26 in the 
                table of sections for subpart A of part IV of 
                subchapter A of chapter 1 is amended by 
                inserting before the period ``; phaseout of 
                certain credits based on income''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

                     TITLE II--EDUCATION INCENTIVES

        Subtitle A--Tax Benefits Relating to Education Expenses

SEC. 201. HOPE CREDIT FOR HIGHER EDUCATION TUITION AND RELATED 
                    EXPENSES.

    (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 25 the following new 
section:

``SEC. 25A. HIGHER EDUCATION TUITION AND RELATED EXPENSES.

    ``(a) Allowance of Credit.--In the case of an individual, 
there shall be allowed as a credit against the tax imposed by 
this chapter for the taxable year the amount equal to 50 
percent of qualified tuition and related expenses paid by the 
taxpayer during such taxable year for education furnished 
during any academic period beginning in such year.
    ``(b) Limitations.--
          ``(1) Dollar limitation.--The amount allowed as a 
        credit under subsection (a) for any taxable year with 
        respect to the qualified tuition and related expenses 
        of any 1 individual shall not exceed $1,500.
          ``(2) Credit allowed only for 2 taxable years.--No 
        credit shall be allowed under subsection (a) for a 
        taxable year with respect to the qualified tuition and 
        related expenses of an individual unless the taxpayer 
        elects to have this section apply with respect to such 
        individual for such year. An election under this 
        paragraph shall not take effect with respect to an 
        individual for any taxable year if an election under 
        this paragraph (by the taxpayer or any other 
        individual) is in effect with respect to such 
        individual for any 2 prior taxable years.
          ``(3) Credit allowed for year only if individual is 
        at least \1/2\ time student for portion of year.--No 
        credit shall be allowed under subsection (a) for a 
        taxable year with respect to the qualified tuition and 
        related expenses of an individual unless such 
        individual is an eligible student for at least one 
        academic period which begins during such year.
          ``(4) Credit allowed only for first two years of 
        postsecondary education.--No credit shall be allowed 
        under subsection (a) for a taxable year with respect to 
        the qualified tuition and related expenses of an 
        individual if the individual has completed (before the 
        beginning of such taxable year) the first 2 years of 
        postsecondary education at an eligible educational 
        institution.
    ``(c) Limitation Based on Modified Adjusted Gross Income.--
          ``(1) In general.--The amount which would (but for 
        this subsection) be taken into account under subsection 
        (a) for the taxable year shall be reduced (but not 
        below zero) by the amount determined under paragraph 
        (2).
          ``(2) Amount of reduction.--The amount determined 
        under this paragraph is the amount which bears the same 
        ratio to the amount which would be so taken into 
        account as--
                  ``(A) the excess of--
                          ``(i) the taxpayer's modified 
                        adjusted gross income for such taxable 
                        year, over
                          ``(ii) $40,000 ($80,000 in the case 
                        of a joint return), bears to
                  ``(B) $10,000 ($20,000 in the case of a joint 
                return).
          ``(3) Modified adjusted gross income.--The term 
        `modified adjusted gross income' means the adjusted 
        gross income of the taxpayer for the taxable year 
        increased by any amount excluded from gross income 
        under section 911, 931, or 933.
    ``(d) Definitions.--For purposes of this section--
          ``(1) Qualified tuition and related expenses.--
                  ``(A) In general.--The term `qualified 
                tuition and related expenses' means tuition and 
                fees required for the enrollment or attendance 
                of--
                          ``(i) the taxpayer,
                          ``(ii) the taxpayer's spouse, or
                          ``(iii) any dependent of the taxpayer 
                        with respect to whom the taxpayer is 
                        allowed a deduction under section 151,
                at an eligible educational institution and 
                books required for courses of instruction of 
                such individual at such institution.
                  ``(B) Exception for education involving 
                sports, etc.--Such term does not include 
                expenses with respect to any course or other 
                education involving sports, games, or hobbies, 
                unless such course or other education is part 
                of the individual's degree program.
                  ``(C) Exception for nonacademic fees.--Such 
                term does not include student activity fees, 
                athletic fees, insurance expenses, or other 
                expenses unrelated to an individual's academic 
                course of instruction.
          ``(2) Eligible educational institution.--The term 
        `eligible educational institution' means an 
        institution--
                  ``(A) which is described in section 481 of 
                the Higher Education Act of 1965 (20 U.S.C. 
                1088), as in effect on the date of the 
                enactment of this section, and
                  ``(B) which is eligible to participate in a 
                program under title IV of such Act.
          ``(3) Eligible student.--The term `eligible student' 
        means, with respect to any academic period, a student 
        who--
                  ``(A) meets the requirements of section 
                484(a)(1) of the Higher Education Act of 1965 
                (20 U.S.C.1091(a)(1)), as in effect on the date 
of the enactment of this section, and
                  ``(B) is carrying at least \1/2\ the normal 
                full-time work load for the course of study the 
                student is pursuing.
          ``(4) Other terms relating to the higher education 
        act.--The following terms shall have the meanings 
        prescribed in regulations under section 481(g) of the 
        Higher Education Act of 1965 (20 U.S.C. 1088(g)), as 
        added by the Student Financial Aid Improvements Act of 
        1997:
                  ``(A) Academic period.
                  ``(B) Normal full-time workload.
                  ``(C) First two years of postsecondary 
                education.
    ``(e) Treatment of Expenses Paid by Dependent.--If a 
deduction under section 151 with respect to an individual is 
allowed to another taxpayer for a taxable year beginning in the 
calendar year in which such individual's taxable year begins--
          ``(1) no credit shall be allowed under subsection (a) 
        to such individual for such individual's taxable year, 
        and
          ``(2) qualified tuition and related expenses paid by 
        such individual during such individual's taxable year 
        shall be treated for purposes of this section as paid 
        by such other taxpayer.
    ``(f) Treatment of Certain Prepayments.--If qualified 
tuition and related expenses are paid by the taxpayer during a 
taxable year for an academic period which begins during the 
first 3 months following such taxable year, such academic 
period shall be treated for purposes of this section as 
beginning during such taxable year.
    ``(g) Special Rules.--
          ``(1) Identification requirement.--No credit shall be 
        allowed under subsection (a) to a taxpayer with respect 
        to the qualified tuition and related expenses of an 
        individual unless the taxpayer includes the name and 
        taxpayer identification number of such individual on 
        the return of tax for the taxable year.
          ``(2) Adjustment for certain scholarships, etc.--The 
        amount of qualified tuition and related expenses 
        otherwise taken into account under subsection (a) with 
        respect to an individual for an academic period shall 
        be reduced (before the application of subsections (b) 
        and (c)) by the sum of any amounts paid for the benefit 
        of such individual which are allocable to such period 
        as--
                  ``(A) a qualified scholarship which is 
                excludable from gross income under section 117,
                  ``(B) an educational assistance allowance 
                under chapter 30, 31, 32, 34, or 35 of title 
                38, United States Code, or under chapter 1606 
                of title 10, United States Code, and
                  ``(C) a payment (other than a gift, bequest, 
                devise, or inheritance within the meaning of 
                section 102(a)) for such individual's 
                educational expenses, or attributable to such 
                individual's enrollment at an eligible 
                educational institution, which is excludable 
                from gross income under any law of the United 
                States.
          ``(3) Denial of credit if student convicted of a 
        felony drug offense.--No credit shall be allowed under 
        subsection (a) for qualified tuition and related 
        expenses for the enrollment or attendance of a student 
        for any academic period if such student has been 
        convicted of a Federal or State felony offense 
        consisting of the possession or distribution of a 
        controlled substance before the end of the taxable year 
        with or within which such period ends.
          ``(4) Denial of double benefit.--No credit shall be 
        allowed under this section for any expense for which a 
        deduction is allowed under any other provision of this 
        chapter.
          ``(5) No credit for married individuals filing 
        separate returns.--If the taxpayer is a married 
        individual (within the meaning of section 7703), this 
        section shall apply only if the taxpayer and the 
        taxpayer's spouse file a joint return for the taxable 
        year.
          ``(6) Nonresident aliens.--If the taxpayer is a 
        nonresident alien individual for any portion of the 
        taxable year, this section shall apply only if such 
        individual is treated as a resident alien of the United 
        States for purposes of this chapter by reason of an 
        election under subsection (g) or (h) of section 6013.
    ``(h) Inflation Adjustments.--
          ``(1) Dollar limitation on amount of credit.--
                  ``(A) In general.--In the case of a taxable 
                year beginning after 1998, the $1,500 amount in 
                subsection (b)(1) shall be increased by an 
                amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        `calendar year 1997' for `calendar year 
                        1992' in subparagraph (B) thereof.
                  ``(B) Rounding.--If any amount as adjusted 
                under subparagraph (A) is not a multiple of 
                $50, such amount shall be rounded to the next 
                lowest multiple of $50.
          ``(2) Income limits.--
                  ``(A) In general.--In the case of a taxable 
                year beginning after 2000, the $40,000 and 
                $80,000 amounts in subsection (c)(2) shall each 
                be increased by an amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        `calendar year 1999' for `calendar year 
                        1992' in subparagraph (B) thereof.
                  ``(B) Rounding.--If any amount as adjusted 
                under subparagraph (A) is not a multiple of 
                $5,000, such amount shall be rounded to the 
                next lowest multiple of $5,000.
    ``(i) Regulations.--The Secretary may prescribe such 
regulations as may be necessary or appropriate to carry out 
this section, including regulations providing for a recapture 
of credit allowed under this section in cases where there is a 
refund in a subsequent taxable year of any amount which was 
taken into account in determining the amount of such credit.''
    (b) Extension of Procedures Applicable to Mathematical or 
Clerical Errors.--Paragraph (2) of section 6213(g) (relating to 
the definition of mathematical or clerical errors) is amended 
by striking ``and'' at the end of subparagraph (G), by striking 
the period at the end of subparagraph (H) and inserting ``, 
and'', and by inserting after subparagraph (H) the following 
new subparagraph:
                  ``(I) an omission of a correct TIN required 
                under section 25A(g)(1) (relating to higher 
                education tuition and related expenses) to be 
                included on a return.''
    (c) Returns Relating to Tuition and Related Expenses.--
          (1) In general.--Subpart B of part III of subchapter 
        A of chapter 61 (relating to information concerning 
        transactions with other persons) is amended by 
        inserting after section 6050R the following new 
        section:

``SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION TUITION AND RELATED 
                    EXPENSES.

    ``(a) In General.--Any person--
          ``(1) which is an eligible educational institution 
        which receives payments for qualified tuition and 
        related expenses with respect to any individual for any 
        calendar year, or
          ``(2) which is engaged in a trade or business and 
        which, in the course of such trade or business, makes 
        payments during any calendar year to any individual 
        which constitute reimbursements or refunds (or similar 
        amounts) of qualified tuition and related expenses of 
        such individual,shall make the return described in 
subsection (b) with respect to the individual at such time as the 
Secretary may by regulations prescribe.
    ``(b) Form and Manner of Returns.--A return is described in 
this subsection if such return--
          ``(1) is in such form as the Secretary may prescribe,
          ``(2) contains--
                  ``(A) the name, address, and TIN of the 
                individual with respect to whom payments 
                described in subsection (a) were received from 
                (or were paid to),
                  ``(B) the name, address, and TIN of any 
                individual certified by the individual 
                described in subparagraph (A) as the taxpayer 
                who will claim the individual as a dependent 
                for purposes of the deduction allowable under 
                section 151 for any taxable year ending with or 
                within the calendar year, and
                  ``(C) the--
                          ``(i) aggregate amount of payments 
                        for qualified tuition and related 
                        expenses received with respect to the 
                        individual described in subparagraph 
                        (A) during the calendar year, and
                          ``(ii) aggregate amount of 
                        reimbursements or refunds (or similar 
                        amounts) paid to such individual during 
                        the calendar year, and
                  ``(D) such other information as the Secretary 
                may prescribe.
    ``(c) Application to Governmental Units.--For purposes of 
this section--
          ``(1) a governmental unit or any agency or 
        instrumentality thereof shall be treated as a person, 
        and
          ``(2) any return required under subsection (a) by 
        such governmental entity shall be made by the officer 
        or employee appropriately designated for the purpose of 
        making such return.
    ``(d) Statements To Be Furnished to Individuals With 
Respect to Whom Information Is Required.--Every person required 
to make a return under subsection (a) shall furnish to each 
individual whose name is required to be set forth in such 
return under subparagraph (A) or (B) of subsection (b)(2) a 
written statement showing--
          ``(1) the name, address, and phone number of the 
        information contact of the person required to make such 
        return, and
          ``(2) the aggregate amounts described in subsection 
        (b)(2)(C).
The written statement required under the preceding sentence 
shall be furnished on or before January 31 of the year 
following the calendar year for which the return under 
subsection (a) was required to be made.
    ``(e) Definitions.--For purposes of this section, the terms 
`eligible educational institution' and `qualified tuition and 
related expenses' have the meanings given such terms by section 
25A.
    ``(f) Returns Which Would Be Required To Be Made by 2 or 
More Persons.--Except to the extent provided in regulations 
prescribed by the Secretary, in the case of any amount received 
by any person on behalf of another person, only the person 
first receiving such amount shall be required to make the 
return under subsection (a).
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this section. No penalties shall be imposed under section 6724 
with respect to any return or statement required under this 
section until such time as such regulations are issued.''
          (2) Assessable penalties.--
                  (A) Subparagraph (B) of section 6724(d)(1) 
                (relating to definitions) is amended by 
                redesignating clauses (ix) through (xiv) as 
                clauses (x) through (xv), respectively, and by 
                inserting after clause (viii) the following new 
                clause:
                          ``(ix) section 6050S (relating to 
                        returns relating to payments for 
                        qualified tuition and related 
                        expenses),''.
                  (B) Paragraph (2) of section 6724(d) is 
                amended by striking ``or'' at the end of the 
                next to last subparagraph, by striking the 
                period at the end of the last subparagraph and 
                inserting ``, or'', and by adding at the end 
                the following new subparagraph:
                  ``(Z) section 6050S(d) (relating to returns 
                relating to qualified tuition and related 
                expenses).''
          (3) Clerical amendment.--The table of sections for 
        subpart B of part III of subchapter A of chapter 61 is 
        amended by inserting after the item relating to section 
        6050R the following new item:

        ``Sec. 6050S. Returns relating to higher education tuition and 
                  related expenses.''

    (d) Coordination With Section 135.--Subsection (d) of 
section 135 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) Coordination with higher education credit.--The 
        amount of the qualified higher education expenses 
        otherwise taken into account under subsection (a) with 
        respect to the education of an individual shall be 
        reduced (before the application of subsection (b)) by 
        the amount of such expenses which are taken into 
        account in determining the credit allowable to the 
        taxpayer or any other person under section 25A with 
        respect to such expenses.''
    (e) Clerical Amendment.--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 25 the following 
new item:

        ``Sec. 25A. Higher education tuition and related expenses.''

    (f) Effective Date.--The amendments made by this section 
shall apply to expenses paid after December 31, 1997 (in 
taxable years ending after such date), for education furnished 
in academic periods beginning after such date.

SEC. 202. DEDUCTION FOR QUALIFIED HIGHER EDUCATION EXPENSES.

    (a) Deduction Allowed.-- Part VII of subchapter B of 
chapter 1 (relating to additional itemized deductions for 
individuals) is amended by redesignating section 221 as section 
222 and by inserting after section 220 the following new 
section:

``SEC. 221. QUALIFIED HIGHER EDUCATION EXPENSES.

    ``(a) Allowance of Deduction.--In the case of an 
individual, there shall be allowed as a deduction the amount of 
qualified higher education expenses paid by the taxpayer during 
the taxable year for education furnished during any academic 
period (within the meaning of section 25A) beginning in such 
year.
    ``(b) Limitations.--
          ``(1) Annual limit.--The amount allowed as a 
        deduction under subsection (a) for any taxable year 
        with respect to expenses paid for education furnished 
        to any 1 individual shall not exceed the lesser of--
                  ``(A) $10,000, or
                  ``(B) the amount includible in the taxpayer's 
                gross income for such taxable year by reason of 
                a distribution from a qualified tuition program 
                (as defined in section 529), or an education 
                investment account (as defined in section 530), 
                the beneficiary of which is such individual.
          ``(2) Aggregate limit.--The amount allowed as a 
        deduction under subsection (a) to the taxpayer or any 
        other individual with respect to expenses paid for 
        education furnished to any 1 individual shall not 
        exceed $40,000 for all taxable years.
          ``(3) Deduction allowed for year only if individual 
        is at least \1/2\ time student for portion of year.--No 
        deduction shall be allowed under subsection (a)for a 
taxable year with respect to the qualified higher education expenses of 
an individual unless such individual is an eligible student (as defined 
in section 25A(d)(3)) for at least one academic period which begins 
during such year.
          ``(4) Deduction allowed only for first 4 years of 
        postsecondary education.--No deduction shall be allowed 
        under subsection (a) for a taxable year with respect to 
        the qualified higher education expenses of an 
        individual if the individual has completed (before the 
        beginning of such taxable year) the equivalent of the 
        first 4 years of postsecondary education at an eligible 
        educational institution (determined under the rules of 
        section 25A).
          ``(5) Coordination with credit for higher education 
        expenses.--No deduction shall be allowed under this 
        section for a taxable year with respect to the 
        qualified higher education expenses of an individual if 
        an election is in effect under section 25A with respect 
        to such individual for such taxable year.
    ``(c) Qualified Higher Education Expenses.--The term 
`qualified higher education expenses' means qualified higher 
education expenses (as defined in section 529) for the 
education of--
          ``(1) the taxpayer,
          ``(2) the taxpayer's spouse, or
          ``(3) any dependent of the taxpayer with respect to 
        whom the taxpayer is allowed a deduction under section 
        151,
at an eligible educational institution (as defined in section 
529(e)(5)).
    ``(d) Treatment of Expenses Paid by Dependent.--If a 
deduction under section 151 with respect to an individual is 
allowed to another taxpayer for a taxable year beginning in the 
calendar year in which such individual's taxable year begins--
          ``(1) no deduction shall be allowed under subsection 
        (a) to such individual for such individual's taxable 
        year, and
          ``(2) qualified higher education expenses paid by 
        such individual during such individual's taxable year 
        shall be treated for purposes of this section as paid 
        by such other taxpayer.
    ``(e) Coordination With Amounts Includible in Gross Income 
Under Section 529 or 530.--If any deduction is allowed under 
subsection (a) with respect to the qualified higher education 
expenses of an individual with respect to whom the taxpayer is 
allowed a deduction under section 151(c), any amount which 
would (but for this subsection) be includible in such 
individual's gross income by reason of section 529 or section 
530 shall be includible in the gross income of the taxpayer and 
not such individual.
    ``(f) Adjustment for Certain Scholarships, Etc.--The amount 
of qualified higher education expenses otherwise taken into 
account under subsection (a) with respect to an individual for 
an academic period shall be reduced (before the application of 
subsection (b)) by the sum of--
          ``(1) the aggregate amount of the reductions under 
        section 25A(g)(2) for the benefit of such individual 
        for such period, and
          ``(2) the amount excludable from gross income under 
        section 135 by reason of such expenses with respect to 
        such individual which are allocable to such period.
    ``(g) Denial of Deduction if Student Convicted of a Felony 
Drug Offense.--No deduction shall be allowed under subsection 
(a) for qualified higher education expenses for the enrollment 
or attendance of a student for any academic period if such 
student has been convicted of a Federal or State felony offense 
consisting of the possession or distribution of a controlled 
substance before the end of the taxable year with or within 
which such period ends.
    ``(h) Denial of Double Benefit.--No deduction shall be 
allowed under subsection (a) for any expense for which a 
deduction is allowed to the taxpayer under any other provision 
of this chapter.''
    (b) Deduction Allowed Whether or Not Taxpayer Itemizes 
Other Deductions.--
          (1) In general.--Subsection (b) of section 63 is 
        amended by striking ``and'' at the end of paragraph 
        (1), by striking the period at the end of paragraph (2) 
        and inserting ``, and'', and by adding at the end the 
        following new paragraph:
          ``(3) the deduction allowed by section 221 (relating 
        to deduction for qualified higher education 
        expenses).''
          (2) Conforming amendment.--Subsection (d) of section 
        63 is amended by striking ``and'' at the end of 
        paragraph (1), by striking the period at the end of 
        paragraph (2) and inserting ``, and'', and by adding at 
        the end the following new paragraph:
          ``(3) the deduction allowed by section 221 (relating 
        to deduction for qualified higher education 
        expenses).''
    (c) Phaseout of Exclusion for Qualified Tuition 
Reductions.--Subsection (d) of section 117 is amended by 
redesignating the last paragraph as paragraph (4) and by adding 
at the end the following new paragraph:
          ``(5) Phaseout of exclusion.--
                  ``(A) Termination.--Paragraph (1) shall not 
                apply to any qualified tuition reduction for 
                any course of instruction beginning after 
                December 31, 2001.
                  ``(B) Phaseout.--The amount excludable from 
                gross income under paragraph (1) for any course 
                of instruction beginning in a calendar year 
                after 1997 and before 2002 shall not exceed the 
                applicable percentage (determined in accordance 
                with the following table) for such calendar 
                year of the amount which would be so excludable 
                but for this subparagraph:

        In the case of                                    The applicable
          calendar year:                                  percentage is:

          1998..........................................             80 
          1999..........................................             60 
          2000..........................................             40 
          2001..........................................           20.''

    (d) Technical Amendments.--
          (1) Subparagraph (A) of section 529(e)(3) is amended 
        by inserting ``(except as provided in section 221(e))'' 
        after ``distributee''.
          (2) The table of sections for part VII of subchapter 
        B of chapter 1 is amended by striking the item relating 
        to section 221 and inserting:

        ``Sec. 221. Qualified higher education expenses.
        ``Sec. 222. Cross reference.''

    (e) Effective Date.--The amendments made by this section 
shall apply to expenses paid after December 31, 1997 (in 
taxable years ending after such date), for education furnished 
in academic periods beginning after such date.

SEC. 203. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL RETIREMENT PLANS FOR 
                    HIGHER EDUCATION EXPENSES.

    (a) In General.--Paragraph (2) of section 72(t) (relating 
to exceptions to 10-percent additional tax on early 
distributions from qualified retirement plans) is amended by 
adding at the end the following new subparagraph:
                  ``(E) Distributions from individual 
                retirement plans for higher education 
                expenses.--Distributions to an individual from 
                an individual retirement plan to the extent 
                such distributions do not exceed the qualified 
                higher education expenses (as defined in 
                paragraph (7)) of the taxpayer for the taxable 
                year. Distributions shall not be taken into 
                account under the preceding sentence if such 
                distributions are described in subparagraph 
                (A), (C), or (D) or to the extent paragraph (1) 
                does not apply to such distributions by reason 
                of subparagraph (B).''
    (b) Definition.--Section 72(t) is amended by adding at the 
end the following new paragraph:
          ``(7) Qualified higher education expenses.--For 
        purposes of paragraph (2)(E)--
                  ``(A) In general.--The term `qualified higher 
                education expenses' means qualified higher 
                education expenses (as defined in section 
                529(e)(3) without regard to subparagraph (C) 
                thereof) for education furnished to--
                          ``(i) the taxpayer,
                          ``(ii) the taxpayer's spouse, or
                          ``(iii) any child (as defined in 
                        section 151(c)(3)) or grandchild of the 
                        taxpayer or the taxpayer's spouse,
                at an eligible educational institution (as 
                defined in section 529(e)(5)).
                  ``(B) Coordination with other benefits.--The 
                amount of qualified higher education expenses 
                for any taxable year shall be reduced as 
                provided in section 25A(g)(2).''
    (c) Effective Date.--The amendments made by this section 
shall apply to distributions after December 31, 1997, with 
respect to expenses paid after such date (in taxable years 
ending after such date), for education furnished in academic 
periods beginning after such date.

SEC. 204. EXPENSES FOR EDUCATION WHICH SUPPLEMENTS ELEMENTARY AND 
                    SECONDARY EDUCATION.

    (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 25A, as added by this title, 
the following new section:

``SEC. 25B. EXPENSES FOR EDUCATION WHICH SUPPLEMENTS ELEMENTARY AND 
                    SECONDARY EDUCATION.

    ``(a) Allowance of Credit.--In the case of an individual, 
there shall be allowed a credit against the tax imposed by this 
chapter for the taxable year an amount equal to 50 percent of 
the qualifying educational assistance expenses paid by the 
taxpayer during the taxable year.
    ``(b) Limitations.--
          ``(1) Dollar limitation.--The amount allowed as a 
        credit under subsection (a) for any taxable year with 
        respect to the qualified educational assistance 
        expenses of any 1 individual shall not exceed $150.
          ``(2) Reduction of credit based on adjusted gross 
        income.--
                  ``(A) In general.--The aggregate amount which 
                would (but for this paragraph) be allowed by 
                this section shall be reduced (but not below 
                zero) by $25 for each $1,000 (or fraction 
                thereof) by which the taxpayer's modified 
                adjusted gross income exceeds the threshold 
                amount. For purposes of the preceding sentence, 
                the term `modified adjusted gross income' means 
                adjusted gross income increased by any amount 
                excluded from gross income under section 911, 
                931, or 933.
                  ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the term `threshold amount' 
                means--
                          ``(i) $80,000 in the case of a joint 
                        return,
                          ``(ii) $50,000 in the case of an 
                        individual who is not married, and
                          ``(iii) $40,000 in the case of a 
                        married individual filing a separate 
                        return.
                For purposes of this subparagraph, marital 
                status shall be determined under section 7703.
    ``(c) Qualified Educational Assistance Expenses.--For 
purposes of this section--
          ``(1) In general.--The term `qualified educational 
        assistance expenses' means amounts paid to a qualified 
        entity to provide supplementary education to any 
        dependent (within the meaning of section 152) of the 
        taxpayer--
                  ``(A) who is less than 18 years of age as of 
                the close of the taxable year, and
                  ``(B) who is enrolled as a full-time student 
                in an elementary or secondary school.
          ``(2) Supplementary education.--For purposes of 
        paragraph (1), supplementary education is education 
        provided with respect to reading, mathematics, or any 
        subject that the dependent student is studying at the 
        time in elementary or secondary school classes. 
        Eligible courses of study shall not include courses 
        providing assistance with respect to preparation for 
        college entrance examinations.
          ``(3) Qualified entity.--The term `qualified entity' 
        means a person that is accredited as a supplementary 
        education service provider by an accreditation 
        organization that is recognized by the Secretary of 
        Education or by any other agency, association, or group 
        that is certified by the Secretary for purposes of this 
        section.''
    (b) Clerical Amendment.--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 25A the following 
new item:

        ``Sec. 25B. Expenses for education which supplements elementary 
                  and secondary education.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

    Subtitle B--Expanded Education Investment Savings Opportunities

SEC. 211. ELIGIBLE EDUCATIONAL INSTITUTIONS PERMITTED TO MAINTAIN 
                    QUALIFIED TUITION PROGRAMS; OTHER MODIFICATIONS OF 
                    QUALIFIED STATE TUITION PROGRAMS.

    (a) Eligible Educational Institutions Permitted to Maintain 
Qualified Tuition Programs.--Paragraph (1) of section 529(b) 
(defining qualified State tuition program) is amended by 
inserting ``or by one or more eligible educational 
institutions'' after ``maintained by a State or agency or 
instrumentality thereof''.
    (b) Qualified Higher Education Expenses To Include Room and 
Board.--Paragraph (3) of section 529(e) (defining qualified 
higher education expenses) is amended to read as follows:
          ``(3) Qualified higher education expenses.--
                  ``(A) In general.--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 education 
                institution.
                  ``(B) Room and board included for students 
                who are at least half-time.--In the case of an 
                individual who is an eligible student (as 
                defined in section 25A(d)(3)) for any academic 
                period, such term shall also include reasonable 
                costs for such period (as determined under the 
                qualified tuition program) incurred by the 
                designated beneficiary for room and board while 
                attending such institution. The amount treated 
                as qualified higher education expenses by 
                reason of the preceding sentence shall not 
                exceed the minimum amount (applicable to the 
                student) included for room and board for such 
                period in the cost of attendance (as defined in 
                section 472 of the Higher Education Act of 
                1965, 20 U.S.C. 1087ll, as in effect on the 
                date of the enactment of this paragraph) for 
                the eligible educational institution for such 
                period.
                  ``(C) Exclusion for graduate level courses.--
                Such term shall not include expenses for 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. Such courses 
                shall not be taken into account in determining 
                whether an individual is described in 
                subsection (f)(3)(A).''
    (c) Additional Modifications.--
          (1) Member of family.--Paragraph (2) of section 
        529(e) (relating to other definitions and special 
        rules) is amended to read as follows:
          ``(2) Member of family.--The term `member of the 
        family' means--
                  ``(A) an individual who bears a relationship 
                to another individual which is a relationship 
                described in paragraphs (1) through (8) of 
                section 152(a), and
                  ``(B) the spouse of any individual described 
                in subparagraph (A).''
          (2) Eligible educational institution.--Section 529(e) 
        is amended by adding at the end the following:
          ``(5) Eligible educational institution.--The term 
        `eligible educational institution' means an 
        institution--
                  ``(A) which is described in section 481 of 
                the Higher Education Act of 1965 (20 U.S.C. 
                1088), as in effect on the date of the 
                enactment of this paragraph, and
                  ``(B) which is eligible to participate in a 
                program under title IV of such Act.''
          (3) No contributions after beneficiary attains age 
        18; distributions required in certain cases.--
        Subsection (b) of section 529 (as amended by subsection 
        (f) of this section) is amended by adding at the end 
        the following new paragraph:
          ``(7) Restrictions relating to age of beneficiary; 
        completion of education.--
                  ``(A) In general.--A program shall be treated 
                as a qualified tuition program only if--
                          ``(i) no contribution is accepted on 
                        behalf of a designated beneficiary 
                        after the date on which such 
                        beneficiary attains age 18, and
                          ``(ii) any balance to the credit of a 
                        designated beneficiary (if any) on the 
                        account termination date shall be 
                        distributed within 30 days after such 
                        date to such beneficiary (or in the 
                        case of death, the estate of the 
                        beneficiary).
                  ``(B) Account termination date.--For purposes 
                of subparagraph (A), the term `account 
                termination date' means whichever of the 
                following dates is the earliest:
                          ``(i) The date on which the 
                        designated beneficiary completes the 
                        equivalent of 4 years of post-secondary 
                        education (whether or not at the same 
                        eligible educational institution).
                          ``(ii) The date on which the 
                        designated beneficiary attains age 30.
                          ``(iii) The date on which the 
                        designated beneficiary dies.''
          (4) Estate and gift tax treatment.--
                  (A) Gift tax treatment.--
                          (i) Paragraph (2) of section 529(c) 
                        is amended to read as follows:
          ``(2) Gift tax treatment of contributions.--For 
        purposes of chapters 12 and 13, any contribution to a 
        qualified tuition program on behalf of any designated 
        beneficiary--
                  ``(A) shall be treated as a completed gift to 
                such beneficiary which is not a future interest 
                in property, and
                  ``(B) shall not be treated as a qualified 
                transfer under section 2503(e).''
                          (ii) Paragraph (5) of section 529(c) 
                        is amended to read as follows:
          ``(5) Other gift tax rules.--For purposes of chapters 
        12 and 13--
                  ``(A) Treatment of distributions.--In no 
                event shall a distribution from a qualified 
                tuition program be treated as a taxable gift.
                  ``(B) Treatment of designation of new 
                beneficiary.--The taxes imposed by chapters 12 
                and 13 shall apply to a transfer by reason of a 
                change in the designated beneficiary under the 
                program (or a rollover to the account of a new 
                beneficiary) only if the new beneficiary is a 
                generation below the generation of the old 
                beneficiary (determined in accordance with 
                section 2651).''
                  (B) Estate tax treatment.--Paragraph (4) of 
                section 529(c) is amended to read as follows:
          ``(4) Estate tax treatment.--
                  ``(A) In general.--No amount shall be 
                includible in the gross estate of any 
                individual for purposes of chapter 11 by reason 
                of an interest in a qualified tuition program.
                  ``(B) Amounts includible in estate of 
                designated beneficiary in certain cases.--
                Subparagraph (A) shall not apply to amounts 
                distributed on account of the death of a 
                beneficiary.''
          (5) Limitation on contributions to qualified tuition 
        programs not maintained by a state.--Subsection (b) of 
        section 529 is amended by adding at the end the 
        following new paragraph:
          ``(9) Limitation on contributions to qualified 
        tuition programs not maintained by a state.--In the 
        case of a program not maintained by a State or agency 
        or instrumentality thereof, such program shall not be 
        treated as a qualified tuition program unless it limits 
        the annual contribution to the program on behalf of a 
        designated beneficiary to an amount equal to the lesser 
        of--
                  ``(A) $5,000, or
                  ``(B) the excess of--
                          ``(i) $50,000, over
                          ``(ii) the aggregate amount 
                        contributed to such program on behalf 
                        of such beneficiary for all prior 
                        taxable years.''
    (d) Additional Tax on Amounts Not Used For Higher Education 
Expenses.--Section 529 is amended by adding at the end the 
following new subsection:
    ``(f) Imposition of Additional Tax.--
          ``(1) In general.--The tax imposed by this chapter 
        for any taxable year on any taxpayer who receives a 
        payment or distribution from a qualified tuition 
        program which is includible in gross income shall be 
        increased by 10 percent of the amount which is so 
        includible.
          ``(2) Exceptions.--Paragraph (1) shall not apply if 
        the payment or distribution is--
                  ``(A) used for qualified higher education 
                expenses of the designated beneficiary,
                  ``(B) made to a beneficiary (or to the estate 
                of the designated beneficiary) on or after the 
                death of the designated beneficiary,
                  ``(C) attributable to the designated 
                beneficiary's being disabled (within the 
                meaning of section 72(m)(7)), or
                  ``(D) made on account of a scholarship, 
                allowance, or payment described in subparagraph 
                (A), (B), or (C) of section 135(d)(1) received 
                by the account holder to the extent the amount 
                of the payment or distribution does not exceed 
                the amount of the scholarship, allowance, or 
                payment.
          ``(3) Excess contributions returned before due date 
        of return.--In the case of a qualified tuition program 
        not maintained by a State or any agency or 
        instrumentality thereof, paragraph (1) shall not apply 
        to the distribution to a contributor of any 
        contribution made during a taxable year on behalf of a 
        designated beneficiary to the extent that such 
        contribution exceeds the limitation in section 4973(e) 
        if--
                  ``(A) such distribution is received on or 
                before the day prescribed by law (including 
                extensions of time) forfiling such 
contributor's return for such taxable year, and
                  ``(B) such distribution is accompanied by the 
                amount of net income attributable to such 
                excess contribution.
        Any net income described in subparagraph (B) shall be 
        included in the gross income of the contributor for the 
        taxable year in which such excess contribution was 
        made.''
    (e) Coordination With Education Savings Bond.--Section 
135(c)(2) (defining qualified higher education expenses) is 
amended by adding at the end the following:
                  ``(C) Contributions to qualified tuition 
                program.--Such term shall include any 
                contribution to a qualified tuition program (as 
                defined in section 529) on behalf of a 
                designated beneficiary (as defined in such 
                section) who is an individual described in 
                subparagraph (A); but there shall be no 
                increase in the investment in the contract for 
                purposes of applying section 72 by reason of 
                the portion of such contribution which is not 
                includible in gross income by reason of this 
                subparagraph.''
    (f) Tax on Excess Contributions.--
          (1) In general.--Subsection (a) of section 4973 is 
        amended by striking ``or'' at the end of paragraph (2) 
        and by inserting after paragraph (3) the following new 
        paragraphs:
          ``(4) a qualified tuition program (as defined in 
        section 529) not maintained by a State or any agency or 
        instrumentality thereof, or
          ``(5) an education investment account (as defined in 
        section 530),''.
          (2) Excess contributions defined.--Section 4973 is 
        amended by adding at the end the following new 
        subsection:
    ``(e) Excess Contributions to Private Qualified Tuition 
Program and Education Investment Accounts.--For purposes of 
this section--
          ``(1) In general.--In the case of private education 
        investment accounts maintained for the benefit of any 1 
        beneficiary, the term `excess contributions' means the 
        amount by which the amount contributed for the taxable 
        year to such accounts exceeds the lesser of--
                  ``(A) the excess of--
                          ``(i) $5,000, over
                          ``(ii) the aggregate amount 
                        contributed to all qualified tuition 
                        programs (as defined in section 529) 
                        maintained by a State or any agency or 
                        instrumentality thereof on behalf of 
                        such beneficiary for such taxable year, 
                        or
                  ``(B) the excess of--
                          ``(i) $50,000, over
                          ``(ii) the sum of--
                                  ``(I) the aggregate amount 
                                contributed to such accounts 
                                for all prior taxable years, 
                                and
                                  ``(II) the aggregate amount 
                                contributed to all qualified 
                                tuition programs (as defined in 
                                section 529) maintained by a 
                                State or any agency or 
                                instrumentality thereof on 
                                behalf of such beneficiary for 
                                such taxable year and all prior 
                                taxable years.
          ``(2) Private education investment account.--For 
        purposes of paragraph (1), the term `private education 
        investment account' means--
                  ``(A) a qualified tuition program (as defined 
                in section 529) not maintained by a State or 
                any agency or instrumentality thereof, and
                  ``(B) an education investment account (as 
                defined in section 530).
          ``(3) Special rules.--For purposes of paragraph (1), 
        the following contributions shall not be taken into 
        account:
                  ``(A) Any contribution which is distributed 
                out of the education investment account in a 
                distribution to which section 530(c)(3)(B) 
                applies.
                  ``(B) Any contribution to a qualified tuition 
                program (as so defined) described in section 
                530(b)(2)(B) from any such account.
                  ``(C) Any rollover contribution.''
    (g) Technical Amendments.--
          (1) Paragraph (2) of section 26(b) is amended by 
        redesignating subparagraphs (E) through (P) as 
        subparagraphs (F) through (Q), respectively, and by 
        inserting after subparagraph (D) the following new 
        subparagraph:
                  ``(E) section 529(f) (relating to additional 
                tax on certain distributions from qualified 
                tuition programs),''.
          (2) The text of section 529 is amended by striking 
        ``qualified State tuition program'' each place it 
        appears and inserting ``qualified tuition program''.
          (3) Subsection (b) of section 529 is amended by 
        striking paragraph (3) and by redesignating paragraphs 
        (4) through (7) as paragraphs (3) through (6), 
        respectively.
          (4)(A) The section heading of section 529 is amended 
        to read as follows:

``SEC. 529. QUALIFIED TUITION PROGRAMS.''

          (B) The item relating to section 529 in the table of 
        sections for part VIII of subchapter F of chapter 1 is 
        amended by striking ``State''.
          (5)(A) The heading for part VIII of subchapter F of 
        chapter 1 is amended to read as follows:

           ``PART VIII--HIGHER EDUCATION SAVINGS ENTITIES''.

          (B) The table of parts for subchapter F of chapter 1 
        is amended by striking the item relating to part VIII 
        and inserting:

        ``Part VIII. Higher education savings entities.''

    (h) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall 
        take effect on January 1, 1998.
          (2) Expenses to include room and board, etc.--The 
        amendments made by subsection (b) and (c)(2) shall 
        apply to distributions after December 31, 1997, with 
        respect to expenses paid after such date (in taxable 
        years ending after such date), for education furnished 
        in academic periods beginning after such date.
          (3) Penalty for noneducation withdrawals.--The 
        amendment made by subsection (d) shall apply to 
        distributions after December 31, 1997.
          (4) Coordination with education savings bonds.--The 
        amendment made by subsection (e) shall apply to taxable 
        years beginning after December 31, 1997.
          (5) Estate and gift tax changes.--
                  (A) Gift tax changes.--Paragraphs (2) and (5) 
                of section 529(c) of the Internal Revenue Code 
                of 1986, as amended by this section, shall 
                apply to transfers (including designations of 
                new beneficiaries) made after the date of the 
                enactment of this Act.
                  (B) Estate tax changes.--Paragraph (4) of 
                such section 529(c) shall apply to estates of 
                decedents dying after June 8, 1997.

SEC. 212. EDUCATION INVESTMENT ACCOUNTS.

    (a) In General.--Part VIII of subchapter F of chapter 1 
(relating to qualified State tuition programs) is amended by 
adding at the end the following new section:

``SEC. 530. EDUCATION INVESTMENT ACCOUNTS.

    ``(a) General Rule.--An education investment account shall 
be exempt from taxation under this subtitle. Notwithstanding 
the preceding sentence, the education investment account shall 
be subject to the taxes imposed by section 511 (relating to 
imposition of tax on unrelated business income of charitable 
organizations).
    ``(b) Definitions and Special Rules.--For purposes of this 
section--
          ``(1) Education investment account.--The term 
        `education investment account' means a trust created or 
        organized in the United States exclusively for the 
        purpose of paying the qualified higher education 
        expenses of the account holder, but only if the written 
        governing instrument creating the trust meets the 
        following requirements:
                  ``(A) No contribution will be accepted--
                          ``(i) unless it is in cash,
                          ``(ii) after the date on which the 
                        account holder attains age 18, or
                          ``(iii) in excess of $5,000 for the 
                        taxable year.
                  ``(B) The trustee is a bank (as defined in 
                section 408(n)) or another person who 
                demonstrates to the satisfaction of the 
                Secretary that the manner in which that person 
                will administer the trust will be consistent 
                with the requirements of this section.
                  ``(C) No part of the trust assets will be 
                invested in life insurance contracts.
                  ``(D) The assets of the trust shall not be 
                commingled with other property except in a 
                common trust fund or common investment fund.
                  ``(E) Any balance in the account will be 
                distributed as required under section 
                529(b)(8)(B) (as if such account were a 
                qualified tuition program).
        For $50,000 limit on aggregate contributions to 
        accounts, see section 4973(e).
          ``(2) Qualified higher education expenses.--
                  ``(A) In general.--The term `qualified higher 
                education expenses' has the same meaning given 
                such term by section 529(e)(3).
                  ``(B) Qualified tuition programs.--Such term 
                shall include amounts paid or incurred to 
                purchase tuition credits or certificates, or to 
                make contributions to an account, under a 
                qualified tuition program (as defined in 
                section 529(b)) for the benefit of the account 
                holder.
          ``(3) Eligible educational institution.--The term 
        `eligible educational institution' has the meaning 
        given such term by section 529(e)(5).
          ``(4) Account holder.--The term `account holder' 
        means the individual for whose benefit the education 
        investment account is established.
    ``(c) Tax Treatment of Distributions.--
          ``(1) In general.--Any amount paid or distributed 
        shall be includible in gross income as required by 
        section 529(c)(3) (determined as if such account were a 
        qualified tuition program).
          ``(2) Special rules for applying estate and gift 
        taxes with respect to account.--Rules similar to the 
        rules of paragraphs (2), (4), and (5) of section 529(c) 
        shall apply for purposes of this section.
          ``(3) Additional tax for distributions not used for 
        educational expenses.--
                  ``(A) In general.--The tax imposed by section 
                529(f) shall apply to payments and 
                distributions from an education investment 
                account in the same manner as such tax applies 
                to qualified tuition programs (as defined in 
                section 529).
                  ``(B) Excess contributions returned before 
                due date of return.--Subparagraph (A) shall not 
                apply to the distribution to a contributor of 
                any contribution paid during a taxable year to 
                an education investment account to the extent 
                that such contribution exceeds the limitation 
                in section 4973(e) if such distribution (and 
                the net income with respect to such excess 
                contribution) meet requirements comparable to 
                the requirements of section 529(f)(3).
          ``(4) Rollover contributions.--Paragraph (1) shall 
        not apply to any amount paid or distributed from an 
        education investment account to the extent that the 
        amount received is paid into another education 
        investment account for the benefit of the account 
        holder or a member of the family (within the meaning of 
        section 529(e)(2)) of the account holder not later than 
        the 60th day after the date of such payment or 
        distribution. The preceding sentence shall not apply to 
        any payment or distribution if it applied to any prior 
        payment or distribution during the 12-month period 
        ending on the date of the payment or distribution.
          ``(5) Change in account holder.--Any change in the 
        account holder of an education investment account shall 
        not be treated as a distribution for purposes of 
        paragraph (1) if the new account holder is a member of 
        the family (as so defined) of the old account holder.
          ``(6) Special rules for death and divorce.--Rules 
        similar to the rules of paragraphs (7) and (8) of 
        section 220(f) shall apply.
    ``(d) Tax Treatment of Accounts.--Rules similar to the 
rules of paragraphs (2) and (4) of section 408(e) shall apply 
to any education investment account.
    ``(e) Community Property Laws.--This section shall be 
applied without regard to any community property laws.
    ``(f) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of 
such account are held by a bank (as defined in section 408(n)) 
or another person who demonstrates, to the satisfaction of the 
Secretary, that the manner in which he will administer the 
account will be consistent with the requirements of this 
section, and if the custodial account would, except for the 
fact that it is not a trust, constitute an account described in 
subsection (b)(1). For purposes of this title, in the case of a 
custodial account treated as a trust by reason of the preceding 
sentence, the custodian of such account shall be treated as the 
trustee thereof.
    ``(g) Reports.--The trustee of an education investment 
account shall make such reports regarding such account to the 
Secretary and to the account holder with respect to 
contributions, distributions, and such other matters as the 
Secretary may require under regulations. The reports required 
by this subsection shall be filed at such time and in such 
manner and furnished to such individuals at such time and in 
such manner as may be required by those regulations.''
    (b) Tax on Prohibited Transactions.--
          (1) In general.--Paragraph (1) of section 4975(e) 
        (relating to prohibited transactions) is amended by 
        striking ``or'' at the end of subparagraph (D), by 
        redesignating subparagraph (E) as subparagraph (F), and 
        by inserting after subparagraph (D) the following new 
        subparagraph:
                  ``(E) an education investment account 
                described in section 530, or''.
          (2) Special rule.--Subsection (c) of section 4975 is 
        amended by adding at the end of subsection (c) the 
        following new paragraph:
          ``(5) Special rule for education investment 
        accounts.--An individual for whose benefit an education 
        investment account is established and any contributor 
        to such account shall be exempt from the tax imposed by 
        this section with respect to any transaction concerning 
        such account (which would otherwise be taxable under 
        this section) if section 530(d) applies with respect to 
        such transaction.''
    (c) Failure To Provide Reports on Education Investment 
Accounts.--
          (1) In general.--Paragraph (2) of section 6693(a) 
        (relating to failure to provide reports on individual 
        retirement accounts or annuities) is amended by 
        striking ``and'' at the end of subparagraph (A), by 
        striking the period atthe end of subparagraph (B) and 
inserting ``, and'', and by adding at the end the following new 
subparagraph:
                  ``(C) section 530(g) (relating to education 
                investment accounts).''
          (2) Clerical amendment.--The section heading for 
        section 6693 is amended by striking ``INDIVIDUAL 
        RETIREMENT'' and inserting ``CERTAIN TAX-FAVORED''.
    (d) Technical Amendments.--
          (1) Subparagraph (F) of section 26(b)(2), as added by 
        the preceding section, is amended by inserting before 
        the comma ``and section 530(c)(3) (relating to 
        additional tax on certain distributions from education 
        investment accounts)''.
          (2) Subparagraph (C) of section 135(c)(2), as added 
        by the preceding section, is amended by inserting ``, 
        or to an education investment account (as defined in 
        section 530) on behalf of an account holder (as defined 
        in such section),'' after ``(as defined in such 
        section)''.
          (3) The table of sections for part VIII of subchapter 
        F of chapter 1 is amended by adding at the end the 
        following new item:

        ``Sec. 530. Education investment accounts.''

          (4) The item relating to section 6693 in the table of 
        sections for part I of subchapter B of chapter 68 is 
        amended by striking ``individual retirement'' and 
        inserting ``certain tax-favored''.
    (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

                Subtitle C--Other Education Initiatives

SEC. 221. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL 
                    ASSISTANCE.

    (a) In General.--Subsection (d) of section 127 (relating to 
educational assistance programs) is amended to read as follows:
    ``(d) Termination.--This section shall not apply to 
expenses paid with respect to courses of instruction beginning 
after December 31, 1997.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1996.

SEC. 222. INCREASE IN LIMITATION ON QUALIFIED 501(C)(3) BONDS OTHER 
                    THAN HOSPITAL BONDS.

    (a) In General.--The text of paragraph (1) of section 
145(b) is amended by striking ``$150,000,000.'' and inserting 
``the limitation determined in accordance with the following 
table:

In the case of
  calendar year:                                      The limitation is:
  1998..................................................   $160,000,000 
  1999..................................................    170,000,000 
  2000..................................................    180,000,000 
  2001..................................................    190,000,000 
  2002 or thereafter....................................  200,000,000.''

    (b) Conforming Amendment.--The heading for subsection (b) 
of section 145 is amended by striking ``$150,000,000''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 1998.

SEC. 223. CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT FOR 
                    ELEMENTARY OR SECONDARY SCHOOL PURPOSES.

    (a) Contributions of Computer Technology and Equipment for 
Elementary or Secondary School Purposes.--Subsection (e) of 
section 170 is amended by adding at the end the following new 
paragraph:
          ``(6) Special rule for contributions of computer 
        technology and equipment for elementary or secondary 
        school purposes.--
                  ``(A) Limit on reduction.--In the case of a 
                qualified elementary or secondary educational 
                contribution, the reduction under paragraph 
                (1)(A) shall be no greater than the amount 
                determined under paragraph (3)(B).
                  ``(B) Qualified elementary or secondary 
                educational contribution.--For purposes of this 
                paragraph, the term `qualified elementary or 
                secondary educational contribution' means a 
                charitable contribution by a corporation of any 
                computer technology or equipment, but only if--
                          ``(i) the contribution is to--
                                  ``(I) an educational 
                                organization described in 
                                subsection (b)(1)(A)(ii), or
                                  ``(II) an entity described in 
                                section 501(c)(3) and exempt 
                                from tax under section 501(a) 
                                (other than an entity described 
                                in subclause (I)) that is 
                                organized primarily for 
                                purposes of supporting 
                                elementary and secondary 
                                education,
                          ``(ii) the contribution is made not 
                        later than 2 years after the date the 
                        taxpayer acquired the property (or in 
                        the case of property constructed by the 
                        taxpayer, the date the construction of 
                        the property is substantially 
                        completed),
                          ``(iii) substantially all of the use 
                        of the property by the donee is for use 
                        within the United States for 
                        educational purposes in any of the 
                        grades K-12 that are related to the 
                        purpose or function of the organization 
                        or entity,
                          ``(iv) the property is not 
                        transferred by the donee in exchange 
                        for money, other property, or services, 
                        except for shipping, installation and 
                        transfer costs,
                          ``(v) the property will fit 
                        productively into the entity's 
                        education plan, and
                          ``(vi) the entity's use and 
                        disposition of the property will be in 
                        accordance with the provisions of 
                        clauses (iii) and (iv).
                  ``(C) Contribution to private foundation.--A 
                contribution by a corporation of any computer 
                technology or equipment to a private foundation 
                (as defined in section 509) shall be treated as 
                a qualified elementary or secondary educational 
                contribution for purposes of this paragraph 
                if--
                          ``(i) the contribution to the private 
                        foundation satisfies the requirements 
                        of clauses (ii) and (iv) of 
                        subparagraph (B), and
                          ``(ii) within 30 days after such 
                        contribution, the private foundation--
                                  ``(I) contributes the 
                                property to an entity described 
                                in clause (i) of subparagraph 
                                (B) that satisfies the 
                                requirements of clauses (iii) 
                                through (vi) of subparagraph 
                                (B), and
                                  ``(II) notifies the donor of 
                                such contribution.
                  ``(D) Special rule relating to construction 
                of property.--For the purposes of this 
                paragraph, the rules of paragraph (4)(C) shall 
                apply.
                  ``(E) Definitions.--For the purposes of this 
                paragraph--
                          ``(i) Computer technology or 
                        equipment.--The term `computer 
                        technology or equipment' means computer 
                        software (as defined by section 
                        197(e)(3)(B)), computer or peripheral 
                        equipment (as defined by section 
                        168(i)(2)(B)), and fiber optic cable 
                        related to computer use.
                          ``(ii) Corporation.--The term 
                        `corporation' has the meaning given to 
                        such term by paragraph (4)(D).''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after the calendar year 
in which this Act is enacted.

SEC. 224. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS.

    (a) Certain Direct Student Loans the Repayment of Which Is 
Income Contingent.--Paragraph (1) of section 108(f) is amended 
by striking ``any student loan if '' and all that follows and 
inserting ``any student loan if--
                  ``(A) such discharge was pursuant to a 
                provision of such loan under which all or part 
                of the indebtedness of the individual would be 
                discharged if the individual worked for a 
                certain period of time in certain professions 
                for any of a broad class of employers, or
                  ``(B) in the case of a loan made under part D 
                of title IV of the Higher Education Act of 1965 
                which has a repayment schedule established 
                under section 455(e)(4) of such Act (relating 
                to income contingent repayments), such 
                discharge is after the maximum repayment period 
                under such loan (as prescribed under such 
                part).''
    (b) Certain Loans by Exempt Organizations.--
          (1) In general.--Paragraph (2) of section 108(f) 
        (defining student loan) is amended by striking ``or'' 
        at the end of subparagraph (B) and by striking 
        subparagraph (D) and inserting the following:
                  ``(D) any educational organization described 
                in section 170(b)(1)(A)(ii) if such loan is 
                made--
                          ``(i) pursuant to an agreement with 
                        any entity described in subparagraph 
                        (A), (B), or (C) under which the funds 
                        from which the loan was made were 
                        provided to such educational 
                        organization, or
                          ``(ii) pursuant to a program of such 
                        educational organization which is 
                        designed to encourage its students to 
                        serve in occupations with unmet needs 
                        or in areas with unmet needs and under 
                        which the services provided by the 
                        students (or former students) are for 
                        or under the direction of a 
                        governmental unit or an organization 
                        described in section 501(c)(3) and 
                        exempt from tax under section 501(a).
        The term `student loan' includes any loan made by an 
        educational organization so described or by an 
        organization exempt from tax under section 501(a) to 
        refinance a loan meeting the requirements of the 
        preceding sentence.''
          (2) Exception for discharges on account of services 
        performed for certain lenders.--Subsection (f) of 
        section 108 is amended by adding at the end the 
        following new paragraph:
          ``(3) Exception for discharges on account of services 
        performed for certain lenders.--Paragraph (1) shall not 
        apply to the discharge of a loan made by an 
        organization described in paragraph (2)(D) (or by an 
        organization described in paragraph (2)(E) from funds 
        provided by an organization described in paragraph 
        (2)(D)) if the discharge is on account of services 
        performed for either such organization.''
    (c) Effective Date.--The amendments made by this section 
shall apply to discharges of indebtedness after the date of the 
enactment of this Act.

              TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                     Subtitle A--Retirement Savings

SEC. 301. ESTABLISHMENT OF AMERICAN DREAM IRA.

    (a) In General.--Subpart A of part I of subchapter D of 
chapter 1 (relating to pension, profit-sharing, stock bonus 
plans, etc.) is amended by inserting after section 408 the 
following new section:

``SEC. 408A. AMERICAN DREAM IRA.

    ``(a) General Rule.--Except as provided in this section, an 
American Dream IRA shall be treated for purposes of this title 
in the same manner as an individual retirement plan.
    ``(b) American Dream IRA.--For purposes of this title, the 
term `American Dream IRA' or `AD IRA' means an individual 
retirement plan (as defined in section 7701(a)(37)) which is 
designated at the time of the establishment of the plan as an 
American Dream IRA. Such designation shall be made in such 
manner as the Secretary may prescribe.
    ``(c) Treatment of Contributions.--
          ``(1) No deduction allowed.--No deduction shall be 
        allowed under section 219 for a contribution to an AD 
        IRA.
          ``(2) Contribution limit.--
                  ``(A) In general.--The aggregate amount of 
                contributions for any taxable year to all AD 
                IRAs maintained for the benefit of an 
                individual shall not exceed $2,000.
                  ``(B) Inflation adjustment.--In the case of 
                taxable years beginning in a calendar year 
                after 1998, the $2,000 amount contained in 
                subparagraph (A) shall be increased by an 
                amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting 
                        `calendar year 1997' for `calendar year 
                        1992' in subparagraph (B) thereof.
                If the amount as adjusted under the preceding 
                sentence is not a multiple of $50, such amount 
                shall be rounded to the next lowest multiple of 
                $50.
          ``(3) Contributions permitted after age 70\1/2\.--
        Contributions to an AD IRA may be made even after the 
        individual for whom the account is maintained has 
        attained age 70\1/2\.
          ``(4) Mandatory distribution rules not to apply, 
        etc.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), subsections (a)(6) and (b)(3) 
                of section 408 (relating to required 
                distributions) and section 4974 (relating to 
                excise tax on certain accumulations in 
                qualified retirement plans) shall not apply to 
                any AD IRA.
                  ``(B) Post-death distributions.--Rules 
                similar to the rules of section 401(a)(9) 
                (other than subparagraph (A) thereof) shall 
                apply for purposes of this section.
          ``(5) Rules relating to rollover contributions.--
                  ``(A) In general.--No rollover contribution 
                may be made to an AD IRA unless it is a 
                qualified rollover contribution.
                  ``(B) Coordination with limit.--A qualified 
                rollover contribution shall not be taken into 
                account for purposes of paragraph (2).
          ``(6) Time when contributions made.--For purposes of 
        this section, the rule of section 219(f)(3) shall 
        apply.
    ``(d) Distribution Rules.--For purposes of this title--
          ``(1) General rules.--
                  ``(A) Exclusions from gross income.--Any 
                qualified distribution from an AD IRA shall not 
                be includible in gross income.
                  ``(B) Nonqualified distributions.--In 
                applying section 72 to any distribution from an 
                AD IRA which is not a qualified distribution, 
                such distribution shall be treated as made from 
                contributions to the AD IRA to the extent that 
                such distribution, when added to all previous 
                distributions from the AD IRA, does not exceed 
                the aggregate amount of contributions to the AD 
                IRA. For purposes of the preceding sentence, 
                all AD IRAs maintained for the benefit of an 
                individual shall be treated as 1 account.
                  ``(C) Exception from penalty tax.--Section 
                72(t) shall not apply to--
                          ``(i) any qualified distribution from 
                        an AD IRA, and
                          ``(ii) any qualified first-time 
                        homebuyer distribution (whether or not 
                        a qualified distribution) from an AD 
                        IRA.
          ``(2) Qualified distribution.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `qualified 
                distribution' means any payment or 
                distribution--
                          ``(i) made on or after the date on 
                        which the individual attains age 59\1/
                        2\,
                          ``(ii) made to a beneficiary (or to 
                        the estate of the individual) on or 
                        after the death of the individual,
                          ``(iii) attributable to the 
                        individual's being disabled (within the 
                        meaning of section 72(m)(7)), or
                          ``(iv) which is a qualified first-
                        time homebuyer distribution.
                  ``(B) Distributions within 5 years.--No 
                payment or distribution shall be treated as a 
                qualified distribution if--
                          ``(i) it is made within the 5-taxable 
                        year period beginning with the 1st 
                        taxable year for which the individual 
                        made a contribution to an AD IRA (or 
                        such individual's spouse made a 
                        contribution to an AD IRA) established 
                        for such individual, or
                          ``(ii) in the case of a payment or 
                        distribution properly allocable (as 
                        determined in the manner prescribed by 
                        the Secretary) to a qualified rollover 
                        contribution (or income allocable 
                        thereto), it is made within the 5-
                        taxable year period beginning with the 
                        taxable year in which the rollover 
                        contribution was made.
                Clause (ii) shall not apply to a qualified 
                rollover contribution from an AD IRA.
          ``(3) Rollovers.--
                  ``(A) In general.--Paragraph (1) shall not 
                apply to any distribution which is transferred 
                in a qualified rollover contribution to an AD 
                IRA.
                  ``(B) Income inclusion for rollovers from 
                non-ad iras.--
                          ``(i) In general.--In the case of any 
                        distribution to which this subparagraph 
                        applies--
                                  ``(I) sections 72(t) and 
                                408(d)(3) shall not apply (but 
                                section 4980A shall apply), and
                                  ``(II) any amount required to 
                                be included in gross income by 
                                reason of this paragraph shall 
                                be so included ratably over the 
                                4-taxable year period beginning 
                                with the taxable year in which 
                                the distribution is made.
                          ``(ii) Distributions to which 
                        subparagraph applies.--This 
                        subparagraph shall apply to a 
                        distribution before January 1, 1999, 
                        from an individual retirement plan 
                        (other than an AD IRA) maintained for 
                        the benefit of an individual to an AD 
                        IRA maintained for the benefit of such 
                        individual if such distribution would 
                        be a qualified rollover contribution 
                        were such individual retirement plan an 
                        AD IRA.
                          ``(iii) Conversions.--The conversion 
                        of an individual retirement plan (other 
                        than an AD IRA) to an AD IRA shall be 
                        treated for purposes of this 
                        subparagraph as a distribution from 
                        such plan to such AD IRA.
                  ``(C) Additional reporting requirements.--The 
                Secretary shall require that trustees of AD 
                IRAs, trustees of individual retirement plans, 
                or both, whichever is appropriate, shall 
                include such additional information in reports 
                required under section 408(i) as is necessary 
                to ensure that amounts required to be included 
                in gross income under subparagraph (B) are so 
                included.
          ``(4) Qualified first-time homebuyer distribution.--
        For purposes of this section--
                  ``(A) In general.--The term `qualified first-
                time homebuyer distribution' means any payment 
                or distribution received by an individual to 
                the extent such payment or distribution is used 
                by the individual before the close of the 60th 
                day after the day on which such payment or 
                distribution is received to pay qualified 
                acquisition costs with respect to a principal 
                residence of a first-time homebuyer who is such 
                individual, the spouse of such individual, or 
                any child, grandchild, or ancestor of such 
                individual or the individual's spouse.
                  ``(B) Lifetime dollar limitation.--The 
                aggregate amount of payments or distributions 
                received by an individual which may be treated 
                as qualified first-time homebuyer distributions 
                for any taxable year shall not exceed the 
                excess (if any) of--
                          ``(i) $10,000, over
                          ``(ii) the aggregate amounts treated 
                        as qualified first-time homebuyer 
                        distributions with respect to such 
                        individual for all prior taxable years.
                  ``(C) Qualified acquisition costs.--For 
                purposes of this paragraph, the term `qualified 
                acquisition costs' means the costs of 
                acquiring, constructing, or reconstructing a 
                residence. Such term includes any usual or 
                reasonable settlement, financing, or other 
                closing costs.
                  ``(D) First-time homebuyer; other 
                definitions.--For purposes of this paragraph--
                          ``(i) First-time homebuyer.--The term 
                        `first-time homebuyer' means any 
                        individual if--
                                  ``(I) such individual (and if 
                                married, such individual's 
                                spouse) had no present 
                                ownership interest in a 
                                principal residence during the 
                                2-year period ending on the 
                                date of acquisition of the 
                                principal residence to which 
                                this paragraph applies, and
                                  ``(II) subsection (h) or (k) 
                                of section 1034 (as in effect 
                                on the day before the date of 
                                the enactment of this section) 
                                did not suspend the running of 
                                any period of time specified in 
                                section 1034 (as so in effect) 
                                with respect to such individual 
                                on the day before the date the 
                                distribution is applied 
                                pursuant to subparagraph (A).
                          ``(ii) Principal residence.--The term 
                        `principal residence' has the same 
                        meaning as when used in section 121.
                          ``(iii) Date of acquisition.--The 
                        term `date of acquisition' means the 
                        date--
                                  ``(I) on which a binding 
                                contract to acquire the 
                                principal residence to which 
                                subparagraph (A) applies is 
                                entered into, or
                                  ``(II) on which construction 
                                or reconstruction of such a 
                                principal residence is 
                                commenced.
                  ``(E) Special rule where delay in 
                acquisition.--If any distribution from any 
                individual retirement plan fails to meet the 
                requirements of subparagraph (A) solely by 
                reason of a delay or cancellation of the 
                purchase or construction of the residence, the 
                amount of the distribution may be contributed 
                to an individual retirement plan as provided in 
                section 408(d)(3)(A)(i) (determined by 
                substituting `120 days' for `60 days' in such 
                section), except that--
                          ``(i) section 408(d)(3)(B) shall not 
                        be applied to such contribution, and
                          ``(ii) such amount shall not be taken 
                        into account in determining whether 
                        section 408(d)(3)(A)(i) applies to any 
                        other amount.
    ``(e) Qualified Rollover Contribution.--For purposes of 
this section, the term `qualified rollover contribution' means 
a rollover contribution to an AD IRA from another such account, 
but only if such rollover contribution meets the requirements 
of section 408(d)(3).''
    (b) Repeal of Nondeductible Contributions.--
          (1) Subsection (f) of section 219 is amended by 
        striking paragraph (7).
          (2) Paragraph (5) of section 408(d) is amended by 
        striking the last sentence.
          (3) Section 408(o) is amended by adding at the end 
        the following new paragraph:
          ``(5) Termination.--This subsection shall not apply 
        to any designated nondeductible contribution for any 
        taxable year beginning after December 31, 1997.''
          (4) Subsection (b) of section 4973 is amended by 
        striking the last sentence.
    (c) Excess Distributions Tax Not To Apply.--
          (1) Subparagraph (A) of section 4980A(d)(3) is 
        amended by inserting ``(other than AD IRAs, as defined 
        in section 4980A(b))'' after ``individual retirement 
        plans''.
          (2) Subparagraph (B) of section 4980A(e)(1) is 
        amended by inserting ``other than an AD IRA (as defined 
        in section 408A(b))'' after ``retirement plan''.
    (d) Excess Contributions.--
          (1) Section 4973 is amended by adding at the end the 
        following new subsection:
    ``(f) Excess Contributions to American Dream IRAs.--For 
purposes of this section, in the case of American Dream IRAs, 
the term `excess contributions' means the amount by which the 
amount contributed for the taxable year to such IRAs exceeds 
the limitation in section 408A(c)(2).''
          (2) Subsection (b) of section 4973 is amended by 
        adding at the end the following new sentence: ``For 
        purposes of this subsection, an American Dream IRA 
        shall not be treated as an individual retirement 
        plan.''
    (e) Clerical Amendment.--The table of sections for subpart 
A of part I of subchapter D of chapter 1 is amended by 
inserting after the item relating to section 408 the following 
new item:

        ``Sec. 408A. American Dream IRA.''

    (f) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

                       Subtitle B--Capital Gains

                    PART I--INDIVIDUAL CAPITAL GAINS

SEC. 311. 20 PERCENT MAXIMUM CAPITAL GAINS RATE FOR INDIVIDUALS.

    (a) In General.--Subsection (h) of section 1 (relating to 
maximum capital gains rate) is amended to read as follows:
    ``(h) Maximum Capital Gains Rate.--
          ``(1) In general.--If a taxpayer has a net capital 
        gain for any taxable year, the tax imposed by this 
        section for such taxable year shall not exceed the sum 
        of--
                  ``(A) the base tax amount,
                  ``(B) 10 percent of so much of the taxpayer's 
                adjusted net capital gain (or, if less, taxable 
                income) as does not exceed the excess (if any) 
                of--
                          ``(i) the amount of taxable income 
                        which would (without regard to this 
                        paragraph) be taxed at a rate of 15 
                        percent or less, over
                          ``(ii) the taxable income reduced by 
                        the adjusted net capital gain, plus
                  ``(C) 20 percent of the taxpayer's adjusted 
                net capital gain (or, if less, taxable income) 
                in excess of the amount on which a tax is 
                determined under subparagraph (B).
          ``(2) Net capital gain taken into account as 
        investment income.--For purposes of this subsection, 
        the net capital gain for any taxable year shall be 
        reduced (but not below zero) by the amount which the 
        taxpayer takes into account as investment income under 
        section 163(d)(4)(B)(iii).
          ``(3) Base tax amount.--For purposes of paragraph 
        (1), the base tax amount is the lesser of--
                  ``(A) a tax computed at the rates and in the 
                same manner as if this subsection had not been 
                enacted on taxable income reduced by the 
                adjusted net capital gain, or
                  ``(B) the sum of--
                          ``(i) a tax computed at the rates and 
                        in the same manner as if this 
                        subsection had not been enacted on the 
                        greater of--
                                  ``(I) taxable income reduced 
                                by the net capital gain, or
                                  ``(II) the amount of taxable 
                                income taxed at a rate below 28 
                                percent,
                          ``(ii) a tax of 26 percent of the 
                        lesser of--
                                  ``(I) the section 1250 gain, 
                                or
                                  ``(II) the amount of taxable 
                                income in excess of the sum of 
                                the amount on which tax is 
                                determined under clause (i) 
                                plus the net capital gain 
                                determined without regard to 
                                section 1250 gain, plus
                          ``(iii) a tax of 28 percent of the 
                        amount of taxable income in excess of 
                        the sum of--
                                  ``(I) the adjusted net 
                                capital gain, plus
                                  ``(II) the sum of the amounts 
                                on which tax is determined 
                                under clauses (i) and (ii).
          ``(4) Adjusted net capital gain.--For purposes of 
        this subsection, the term `adjusted net capital gain' 
        means net capital gain determined without regard to--
                  ``(A) collectibles gain,
                  ``(B) section 1202 gain, and
                  ``(C) section 1250 gain.
          ``(5) Collectibles gain.--For purposes of paragraph 
        (4)--
                  ``(A) In general.--The term `collectibles 
                gain' means gain from the sale or exchange of a 
                collectible (as defined in section 408(m) 
                without regard to paragraph (3) thereof) which 
                is a capital asset held for more than 1 year 
                but only to the extent such gain is taken into 
                account in computing gross income.
                  ``(B) Coordination with section 1022.--Gain 
                from the disposition of a collectible which is 
                an indexed asset to which section 1022(a) 
                applies shall be disregarded for purposes of 
                this subsection. A taxpayer may elect to treat 
                any collectible specified in such election as 
                not being an indexed asset for purposes of 
                section 1022. Any such election, and any 
                specification therein, once made, shall be 
                irrevocable.
                  ``(C) Partnerships, etc.--For purposes of 
                subparagraph (A), any gain from the sale of an 
                interest in a partnership, S corporation, or 
                trust which is attributable to unrealized 
                appreciation in the value of collectibles shall 
                be treated as gain from the sale or exchange of 
                a collectible. Rules similar to the rules of 
                section 751 shall apply for purposes of the 
                preceding sentence.
          ``(6) Section 1202 gain.--For purposes of paragraph 
        (4), the term `section 1202 gain' means gain from the 
        sale or exchange of any qualified small business stock 
        (as defined in section 1202(c)) held more than 5 years 
        which is taken into account in computing gross income.
          ``(7) Section 1250 gain.--For purposes of paragraph 
        (4), the term `section 1250 gain' means the excess (if 
        any) of--
                  ``(A) the amount which would be treated as 
                ordinary income under section 1245 if all 
                section 1250 property disposed of by the 
                taxpayer were section 1245 property, over
                  ``(B) the amount treated as ordinary income 
                under section 1250.
        In the case of a taxable year which includes May 7, 
        1997, section 1250 gain shall be determined by taking 
        into account only the gain properly taken into account 
        for the portion of the taxable year after May 6, 1997.
          ``(8) Pre-effective date gain.--
                  ``(A) In general.--In the case of a taxable 
                year which includes May 7, 1997, adjusted net 
                capital gain shall be determined without regard 
                to pre-May 7, 1997, gain.
                  ``(B) Pre-may 7, 1997, gain.--The term `pre-
                May 7, 1997, gain' means the amount which would 
                be adjusted net capital gain for the taxable 
                year if adjusted net capital gain were 
                determined by taking into account only the gain 
                or loss properly taken into account for the 
                portion of the taxable year before May 7, 1997.
                  ``(C) Special rules for pass-thru entities.--
                In applying subparagraph (A) with respect to 
                any pass-thru entity, the determination of when 
                gains and loss are properly taken into account 
                shall be made at the entity level.
                  ``(D) Pass-thru entity defined.--For purposes 
                of subparagraph (C), the term `pass-thru 
                entity' means--
                          ``(i) a regulated investment company,
                          ``(ii) a real estate investment 
                        trust,
                          ``(iii) an S corporation,
                          ``(iv) a partnership,
                          ``(v) an estate or trust, and
                          ``(vi) a common trust fund.''
    (b) Minimum tax.--
          (1) In general.--Subsection (b) of section 55 is 
        amended by adding at the end the following new 
        paragraph:
          ``(3) Maximum rate of tax on net capital gain of 
        noncorporate taxpayers.--The amount determined under 
        the first sentence of paragraph (1)(A)(i) shall not 
        exceed the sum of--
                  ``(A) the lesser of--
                          ``(i) the amount determined under 
                        such first sentence computed at the 
                        rates and in the same manner as if this 
                        paragraph had not been enacted on the 
                        taxable excess reduced by the adjusted 
                        net capital gain (as defined in section 
                        1(h)(4)), or
                          ``(ii) the sum of--
                                  ``(I) the amount determined 
                                under such first sentence 
                                computed at the rates and in 
                                the same manner as if this 
                                paragraph had not been enacted 
                                on the taxable excess reduced 
                                by the sum of the adjusted net 
                                capital gain (as so defined) 
                                and the section 1250 gain (as 
                                defined in section 1(h)(7)), 
                                plus
                                  ``(II) 26 percent of the 
                                lesser of the section 1250 gain 
                                (as so defined) or the taxable 
                                excess reduced by the adjusted 
                                net capital gain (as so 
                                defined),
                  ``(B) a tax of 10 percent of so much of the 
                taxpayer's adjusted net capital gain (or, if 
                less, taxable excess) as does not exceed the 
                amount on which a tax is determined under 
                section 1(h)(1)(B), plus
                  ``(C) a tax of 20 percent of the taxpayer's 
                adjusted net capital gain (or, if less, taxable 
                excess) in excess of the amount on which tax is 
                determined under subparagraph (B).''
          (2) Conforming amendment.--Clause (ii) of section 
        55(b)(1)(A) is amended by striking ``clause (i)'' and 
        inserting ``this subsection''.
    (c) Other Conforming Amendments.--
          (1) Subsection (d) of section 291 is amended by 
        inserting at the end the following new sentence: ``Any 
        capital gain dividend treated as having been paid out 
        of such difference to a shareholder which is not a 
        corporation retains its characters as section 1250 gain 
        for purposes of applying section 1(h) to such 
        shareholder.''
          (2) Paragraph (1) of section 1445(e) is amended by 
        striking ``28 percent'' and inserting ``20 percent''.
          (3) The second sentence of section 7518(g)(6)(A), and 
        the second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936, are each amended by striking 
        ``28 percent'' and inserting ``20 percent''.
    (d) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        taxable years ending after May 6, 1997.
          (2) Withholding.--The amendment made by subsection 
        (c)(2) shall apply only to amounts paid after the date 
        of the enactment of this Act.
          (3) Application of estimated tax rules.--Clause (i) 
        of section 6654(d)(1)(C) of the Internal Revenue Code 
        of 1986 shall be applied by substituting ``109 
        percent'' for ``110 percent'' where the preceding 
        taxable year referred in such clause is a taxable year 
        beginning in calendar year 1996.

SEC. 312. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 2000, 
                    FOR PURPOSES OF DETERMINING GAIN.

    (a) In General.--Part II of subchapter O of chapter 1 
(relating to basis rules of general application) is amended by 
inserting after section 1021 the following new section:

``SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 
                    2000, FOR PURPOSES OF DETERMINING GAIN.

    ``(a) General Rule.--
          ``(1) Indexed basis substituted for adjusted basis.--
        Solely for purposes of determining gain on the sale or 
        other disposition by a taxpayer (other than a 
        corporation) of an indexed asset which has been held 
        for more than 3 years, the indexed basis of the asset 
        shall be substituted for its adjusted basis.
          ``(2) Exception for depreciation, etc.--The 
        deductions for depreciation, depletion, and 
        amortization shall be determined without regard to the 
        application of paragraph (1) to the taxpayer or any 
        other person.
          ``(3) Exception for principal residences.--Paragraph 
        (1) shall not apply to any disposition of the principal 
        residence (within the meaning of section 121) of the 
        taxpayer .
    ``(b) Indexed Asset.--
          ``(1) In general.--For purposes of this section, the 
        term `indexed asset' means--
                  ``(A) common stock in a C corporation (other 
                than a foreign corporation), and
                  ``(B) tangible property,
        which is a capital asset or property used in the trade 
        or business (as defined in section 1231(b)).
          ``(2) Stock in certain foreign corporations 
        included.--For purposes of this section--
                  ``(A) In general.--The term `indexed asset' 
                includes common stock in a foreign corporation 
                which is regularly traded on an established 
                securities market.
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply to--
                          ``(i) stock of a foreign investment 
                        company (within the meaning of section 
                        1246(b)),
                          ``(ii) stock in a passive foreign 
                        investment company (as defined in 
                        section 1296),
                          ``(iii) stock in a foreign 
                        corporation held by a United States 
                        person who meets the requirements of 
                        section 1248(a)(2), and
                          ``(iv) stock in a foreign personal 
                        holding company (as defined in section 
                        552).
                  ``(C) Treatment of american depository 
                receipts.--An American depository receipt for 
                common stock in a foreign corporation shall be 
                treated as common stock in such corporation.
    ``(c) Indexed Basis.--For purposes of this section--
          ``(1) General rule.--The indexed basis for any asset 
        is--
                  ``(A) the adjusted basis of the asset, 
                increased by
                  ``(B) the applicable inflation adjustment.
          ``(2) Applicable inflation adjustment.--The 
        applicable inflation adjustment for any asset is an 
        amount equal to--
                  ``(A) the adjusted basis of the asset, 
                multiplied by
                  ``(B) the percentage (if any) by which--
                          ``(i) the chain-type price index for 
                        GDP for the last calendar quarter 
                        ending before the asset is disposed of, 
                        exceeds
                          ``(ii) the chain-type price index for 
                        GDP for the last calendar quarter 
                        ending before the asset was acquired by 
                        the taxpayer.
        The percentage under subparagraph (B) shall be rounded 
        to the nearest \1/10\ of 1 percentage point.
          ``(3) Chain-type price index for GDP.--The chain-type 
        price index for GDP for any calendar quarter is such 
        index for such quarter (as shown in the last revision 
        thereof released by the Secretary of Commerce before 
        the close of the following calendar quarter).
    ``(d) Suspension of Holding Period Where Diminished Risk of 
Loss; Treatment of Short Sales.--
          ``(1) In general.--If the taxpayer (or a related 
        person) enters into any transaction which substantially 
        reduces the risk of loss from holding any asset, such 
        asset shall not be treated as an indexed asset for the 
        period of such reduced risk.
          ``(2) Short sales.--
                  ``(A) In general.--In the case of a short 
                sale of an indexed asset with a short sale 
                period in excess of 3 years, for purposes of 
                this title, the amount realized shall be an 
                amount equal to the amount realized (determined 
                without regard to this paragraph) increased by 
                the applicable inflation adjustment. In 
                applying subsection (c)(2) for purposes of the 
                preceding sentence, the date on which the 
                property is sold short shall be treated as the 
                date of acquisition and the closing date for 
                the sale shall be treated as the date of 
                disposition.
                  ``(B) Short sale period.--For purposes of 
                subparagraph (A), the short sale period begins 
                on the day that the property is sold and ends 
                on the closing date for the sale.
    ``(e) Treatment of Regulated Investment Companies and Real 
Estate Investment Trusts.--
          ``(1) Adjustments at entity level.--
                  ``(A) In general.--Except as otherwise 
                provided in this paragraph, the adjustment 
                under subsection (a) shall be allowed to any 
                qualified investment entity (including for 
                purposes of determining the earnings and 
                profits of such entity).
                  ``(B) Exception for corporate shareholders.--
                Under regulations--
                          ``(i) in the case of a distribution 
                        by a qualified investment entity 
                        (directly or indirectly) to a 
                        corporation--
                                  ``(I) the determination of 
                                whether such distribution is a 
                                dividend shall be made without 
                                regard to this section, and
                                  ``(II) the amount treated as 
                                gain by reason of the receipt 
                                of any capital gain dividend 
                                shall be increased by the 
                                percentage by which the 
                                entity's net capital gain for 
                                the taxable year (determined 
                                without regard to this section) 
                                exceeds the entity's net 
                                capital gain for such year 
                                determined with regard to this 
                                section, and
                          ``(ii) there shall be other 
                        appropriate adjustments (including 
                        deemed distributions) so as to ensure 
                        that the benefits of this section are 
                        not allowed (directly or indirectly) to 
                        corporate shareholders of qualified 
                        investment entities.
                For purposes of the preceding sentence, any 
                amount includible in gross income under section 
                852(b)(3)(D) shall be treated as a capital gain 
                dividend and an S corporation shall not be 
                treated as a corporation.
                  ``(C) Exception for qualification purposes.--
                This section shall not apply for purposes of 
                sections 851(b) and 856(c).
                  ``(D) Exception for certain taxes imposed at 
                entity level.--
                          ``(i) Tax on failure to distribute 
                        entire gain.--If any amount is subject 
                        to tax under section 852(b)(3)(A) for 
                        any taxable year, the amount on which 
                        tax is imposed under such section shall 
                        be increased by the percentage 
                        determined under subparagraph 
                        (B)(i)(II). A similar rule shall apply 
                        in the case of any amount subject to 
                        tax under paragraph (2) or (3) of 
                        section 857(b) to the extent 
                        attributable to the excess of the net 
                        capital gain over the deduction for 
                        dividends paid determined with 
                        reference to capital gain dividends 
                        only. The first sentence of this clause 
                        shall not apply to so much of the 
                        amount subject to tax under section 
                        852(b)(3)(A) as is designated by the 
                        company under section 852(b)(3)(D).
                          ``(ii) Other taxes.--This section 
                        shall not apply for purposes of 
                        determining the amount of any tax 
                        imposed by paragraph (4), (5), or (6) 
                        of section 857(b).
          ``(2) Adjustments to interests held in entity.--
                  ``(A) Regulated investment companies.--Stock 
                in a regulated investment company (within the 
                meaning of section 851) shall be an indexed 
                asset for any calendar quarter in the same 
                ratio as--
                          ``(i) the average of the fair market 
                        values of the indexed assets held by 
                        such company at the close of each month 
                        during such quarter, bears to
                          ``(ii) the average of the fair market 
                        values of all assets held by such 
                        company at the close of each such 
                        month.
                  ``(B) Real estate investment trusts.--Stock 
                in a real estate investment trust (within the 
                meaning of section 856) shall be an indexed 
                asset for any calendar quarter in the same 
                ratio as--
                          ``(i) the fair market value of the 
                        indexed assets held by such trust at 
                        the close of such quarter, bears to
                          ``(ii) the fair market value of all 
                        assets held by such trust at the close 
                        of such quarter.
                  ``(C) Ratio of 80 percent or more.--If the 
                ratio for any calendar quarter determined under 
                subparagraph (A) or (B) would (but for this 
                subparagraph) be 80 percent or more, such ratio 
                for such quarter shall be 100 percent.
                  ``(D) Ratio of 20 percent or less.--If the 
                ratio for any calendar quarter determined under 
                subparagraph (A) or (B) would (but for this 
                subparagraph) be 20 percent or less, such ratio 
                for such quarter shall be zero.
                  ``(E) Look-thru of partnerships.--For 
                purposes of this paragraph, a qualified 
                investment entity which holds a partnership 
                interest shall be treated (in lieu of holding a 
                partnership interest) as holding its 
                proportionate share of the assets held by the 
                partnership.
          ``(3) Treatment of return of capital distributions.--
        Except as otherwise provided by the Secretary, a 
        distribution with respect to stock in a qualified 
        investment entity which is not a dividend and which 
        results in a reduction in the adjusted basis of such 
        stock shall be treated asallocable to stock acquired by 
the taxpayer in the order in which such stock was acquired.
          ``(4) Qualified investment entity.--For purposes of 
        this subsection, the term `qualified investment entity' 
        means--
                  ``(A) a regulated investment company (within 
                the meaning of section 851), and
                  ``(B) a real estate investment trust (within 
                the meaning of section 856).
    ``(f) Other Pass-Thru Entities.--
          ``(1) Partnerships.--
                  ``(A) In general.--In the case of a 
                partnership, the adjustment made under 
                subsection (a) at the partnership level shall 
                be passed through to the partners.
                  ``(B) Special rule in the case of section 754 
                elections.--In the case of a transfer of an 
                interest in a partnership with respect to which 
                the election provided in section 754 is in 
                effect--
                          ``(i) the adjustment under section 
                        743(b)(1) shall, with respect to the 
                        transferor partner, be treated as a 
                        sale of the partnership assets for 
                        purposes of applying this section, and
                          ``(ii) with respect to the transferee 
                        partner, the partnership's holding 
                        period for purposes of this section in 
                        such assets shall be treated as 
                        beginning on the date of such 
                        adjustment.
          ``(2) S corporations.--In the case of an S 
        corporation, the adjustment made under subsection (a) 
        at the corporate level shall be passed through to the 
        shareholders. This section shall not apply for purposes 
        of determining the amount of any tax imposed by section 
        1374 or 1375.
          ``(3) Common trust funds.--In the case of a common 
        trust fund, the adjustment made under subsection (a) at 
        the trust level shall be passed through to the 
        participants.
          ``(4) Indexing adjustment disregarded in determining 
        loss on sale of interest in entity.--Notwithstanding 
        the preceding provisions of this subsection, for 
        purposes of determining the amount of any loss on a 
        sale or exchange of an interest in a partnership, S 
        corporation, or common trust fund, the adjustment made 
        under subsection (a) shall not be taken into account in 
        determining the adjusted basis of such interest.
    ``(g) Dispositions Between Related Persons.--
          ``(1) In general.--This section shall not apply to 
        any sale or other disposition of property between 
        related persons except to the extent that the basis of 
        such property in the hands of the transferee is a 
        substituted basis.
          ``(2) Related persons defined.--For purposes of this 
        section, the term `related persons' means--
                  ``(A) persons bearing a relationship set 
                forth in section 267(b), and
                  ``(B) persons treated as single employer 
                under subsection (b) or (c) of section 414.
    ``(h) Transfers To Increase Indexing Adjustment.--If any 
person transfers cash, debt, or any other property to another 
person and the principal purpose of such transfer is to secure 
or increase an adjustment under subsection (a), the Secretary 
may disallow part or all of such adjustment or increase.
    ``(i) Special Rules.--For purposes of this section--
          ``(1) Treatment of improvements, etc.--If there is an 
        addition to the adjusted basis of any tangible property 
        or of any stock in a corporation during the taxable 
        year by reason of an improvement to such property or a 
        contribution to capital of such corporation--
                  ``(A) such addition shall never be taken into 
                account under subsection (c)(1)(A) if the 
                aggregate amount thereof during the taxable 
                year with respect to such property or stock is 
                less than $1,000, and
                  ``(B) such addition shall be treated as a 
                separate asset acquired at the close of such 
                taxable year if the aggregate amount thereof 
                during the taxable year with respect to such 
                property or stock is $1,000 or more.
        A rule similar to the rule of the preceding sentence 
        shall apply to any other portion of an asset to the 
        extent that separate treatment of such portion is 
        appropriate to carry out the purposes of this section.
          ``(2) Assets which are not indexed assets throughout 
        holding period.--The applicable inflation adjustment 
        shall be appropriately reduced for periods during which 
        the asset was not an indexed asset.
          ``(3) Treatment of certain distributions.--A 
        distribution with respect to stock in a corporation 
        which is not a dividend shall be treated as a 
        disposition.
          ``(4) Acquisition date where there has been prior 
        application of subsection (a)(1) with respect to the 
        taxpayer.--If there has been a prior application of 
        subsection (a)(1) to an asset while such asset was held 
        by the taxpayer, the date of acquisition of such asset 
        by the taxpayer shall be treated as not earlier than 
        the date of the most recent such prior application.
          ``(5) Collapsible corporations.--The application of 
        section 341(a) (relating to collapsible corporations) 
        shall be determined without regard to this section.
    ``(j) 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 part II 
of subchapter O of chapter 1 is amended by inserting after the 
item relating to section 1021 the following new item:

        ``Sec. 1022. Indexing of certain assets acquired after December 
                  31, 2000, for purposes of determining gain.''

    (c) Effective Dates.--
          (1) In general.--The amendments made by this section 
        shall apply to the disposition of any property the 
        holding period of which begins after December 31, 2000.
          (2) Certain transactions between related persons.--
        The amendments made by this section shall not apply to 
        the disposition of any property acquired after December 
        31, 2000, from a related person (as defined in section 
        1022(g)(2) of the Internal Revenue Code of 1986, as 
        added by this section) if--
                  (A) such property was so acquired for a price 
                less than the property's fair market value, and
                  (B) the amendments made by this section did 
                not apply to such property in the hands of such 
                related person.
    (d) Election To Recognize Gain on Assets Held on January 1, 
2001.--For purposes of the Internal Revenue Code of 1986--
          (1) In general.--A taxpayer other than a corporation 
        may elect to treat--
                  (A) any readily tradable stock (which is an 
                indexed asset) held by such taxpayer on January 
                1, 2001, and not sold before the next business 
                day after such date, as having been sold on 
                such next business day for an amount equal to 
                its closing market price on such next business 
                day (and as having been reacquired on such next 
                business day for an amount equal to such 
                closing market price), and
                  (B) any other indexed asset held by the 
                taxpayer on January 1, 2001, as having been 
                sold on such date for an amount equal to its 
                fair market value on such date (and as having 
                been reacquired on such date for an amount 
                equal to such fair market value).
          (2) Treatment of gain or loss.--
                  (A) Any gain resulting from an election under 
                paragraph (1) shall be treated as received or 
                accrued on the date the asset is treated as 
                sold under paragraph(1) and shall be recognized 
notwithstanding any provision of the Internal Revenue Code of 1986.
                  (B) Any loss resulting from an election under 
                paragraph (1) shall not be allowed for any 
                taxable year.
          (3) Election.--An election under paragraph (1) shall 
        be made in such manner as the Secretary of the Treasury 
        or his delegate may prescribe and shall specify the 
        assets for which such election is made. Such an 
        election, once made with respect to any asset, shall be 
        irrevocable.
          (4) Readily tradable stock.--For purposes of this 
        subsection, the term ``readily tradable stock'' means 
        any stock which, as of January 1, 2001, is readily 
        tradable on an established securities market or 
        otherwise.

SEC. 313. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL RESIDENCE.

    (a) In General.--Section 121 (relating to one-time 
exclusion of gain from sale of principal residence by 
individual who has attained age 55) is amended to read as 
follows:

``SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.

    ``(a) Exclusion.--Gross income shall not include gain from 
the sale or exchange of property if, during the 5-year period 
ending on the date of the sale or exchange, such property has 
been owned and used by the taxpayer as the taxpayer's principal 
residence for periods aggregating 2 years or more.
    ``(b) Limitations.--
          ``(1) Dollar limitation.--The amount of gain excluded 
        from gross income under subsection (a) with respect to 
        any sale or exchange shall not exceed $250,000 
        ($500,000 in the case of a joint return where both 
        spouses meet the use requirement of subsection (a)).
          ``(2) Application to only 1 sale or exchange every 2 
        years.--
                  ``(A) In general.--Subsection (a) shall not 
                apply to any sale or exchange by the taxpayer 
                if, during the 2-year period ending on the date 
                of such sale or exchange, there was any other 
                sale or exchange by the taxpayer or his spouse 
                to which subsection (a) applied.
                  ``(B) Premarriage sales by spouse not taken 
                into account.--If, but for this subparagraph, 
                subsection (a) would not apply to a sale or 
                exchange by a married individual by reason of a 
                sale or exchange by such individual's spouse 
                before their marriage--
                          ``(i) subparagraph (A) shall be 
                        applied without regard to the sale or 
                        exchange by such individual's spouse, 
                        but
                          ``(ii) the amount of gain excluded 
                        from gross income under subsection (a) 
                        with respect to the sale or exchange by 
                        such individual shall not exceed 
                        $250,000.
                  ``(C) Pre-may 7, 1997, sales not taken into 
                account.--Subparagraph (A) shall be applied 
                without regard to any sale or exchange before 
                May 7, 1997.
    ``(c) Exclusion for Taxpayers Failing To Meet Certain 
Requirements.--
          ``(1) In general.--In the case of a sale or exchange 
        to which this subsection applies, the ownership and use 
        requirements of subsection (a) shall not apply and 
        subsection (b)(2) shall not apply; but the amount of 
        gain excluded from gross income under subsection (a) 
        with respect to such sale of exchange shall not 
        exceed--
                  ``(A) the amount which bears the same ratio 
                to the amount which would be so excluded if 
                such requirements had been met, as
                  ``(B) the shorter of--
                          ``(i) the aggregate periods, during 
                        the 5-year period ending on the date of 
                        such sale or exchange, such property 
                        has been owned and used by the taxpayer 
                        as the taxpayer's principal residence, 
                        or
                          ``(ii) the period after the date of 
                        the most recent prior sale or exchange 
                        by the taxpayer or his spouse to which 
                        subsection (a) applied and before the 
                        date of such sale or exchange,
                bears to 2 years.
          ``(2) Sales and exchanges to which subsection 
        applies.--This subsection shall apply to any sale or 
        exchange if--
                  ``(A) subsection (a) would not (but for this 
                subsection) apply to such sale or exchange by 
                reason of--
                          ``(i) a failure to meet the ownership 
                        and use requirements of subsection (a), 
                        or
                          ``(ii) subsection (b)(2), and
                  ``(B) such sale or exchange is by reason of a 
                change in place of employment, health, or, to 
                the extent provided in regulations, other 
                unforeseen circumstances.
    ``(d) Special Rules.--
          ``(1) Joint returns.--For purposes of this section, 
        if a husband and wife make a joint return for the 
        taxable year of the sale or exchange of the property, 
        subsection (a) shall, subject to the provisions of 
        subsection (b), apply if either spouse meets the 
        ownership and use requirements of subsection (a) with 
        respect to such property.
          ``(2) Property of deceased spouse.--For purposes of 
        this section, in the case of an unmarried individual 
        whose spouse is deceased on the date of the sale or 
        exchange of property, the period such unmarried 
        individual owned such property shall include the period 
        such deceased spouse held such property before death.
          ``(3) Property of divorced spouse.--For purposes of 
        this section, in the case of an individual holding 
        property transferred to such individual incident to 
        divorce (within the meaning of section 1041(c))--
                  ``(A) the period such individual owns such 
                property shall include the period the former 
                spouse owned the property, and
                  ``(B) the dollar limitation applicable under 
                paragraph (1) shall not be less than the amount 
                such limitation would have been had the sale or 
                exchange occurred on the date the divorce 
                became final.
          ``(4) Tenant-stockholder in cooperative housing 
        corporation.--For purposes of this section, if the 
        taxpayer holds stock as a tenant-stockholder (as 
        defined in section 216) in a cooperative housing 
        corporation (as defined in such section), then--
                  ``(A) the holding requirements of subsection 
                (a) shall be applied to the holding of such 
                stock, and
                  ``(B) the use requirements of subsection (a) 
                shall be applied to the house or apartment 
                which the taxpayer was entitled to occupy as 
                such stockholder.
          ``(5) Involuntary conversions.--
                  ``(A) In general.--For purposes of this 
                section, the destruction, theft, seizure, 
                requisition, or condemnation of property shall 
                be treated as the sale of such property.
                  ``(B) Application of section 1033.--In 
                applying section 1033 (relating to involuntary 
                conversions), the amount realized from the sale 
                or exchange of property shall be treated as 
                being the amount determined without regard to 
                this section, reduced by the amount of gain not 
                included in gross income pursuant to this 
                section.
                  ``(C) Property acquired after involuntary 
                conversion.--If the basis of the property sold 
                or exchanged is determined (in whole or in 
                part) under section 1033(b) (relating to basis 
                of property acquired through involuntary 
                conversion), then the holding and use by the 
                taxpayer of the converted property shall be 
                treated as holding and use by the taxpayer of 
                the property sold or exchanged.
          ``(6) Recognition of gain attributable to 
        depreciation.--Subsection (a) shall not apply to so 
        much ofthe gain from the sale of any property as does 
not exceed the portion of the depreciation adjustments (as defined in 
section 1250(b)(3)) attributable to periods after May 6, 1997, in 
respect of such property.
          ``(7) Determination of use during periods of out-of-
        residence care.--In the case of a taxpayer who--
                  ``(A) becomes physically or mentally 
                incapable of self-care, and
                  ``(B) owns property and uses such property as 
                the taxpayer's principal residence during the 
                5-year period described in subsection (a) for 
                periods aggregating at least 1 year,
        then the taxpayer shall be treated as using such 
        property as the taxpayer's principal residence during 
        any time during such 5-year period in which the 
        taxpayer owns the property and resides in any facility 
        (including a nursing home) licensed by a State or 
        political subdivision to care for an individual in the 
        taxpayer's condition.
          ``(8) Determination of marital status.--In the case 
        of any sale or exchange, for purposes of this section--
                  ``(A) the determination of whether an 
                individual is married shall be made as of the 
                date of the sale or exchange, and
                  ``(B) an individual legally separated from 
                his spouse under a decree of divorce or of 
                separate maintenance shall not be considered as 
                married.
          ``(9) Sales of life estates and remainder 
        interests.--For purposes of this section--
                  ``(A) In general.--This section shall not 
                fail to apply to the sale or exchange of an 
                interest in a principal residence by reason of 
                such interest being a life estate or a 
                remainder interest in such residence, but this 
                section shall apply only to one such interest 
                in such residence which is sold or exchanged 
                separately.
                  ``(B) Exception for sales to related 
                parties.--Subparagraph (A) shall not apply to 
                any sale to, or exchange with, any person who 
                bears a relationship to the taxpayer which is 
                described in section 267(b) or 707(b).
    ``(e) Denial of Exclusion for Expatriates.--This section 
shall not apply to any sale or exchange by an individual if the 
treatment provided by section 877(a)(1) applies to such 
individual.
    ``(f) Election To Have Section Not Apply.--This section 
shall not apply to any sale or exchange with respect to which 
the taxpayer elects not to have this section apply.
    ``(g) Residences Acquired in Rollovers Under Section 
1034.--For purposes of this section, in the case of property 
the acquisition of which by the taxpayer resulted under section 
1034 (as in effect on the day before the date of the enactment 
of this sentence) in the nonrecognition of any part of the gain 
realized on the sale or exchange of another residence, in 
determining the period for which the taxpayer has owned and 
used such property as the taxpayer's principal residence, there 
shall be included the aggregate periods for which such other 
residence (and each prior residence taken into account under 
section 1223(7) in determining the holding period of such 
property) had been so owned and used.''
    (b) Repeal of Nonrecognition of Gain on Rollover of 
Principal Residence.--Section 1034 (relating to rollover of 
gain on sale of principal residence) is hereby repealed.
    (c) Conforming Amendments.--
          (1) The following provisions of the Internal Revenue 
        Code of 1986 are each amended by striking ``section 
        1034'' and inserting ``section 121'': sections 
        25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i), 
        143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A), 
        464(f)(3)(B)(i), 1033(h)(4), 1274(c)(3)(B), 
        6334(a)(13), and 7872(f)(11)(A).
          (2) Paragraph (4) of section 32(c) is amended by 
        striking ``(as defined in section 1034(h)(3))'' and by 
        adding at the end the following new sentence: ``For 
        purposes of the preceding sentence, the term `extended 
        active duty' means any period of active duty pursuant 
        to a call or order to such duty for a period in excess 
        of 90 days or for an indefinite period.''
          (3) Subparagraph (A) of 143(m)(6) is amended by 
        inserting ``(as in effect on the day before the date of 
        the enactment of the Revenue Reconciliation Act of 
        1997)'' after ``1034(e)''.
          (4) Subsection (e) of section 216 is amended by 
        striking ``such exchange qualifies for nonrecognition 
        of gain under section 1034(f)'' and inserting ``such 
        dwelling unit is used as his principal residence 
        (within the meaning of section 121)''.
          (5) Section 512(a)(3)(D) is amended by inserting 
        ``(as in effect on the day before the date of the 
        enactment of the Revenue Reconciliation Act of 1997)'' 
        after ``1034''.
          (6) Paragraph (7) of section 1016(a) is amended by 
        inserting ``(as in effect on the day before the date of 
        the enactment of the Revenue Reconciliation Act of 
        1997)'' after ``1034'' and by inserting ``(as so in 
        effect)'' after ``1034(e)''.
          (7) Paragraph (3) of section 1033(k) is amended to 
        read as follows:
          ``(3) For exclusion from gross income of gain from 
        involuntary conversion of principal residence, see 
        section 121.''
          (8) Subsection (e) of section 1038 is amended to read 
        as follows:
    ``(e) Principal Residences.--If--
          ``(1) subsection (a) applies to a reacquisition of 
        real property with respect to the sale of which gain 
        was not recognized under section 121 (relating to gain 
        on sale of principal residence); and
          ``(2) within 1 year after the date of the 
        reacquisition of such property by the seller, such 
        property is resold by him,
then, under regulations prescribed by the Secretary, 
subsections (b), (c), and (d) of this section shall not apply 
to the reacquisition of such property and, for purposes of 
applying section 121, the resale of such property shall be 
treated as a part of the transaction constituting the original 
sale of such property.''
          (9) Paragraph (7) of section 1223 is amended by 
        inserting ``(as in effect on the day before the date of 
        the enactment of the Revenue Reconciliation Act of 
        1997)'' after ``1034''.
          (10) Paragraph (7) of section 1250(d) is amended to 
        read as follows:
          ``(7) Disposition of principal residence.--Subsection 
        (a) shall not apply to a disposition of property to the 
        extent used by the taxpayer as his principal residence 
        (within the meaning of section 121, relating to gain on 
        sale of principal residence).''
          (11) Subsection (c) of section 6012 is amended by 
        striking ``(relating to one-time exclusion of gain from 
        sale of principal residence by individual who has 
        attained age 55)'' and inserting ``(relating to gain 
        from sale of principal residence)''.
          (12) Paragraph (2) of section 6212(c) is amended by 
        striking subparagraph (C) and by redesignating the 
        succeeding subparagraphs accordingly.
          (13) Section 6504 is amended by striking paragraph 
        (4) and by redesignating the succeeding paragraphs 
        accordingly.
          (14) The item relating to section 121 in the table of 
        sections for part III of subchapter B of chapter 1 is 
        amended to read as follows:

        ``Sec. 121. Exclusion of gain from sale of principal 
                  residence.''

          (15) The table of sections for part III of subchapter 
        O of chapter 1 of such Code is amended by striking the 
        item relating to section 1034.
    (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to sales and exchanges after May 6, 1997.
          (2) Sales before date of enactment.--At the election 
        of the taxpayer, the amendments made by this section 
        shall not apply to any sale or exchange before the date 
        of the enactment of this Act.
          (3) Binding contracts.--At the election of the 
        taxpayer, the amendments made by this section shall not 
        apply to a sale or exchange after the date of the 
        enactment of this Act, if--
                  (A) such sale or exchange is pursuant to a 
                contract which was binding on such date, or
                  (B) without regard to such amendments, gain 
                would not be recognized under section 1034 of 
                the Internal Revenue Code of 1986 (as in effect 
                on the day before the date of the enactment of 
                this Act) on such sale or exchange by reason of 
                a new residence acquired on or before such date 
                or with respect to the acquisition of which by 
                the taxpayer a binding contract was in effect 
                on such date.
        This paragraph shall not apply to any sale or exchange 
        by an individual if the treatment provided by section 
        877(a)(1) of the Internal Revenue Code of 1986 applies 
        to such individual.

                    PART II--CORPORATE CAPITAL GAINS

SEC. 321. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX FOR CORPORATIONS.

    (a) In General.--Section 1201 is amended to read as 
follows:

``SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.

    ``(a) General Rule.--If for any taxable year a corporation 
has 8-year gain, then, in lieu of the tax imposed by sections 
11, 511, and 831 (a) and (b) (whichever is applicable), there 
is hereby imposed a tax (if such tax is less than the tax 
imposed by such sections) which shall consist of the sum of--
          ``(1) a tax computed on the taxable income reduced by 
        the amount of the 8-year gain, at the rates and in the 
        manner as if this subsection had not been enacted, plus
          ``(2) a tax of the applicable percentage of the 
        amount of the 8-year gain (or, if less, taxable 
        income).
    ``(b) Applicable Percentage.--For purposes of subsection 
(a)--
          ``(1) In general.--The term `applicable percentage' 
        means--
                  ``(A) 32 percent for the portion of any 
                taxable year within 1998,
                  ``(B) 31 percent for the portion of any 
                taxable year within 1999, and
                  ``(C) 30 percent for the portion of any 
                taxable year after 1999.
          ``(2) Fiscal year taxpayers.--
                  ``(A) Taxable years beginning in 1997.--In 
                applying this section to taxable years 
                beginning in 1997, 8-year gain shall not exceed 
                the 8-year gain determined by taking into 
                account only gains and losses properly taken 
                into account for the portion of the taxable 
                year after December 31, 1997.
                  ``(B) Taxable years beginning in 1998 or 
                1999.--In the case of a taxable year beginning 
                in 1998 or 1999 which includes portions of 2 
                calendar years, the applicable percentage shall 
                be applied separately to such portions by 
                taking into account--
                          ``(i) in the case of the first such 
                        portion, the lesser of--
                                  ``(I) the 8-year gain 
                                determined by taking into 
                                account only gains and losses 
                                properly taken into account for 
                                such portion, or
                                  ``(II) the 8-year gain 
                                determined for the entire 
                                taxable year, and
                          ``(ii) in the case of the second such 
                        portion, the 8-year gain (and the 
                        taxable income) determined for the 
                        entire taxable year reduced by the 
                        amount on which tax is determined under 
                        subsection (a)(2) for the first such 
                        portion determined under clause (i).
                  ``(C) Special rule for pass-thru entities.--
                Section 1(h)(8)(C) shall apply for purposes of 
                this paragraph.
    ``(c) 8-Year Gain.--For purposes of this section, the term 
`8-year gain' means the lesser of--
          ``(1) the amount of long-term capital gain which 
        would be computed for the taxable year if only gain 
        from the sale or exchange of property held by the 
        taxpayer for more than 8 years were taken into account, 
        or
          ``(2) net capital gain.
The determination under the preceding sentence shall be made 
without regard to collectibles gain (as defined in section 
1(h)(5)) or section 1250 gain (as defined in section 1(h)(7)).
    ``(d) Cross References.--

          ``For computation of the alternative tax--
          ``(1) in the case of life insurance companies, see section 
        801(a)(2),
          ``(2) in the case of regulated investment companies and their 
        shareholders, see section 852(b)(3)(A) and (D), and
          ``(3) in the case of real estate investment trusts, see 
        section 857(b)(3)(A).''

    (b) Technical Amendments.--
          (1) Subsection (d) of section 291 is amended by 
        striking ``subsection (a)(1) to such shareholder'' and 
        inserting ``subsection (a)(1) and section 1201 to such 
        shareholder''.
          (2) Clause (iii) of section 852(b)(3)(D) is amended 
        by striking ``65 percent'' and inserting ``the 
        applicable percentage'' and by inserting at the end the 
        following new sentence: ``For purposes of the preceding 
        sentence, the term `applicable percentage' means the 
        percentage equal to the excess of 100 percent over the 
        percentage applicable under section 1201(a).''
          (3)(A) Subparagraph (B) of section 852(b)(3) is 
        amended to read as follows:
                  ``(B) Treatment of capital gain dividends by 
                shareholders.--
                          ``(i) In general.--Except as provided 
                        in clause (ii), a capital gain dividend 
                        shall be treated by the shareholders as 
                        gain from the sale or exchange of a 
                        capital asset held for more than 1 
                        year.
                          ``(ii) Coordination with 8-year 
                        holding period for corporate net 
                        capital gain.--The portion of any 
                        capital gain dividend designated by the 
                        company as allocable to gain from the 
                        sale or exchange of property held by 
                        the company for more than 8 years shall 
                        be treated as gain from the sale or 
                        exchange of a capital asset held for 
                        more than 8 years. Rules similar to the 
                        rules of subparagraph (C) shall apply 
                        to any designation under the preceding 
                        sentence.''
          (B) Clause (i) of section 851(b)(3)(D) is amended by 
        adding at the end thereof the following new sentence: 
        ``Rules similar to the rules of subparagraph (B) shall 
        apply in determining character of the amount to be so 
        included by any such shareholder which is a 
        corporation.''
          (4) Subparagraph (B) of section 857(b)(3) is amended 
        to read as follows:
                  ``(B) Treatment of capital gain dividends by 
                shareholders.--
                          ``(i) In general.--Except as provided 
                        in clause (ii), a capital gain dividend 
                        shall be treated by the shareholders or 
                        holders of beneficial interests as gain 
                        from the sale or exchange of a capital 
                        asset held for more than 1 year.
                          ``(ii) Coordination with 8-year 
                        holding period for corporate net 
                        capital gain.--The portion of any 
                        capital gain dividend designated by the 
                        company as allocable to gain from the 
                        sale or exchange of property held by 
                        the company for more than 8 years shall 
                        be treated as gain from the sale or 
                        exchange of a capital asset held for 
                        more than 8 years. Rules similar to the 
                        rules of subparagraph (C) shall apply 
                        to any designation under the preceding 
                        sentence.''
          (5) Subsection (c) of section 584 is amended--
                  (A) by inserting ``but not more than 8 
                years'' after ``1 year'' each place it appears 
                in paragraph (2),
                  (B) by striking ``and'' at the end of 
                paragraph (2), and
                  (C) by redesignating paragraph (3) as 
                paragraph (4) and inserting after paragraph (2) 
                the following new paragraph:
          ``(3) as part of its gains and losses from sales or 
        exchanges of capital assets held for more than 8 years, 
        its proportionate share of the gains and losses of the 
        common trust fund from sales or exchanges of capital 
        assets held for more than 8 years, and''.
          (6) Subparagraph (E) of section 904(b)(3) is amended 
        by adding at the end the following new clause:
                          ``(iv) Regulations.--The Secretary 
                        shall prescribe regulations that adjust 
                        the limitation under subsection (a) to 
                        reflect the rate differential for 8-
                        year gain (as defined in section 
                        1201(c)) between the highest rate of 
                        tax specified in section 11(b) and the 
                        alternate rate of tax under section 
                        1201(a) and the limitation on the 
                        deduction for capital losses under 
                        section 1211.''
    (c) Effective Dates.--The amendments made by this section 
shall apply to taxable years ending after December 31, 1997.

                TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

SEC. 401. ADJUSTMENT OF EXEMPTION AMOUNTS FOR TAXPAYERS OTHER THAN 
                    CORPORATIONS.

    (a) In General.--Subsection (d) of section 55 is amended by 
adding at the end the following new paragraph:
          ``(4) Adjustment of exemption amounts for taxpayers 
        other than corporations.--
                  ``(A) Taxable years beginning before january 
                1, 2008.--In the case of any taxable year 
                beginning in a calendar year after 1998 and 
                before 2008--
                          ``(i) In general.--The dollar amount 
                        applicable under paragraph (1)(A) for 
                        any odd-numbered calendar year--
                                  ``(I) shall be $1,000 greater 
                                than the dollar amount 
                                applicable under paragraph 
                                (1)(A) for the prior odd-
                                numbered calendar year, and
                                  ``(II) shall apply to taxable 
                                years beginning in such odd-
                                numbered calendar year and the 
                                succeeding calendar year.
                  ``(B) Taxable years beginning after december 
                31, 2007.--In the case of any taxable year 
                beginning in a calendar year after 2007, the 
                dollar amount applicable under paragraph (1)(A) 
                for taxable years beginning in 2007 shall be 
                increased by an amount equal to the product 
                of--
                          ``(i) such dollar amount, and
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        `calendar year 2006' for `calendar year 
                        1992' in subparagraph (B) thereof.
                If any increase determined under the preceding 
                sentence is not a multiple of $100, such 
                increase shall be rounded to the next lowest 
                multiple of $100.
                  ``(C) Other amounts.--
                          ``(i) The dollar amount applicable 
                        under paragraph (1)(B) for any taxable 
                        year shall be an amount equal to 75 
                        percent of the dollar amount applicable 
                        under paragraph (1)(A) for such year.
                          ``(ii) The dollar amount applicable 
                        under paragraph (1)(C) for any taxable 
                        year shall be an amount equal to 50 
                        percent of the dollar amount applicable 
                        under paragraph (1)(A) for such year.''
    (b) Conforming Amendment.--The last sentence of section 
55(d)(3) is amended by striking ``$165,000 or (ii) $22,500'' 
and inserting ``the minimum amount of such income (as so 
determined) for which the exemption amount under paragraph 
(1)(C) is zero, or (ii) such exemption amount (determined 
without regard to this paragraph)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1998.

SEC. 402. EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL 
                    CORPORATIONS.

    (a) In General.--Section 55 (relating to alternative 
minimum tax imposed) is amended by adding at the end the 
following new subsection:
    ``(e) Exemption for Small Corporations.--
          ``(1) In general.--The tentative minimum tax of a 
        corporation shall be zero for any taxable year if--
                  ``(A) such corporation met the $5,000,000 
                gross receipts test of section 448(c) for any 
                prior taxable year beginning after December 31, 
                1996, and
                  ``(B) such corporation would meet such test 
                for the taxable year and all prior taxable 
                years beginning after December 31, 1997, if 
                such test were applied by substituting 
                `$7,500,000' for `$5,000,000'.
          ``(2) Prospective application of minimum tax if small 
        corporation ceases to be small.--In the case of a 
        corporation whose tentative minimum tax is zero for any 
        prior taxable year by reason of paragraph (1), the 
        application of this part for taxable years beginning 
        with the first taxable year such corporation ceases to 
        be described in paragraph (1) shall be determined 
        without regard to transactions entered into or other 
        items arising in taxable years prior to such first 
        taxable year.
          ``(3) Limitation on use of credit for prior year 
        minimum tax liability.--In the case of a taxpayer whose 
        tentative minimum tax for any taxable year is zero by 
        reason of paragraph (1), the amount described in 
        paragraph (2) of section 53(b) shall not be less than 
        the greater of--
                  ``(A) the tentative minimum tax for the 
                taxable year, or
                  ``(B) 25 percent of so much of the regular 
                tax liability (reduced by the credit allowed by 
                section 27) as exceeds $25,000.
        Rules similar to the rules of section 38(c)(3)(B) shall 
        apply for purposes of the preceding sentence.''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 403. REPEAL OF ADJUSTMENT FOR DEPRECIATION.

    Clause (i) of section 56(a)(1)(A) is amended by inserting 
``and before January 1, 1999,'' after ``December 31, 1986,''.

SEC. 404. MINIMUM TAX NOT TO APPLY TO FARMERS' INSTALLMENT SALES.

    (a) In General.--The last sentence of paragraph (6) of 
section 56(a) (relating to treatment of installment sales in 
computing alternative minimum taxable income) is amended to 
read as follows: ``This paragraph shall not apply to any 
disposition--
                  ``(A) in the case of a taxpayer using the 
                cash receipts and disbursements method of 
                accounting, described in section 453(l)(2)(A) 
                (relating to farm property), or
                  ``(B) with respect to which an election is in 
                effect under section 453(l)(2)(B) (relating to 
                timeshares and residential lots).''
    (b) Effective Dates.--
          (1) In general.--The amendment made by this section 
        shall apply to dispositions in taxable years beginning 
        after December 31, 1987.
          (2) Special rule for 1987.--In the case of taxable 
        years beginning in 1987, the last sentence of section 
        56(a)(6) of the Internal Revenue Code of 1986 (as in 
        effect for such taxable years) shall be applied by 
        inserting ``or in the case of a taxpayer using the cash 
        receipts and disbursements method of accounting, any 
        disposition described in section 453C(e)(1)(B)(ii)'' 
        after ``section 453C(e)(4)''.

     TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS

               Subtitle A--Estate and Gift Tax Provisions

SEC. 501. COST-OF-LIVING ADJUSTMENTS RELATING TO ESTATE AND GIFT TAX 
                    PROVISIONS.

    (a) Increase in Unified Estate and Gift Tax Credit.--
          (1) Estate tax credit.--
                  (A) In general.--Subsection (a) of section 
                2010 (relating to unified credit against estate 
                tax) is amended by striking ``$192,800'' and 
                inserting ``the applicable credit amount''.
                  (B) Applicable credit amount.--Section 2010 
                is amended by redesignating subsection (c) as 
                subsection (d) and by inserting after 
                subsection (b) the following new subsection:
    ``(c) Applicable Credit Amount.--For purposes of this 
section--
          ``(1) In general.--For purposes of this section, the 
        applicable credit amount is the amount of the tentative 
        tax which would be determined under the rate schedule 
        set forth in section 2001(c) if the amount with respect 
        to which such tentative tax is to be computed were the 
        applicable exclusion amount determined in accordance 
        with the following table:

    ``In the case of estates of decedents                 The applicable
      dying, and gifts made, during:                exclusion amount is:
          1998..........................................      $ 650,000 
          1999..........................................      $ 750,000 
          2000..........................................      $ 765,000 
          2001 through 2004.............................      $ 775,000 
          2005..........................................      $ 800,000 
          2006..........................................     $  825,000 
          2007 or thereafter............................     $1,000,000.

          ``(2) Cost-of-living adjustment.--In the case of any 
        decedent dying, and gift made, in a calendar year after 
        2007, the $1,000,000 amount set forth in paragraph (1) 
        shall be increased by an amount equal to--
                  ``(A) $1,000,000, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                2006' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $10,000, such amount shall be 
        rounded to the next lowest multiple of $10,000.''
                  (C) Estate tax returns.--Paragraph (1) of 
                section 6018(a) is amended by striking 
                ``$600,000'' and inserting ``the applicable 
                exclusion amount in effect under section 
                2010(c) for the calendar year which includes 
                the date of death''.
                  (D) Phaseout of graduated rates and unified 
                credit.--Paragraph (2) of section 2001(c) is 
                amended by striking ``$21,040,000'' and 
                inserting ``the amount at which the average tax 
                rate under this section is 55 percent''.
                  (E) Estates of nonresidents not citizens.--
                Subparagraph (A) of section 2102(c)(3) is 
                amended by striking ``$192,800'' and inserting 
                ``the applicable credit amount in effect under 
                section 2010(c) for the calendar year which 
                includes the date of death''.
          (2) Unified gift tax credit.--Paragraph (1) of 
        section 2505(a) is amended by striking ``$192,800'' and 
        inserting ``the applicable credit amount in effect 
        under section 2010(c) for such calendar year''.
    (b) Alternate Valuation of Certain Farm, Etc., Real 
Property.--Subsection (a) of section 2032A is amended by adding 
at the end the following new paragraph:
          ``(3) Inflation adjustment.--In the case of estates 
        of decedents dying in a calendar year after 1998, the 
        $750,000 amount contained in paragraph (2) shall be 
        increased by an amount equal to--
                  ``(A) $750,000, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $10,000, such amount shall be 
        rounded to the next lowest multiple of $10,000.''
    (c) Annual Gift Tax Exclusion.--Subsection (b) of section 
2503 is amended--
          (1) by striking the subsection heading and inserting 
        the following:
    ``(b) Exclusions From Gifts.--
          ``(1) In general.--'',
          (2) by moving the text 2 ems to the right, and
          (3) by adding at the end the following new paragraph:
          ``(2) Inflation adjustment.--In the case of gifts 
        made in a calendar year after 1998, the $10,000 amount 
        contained in paragraph (1) shall be increased by an 
        amount equal to--
                  ``(A) $10,000, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $1,000, such amount shall be 
        rounded to the next lowest multiple of $1,000.''
    (d) Exemption From Generation-Skipping Tax.--Section 2631 
(relating to GST exemption) is amended by adding at the end the 
following new subsection:
    ``(c) Inflation Adjustment.--In the case of an individual 
who dies in any calendar year after 1998, the $1,000,000 amount 
contained in subsection (a) shall be increased by an amount 
equal to--
          ``(1) $1,000,000, multiplied by
          ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for such calendar year by substituting 
        `calendar year 1997' for `calendar year 1992' in 
        subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a 
multiple of $10,000, such amount shall be rounded to the next 
lowest multiple of $10,000.''
    (e) Amount Subject to Reduced Rate Where Extension of Time 
for Payment of Estate Tax on Closely Held Business.--Subsection 
(j) of section 6601 is amended by redesignating paragraph (3) 
as paragraph (4) and by inserting after paragraph (2) the 
following new paragraph:
          ``(3) Inflation adjustment.--In the case of estates 
        of decedents dying in a calendar year after 1998, the 
        $1,000,000 amount contained in paragraph (2)(A) shall 
        be increased by an amount equal to--
                  ``(A) $1,000,000, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $10,000, such amount shall be 
        rounded to the next lowest multiple of $10,000.''
    (f) Effective Date.--The amendments made by this section 
shall apply to the estates of decedents dying, and gifts made, 
after December 31, 1997.

SEC. 502. 20-YEAR INSTALLMENT PAYMENT WHERE ESTATE CONSISTS LARGELY OF 
                    INTEREST IN CLOSELY HELD BUSINESS.

    (a) In General.--Section 6166(a) (relating to extension of 
time for payment of estate tax where estate consists largely of 
interest in closely held business) is amended by striking 
``10'' in paragraph (1) and the heading thereof and inserting 
``20''.
    (b) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after December 31, 
1997.

SEC. 503. NO INTEREST ON CERTAIN PORTION OF ESTATE TAX EXTENDED UNDER 
                    SECTION 6166, REDUCED INTEREST ON REMAINING 
                    PORTION, AND NO DEDUCTION FOR SUCH REDUCED 
                    INTEREST.

    (a) No Interest and Reduced Interest.--
          (1) In general.--Paragraphs (1) and (2) of section 
        6601(j) (relating to 4-percent rate on certain portion 
        of estate tax extended under section 6166), as amended 
        by section 501(e), are amended to read as follows:
          ``(1) In general.--If the time for payment of an 
        amount of tax imposed by chapter 11 is extended as 
        provided in section 6166, then in lieu of the annual 
        rate provided by subsection (a)--
                  ``(A) no interest shall be paid on the no-
                interest portion of such amount, and
                  ``(B) interest on so much of such amount as 
                exceeds such no-interest portion shall be paid 
                at a rate equal to 45 percent of the annual 
                rate provided by subsection (a).
        For purposes of this subsection, the amount of any 
        deficiency which is prorated to installments payable 
        under section 6166 shall be treated as an amount of tax 
        payable in installments under such section.
          ``(2) No-interest portion.--For purposes of this 
        section, the term `no-interest portion' means the 
        lesser of--
                  ``(A)(i) the amount of the tentative tax 
                which would be determined under the rate 
                schedule set forth in section 2001(c) if the 
                amount with respect to which such tentative tax 
                is to be computed were the sum of $1,000,000 
                and the applicable exclusion amount in effect 
                under section 2010(c), reduced by
                  ``(ii) the applicable credit amount in effect 
                under section 2010(c), or
                  ``(B) the amount of the tax imposed by 
                chapter 11 which is extended as provided in 
                section 6166.''
          (2) Conforming amendments.--
                  (A) Section 6601(j), as amended by section 
                501, is amended--
                          (i) by striking ``4-percent'' each 
                        place it appears in paragraph (3) and 
                        inserting ``no-interest'', and
                          (ii) by striking ``4-Percent Rate on 
                        Certain Portion of'' in the heading and 
                        inserting ``Rate on''.
                  (B) Section 6166(b)(7)(A)(iii) is amended to 
                read as follows:
                          ``(iii) for purposes of applying 
                        section 6601(j) (relating to rate on 
                        estate tax extended under section 
                        6166), the no-interest portion shall be 
                        zero.''
                  (C) Section 6166(b)(8)(A)(iii) is amended to 
                read as follows:
                          ``(iii) No-interest portion not to 
                        apply.--For purposes of applying 
                        section 6601(j) (relating to rate on 
                        estate tax extended under section 
                        6166), the no-interest portion shall be 
                        zero.''
    (b) Disallowance of Interest Deduction.--
          (1) Estate tax.--Paragraph (1) of section 2053(c) is 
        amended by adding at the end the following new 
        subparagraph:
                  ``(D) Section 6166 interest.--No deduction 
                shall be allowed under this section for any 
                interest payable under section 6601 on any 
                unpaid portion of the tax imposed by section 
                2001 for the period during which an extension 
                of time for payment of such tax is in effect 
                under section 6166.''
          (2) Income tax.--Subparagraph (E) of section 
        163(h)(2) is amended by striking ``or 6166''.
    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after December 31, 
1997.

SEC. 504. EXTENSION OF TREATMENT OF CERTAIN RENTS UNDER SECTION 2032A 
                    TO LINEAL DESCENDANTS.

    (a) General Rule.--Paragraph (7) of section 2032A(c) 
(relating to special rules for tax treatment of dispositions 
and failures to use for qualified use) is amended by adding at 
the end the following new subparagraph:
                  ``(E) Certain rents treated as qualified 
                use.--For purposes of this subsection, a 
                surviving spouse or lineal descendant of the 
                decedent shall not be treated as failing to use 
                qualified real property in a qualified use 
                solely because such spouse or descendant rents 
                such property to a member of the family of such 
                spouse or descendant on a net cash basis. For 
                purposes of the preceding sentence, a legally 
                adopted child of an individual shall be treated 
                as the child of such individual by blood.''
    (b) Conforming Amendment.--Section 2032A(b)(5)(A) is 
amended by striking the last sentence.
    (c) Effective Date.--The amendments made by this section 
shall apply with respect to leases entered into after December 
31, 1976.

SEC. 505. CLARIFICATION OF JUDICIAL REVIEW OF ELIGIBILITY FOR EXTENSION 
                    OF TIME FOR PAYMENT OF ESTATE TAX.

    (a) In General.--Part IV of subchapter C of chapter 76 of 
the Internal Revenue Code of 1986 (relating to declaratory 
judgments) is amended by adding at the end the following new 
section:

``SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELIGIBILITY OF ESTATE 
                    WITH RESPECT TO INSTALLMENT PAYMENTS UNDER SECTION 
                    6166.

    (a) Creation of Remedy.--In a case of actual controversy 
involving a determination by the Secretary of (or a failure by 
the Secretary to make a determination with respect to)--
          ``(1) whether an election may be made under section 
        6166 (relating to extension of time for payment of 
        estate tax where estate consists largely of interest in 
        closely held business) with respect to an estate, or
          ``(2) whether the extension of time for payment of 
        tax provided in section 6166(a) has ceased to apply 
        with respect to an estate,
upon the filing of an appropriate pleading, the Tax Court may 
make a declaration with respect to whether such election may be 
made, whether such extension has ceased to apply, or the amount 
of such installment payments. Any such declaration shall have 
the force and effect of a decision of the Tax Court and shall 
be reviewable as such.
    ``(b) Limitations.--
          ``(1) Petitioner.--A pleading may be filed under this 
        section, with respect to any estate, only--
                  ``(A) by the executor of such estate, or
                  ``(B) by any person who has assumed an 
                obligation to make payments under section 6166 
                with respectto such estate (but only if each 
other such person is joined as a party).
          ``(2) Exhaustion of administrative remedies.--The 
        court shall not issue a declaratory judgment or decree 
        under this section in any proceeding unless it 
        determines that the petitioner has exhausted all 
        available administrative remedies within the Internal 
        Revenue Service. A petitioner shall be deemed to have 
        exhausted its administrative remedies with respect to a 
        failure of the Secretary to make a determination at the 
        expiration of 180 days after the date on which the 
        request for such determination was made if the 
        petitioner has taken, in a timely manner, all 
        reasonable steps to secure such determination.
          ``(3) Time for bringing action.--If the Secretary 
        sends by certified or registered mail notice of his 
        determination as described in subsection (a) to the 
        petitioner, no proceeding may be initiated under this 
        section unless the pleading is filed before the 91st 
        day after the date of such mailing.''
    (b) Clerical Amendment.--The table of sections for part IV 
of subchapter C of chapter 76 of such Code is amended by adding 
at the end the following new item:

        ``Sec. 7479. Declaratory judgments relating to eligibility of 
                  estate with respect to installment payments under 
                  section 6166.''

    (c) Effective Date.--The amendments made by this section 
shall apply to the estates of decedents dying after the date of 
the enactment of this Act.

SEC. 506. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX PURPOSES AFTER 
                    EXPIRATION OF STATUTE OF LIMITATIONS.

    (a) In General.--Section 2001 (relating to imposition and 
rate of estate tax) is amended by adding at the end the 
following new subsection:
    ``(f) Valuation of Gifts.--If--
          ``(1) the time has expired within which a tax may be 
        assessed under chapter 12 (or under corresponding 
        provisions of prior laws) on the transfer of property 
        by gift made during a preceding calendar period (as 
        defined in section 2502(b)), and
          ``(2) the value of such gift is shown on the return 
        for such preceding calendar period or is disclosed in 
        such return, or in a statement attached to the return, 
        in a manner adequate to apprise the Secretary of the 
        nature of such gift,
the value of such gift shall, for purposes of computing the tax 
under this chapter, be the value of such gift as finally 
determined for purposes of chapter 12.''
    (b) Modification of Application of Statute of 
Limitations.--Paragraph (9) of section 6501(c) is amended to 
read as follows:
          ``(9) Gift tax on certain gifts not shown on 
        return.--If any gift of property the value of which (or 
        any increase in taxable gifts required under section 
        2701(d) which) is required to be shown on a return of 
        tax imposed by chapter 12 (without regard to section 
        2503(b)), and is not shown on such return, any tax 
        imposed by chapter 12 on such gift may be assessed, or 
        a proceeding in court for the collection of such tax 
        may be begun without assessment, at any time. The 
        preceding sentence shall not apply to any item which is 
        disclosed in such return, or in a statement attached to 
        the return, in a manner adequate to apprise the 
        Secretary of the nature of such item. The value of any 
        item which is so disclosed may not be redetermined by 
        the Secretary after the expiration of the period under 
        subsection (a).''
    (c) Declaratory Judgment Procedure for Determining Value of 
Gift.--
          (1) In general.--Part IV of subchapter C of chapter 
        76 is amended by inserting after section 7476 the 
        following new section:

``SEC. 7477. DECLARATORY JUDGMENTS RELATING TO VALUE OF CERTAIN GIFTS.

    ``(a) Creation of Remedy.--In a case of an actual 
controversy involving a determination by the Secretary of the 
value of any gift shown on the return of tax imposed by chapter 
12 or disclosed on such return or in any statement attached to 
such return, upon the filing of an appropriate pleading, the 
Tax Court may make a declaration of the value of such gift. Any 
such declaration shall have the force and effect of a decision 
of the Tax Court and shall be reviewable as such.
    ``(b) Limitations.--
          ``(1) Petitioner.--A pleading may be filed under this 
        section only by the donor.
          ``(2) Exhaustion of administrative remedies.--The 
        court shall not issue a declaratory judgment or decree 
        under this section in any proceeding unless it 
        determines that the petitioner has exhausted all 
        available administrative remedies within the Internal 
        Revenue Service.
          ``(3) Time for bringing action.--If the Secretary 
        sends by certified or registered mail notice of his 
        determination as described in subsection (a) to the 
        petitioner, no proceeding may be initiated under this 
        section unless the pleading is filed before the 91st 
        day after the date of such mailing.''
          (2) Clerical amendment.--The table of sections for 
        such part IV is amended by inserting after the item 
        relating to section 7476 the following new item:

        ``Sec. 7477. Declaratory judgments relating to value of certain 
                  gifts.''

    (d) Conforming Amendment.--Subsection (c) of section 2504 
is amended by striking ``, and if a tax under this chapter or 
under corresponding provisions of prior laws has been assessed 
or paid for such preceding calendar period''.
    (e) Effective Dates.--
          (1) In general.--The amendments made by subsections 
        (a) and (c) shall apply to gifts made after the date of 
        the enactment of this Act.
          (2) Subsection (b)--The amendment made by subsection 
        (b) shall apply to gifts made in calendar years ending 
        after the date of the enactment of this Act.

SEC. 507. TERMINATION OF THROWBACK RULES FOR DOMESTIC TRUSTS.

    (a) Accumulation Distributions.--
          (1) In general.--Section 665 is amended by adding at 
        the end the following new subsection:
    ``(f) Special Rule for United States Trusts.--For purposes 
of this subpart, in the case of a trust other than a foreign 
trust, any distribution in any taxable year beginning after the 
date of the enactment of this subsection shall be computed 
without regard to any undistributed net income.''
          (2) Conforming amendment.--Subsection (b) of section 
        665 is amended by inserting ``except as provided in 
        subsection (f),'' after ``subpart,''
    (b) Property Transferred to Trusts.--Subsection (e) of 
section 644 is amended by striking ``or'' at the end of 
paragraph (3), by striking the period at the end of paragraph 
(4) and inserting ``, or '', and by adding at the end the 
following new paragraph:
          ``(5) in the case of a trust other than a foreign 
        trust, any sale or exchange of property after the date 
        of the enactment of this paragraph.''
    (c) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        distributions in taxable years beginning after the date 
        of the enactment of this Act.
          (2) Transferred property.--The amendments made by 
        subsection (b) shall apply to sales or exchanges after 
        the date of the enactment of this Act.

SEC. 508. UNIFIED CREDIT OF DECEDENT INCREASED BY UNIFIED CREDIT OF 
                    SPOUSE USED ON SPLIT GIFT INCLUDED IN DECEDENT'S 
                    GROSS ESTATE.

    (a) In General.--Section 2010 (relating to unified credit 
against estate tax) is amended by adding at the end the 
following new subsection:
    ``(d) Treatment of Unified Credit Used By Spouse on Split-
Gift Included in Decedent's Gross Estate.--If--
          ``(1) the decedent was the donor of any gift one-half 
        of which was considered under section 2513 as made by 
        the decedent's spouse, and
          ``(2) the amount of such gift is includible in the 
        gross estate of the decedent by reason of section 2035, 
        2036, 2037, or 2038,
the amount of the credit allowable by subsection (a) to the 
estate of the decedent shall be increased by the amount of the 
unified credit allowed against the tax imposed by section 2501 
on the amount of such gift considered under section 2513 as 
made by such spouse.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to gifts made after the date of the enactment of 
this Act.

SEC. 509. REFORMATION OF DEFECTIVE BEQUESTS, ETC., TO SPOUSE OF 
                    DECEDENT.

    (a) In General.--Subsection (b) of section 2056 (relating 
to bequests, etc., to surviving spouse) is amended by adding at 
the end the following new paragraph:
          ``(11) Reformations permitted.--
                  ``(A) In general.--In the case of any 
                interest in property with respect to which a 
                deduction would be allowable under subsection 
                (a) but for a provision of this subsection, 
                if--
                          ``(i) the surviving spouse is 
                        entitled to all of the income from the 
                        property for life,
                          ``(ii) no person other than such 
                        spouse is entitled to any distribution 
                        of such property during such spouse's 
                        life, and
                          ``(iii) there is a change of a 
                        governing instrument (by reformation, 
                        amendment, construction, or otherwise) 
                        as of the applicable date which results 
                        in the satisfaction of the requirements 
                        of such provision as of the date of the 
                        decedent's death,
                the determination of whether such deduction is 
                allowable shall be made as of the applicable 
                date.
                  ``(B) Special rule where timely commencement 
                of reformation.--Clauses (i) and (ii) of 
                subparagraph (A) shall not apply to any 
                interest if, not later than the date described 
                in subparagraph (C)(i), a judicial proceeding 
                is commenced to change such interest into an 
                interest which satisfies the requirements of 
                the provision by reason of which (but for this 
                paragraph) a deduction would not be allowable 
                under subsection (a) for such interest.
                  ``(C) Applicable date.--For purposes of 
                subparagraph (A), the term `applicable date' 
                means--
                          ``(i) the last date (including 
                        extensions) for filing the return of 
                        tax imposed by this chapter, or
                          ``(ii) if a judicial proceeding is 
                        commenced to comply with such 
                        provision, the time when the changes 
                        pursuant to such proceeding are made.
                  ``(D) Special rule.--If the change referred 
                to in subparagraph (A)(iii) is to qualify the 
                passage of the interest under paragraph (7), 
                subparagraph (A) shall apply only if the 
                election under paragraph (7)(B) is made.
                  ``(E) Statute of limitations.--If a judicial 
                proceeding described in subparagraph (C)(ii) is 
                commenced with respect to any interest, the 
                period for assessing any deficiency of tax 
                attributable to such interest shall not expire 
                before the date 1 year after the date on which 
                the Secretary is notified that such provision 
                has been complied with or that such proceeding 
                has been terminated.''
    (b) Comparable Rule for Gift Tax.--Section 2523 (relating 
to gift to spouse) is amended by adding at the end the 
following new subsection:
    ``(j) Reformations permitted.--Rules similar to the rules 
of section 2056(b)(11) shall apply for purposes of this 
section.''
    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying, and gifts made, 
after the date of the enactment of this Act.

             Subtitle B--Generation-Skipping Tax Provisions

SEC. 511. SEVERING OF TRUSTS HOLDING PROPERTY HAVING AN INCLUSION RATIO 
                    OF GREATER THAN ZERO.

    (a) In General.--Subsection (a) of section 2642 (relating 
to inclusion ratio) is amended by adding at the end the 
following new paragraph:
          ``(3) Severing of trusts holding property having an 
        inclusion ratio of greater than zero.--
                  ``(A) In general.--If a trust holding 
                property having an inclusion ratio of greater 
                than zero is severed in a qualified severance, 
                at the election of the trustee of such trust, 
                the trusts resulting from such severance shall 
                be treated as separate trusts for purposes of 
                this chapter and 1 such trust shall have an 
                inclusion ratio of 1 and the other such trust 
                shall have an inclusion ratio of zero.
                  ``(B) Qualified severance.--For purposes of 
                subparagraph (A), the term `qualified 
                severance' means the creation of 2 trusts from 
                a single trust if each property held by the 
                single trust was divided between the 2 created 
                trusts such that one trust received an interest 
                in each such property equal to the applicable 
                fraction of the single trust. Such term 
                includes any other severance permitted under 
                regulations prescribed by the Secretary.
                  ``(C) Election.--The election under this 
                paragraph shall be made at the time prescribed 
                by the Secretary. Such an election, once made, 
                shall be irrevocable.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to severances after the date of the enactment of 
this Act.

SEC. 512. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING TRANSFER TAX 
                    FOR TRANSFERS TO INDIVIDUALS WITH DECEASED PARENTS.

    (a) In General.--Section 2651 (relating to generation 
assignment) is amended by redesignating subsection (e) as 
subsection (f), and by inserting after subsection (d) the 
following new subsection:
    ``(e) Special Rule for Persons With a Deceased Parent.--
          ``(1) In general.--For purposes of determining 
        whether any transfer is a generation-skipping transfer, 
        if--
                  ``(A) an individual is a descendant of a 
                parent of the transferor (or the transferor's 
                spouse or former spouse), and
                  ``(B) such individual's parent who is a 
                lineal descendant of the parent of the 
                transferor (or the transferor's spouse or 
                former spouse) is dead at the time the transfer 
                (from which an interest of such individual is 
                established or derived) is subject to a tax 
                imposed by chapter 11 or 12 upon the transferor 
                (and if there shall be more than 1 such time, 
                then at the earliest such time),
        such individual shall be treated as if such individual 
        were a member of the generation which is 1 generation 
        below the lower of the transferor's generation or the 
        generation assignment of the youngest living ancestor 
        of such individual whois also a descendant of the 
parent of the transferor (or the transferor's spouse or former spouse), 
and the generation assignment of any descendant of such individual 
shall be adjusted accordingly.
          ``(2) Limited application of subsection to collateral 
        heirs.--This subsection shall not apply with respect to 
        a transfer to any individual who is not a lineal 
        descendant of the transferor (or the transferor's 
        spouse or former spouse) if, at the time of the 
        transfer, such transferor has any living lineal 
        descendant.''
    (b) Conforming Amendments.--
          (1) Section 2612(c) (defining direct skip) is amended 
        by striking paragraph (2) and by redesignating 
        paragraph (3) as paragraph (2).
          (2) Section 2612(c)(2) (as so redesignated) is 
        amended by striking ``section 2651(e)(2)'' and 
        inserting ``section 2651(f)(2)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to terminations, distributions, and transfers 
occurring after December 31, 1997.

                          TITLE VI--EXTENSIONS

SEC. 601. RESEARCH TAX CREDIT.

    (a) In General.--Paragraph (1) of section 41(h) (relating 
to termination) is amended--
          (1) by striking ``May 31, 1997'' and inserting 
        ``December 31, 1998'', and
          (2) by striking in the last sentence ``during the 
        first 11 months of such taxable year.'' and inserting 
        ``during the 30-month period beginning with the first 
        month of such year. The 30 months referred to in the 
        preceding sentence shall be reduced by the number of 
        full months after June 1996 (and before the first month 
        of such first taxable year) during which the taxpayer 
        paid or incurred any amount which is taken into account 
        in determining the credit under this section.''
    (b) Technical Amendments.--
          (1) Subparagraph (B) of section 41(c)(4) is amended 
        to read as follows:
                  ``(B) Election.--An election under this 
                paragraph shall apply to the taxable year for 
                which made and all succeeding taxable years 
                unless revoked with the consent of the 
                Secretary.''
          (2) Paragraph (1) of section 45C(b) is amended by 
        striking ``May 31, 1997'' and inserting ``December 31, 
        1998''.
    (c) Effective Date.--The amendments made by this section 
shall apply to amounts paid or incurred after May 31, 1997.

SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.

    (a) In General.--Clause (ii) of section 170(e)(5)(D) 
(relating to termination) is amended by striking ``May 31, 
1997'' and inserting ``December 31, 1998''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to contributions made after May 31, 1997.

SEC. 603. WORK OPPORTUNITY TAX CREDIT.

    (a) Extension.--
          (1) In general.--Subparagraph (B) of section 51(c)(4) 
        (relating to termination) is amended by striking 
        ``September 30, 1997'' and inserting ``September 30, 
        1998''.
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to individuals who begin work for the 
        employer after September 30, 1997.
    (b) Work Opportunity Credit Allowed Against Minimum Tax.--
          (1) In General.--Subsection (c) of section 38 
        (relating to limitation based on amount of tax) is 
        amended by redesignating paragraph (3) as paragraph (4) 
        and by inserting after paragraph (2) the following new 
        paragraph:
          ``(3) Special rules for work opportunity credit.--
                  ``(A) In general.--In the case of the work 
                opportunity credit--
                          ``(i) this section and section 39 
                        shall be applied separately with 
                        respect to the credit, and
                          ``(ii) in applying paragraph (1) to 
                        the credit--
                                  ``(I) subparagraph (A) shall 
                                not apply, and
                                  ``(II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the work 
                                opportunity credit).
                  ``(B) Work opportunity credit.--For purposes 
                of this subsection, the term `work opportunity 
                credit' means the credit allowable under 
                subsection (a) by reason of section 51(a).''
          (2) Conforming amendment.--Subclause (II) of section 
        38(c)(2)(A)(ii) is amended by inserting ``or the work 
        opportunity credit'' after ``employment credit''.
          (3) Effective date.--The amendments made by this 
        subsection shall apply to taxable years beginning after 
        December 31, 1997.
    (c) Percentage of Wages Allowed as Credit.--
          (1) In general.--Subsection (a) of section 51 
        (relating to determination of amount) is amended by 
        striking ``35 percent'' and inserting ``40 percent''.
          (2) Application of credit for individuals performing 
        fewer than 400 hours of services.--Paragraph (3) of 
        section 51(i) is amended to read as follows:
          ``(3) Individuals not meeting minimum employment 
        periods.--
                  ``(A) Reduction of credit for individuals 
                performing fewer than 400 hours of services.--
                In the case of an individual who has completed 
                at least 120 hours, but less than 400 hours, of 
                services performed for the employer, subsection 
                (a) shall be applied by substituting `25 
                percent' for `40 percent'.
                  ``(B) Denial of credit for individuals 
                performing fewer than 120 hours of services.--
                No wages shall be taken into account under 
                subsection (a) with respect to any individual 
                unless such individual has completed at least 
                120 hours of services performed for the 
                employer.''
          (3) Effective date.--The amendments made by this 
        subsection shall apply to individuals who begin work 
        for the employer after September 30, 1997.
    (d) Modification of Eligibility Requirement Based on Period 
on Welfare.--
          (1) In general.--Subparagraph (A) of section 51(d)(2) 
        (defining qualified IV-A recipient) is amended by 
        striking all that follows ``a IV-A program'' and 
        inserting ``for any 9 months during the 18-month period 
        ending on the hiring date.''
          (2) Conforming amendment.--Subparagraph (A) of 
        section 51(d)(3) is amended to read as follows:
                  ``(A) In general.--The term `qualified 
                veteran' means any veteran who is certified by 
                the designated local agency as being 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.''
          (3) Effective date.--The amendments made by this 
        subsection shall apply to individuals who begin work 
        for the employer after September 30, 1997.

SEC. 604. ORPHAN DRUG TAX CREDIT.

    (a) In General.--Section 45C (relating to clinical testing 
expenses for certain drugs for rare diseases or conditions) is 
amended by striking subsection (e).
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to amounts paid or incurred after May 31, 1997.

  TITLE VII--INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA

SEC. 701. TAX INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF 
                    COLUMBIA.

    (a) In General.--Chapter 1 is amended by adding at the end 
the following new subchapter:

          ``Subchapter W--District of Columbia Enterprise Zone

        ``Sec. 1400.  Establishment of DC Zone.
        ``Sec. 1400A. Tax-exempt economic development bonds.
        ``Sec. 1400B. Credit for equity investments in and loans to 
                  District of Columbia businesses.
        ``Sec. 1400C. Zero percent capital gains rate.
        ``Sec. 1400D. Credit to provide equivalent of 10 percent rate 
                  bracket in lieu of 15 percent bracket.

``SEC. 1400. ESTABLISHMENT OF DC ZONE.

    ``(a) In General.--The applicable DC area is hereby 
designated as the District of Columbia Enterprise Zone. For 
purposes of this title (except as otherwise provided in this 
subchapter), the District of Columbia Enterprise Zone shall be 
treated as an empowerment zone designated under subchapter U.
    ``(b) Applicable DC Area.--For purposes of subsection (a), 
the term `applicable DC area' means the area consisting of--
          ``(1) the census tracts located in the District of 
        Columbia which are part of an enterprise community 
        designated under subchapter U before the date of the 
        enactment of this subchapter, and
          ``(2) all other census tracts--
                  ``(A) which are located in the District of 
                Columbia, and
                  ``(B) for which the poverty rate is not less 
                than 35 percent.
    ``(c) District of Columbia Enterprise Zone.--For purposes 
of this subchapter, the terms `District of Columbia Enterprise 
Zone' and `DC Zone' mean the District of Columbia Enterprise 
Zone designated by subsection (a).
    (d) Special Rule for Application of Employment Credit.--In 
the case of the DC Zone, section 1396 (relating to empowerment 
zone employment credit) shall be applied by substituting ``20'' 
for ``15'' in the table contained in section 1396(b). The 
preceding sentence shall apply only with respect to qualified 
zone employees, as defined in section 1396(d), determined by 
treating no area other than the DC Zone as an empowerment zone 
or enterprise community.
    ``(e) Time For Which Designation Applicable.--
          ``(1) In general.--The designation made by subsection 
        (a) shall apply for the period beginning on January 1, 
        1998, and ending on December 31, 2002.
          ``(2) Coordination with dc enterprise community 
        designated under subchapter u.--The designation as an 
        enterprise community, under subchapter U, of the census 
        tracts referred to in subsection (b)(1) shall terminate 
        on December 31, 2002.

``SEC. 1400A. TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.

    ``(a) In General.--In the case of the District of Columbia 
Enterprise Zone--
          ``(1) subsection (a) of section 1394 (relating to 
        tax-exempt facility bonds for empowerment zones and 
        enterprise communities) applies only with respect to 
        bonds issued by the Economic Development Corporation, 
        and
          ``(2) subparagraph (A) of section 1394(c)(1) 
        (relating to limitation on amount of bonds) shall be 
        applied by substituting `$15,000,000' for `$3,000,000'.
    ``(b) Economic Development Corporation.--For purposes of 
this section, the term `Economic Development Corporation' means 
an entity which is created by Federal law in 1997 as part of 
the District of Columbia government.
    ``(c) Period of Applicability.--This section shall apply to 
bonds issued during the period beginning on January 1, 1998, 
and ending on December 31, 2002.

``SEC. 1400B. CREDIT FOR EQUITY INVESTMENTS IN AND LOANS TO DISTRICT OF 
                    COLUMBIA BUSINESSES.

    ``(a) General Rule.--For purposes of section 38, the DC 
Zone investment credit determined under this section for any 
taxable year is--
          ``(1) the qualified lender credit for such year, and
          ``(2) the qualified equity investment credit for such 
        year.
    ``(b) Qualified Lender Credit.--For purposes of this 
section--
          ``(1) In general.--The qualified lender credit for 
        any taxable year is the amount of credit specified for 
        such year by the Economic Development Corporation with 
        respect to qualified District loans made by the 
        taxpayer.
          ``(2) Limitation.--In no event may the qualified 
        lender credit with respect to any loan exceed 25 
        percent of the cost of the property purchased with the 
        proceeds of the loan.
          ``(3) Qualified district loan.--For purposes of 
        paragraph (1), the term `qualified district loan' means 
        any loan for the purchase (as defined in section 
        179(d)(2)) of property to which section 168 applies (or 
        would apply but for section 179) (or land which is 
        functionally related and subordinate to such property) 
        and substantially all of the use of which is in the 
        District of Columbia and is in the active conduct of a 
        trade or business in the District of Columbia. A rule 
        similar to the rule of section 1397C(a)(2) shall apply 
        for purposes of the preceding sentence.
    ``(c) Qualified Equity Investment Credit.--
          ``(1) In general.--For purposes of this section, the 
        qualified equity investment credit determined under 
        this section for any taxable year is an amount equal to 
        the percentage specified by the Economic Development 
        Corporation (but not greater than 25 percent) of the 
        aggregate amount paid in cash by the taxpayer during 
        the taxable year for the purchase of District business 
        investments.
          ``(2) District business investment.--For purposes of 
        this subsection, the term `District business 
        investment' means--
                  ``(A) any District business stock, and
                  ``(B) any District partnership interest.
          ``(3) District business stock.--For purposes of this 
        subsection--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), the term `District business 
                stock' means any stock in a domestic 
                corporation if--
                          ``(i) such stock is acquired by the 
                        taxpayer at its original issue 
                        (directly or through an underwriter) 
                        solely in exchange for cash, and
                          ``(ii) as of the time such stock was 
                        issued, such corporation was engaged in 
                        a trade or business in the District of 
                        Columbia (or, in the case of a new 
                        corporation, such corporation was being 
                        organized for purposes of engaging in 
                        such a trade or business).
                  ``(B) Redemptions.--A rule similar to the 
                rule of section 1202(c)(3) shall apply for 
                purposes of this paragraph.
          ``(4) Qualified district partnership interest.--For 
        purposes of this subsection, the term `qualified 
        District partnership interest' means any interest in a 
        partnership if--
                  ``(A) such interest is acquired by the 
                taxpayer from the partnership solely in 
                exchange for cash, and
                  ``(B) as of the time such interest was 
                acquired, such partnership was engaging in a 
                trade or business in the District of Columbia 
                (or, in the case of a new partnership, such 
                partnership was being organized for purposes of 
                engaging in such a trade or business).
        A rule similar to the rule of paragraph (3)(B) shall 
        apply for purposes of this paragraph.
          ``(5) Recapture of credit upon certain dispositions 
        of district business investments.--
                  ``(A) In general.--If a taxpayer disposes of 
                any District business investment (or any other 
                property the basis of which is determined in 
                whole or in part by reference to the adjusted 
                basis of such investment) before the end of the 
                5-year period beginning on the date such 
                investment was acquired by the taxpayer, the 
                taxpayer's tax imposed by this chapter for the 
                taxable year in which such distribution occurs 
                shall be increased by the aggregate decrease in 
                the credits allowed under section 38 for all 
                prior taxable years which would have resulted 
                solely from reducing to zero any credit 
                determined under this section with respect to 
                such investment.
                  ``(B) Exceptions.--Subparagraph (A) shall not 
                apply to any gift, transfer, or transaction 
                described in paragraph (1), (2), or (3) of 
                section 1245(b).
                  ``(C) Special rule.--Any increase in tax 
                under subparagraph (A) shall not be treated as 
                a tax imposed by this chapter for purposes of--
                          ``(i) determining the amount of any 
                        credit allowable under this chapter, 
                        and
                          ``(ii) determining the amount of the 
                        tax imposed by section 55.
          ``(6) Basis reduction.--For purposes of this title, 
        the basis of any District business investment shall be 
        reduced by the amount of the credit determined under 
        this section with respect to such investment.
    ``(d) Limitation on Amount of Credit.--
          ``(1) In general.--The amount of the DC Zone 
        investment credit determined under this section with 
        respect to any taxpayer for any taxable year shall not 
        exceed the credit amount allocated to such taxpayer for 
        such taxable year by the Economic Development 
        Corporation.
          ``(2) Overall limitation.--The aggregate credit 
        amount which may be allocated by the Economic 
        Development Corporation under this section shall not 
        exceed $75,000,000.
          ``(3) Criteria for allocating credit amounts.--The 
        allocation of credit amounts under this section shall 
        be made in accordance with criteria established by the 
        Economic Development Corporation. In establishing such 
        criteria, such Corporation shall take into account--
                  ``(A) the degree to which the business 
                receiving the loan or investment will provide 
                job opportunities for low and moderate income 
                residents of the DC Zone, and
                  ``(B) whether such business is within the DC 
                Zone.
    ``(e) Economic Development Corporation.--For purposes of 
this section, the term `Economic Development Corporation' has 
the meaning given such term by section 1400A(b).
    ``(f) Regulations.--The Secretary shall prescribe such 
regulations as may be appropriate to carry out this section.
    ``(g) Application of Section.--This section shall apply to 
any credit amount allocated for taxable years beginning after 
December 31, 1997, and before January 1, 2003.

``SEC. 1400C. ZERO PERCENT CAPITAL GAINS RATE.

      ``(a) Exclusion.--Gross income shall not include 
qualified capital gain from the sale or exchange of any DC Zone 
asset held for more than 5 years.
    ``(b) DC Zone Asset.--For purposes of this section--
          ``(1) In general.--The term `DC Zone asset' means--
                  ``(A) any DC Zone business stock,
                  ``(B) any DC Zone partnership interest, and
                  ``(C) any DC Zone business property.
          ``(2) DC zone business stock.--
                  ``(A) In general.--The term `DC Zone business 
                stock' means any stock in a domestic 
                corporation which is originally issued after 
                December 31, 1997, if--
                          ``(i) such stock is acquired by the 
                        taxpayer, before January 1, 2003, at 
                        its original issue (directly or through 
                        an underwriter) solely in exchange for 
                        cash,
                          ``(ii) as of the time such stock was 
                        issued, such corporation was a DC Zone 
                        business (or, in the case of a new 
                        corporation, such corporation was being 
                        organized for purposes of being a DC 
                        Zone business), and
                          ``(iii) during substantially all of 
                        the taxpayer's holding period for such 
                        stock, such corporation qualified as a 
                        DC Zone business.
                  ``(B) Redemptions.--A rule similar to the 
                rule of section 1202(c)(3) shall apply for 
                purposes of this paragraph.
          ``(3) DC zone partnership interest.--The term `DC 
        Zone partnership interest' means any capital or profits 
        interest in a domestic partnership which is originally 
        issued after December 31, 1997, if--
                  ``(A) such interest is acquired by the 
                taxpayer, before January 1, 2003, from the 
                partnership solely in exchange for cash,
                  ``(B) as of the time such interest was 
                acquired, such partnership was a DC Zone 
                business (or, in the case of a new partnership, 
                such partnership was being organized for 
                purposes of being a DC Zone business), and
                  ``(C) during substantially all of the 
                taxpayer's holding period for such interest, 
                such partnership qualified as a DC Zone 
                business.
        A rule similar to the rule of paragraph (2)(B) shall 
        apply for purposes of this paragraph.
          ``(4) DC zone business property.--
                  ``(A) In general.--The term `DC Zone business 
                property' means tangible property if--
                          ``(i) such property was acquired by 
                        the taxpayer by purchase (as defined in 
                        section 179(d)(2)) after December 31, 
                        1997, and before January 1, 2003,
                          ``(ii) the original use of such 
                        property in the DC Zone commences with 
                        the taxpayer, and
                          ``(iii) during substantially all of 
                        the taxpayer's holding period for such 
                        property, substantially all of the use 
                        of such property was in a DC Zone 
                        business of the taxpayer.
                  ``(B) Special rule for buildings which are 
                substantially improved.--
                          ``(i) In general.--The requirements 
                        of clauses (i) and (ii) of subparagraph 
                        (A) shall be treated as met with 
                        respect to--
                                  ``(I) property which is 
                                substantially improved by the 
                                taxpayer before January 1, 
                                2003, and
                                  ``(II) any land on which such 
                                property is located.
                          ``(ii) Substantial improvement.--For 
                        purposes of clause (i), property shall 
                        be treated as substantially improved by 
                        the taxpayer only if, during any 24-
                        month period beginning after December 
                        31, 1997, additions to basis with 
                        respect to such property in the hands 
                        of the taxpayer exceed the greater of--
                                  ``(I) an amount equal to the 
                                adjusted basis of such property 
                                at the beginning of such 24-
                                month period in the hands of 
                                the taxpayer, or
                                  ``(II) $5,000.
          ``(6) Treatment of subsequent purchasers, etc.--The 
        term `DC Zone asset' includes any property which would 
        be a DC Zone asset but for paragraph (2)(A)(i), (3)(A), 
        or (4)(A)(ii) in the hands of the taxpayer if such 
        property was a DC Zone asset in the hands of a prior 
        holder.
          ``(7) 5-year safe harbor.--If any property ceases to 
        be a DC Zone asset by reason of paragraph (2)(A)(iii), 
        (3)(C), or (4)(A)(iii) after the 5-year period 
        beginning on the date the taxpayer acquired such 
        property, such property shall continue to be treated as 
        meeting the requirements of such paragraph; except that 
        the amount of gain to which subsection (a) applies on 
        any sale or exchange of such property shall not exceed 
        the amount which would be qualified capital gain had 
        such property been sold on the date of such cessation.
    ``(c) DC Zone Business.--For purposes of this section, the 
term `DC Zone business' means any entity which is an enterprise 
zone business (as defined in section 1397B), determined by 
treating no area other than the DC Zone as an empowerment zone 
or enterprise community.
    ``(d) Other Definitions and Special Rules.--For purposes of 
this section--
          ``(1) Qualified capital gain.--Except as otherwise 
        provided in this subsection, the term `qualified 
        capital gain' means any gain recognized on the sale or 
        exchange of--
                  ``(A) a capital asset, or
                  ``(B) property used in the trade or business 
                (as defined in section 1231(b)).
          ``(2) Gain before 1998 or after 2007 not qualified.--
        The term `qualified capital gain' shall not include any 
        gain attributable to periods before January 1, 1998, or 
        after December 31, 2007.
          ``(3) Certain gain on real property not qualified.--
        The term `qualified capital gain' shall not include any 
        gain which would be treated as ordinary income under 
        section 1250 if section 1250 applied to all 
        depreciation rather than the additional depreciation.
          ``(4) Intangibles and land not integral part of dc 
        zone business.--The term `qualified capital gain' shall 
        not include any gain which is attributable to real 
        property, or an intangible asset, which is not an 
        integral part of a DC Zone business.
          ``(5) Related party transactions.--The term 
        `qualified capital gain' shall not include any gain 
        attributable, directly or indirectly, in whole or in 
        part, to a transaction with a related person. For 
        purposes of this paragraph, persons are related to each 
        other if such persons are described in section 267(b) 
        or 707(b)(1).
    ``(e) Certain Other Rules To Apply.--Rules similar to the 
rules of subsections (g), (h), (i)(2), and (j) of section 1202 
shall apply for purposes of this section.
    ``(f) Sales and Exchanges of Interests in Partnerships and 
S Corporations Which Are DC Zone Businesses.--In the case of 
the sale or exchange of an interest in a partnership, or of 
stock in an S corporation, which was a DC Zone business during 
substantially all of the period the taxpayer held such interest 
or stock, the amount of qualified capital gain shall be 
determined without regard to--
          ``(1) any gain which is attributable to real 
        property, or an intangible asset, which is not an 
        integral part of a DC Zone business, and
          ``(2) any gain attributable to periods before January 
        1, 1998, or after December 31, 2007.

``SEC. 1400D. CREDIT TO PROVIDE EQUIVALENT OF 10 PERCENT RATE BRACKET 
                    IN LIEU OF 15 PERCENT BRACKET.

    ``(a) In General.--In the case of a DC Zone individual, 
there shall be allowed as a credit against the tax imposed by 
this chapter for the taxable year an amount equal to 5 percent 
of so much of the taxpayer's taxable income for the year as 
does not exceed the highest amount of such income which is 
subject to the 15 percent rate under section 1.
    ``(b) DC Zone Individual.--For purposes of this section, 
the term `DC Zone individual' means an individual who has a 
principal place of abode in the District of Columbia Enterprise 
Zone for not less than 183 days of the taxable year.
    ``(c) Credit Not To Apply to Estate or Trust.--This section 
shall not apply to an estate or trust.
    ``(d) Coordination With Other Credits.--For purposes of 
this chapter, the credit under this section shall be treated as 
a credit under subpart A of part IV of subchapter A.
    ``(e) Termination.--This section shall not apply to any 
taxable year beginning after December 31, 2007.''
    (b) Credits Made Part of General Business Credit.--
          (1) Subsection (b) of section 38 is amended by 
        striking ``plus'' at the end of paragraph (11), by 
        striking the period at the end of paragraph (12) and 
        inserting ``, plus'', and by adding at the end the 
        following new paragraph:
          ``(13) the DC Zone investment credit determined under 
        section 1400B(a).''
          (2) Subsection (d) of section 39 is amended by adding 
        at the end the following new paragraph:
          ``(8) No carryback of dc zone credits before 
        effective date.--No portion of the unused business 
        credit for any taxable year which is attributable to 
        the credit under section 1400B, or to the credits under 
        subchapter U by reason of section 1400, may be carried 
        back to a taxable year ending before the date of the 
        enactment of sections 1400B and 1400.''
          (3) Subsection (c) of section 196 is amended by 
        striking ``and'' at the end of paragraph (6), by 
        striking the period at the end of paragraph (7) and 
        inserting ``, and'', and by adding at the end the 
        following new paragraph:
          ``(8) the DC Zone investment credit determined under 
        section 1400B(a).''
    (c) Clerical Amendment.--The table of subchapters for 
chapter 1 is amended by adding at the end the following new 
item:
        ``Subchapter W. District of Columbia Enterprise Zone.''
    (d) Effective Date.--This section shall take effect on the 
date of the enactment of this Act.

SEC. 702. INCENTIVES CONDITIONED ON OTHER DC REFORM.

    The amendments made by section 701 shall not take effect 
unless an entity known as the Economic Development Corporation 
is created by Federal law in 1997 as part of the District of 
Columbia government.

                 TITLE VIII--WELFARE-TO-WORK INCENTIVES

SEC. 801. INCENTIVES FOR EMPLOYING LONG-TERM FAMILY ASSISTANCE 
                    RECIPIENTS.

    (a) In General.--Subpart F of part IV of subchapter A of 
chapter 1 is amended by inserting after section 51 the 
following new section:

``SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING LONG-TERM FAMILY 
                    ASSISTANCE RECIPIENTS.

    ``(a) Determination of Amount.--For purposes of section 38, 
the amount of the welfare-to-work credit determined under this 
section for the taxable year shall be equal to--
          ``(1) 35 percent of the qualified first-year wages 
        for such year, and
          ``(2) 50 percent of the qualified second-year wages 
        for such year.
    ``(b) Qualified Wages Defined.--For purposes of this 
section--
          ``(1) In general.--The term `qualified wages' means 
        the wages paid or incurred by the employer during the 
        taxable year to individuals who are long-term family 
        assistance recipients.
          ``(2) Qualified first-year wages.--The term 
        `qualified first-year wages' means, with respect to any 
        individual, qualified wages attributable to service 
        rendered during the 1-year period beginning with the 
        day the individual begins work for the employer.
          ``(3) Qualified second-year wages.--The term 
        `qualified second-year wages' means, with respect to 
        any individual, qualified wages attributable to service 
        rendered during the 1-year period beginning on the day 
        after the last day of the 1-year period with respect to 
        such individual determined under paragraph (2).
          ``(4) Only first $10,000 of wages per year taken into 
        account.--The amount of the qualified first-year wages, 
        and the amount of qualified second-year wages, which 
        may be taken into account with respect to any 
        individual shall not exceed $10,000 per year.
          ``(5) Wages.--
                  ``(A) In general.--The term `wages' has the 
                meaning given such term by section 51(c), 
                without regard to paragraph (4) thereof.
                  ``(B) Certain amounts treated as wages.--The 
                term `wages' includes amounts paid or incurred 
                by the employer which are excludable from such 
                recipient's gross income under--
                          ``(i) section 105 (relating to 
                        amounts received under accident and 
                        health plans),
                          ``(ii) section 106 (relating to 
                        contributions by employer to accident 
                        and health plans),
                          ``(iii) section 127 (relating to 
                        educational assistance programs) or 
                        would be so excludable but for section 
                        127(d), but only to the extent paid or 
                        incurred to a person not related to the 
                        employer, or
                          ``(iv) section 129 (relating to 
                        dependent care assistance programs).
                The amount treated as wages by clause (i) or 
                (ii) for any period shall be based on the 
                reasonable cost of coverage for the period, but 
                shall not exceed the applicable premium for the 
                period under section 4980B(f)(4).
                  ``(C) Special rules for agricultural and 
                railway labor.--If such recipient is an 
                employee to whom subparagraph (A) or (B) of 
                section 51(h)(1) applies, rules similar to the 
                rules of such subparagraphs shall apply except 
                that--
                          ``(i) such subparagraph (A) shall be 
                        applied by substituting `$10,000' for 
                        `$6,000', and
                          ``(ii) such subparagraph (B) shall be 
                        applied by substituting `$833.33' for 
                        `$500'.
    ``(c) Long-Term Family Assistance Recipients.--For purposes 
of this section--
          ``(1) In general.--The term `long-term family 
        assistance recipient' means any individual who is 
        certified by the designated local agency (as defined in 
        section 51(d)(10))--
                  ``(A) as being a member of a family receiving 
                assistance under a IV-A program (as defined in 
                section 51(d)(2)(B)) for at least the 18-month 
                period ending on the hiring date.
                  ``(B)(i) as being a member of a family 
                receiving such assistance for 18 months 
                beginning after the date of the enactment of 
                this section, and
                  ``(ii) as having a hiring date which is not 
                more than 2 years after the end of the earliest 
                such 18-month period, or
                  ``(C)(i) as being a member of a family which 
                ceased to be eligible after the date of the 
                enactment of this section for such assistance 
                by reason of any limitation imposed by Federal 
                or State law on the maximum period such 
                assistance is payable to a family, and
                  ``(ii) as having a hiring date which is not 
                more than 2 years after the date of such 
                cessation.
          ``(2) Hiring date.--The term `hiring date' has the 
        meaning given such term by section 51(d).
    ``(d) Certain Rules To Apply.--
          ``(1) In general.--Rules similar to the rules of 
        section 52, and subsections (d)(11), (f), (g), (i) (as 
        in effect on the day before the date of the enactment 
        of the Revenue Reconciliation Act of 1997), (j), and 
        (k) of section 51, shall apply for purposes of this 
        section.
          ``(2) Credit to be part of general business credit, 
        etc.--References to section 51 in section 38(b), 
        280C(a), and 1396(c)(3) shall be treated as including 
        references to this section.
    ``(e) Coordination With Work Opportunity Credit.--If a 
credit is allowed under this section to an employer with 
respect to an individual for any taxable year, then for 
purposes of applying section 51 to such employer, such 
individual shall not be treated as a member of a targeted group 
for such taxable year.
    ``(f) Termination.--This section shall not apply to 
individuals who begin work for the employer after April 30, 
1999.''
    (b) Clerical Amendment.--The table of sections for subpart 
F of part IV of subchapter A of chapter 1 is amended by 
inserting after the item relating to section 51 the following 
new item:

        ``Sec. 51A. Temporary incentives for employing long-term family 
                  assistance recipients.''

    (c) Effective Date.--The amendments made by this section 
shall apply to individuals who begin work for the employer 
after December 31, 1997.

                   TITLE IX--MISCELLANEOUS PROVISIONS

            Subtitle A--Provisions Relating to Excise Taxes

SEC. 901. REPEAL OF TAX ON DIESEL FUEL USED IN RECREATIONAL BOATS.

    (a) In General.--Subparagraph (B) of section 6421(e)(2) 
(defining off-highway business use) is amended by striking 
clauses (iii) and (iv).
    (b) Conforming Amendments.--
          (1) Subparagraph (A) of section 4041(a)(1) is 
        amended--
                  (A) by striking ``, a diesel-powered train, 
                or a diesel-powered boat'' each place it 
                appears and inserting ``or a diesel-powered 
                train'', and
                  (B) by striking ``vehicle, train, or boat'' 
                and inserting ``vehicle or train''.
          (2) Paragraph (1) of section 4041(a) is amended by 
        striking subparagraph (D).
          (3) Paragraph (2) of section 9503(f) is amended by 
        striking subparagraph (C) and by redesignating 
        subparagraphs (D) and (E) as subparagraphs (C) and (D), 
        respectively.
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 1998.

SEC. 902. CONTINUED APPLICATION OF TAX ON IMPORTED RECYCLED HALON-1211.

    (a) In General.--Paragraph (1) of section 4682(d) is 
amended by striking ``recycled halon'' and inserting ``recycled 
Halon-1301 or recycled Halon-2402''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the date of the enactment of this Act.

SEC. 903. UNIFORM RATE OF TAX ON VACCINES.

    (a) In General.--Subsection (b) of section 4131 is amended 
to read as follows:
    ``(b) Amount of Tax.--
          ``(1) In general.--The amount of the tax imposed by 
        subsection (a) shall be 84 cents per dose of any 
        taxable vaccine.
          ``(2) Combinations of vaccines.--If any taxable 
        vaccine is described in more than 1 subparagraph of 
        section 4132(a)(1), the amount of the tax imposed by 
        subsection (a) on such vaccine shall be the sum of the 
        amounts for the vaccines which are so included.''
    (b) Taxable Vaccines.--Paragraph (1) of section 4132(a) is 
amended to read as follows:
          ``(1) Taxable vaccine.--The term `taxable vaccine' 
        means any of the following vaccines which are 
        manufactured or produced in the United States or 
        entered into the United States for consumption, use, or 
        warehousing:
                  ``(A) Any vaccine containing diphtheria 
                toxoid.
                  ``(B) Any vaccine containing tetanus toxoid.
                  ``(C) Any vaccine containing pertussis 
                bacteria, extracted or partial cell bacteria, 
                or specific pertussis antigens.
                  ``(D) Any vaccine against measles.
                  ``(E) Any vaccine against mumps.
                  ``(F) Any vaccine against rubella.
                  ``(G) Any vaccine containing polio virus.
                  ``(H) Any HIB vaccine.
                  ``(I) Any vaccine against hepatitis B.
                  ``(J) Any vaccine against chicken pox.''
    (c) Conforming Amendment.--Subsection (a) of section 4132 
is amended by striking paragraphs (2), (3), and (4) and by 
redesignating paragraphs (5) through (8) as paragraphs (2) 
through (5), respectively.
    (d) Effective Date.--The amendments made by this section 
shall take effect on October 1, 1997.

SEC. 904. OPERATORS OF MULTIPLE GASOLINE RETAIL OUTLETS TREATED AS 
                    WHOLESALE DISTRIBUTOR FOR REFUND PURPOSES.

    (a) In General.--Subparagraph (B) of section 6416(a)(4) 
(defining whole distributor) is amended by adding at the end 
the following new sentence: ``Such term includes any person who 
makes retail sales of gasoline at 10 or more retail motor fuel 
outlets.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the date of the enactment of this Act.

SEC. 905. EXEMPTION OF ELECTRIC AND OTHER CLEAN-FUEL MOTOR VEHICLES 
                    FROM LUXURY AUTOMOBILE CLASSIFICATION.

    (a) In General.--Subsection (a) of section 4001 (relating 
to imposition of tax) is amended to read as follows:
    ``(a) Imposition of Tax.--
          ``(1) In general.--There is hereby imposed on the 1st 
        retail sale of any passenger vehicle a tax equal to 10 
        percent of the price for which so sold to the extent 
        such price exceeds the applicable amount.
          ``(2) Applicable amount.--
                  ``(A) In general.--Except as provided in 
                subparagraphs (B) and (C), the applicable 
                amount is $30,000.
                  ``(B) Qualified clean-fuel vehicle 
                property.--In the case of a passenger vehicle 
                which is propelled by a fuel which is not a 
                clean-burning fuel to which is installed 
                qualified clean-fuel vehicle property (as 
                defined in section 179A(c)(1)(A)) for purposes 
                of permitting such vehicle to be propelled by a 
                clean-burning fuel, the applicable amount is 
                equal to the sum of--
                          ``(i) $30,000, plus
                          ``(ii) the increase in the price for 
                        which the passenger vehicle was sold 
                        (within the meaning of section 4002) 
                        due to the installation of such 
                        property.
                  ``(C) Purpose built passenger vehicle.--
                          ``(i) In general.--In the case of a 
                        purpose built passenger vehicle, the 
                        applicable amount is equal to 150 
                        percent of $30,000.
                          ``(ii) Purpose built passenger 
                        vehicle.--For purposes of clause (i), 
                        the term `purpose built passenger 
                        vehicle' means a passenger vehicle 
                        produced by an original equipment 
                        manufacturer and designed so that the 
                        vehicle may be propelled primarily by 
                        electricity.''
    (b) Conforming Amendments.--
          (1) 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 
        subparagraphs (A), (B)(i), and (C)(i) of subsection 
        (a)(2) 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) Subsection (f) of section 4001 (relating to 
        phasedown) is amended by striking ``subsection (a)'' 
        and inserting ``subsection (a)(1)''.
          (3) Subparagraph (B) of section 4003(a)(2) is amended 
        to read as follows:
                  ``(B) the appropriate applicable amount as 
                determined under section 4001(a)(2).''
    (c) Effective Date.--The amendments made by this section 
shall apply to sales and installations occurring on or after 
the date of the enactment of this Act.

    Subtitle B--Provisions Relating to Pensions and Fringe Benefits

SEC. 911. SECTION 401(K) PLANS FOR CERTAIN IRRIGATION AND DRAINAGE 
                    ENTITIES.

    (a) In General.--Subparagraph (B) of section 401(k)(7) 
(relating to rural cooperative plan) is amended--
          (1) by striking ``and'' at the end of clause (iii), 
        by redesignating clause (iv) as clause (v), and by 
        inserting after clause (iii) the following new clause:
                          ``(iv) any organization which--
                                  ``(I) is a mutual irrigation 
                                or ditch company described in 
                                section 501(c)(12) (without 
                                regard to the 85 percent 
                                requirement thereof), or
                                  ``(II) is a district 
                                organized under the laws of a 
                                State as a municipal 
                                corporation for the purpose of 
                                irrigation, water conservation, 
                                or drainage, and'', and
          (2) in clause (v), as so redesignated, by striking 
        ``or (iii)'' and inserting ``, (iii), or (iv)''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall apply to years beginning after December 31, 1997.

SEC. 912. EXTENSION OF MORATORIUM ON APPLICATION OF CERTAIN 
                    NONDISCRIMINATION RULES TO STATE AND LOCAL 
                    GOVERNMENTS.

    (a) General Nondiscrimination and Participation Rules.--
          (1) Nondiscrimination requirements.--Section 
        401(a)(5) (relating to qualified pension, profit-
        sharing, and stock bonus plans) is amended by adding at 
        the end the following:
                  ``(G) Governmental plans.--Paragraphs (3) and 
                (4) shall not apply to a governmental plan 
                (within the meaning of section 414(d)).''.
          (2) Additional participation requirements.--Section 
        401(a)(26)(H) (relating to additional participation 
        requirements) is amended to read as follows:
                  ``(H) Exception for governmental plans.--This 
                paragraph shall not apply to a governmental 
                plan (within the meaning of section 414(d)).''.
          (3) Minimum participation standards.--Section 
        410(c)(2) (relating to application of participation 
        standards to certain plans) is amended to read as 
        follows:
          ``(2) A plan described in paragraph (1) shall be 
        treated as meeting the requirements of this section for 
        purposes of section 401(a), except that in the case of 
        a plan described in subparagraph (B), (C), or (D) of 
        paragraph (1), this paragraph shall only apply if such 
        plan meets the requirements of section 401(a)(3) (as in 
        effect on September 1, 1974).''.
    (b) Participation Standards for Qualified Cash or Deferred 
Arrangements.--Section 401(k)(3) (relating to application of 
participation and discrimination standards) is amended by 
adding at the end the following:
                  ``(G)(i) The requirements of subparagraph 
                (A)(i) and (C) shall not apply to a 
                governmental plan (within the meaning of 
                section 414(d)).
                  ``(ii) The requirements of subsection (m)(2) 
                (without regard to subsection (a)(4)) shall 
                apply to any matching contribution of a 
                governmental plan (as so defined).''.
    (c) Nondiscrimination Rules for Section 403(b) Plans.--
Section 403(b)(12) (relating to nondiscrimination requirements) 
is amended by adding at the end the following:
                  ``(C) Governmental plans.--For purposes of 
                paragraph (1)(D), the requirements of 
                subparagraph (A)(i) shall not apply to a 
                governmental plan (within the meaning of 
                section 414(d)).''.
    (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        apply to taxable years beginning on or after the date 
        of enactment of this Act.
          (2) Treatment for years beginning before date of 
        enactment.--A governmental plan (within the meaning of 
        section 414(d) of the Internal Revenue Code of 1986) 
        shall be treated as satisfying the requirements of 
        sections 401(a)(3), 401(a)(4), 401(a)(26), 401(k), 
        401(m), 403 (b)(1)(D) and (b)(12), and 410 of such Code 
        for all taxable years beginning before the date of 
        enactment of this Act.

SEC. 913. TREATMENT OF CERTAIN DISABILITY BENEFITS RECEIVED BY FORMER 
                    POLICE OFFICERS OR FIREFIGHTERS.

    (a) General Rule.--For purposes of determining whether any 
amount to which this section applies is excludable from gross 
income under section 104(a)(1) of the Internal Revenue Code of 
1986, the following conditions shall be treated as personal 
injuries or sickness in the course of employment:
          (1) Heart disease.
          (2) Hypertension.
    (b) Amounts To Which Section Applies.--This section shall 
apply to any amount--
          (1) which is payable--
                  (A) to an individual (or to the survivors of 
                an individual) who was a full-time employee of 
                any police department or fire department which 
                is organized and operated by a State, by any 
                political subdivision thereof, or by any agency 
                or instrumentality of a State or political 
                subdivision thereof, and
                  (B) under a State law (as amended on May 19, 
                1992) which irrebuttably presumed that heart 
                disease and hypertension are work-related 
                illnesses but only for employees separating 
                from service before July 1, 1992; and
          (2) which was received in calendar year 1989, 1990, 
        or 1991.
    (c) Waiver of Statute of Limitations.--If, on the date of 
the enactment of this Act (or at any time within the 1-year 
period beginning on such date of enactment) credit or refund of 
any overpayment of tax resulting from the provisions of this 
section is barred by any law or rule of law, credit or refund 
of such overpayment shall, nevertheless, be allowed or made if 
claim therefore is filed before the date 1 year after such date 
of enactment.

SEC. 914. PORTABILITY OF PERMISSIVE SERVICE CREDIT UNDER GOVERNMENTAL 
                    PENSION PLANS.

    (a) In General.--Section 415(b)(2) (relating to the 
limitation for defined benefit plans) is amended by adding at 
the end the following new subparagraph:
                  ``(J) Purchase of permissive service 
                credit.--
                          ``(i) Benefits treated as derived 
                        from employer contributions.--For 
                        purposes of this section, the term 
                        `annual benefit' shall include the 
                        accrued benefit derived from 
                        contributions to a governmental plan 
                        (within the meaning of section 414(d)) 
                        to purchase permissive service credit.
                          ``(ii) Definition of permissive 
                        service credit.--For purposes of this 
                        subparagraph, the term `permissive 
                        service credit' means credit--
                                  ``(I) for a period of service 
                                recognized by a governmental 
                                plan for purposes of 
                                calculating an employee's 
                                accrued benefit under such 
                                plan,
                                  ``(II) which such employee 
                                has not received (or has 
                                forfeited), and
                                  ``(III) which such employee 
                                may receive only by making a 
                                contribution, as determined 
                                under the governmental plan, 
                                which does not exceed the 
                                amount (actuarially determined 
                                under the terms of such 
                                governmental plan) necessary to 
                                fund the accrued benefit 
                                attributable to such period of 
                                service.
                          ``(iii) No effect on employer `pick-
                        up' contributions.--Nothing in this 
                        subparagraph shall be construed as 
                        preventing the application of section 
                        414(h) to contributions to purchase 
                        permissive service credit.''
    (b) Conforming Amendment.--Section 415(c)(2) is amended by 
adding at the end the following new sentence: ``The term 
`annual addition' shall not include contributions to purchase 
permissive service credit (within the meaning of subsection 
(b)(2)(J)).''
    (c) Effective Date.--The amendments made by this section 
shall apply to years beginning after December 31, 1997.

SEC. 915. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES.

    (a) In General.--Subparagraph (C) of section 664(d)(1) and 
subparagraph (C) of section 664(d)(2) are each amended by 
striking the period at the end thereof and inserting ``or, to 
the extent the remainder interest is in qualified employer 
securities (as defined in paragraph (3)(C)), is to be 
transferred to an employee stock ownership plan (as defined in 
section 4975(e)(7)) in a qualified gratuitous transfer (as 
defined by subsection (g)).''
    (b) Qualified Gratuitous Transfer Defined.--Section 664 is 
amended by adding at the end the following new subsection:
    ``(g) Qualified Gratuitous Transfer of Qualified Employer 
Securities.--
          ``(1) In general.--For purposes of this section, the 
        term `qualified gratuitous transfer' means a transfer 
        of qualified employer securities to an employee stock 
        ownership plan (as defined in section 4975(e)(7)) but 
        only to the extent that--
                  ``(A) the securities transferred previously 
                passed from a decedent dying before January 1, 
                1999, to a trust described in paragraph (1) or 
                (2) of subsection (d),
                  ``(B) no deduction under section 404 is 
                allowable with respect to such transfer,
                  ``(C) such plan contains the provisions 
                required by paragraph (3),
                  ``(D) such plan treats such securities as 
                being attributable to employer contributions 
                but without regard to the limitations otherwise 
                applicable to such contributions under section 
                404, and
                  ``(E) the employer whose employees are 
                covered by the plan described in this paragraph 
                files with the Secretary a verified written 
                statement consenting to the application of 
                sections 4978 and 4979A with respect to such 
                employer.
          ``(2) Exception.--The term `qualified gratuitous 
        transfer' shall not include a transfer of qualified 
        employer securities to an employee stock ownership plan 
        unless--
                  ``(A) such plan was in existence on August 1, 
                1996,
                  ``(B) at the time of the transfer, the 
                decedent and members of the decedent's family 
                (within the meaning of section 267(c)(4)) own 
                (directly or through the application of section 
                318(a)) no more than 10 percent of the value of 
                the stock of the corporation referred to in 
                paragraph (4), and
                  ``(C) immediately after the transfer, such 
                plan owns (after the application of section 
                318(a)(4)) at least 60 percent of the value of 
                the outstanding stock of the corporation.
          ``(3) Plan requirements.--A plan contains the 
        provisions required by this paragraph if such plan 
        provides that--
                  ``(A) the qualified employer securities so 
                transferred are allocated to plan participants 
                in a manner consistent with section 401(a)(4),
                  ``(B) plan participants are entitled to 
                direct the plan as to the manner in which such 
                securities which are entitled to vote and are 
                allocated to the account of such participant 
                are to be voted,
                  ``(C) an independent trustee votes the 
                securities so transferred which are not 
                allocated to plan participants,
                  ``(D) each participant who is entitled to a 
                distribution from the plan has the rights 
                described in subparagraphs (A) and (B) of 
                section 409(h)(1),
                  ``(E) such securities are held in a suspense 
                account under the plan to be allocated each 
                year, up to the limitations under section 
                415(c), after first allocating all other annual 
                additions for the limitation year, up to the 
                limitations under sections 415 (c) and (e), and
                  ``(F) on termination of the plan, all 
                securities so transferred which are not 
                allocated to plan participants as of such 
                termination are to be transferred to, or for 
                the use of, an organization described in 
                section 170(c).
        For purposes of the preceding sentence, the term 
        `independent trustee' means any trustee who is not a 
        member of the family (within the meaning of section 
        267(c)(4)) of the decedent or a 5-percent shareholder. 
        A plan shall not fail to be treated as meeting the 
        requirements of section 401(a) by reason of meeting the 
        requirements of this subsection.
          ``(4) Qualified employer securities.--For purposes of 
        this section, the term `qualified employer securities' 
        means employer securities (as defined in section 
        409(l)) which are issued by a domestic corporation--
                  ``(A) which has no outstanding stock which is 
                readily tradable on an established securities 
                market, and
                  ``(B) which has only 1 class of stock.
          ``(5) Treatment of securities allocated by employee 
        stock ownership plan to persons related to decedent or 
        5-percent shareholders.--
                  ``(A) In general.--If any portion of the 
                assets of the plan attributable to securities 
                acquired by the plan in a qualified gratuitous 
                transfer are allocated to the account of--
                          ``(i) any person who is related to 
                        the decedent (within the meaning of 
                        section 267(b)), or
                          ``(ii) any person who, at the time of 
                        such allocation or at any time during 
                        the 1-year period ending on the date of 
                        the acquisition of qualified employer 
                        securities by the plan, is a 5-percent 
                        shareholder of the employer maintaining 
                        the plan,
                the plan shall be treated as having distributed 
                (at the time of such allocation) to such person 
                or shareholder the amount so allocated.
                  ``(B) 5-percent shareholder.--For purposes of 
                subparagraph (A), the term `5-percent 
                shareholder' means any person who owns 
                (directly or through the application of section 
                318(a)) more than 5 percent of the outstanding 
                stock of the corporation which issued such 
                qualified employer securities or of any 
                corporation which is a member of the same 
                controlled group of corporations (within the 
                meaning of section 409(l)(4)) as such 
                corporation. For purposes of the preceding 
                sentence, section 318(a) shall be applied 
                without regard to the exception in paragraph 
                (2)(B)(i) thereof.
                  ``(C) Cross reference.--
          ``For excise tax on allocations described in subparagraph (A), 
        see section 4979A.
          ``(6) Tax on failure to transfer unallocated 
        securities to charity on termination of plan.--If the 
        requirements of paragraph (3)(F) are not met with 
        respect to any securities, there is hereby imposed a 
        tax on the employer maintaining the plan in an amount 
        equal to the sum of--
                  ``(A) the amount of the increase in the tax 
                which would be imposed by chapter 11 if such 
                securities were not transferred as described in 
                paragraph (1), and
                  ``(B) interest on such amount at the 
                underpayment rate under section 6621 (and 
                compounded daily) from the due date for filing 
                the return of the tax imposed by chapter 11.''
    (c) Conforming Amendments.--
          (1) Section 401(a)(1) is amended by inserting ``or by 
        a charitable remainder trust pursuant to a qualified 
        gratuitous transfer (as defined in section 
        664(g)(1)),'' after ``stock bonus plans),''.
          (2) Section 404(a)(9) is amended by inserting after 
        subparagraph (B) the following new subparagraph:
                  ``(C) A qualified gratuitous transfer (as 
                defined in section 664(g)(1)) shall have no 
                effect on the amount or amounts otherwise 
                deductible under paragraph (3) or (7) or under 
                this paragraph.''
          (3) Section 415(c)(6) is amended by adding at the end 
        thereof the following new sentence:
        ``The amount of any qualified gratuitous transfer (as 
        defined in section 664(g)(1)) allocated to a 
        participant for any limitation year shall not exceed 
        the limitations imposed by this section, but such 
        amount shall not be taken into account in determining 
        whether any other amount exceeds the limitations 
        imposed by this section.''
          (4) Section 415(e) is amended--
                  (A) by redesignating paragraph (6) as 
                paragraph (7), and
                  (B) by inserting after paragraph (5) the 
                following new paragraph:
          ``(6) Special rule for qualified gratuitous 
        transfers.--Any qualified gratuitous transfer of 
        qualified employer securities (as defined by section 
        664(g)) shall not be taken into account in calculating, 
        and shall not be subject to, the limitations provided 
        in this subsection.''
          (5) Subparagraph (B) of section 664(d)(1) and 
        subparagraph (B) of section 664(d)(2) are each amended 
        by inserting ``and other than qualified gratuitous 
        transfers described in subparagraph (C)'' after 
        ``subparagraph (A)''.
          (6) Paragraph (4) of section 674(b) is amended by 
        inserting before the period ``or to an employee stock 
        ownership plan (as defined in section 4975(e)(7)) in a 
        qualified gratuitous transfer (as defined in section 
        664(g)(1))''.
          (7) Section 2055(a) is amended--
                  (i) by striking ``or'' at the end of 
                paragraph (3),
                  (ii) by striking the period at the end of 
                paragraph (4) and inserting ``; or'', and
                  (iii) by inserting after paragraph (4) the 
                following new paragraph:
          ``(5) to an employee stock ownership plan if such 
        transfer qualifies as a qualified gratuitous transfer 
        of qualified employer securities within the meaning of 
        section 664(g).''
          (8) Paragraph (8) of section 2056(b) is amended to 
        read as follows:
          ``(8) Special rule for charitable remainder trusts.--
                  ``(A) In general.--If the surviving spouse of 
                the decedent is the only beneficiary of a 
                qualified charitable remainder trust who is not 
                a charitable beneficiary nor an ESOP 
                beneficiary, paragraph (1) shall not apply to 
                any interest in such trust which passes or has 
                passed from the decedent to such surviving 
                spouse.
                  ``(B) Definitions.--For purposes of 
                subparagraph (A)--
                          ``(i) Charitable beneficiary.--The 
                        term `charitable beneficiary' means any 
                        beneficiary which is an organization 
                        described in section 170(c).
                          ``(ii) ESOP beneficiary.--The term 
                        `ESOP beneficiary' means any 
                        beneficiary which is an employee stock 
                        ownership plan (as defined in section 
                        4975(e)(7)) that holds a remainder 
                        interest in qualified employer 
                        securities (as defined in section 
                        664(g)(4)) to be transferred to such 
                        plan in a qualified gratuitous transfer 
                        (as defined in section 664(g)(1)).
                          ``(iii) Qualified charitable 
                        remainder trust.--The term `qualified 
                        charitable remainder trust' means a 
                        charitable remainder annuity trust or a 
                        charitable remainder unitrust 
                        (described in section 664).''
          (9) Section 4947(b) is amended by inserting after 
        paragraph (3) the following new paragraph:
          ``(4) Section 507.--The provisions of section 507(a) 
        shall not apply to a trust which is described in 
        subsection (a)(2) by reason of a distribution of 
        qualified employer securities (as defined in section 
        664(g)(4)) to an employee stock ownership plan (as 
        defined in section 4975(e)(7)) in a qualified 
        gratuitous transfer (as defined by section 664(g)).''
          (10) The last sentence of section 4975(e)(7) is 
        amended by inserting ``and section 664(g)'' after 
        ``section 409(n)''
          (11) Subsection (a) of section 4978 is amended--
                  (A) by inserting ``or acquired any qualified 
                employer securities in a qualified gratuitous 
                transfer to which section 664(g) applied'' 
                after ``section 1042 applied'', and
                  (B) by inserting before the period at the end 
                of subparagraph (B) ``60 percent of the total 
                value of all employer securities as of such 
                disposition in the case of any qualified 
                employer securities in a qualified gratuitous 
                transfer to which section 664(g) applied)''.
          (12) Paragraph (2) of section 4978(b) is amended--
                  (A) by inserting ``or acquired in the 
                qualified gratuitous transfer to which section 
                664(g) applied'' after ``section 1042 
                applied'', and
                  (B) by inserting ``or to which section 664(g) 
                applied'' after ``section 1042 applied'' in 
                subparagraph (C) thereof.
          (13) Subsection (c) of section 4978 is amended by 
        striking ``written statement'' and all that follows and 
        inserting ``written statement described in section 
        664(g)(1)(E) or in section 1042(b)(3) (as the case may 
        be).''
          (14) Paragraph (2) of section 4978(e) is amended by 
        striking the period and inserting ``; except that such 
        section shall be applied without regard to subparagraph 
        (B) thereof for purposes of applying this section and 
        section 4979A with respect to securities acquired in a 
        qualified gratuitous transfer (as defined in section 
        664(g)(1)).''
          (15) Subsection (a) of section 4979A is amended to 
        read as follows:
    ``(a) Imposition of Tax.--If--
          ``(1) there is a prohibited allocation of qualified 
        securities by any employee stock ownership plan or 
        eligible worker-owned cooperative, or
          ``(2) there is an allocation described in section 
        664(g)(5)(A),
there is hereby imposed a tax on such allocation equal to 50 
percent of the amount involved.''
          (16) Subsection (c) of section 4979A is amended to 
        read as follows:
    ``(c) Liability for Tax.--The tax imposed by this section 
shall be paid by--
          ``(1) the employer sponsoring such plan, or
          ``(2) the eligible worker-owned cooperative,
which made the written statement described in section 
664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may 
be).''
          (17) Section 4979A is amended by redesignating 
        subsection (d) as subsection (e) and by inserting after 
        subsection (c) the following new subsection:
    ``(d) Special Statute of Limitations for Tax Attributable 
to Certain Allocations.--The statutory period for the 
assessment of any tax imposed by this section on an allocation 
described in subsection (a)(2) of qualified employer securities 
shall not expire before the date which is 3 years from the 
later of--
          ``(1) the 1st allocation of such securities in 
        connection with a qualified gratuitous transfer (as 
        defined in section 664(g)(1)), or
          ``(2) the date on which the Secretary is notified of 
        the allocation described in subsection (a)(2).''
    (d) Effective Date.--The amendments made by this section 
shall apply to transfers made by trusts to, or for the use of, 
an employee stock ownership plan after the date of the 
enactment of this Act.

SEC. 916. TREATMENT OF CERTAIN TRANSPORTATION ON NON-COMMERCIALLY 
                    OPERATED AIRCRAFT AS A FRINGE BENEFIT EXCLUDABLE 
                    FROM GROSS INCOME.

    (a) In General.--Subsection (b) of section 132 (relating to 
no-additional-cost service defined) is amended to read as 
follows:
    ``(b) No-Additional-Cost Service Defined.--For purposes of 
this section, the term `no-additional-cost service'means any 
service provided by an employer to an employee for use by such employee 
if--
          ``(1) such service--
                  ``(A) is offered for sale to customers in the 
                ordinary course of the line of business of the 
                employer in which the employee is performing 
                services, or
                  ``(B) consists of transportation on an 
                aircraft, if--
                          ``(i) transportation on such aircraft 
                        is not offered for sale to customers,
                          ``(ii) such transportation for use by 
                        such employee is provided on a flight 
                        made in the ordinary course of the 
                        trade or business of an employer which 
                        owns or leases such aircraft for use in 
                        such trade or business, and
                          ``(iii) the flight on which the 
                        transportation is provided would have 
                        been made whether or not such employee 
                        was transported on the flight, and
          ``(2) the employer incurs no substantial additional 
        cost (including forgone revenue) in providing such 
        service to the employee (determined without regard to 
        any amount paid by the employee for such service).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to services provided after December 31, 1997.

SEC. 917. MINIMUM PENSION ACCRUED BENEFIT DISTRIBUTABLE WITHOUT CONSENT 
                    INCREASED TO $5,000.

    (a) In General.--Subparagraph (A) of section 411(a)(11) 
(relating to restrictions on certain mandatory distributions) 
is amended by striking ``$3,500'' and inserting ``the 
applicable limit''.
    (b) Applicable Limit.--Paragraph (11) of section 411(a) is 
amended by adding at the end the following new subparagraph:
                  ``(D) Applicable limit.--
                          ``(i) In general.--For purposes of 
                        subparagraph (A), the applicable limit 
                        is $5,000.
                          ``(ii) Inflation adjustment.--In the 
                        case of plan years beginning in a 
                        calendar year after 1998, the dollar 
                        amount contained in clause (i) shall be 
                        increased by an amount equal to--
                                  ``(I) such dollar amount, 
                                multiplied by
                                  ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for such 
                                calendar year by substituting 
                                `calendar year 1997' for 
                                `calendar year 1992' in 
                                subparagraph (B) thereof.
                        If any amount as adjusted under the 
                        preceding sentence is not a multiple of 
                        $50, such amount shall be rounded to 
                        the next lowest multiple of $50.''
    (c) Conforming Amendments.--
          (1) Section 411(a)(7)(B), paragraphs (1) and (2) of 
        section 417(e), and section 457(e)(9) are each amended 
        by striking ``$3,500'' each place in appears (other 
        than the headings) and inserting ``the applicable limit 
        under section 411(a)(11)(D)''.
          (2) The headings for paragraphs (1) and (2) of 
        section 417(e) and subparagraph (A) of section 
        457(e)(9) are each amended by striking ``$3,500'' and 
        inserting ``applicable limit''.
    (d) Effective Date.--The amendments made by this section 
shall apply to plan years beginning after the date of the 
enactment of this Act.

SEC. 918. CLARIFICATION OF CERTAIN RULES RELATING TO EMPLOYEE STOCK 
                    OWNERSHIP PLANS OF S CORPORATIONS.

    (a) Certain Cash Distributions Permitted.--
          (1) Paragraph (2) of section 409(h) is amended by 
        adding at the end the following new subparagraph:
                  ``(B) Plan maintained by s corporation.--In 
                the case of a plan established and maintained 
                by an S corporation which otherwise meets the 
                requirements of this subsection or section 
                4975(e)(7), such plan shall not be treated as 
                failing to meet the requirements of this 
                subsection or section 401(a) merely because it 
                does not permit a participant to exercise the 
                right described in paragraph (1)(A) if such 
                plan provides that the participant entitled to 
                a distribution has a right to receive the 
                distribution in cash.''
          (2) Paragraph (2) of section 409(h) is amended--
                  (A) by striking ``a plan which'' in the first 
                sentence and inserting the following:
                  ``(A) In general.--A plan which'', and
                  (B) by moving the text before subparagraph 
                (B) 2 ems to the right.
    (b) Shareholder-Employees Not Treated as Owner-Employees 
Under Tax on Prohibited Transactions.--The last sentence of 
section 4975(d) is amended by striking all that follows 
``preceding sentence,'' through ``Revision Act of 1982,''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

              Subtitle C--Revisions Relating to Disasters

SEC. 921. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES BY REASON 
                    OF PRESIDENTIALLY DECLARED DISASTER.

    (a) In General.--Chapter 77 is amended by inserting after 
section 7508 the following new section:

``SEC. 7508A. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES BY 
                    REASON OF PRESIDENTIALLY DECLARED DISASTER.

    ``(a) In General.--In the case of a taxpayer determined by 
the Secretary to be affected by a Presidentially declared 
disaster (as defined by section 1033(h)(3)), the Secretary may 
prescribe regulations under which a period of up to 90 days may 
be disregarded in determining, under the internal revenue laws, 
in respect of any tax liability (including any penalty, 
additional amount, or addition to the tax) of such taxpayer--
          ``(1) whether any of the acts by the taxpayer 
        described in paragraph (1) of section 7508(a) were 
        performed within the time prescribed therefor, and
          ``(2) the amount of any credit or refund.
    ``(b) Interest on Overpayments and Underpayments.--
Subsection (a) shall not apply for the purpose of determining 
interest on any overpayment or underpayment.''
    (b) Clerical Amendment.--The table of sections for chapter 
77 is amended by inserting after the item relating to section 
7508 the following new item:
        ``Sec. 7508A. Authority to postpone certain tax-related 
                  deadlines by reason of presidentially declared 
                  disaster.''
    (c) Effective Date.--The amendments made by this section 
shall apply with respect to any period for performing an act 
that has not expired before the date of the enactment of this 
Act.

SEC. 922. USE OF CERTAIN APPRAISALS TO ESTABLISH AMOUNT OF DISASTER 
                    LOSS.

    (a) In General.--Subsection (i) of section 165 is amended 
by adding at the end the following new paragraph:
          ``(4) Use of disaster loan appraisals to establish 
        amount of loss.--Nothing in this title shall be 
        construed to prohibit the Secretary from prescribing 
        regulations or other guidance under which an appraisal 
        for the purpose of obtaining a loan of Federal funds or 
        a loan guarantee from the Federal Government as a 
        result of a Presidentially declared disaster (as 
        defined by section 1033(h)(3)) may be used to establish 
        the amount of any loss described in paragraph (1) or 
        (2).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the date of the enactment of this Act.

SEC. 923. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT OF WEATHER-RELATED 
                    CONDITIONS.

    (a) Deferral of Income Inclusion.--Subsection (e) of 
section 451 (relating to special rules for proceeds from 
livestock sold on account of drought) is amended--
          (1) by striking ``drought conditions, and that these 
        drought conditions'' in paragraph (1) and inserting 
        ``drought, flood, or other weather-related conditions, 
        and that such conditions''; and
          (2) by inserting ``, Flood, or Other Weather-Related 
        Conditions'' after ``Drought'' in the subsection 
        heading.
    (b) Involuntary Conversions.--Subsection (e) of section 
1033 (relating to livestock sold on account of drought) is 
amended--
          (1) by inserting ``, flood, or other weather-related 
        conditions'' before the period at the end thereof; and
          (2) by inserting ``, Flood, or Other Weather-Related 
        Conditions'' after ``Drought'' in the subsection 
        heading.
    (c) Effective Date.--The amendments made by this section 
shall apply to sales and exchanges after December 31, 1996.

SEC. 924. MORTGAGE FINANCING FOR RESIDENCES LOCATED IN DISASTER AREAS.

    Subsection (k) of section 143 (relating to mortgage revenue 
bonds; qualified mortgage bond and qualified veteran's mortgage 
bond) is amended by adding at the end the following new 
paragraph:
          ``(11) Special rules for residences located in 
        disaster areas.--In the case of a residence located in 
        an area determined by the President to warrant 
        assistance from the Federal Government under the 
        Disaster Relief and Emergency Assistance Act (as in 
        effect on the date of the enactment of the Revenue 
        Reconciliation Act of 1997), this section shall be 
        applied with the following modifications to financing 
        provided with respect to such residence within 1 year 
        after the date of the disaster declaration:
                  ``(A) Subsection (d) (relating to 3-year 
                requirement) shall not apply.
                  ``(B) Subsections (e) and (f) (relating to 
                purchase price requirement and income 
                requirement) shall be applied as if such 
                residence were a targeted area residence.
        The preceding sentence shall apply only with respect to 
        bonds issued after December 31, 1996, and before 
        January 1, 2000.''

          Subtitle D--Provisions Relating to Employment Taxes

SEC. 931. CLARIFICATION OF EMPLOYMENT TAX STATUS OF INDIVIDUALS 
                    DISTRIBUTING BAKERY PRODUCTS.

    (a) Internal Revenue Code.--Subparagraph (A) of section 
3121(d)(3) is amended by striking ``bakery products,''.
    (b) Social Security Act.--Subparagraph (A) of section 
210(j)(3) of the Social Security Act is amended by striking 
``bakery products,''.
    (c) Effective Date.--The amendments made by this section 
shall apply to services performed after December 31, 1997.

SEC. 932. CLARIFICATION OF STANDARD TO BE USED IN DETERMINING 
                    EMPLOYMENT TAX STATUS OF SECURITIES BROKERS.

    (a) In General.--In determining for purposes of the 
Internal Revenue Code of 1986 whether a registered 
representative of a securities broker-dealer is an employee (as 
defined in section 3121(d) of the Internal Revenue Code of 
1986), no weight shall be given to instructions from the 
service recipient which are imposed only in compliance with 
investor protection standards imposed by the Federal 
Government, any State government, or a governing body pursuant 
to a delegation by a Federal or State agency.
    (b) Effective Date.--Subsection (a) shall apply to services 
performed after December 31, 1997.

SEC. 933. CLARIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT TAX FOR 
                    CERTAIN TERMINATION PAYMENTS RECEIVED BY FORMER 
                    INSURANCE SALESMEN.

    (a) Internal Revenue Code.--Section 1402 (relating to 
definitions) is amended by adding at the end the following new 
subsection:
    ``(k) Codification of Treatment of Certain Termination 
Payments Received by Former Insurance Salesmen.--Nothing in 
subsection (a) shall be construed as including in the net 
earnings from self-employment of an individual any amount 
received during the taxable year from an insurance company on 
account of services performed by such individual as an 
insurance salesman for such company if--
          ``(1) such amount is received after termination of 
        such individual's agreement to perform such services 
        for such company,
          ``(2) such individual performs no services for such 
        company after such termination and before the close of 
        such taxable year,
          ``(3) such individual enters into a covenant not to 
        compete against such company which applies to at least 
        the 1-year period beginning on the date of such 
        termination, and
          ``(4) the amount of such payment--
                  ``(A) depends solely on policies sold by such 
                individual during the last year of such 
                agreement and the extent to which such policies 
                remain in force for some period after such 
                termination, and
                  ``(B) does not depend to any extent on length 
                of service or overall earnings from services 
                performed for such company.''
    (b) Social Security Act.--Section 211 of the Social 
Security Act is amended by adding at the end the following new 
subsection:

``Codification of Treatment of Certain Termination Payments Received by 
                       Former Insurance Salesmen

    ``(j) Nothing in subsection (a) shall be construed as 
including in the net earnings from self-employment of an 
individual any amount received during the taxable year from an 
insurance company on account of services performed by such 
individual as an insurance salesman for such company if--
          ``(1) such amount is received after termination of 
        such individual's agreement to perform such services 
        for such company,
          ``(2) such individual performs no services for such 
        company after such termination and before the close of 
        such taxable year,
          ``(3) such individual enters into a covenant not to 
        compete against such company which applies to at least 
        the 1-year period beginning on the date of such 
        termination, and
          ``(4) the amount of such payment--
                  ``(A) depends solely on policies sold by such 
                individual during the last year of such 
                agreement and the extent to which such policies 
                remain in force for some period after such 
                termination, and
                  ``(B) does not depend to any extent on length 
                of service or overall earnings from services 
                performed for such company.''
    (c) Effective Date.--The amendments made by this section 
shall apply to payments after December 31, 1997.

SEC. 934. STANDARDS FOR DETERMINING WHETHER INDIVIDUALS ARE NOT 
                    EMPLOYEES.

    (a) In General.--Chapter 25 (general provisions relating to 
employment taxes) is amended by adding after section 3510 the 
following new section:

``SEC. 3511. STANDARDS FOR DETERMINING WHETHER INDIVIDUALS ARE NOT 
                    EMPLOYEES.

    ``(a) General Rule.--For purposes of this title, and 
notwithstanding any provision of this title to the contrary, if 
the requirements of subsections (b), (c), and (d) are met with 
respectto any service performed by any individual, then with 
respect to such service--
          ``(1) the service provider shall not be treated as an 
        employee,
          ``(2) the service recipient shall not be treated as 
        an employer, and
          ``(3) the payor shall not be treated as an employer.
    ``(b) Service Provider Requirements With Regard to Service 
Recipient.--For the purposes of subsection (a), the 
requirements of this subsection are met if the service 
provider, in connection with performing the service--
          ``(1) has a significant investment in assets and/or 
        training,
          ``(2) incurs significant unreimbursed expenses,
          ``(3) agrees to perform the service for a particular 
        amount of time or to complete a specific result and is 
        liable for damages for early termination without cause,
          ``(4) is paid primarily on a commissioned basis, or
          ``(5) purchases products for resale.
    ``(c) Additional Service Provider Requirements With Regard 
to Others.--For the purposes of subsection (a), the 
requirements of this subsection are met if--
          ``(1) the service provider--
                  ``(A) has a principal place of business,
                  ``(B) does not primarily provide the service 
                in the service recipient's place of business, 
                or
                  ``(C) pays a fair market rent for use of the 
                service recipient's place of business; or
          ``(2) the service provider--
                  ``(A) is not required to perform service 
                exclusively for the service recipient, and
                  ``(B) in the year involved, or in the 
                preceding or subsequent year--
                          ``(i) has performed a significant 
                        amount of service for other persons,
                          ``(ii) has offered to perform service 
                        for other persons through--
                                  ``(I) advertising,
                                  ``(II) individual written or 
                                oral solicitations,
                                  ``(III) listing with 
                                registries, agencies, brokers, 
                                and other persons in the 
                                business of providing referrals 
                                to other service recipients, or
                                  ``(IV) other similar 
                                activities, or
                          ``(iii) provides service under a 
                        business name which is registered with 
                        (or for which a license has been 
                        obtained from) a State, a political 
                        subdivision of a State, or any agency 
                        or instrumentality of 1 or more States 
                        or political subdivisions.
    ``(d) Written Document Requirements.--For purposes of 
subsection (a), the requirements of this subsection are met if 
the services performed by the individual are performed pursuant 
to a written contract between such individual and the person 
for whom the services are performed, or the payor, and such 
contract provides that the individual will not be treated as an 
employee with respect to such services for purposes of this 
subtitle or subtitle A.
    ``(e) Special Rules.--For purposes of this section--
          ``(1) If for any taxable year any service recipient 
        or payor fails to meet the applicable reporting 
        requirements of sections 6041(a), 6041A(a), or 6051 
        with respect to a service provider, then, unless such 
        failure is due to reasonable cause and not willful 
        neglect, this section shall not apply in determining 
        whether such service provider shall not be treated as 
        an employee of such service recipient or payor for such 
        year.
          ``(2) If the service provider is performing services 
        through an entity owned in whole or in part by such 
        service provider, then the references to `service 
        provider' in subsections (b) through (d) may include 
        such entity, provided that the written contract 
        referred to in paragraph (1) of subsection (d) may be 
        with either the service provider or such entity and 
        need not be with both.
    ``(f) Definitions.--For the purposes of this section--
          ``(1) Service provider.--The term `service provider' 
        means any individual who performs service for another 
        person.
          ``(2) Service recipient.--Except as provided in 
        paragraph (5), the term `service recipient' means the 
        person for whom the service provider performs such 
        service.
          ``(3) Payor.--Except as provided in paragraph (5), 
        the term `payor' means the person who pays the service 
        provider for the performance of such service in the 
        event that the service recipients do not pay the 
        service provider.
          ``(4) In connection with performing the service.--The 
        term `in connection with performing the service' means 
        in connection or related to--
                  ``(A) the actual service performed by the 
                service provider for the service recipients or 
                for other persons for whom the service provider 
                has performed similar service, or
                  ``(B) the operation of the service provider's 
                trade or business.
          ``(5) Exceptions.--The terms `service recipient' and 
        `payor' do not include any entity which is owned in 
        whole or in part by the service provider.''
    (b) Clerical Amendment.--The table of sections for chapter 
25 is amended by adding at the end the following new item:

        ``Sec. 3511. Standards for determining whether individuals are 
                  not employees.''

    (c) Effective Date.--The amendments made by this section 
shall apply to services performed after December 31, 1997.

          Subtitle E--Provisions Relating to Small Businesses

SEC. 941. WAIVER OF PENALTY THROUGH 1998 ON SMALL BUSINESSES FAILING TO 
                    MAKE ELECTRONIC FUND TRANSFERS OF TAXES.

    No penalty shall be imposed under the Internal Revenue Code 
of 1986 solely by reason of a failure by a person to use the 
electronic fund transfer system established under section 
6302(h) of such Code if--
          (1) such person is a member of a class of taxpayers 
        first required to use such system on or after July 1, 
        1997, and
          (2) such failure occurs before January 1, 1999.

SEC. 942. CLARIFICATION OF TREATMENT OF HOME OFFICE USE FOR 
                    ADMINISTRATIVE AND MANAGEMENT ACTIVITIES.

    (a) In General.--Paragraph (1) of section 280A(c) is 
amended by adding at the end the following new sentence: ``For 
purposes of subparagraph (A), the term `principal place of 
business' includes a place of business which is used by the 
taxpayer for the administrative or management activities of any 
trade or business of the taxpayer if there is no other fixed 
location of such trade or business where the taxpayer conducts 
substantial administrative or management activities of such 
trade or business.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

                      Subtitle F--Other Provisions

SEC. 951. USE OF ESTIMATES OF SHRINKAGE FOR INVENTORY ACCOUNTING.

    (a) In General.--Section 471 (relating to general rule for 
inventories) is amended by redesignating subsection (b) as 
subsection (c) and by inserting after subsection (a) the 
following new subsection:
    ``(b) Estimates of Inventory Shrinkage Permitted.--A method 
of determining inventories shall not be deemed not to clearly 
reflect income solely because it utilizes estimates of 
inventory shrinkage that are confirmed by a physical count only 
after the last day of the taxable year if--
          ``(1) the taxpayer normally does a physical count of 
        inventories at each location on a regular and 
        consistent basis, and
          ``(2) the taxpayer makes proper adjustments to such 
        inventories and to its estimating methods to the extent 
        such estimates are greater than or less than the actual 
        shrinkage.''
    (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to taxable years ending after the date of 
        the enactment of this Act.
          (2) Coordination with section 481.--In the case of 
        any taxpayer permitted by this section to change its 
        method of accounting to a permissible method for any 
        taxable year--
                  (A) such changes shall be treated as 
                initiated by the taxpayer,
                  (B) such changes shall be treated as made 
                with the consent of the Secretary, and
                  (C) the period for taking into account the 
                adjustments under section 481 by reason of such 
                change shall be 4 years.

SEC. 952. ASSIGNMENT OF WORKMEN'S COMPENSATION LIABILITY ELIGIBLE FOR 
                    EXCLUSION RELATING TO PERSONAL INJURY LIABILITY 
                    ASSIGNMENTS.

    (a) In General.--Subsection (c) of section 130 (relating to 
certain personal injury liability assignments) is amended--
          (1) by inserting ``, or as compensation under any 
        workmen's compensation act,'' after ``(whether by suit 
        or agreement)'' in the material preceding paragraph 
        (1),
          (2) by inserting ``or the workmen's compensation 
        claim,'' after ``agreement,'' in paragraph (1), and
          (3) by striking ``section 104(a)(2)'' in paragraph 
        (2)(D) and inserting ``paragraph (1) or (2) of section 
        104(a)''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall apply to claims under workmen's compensation acts filed 
after the date of the enactment of this Act.

SEC. 953. TAX-EXEMPT STATUS FOR CERTAIN STATE WORKER'S COMPENSATION ACT 
                    COMPANIES.

    (a) In General.--Section 501(c)(27) (relating to membership 
organizations under workmen's compensation acts) is amended by 
adding at the end the following:
          ``(B) Any organization (including a mutual insurance 
        company) if--
                  ``(i) such organization is created by State 
                law and is organized and operated under State 
                law exclusively to--
                          ``(I) provide workmen's compensation 
                        insurance which is required by State 
                        law or with respect to which State law 
                        provides significant disincentives if 
                        such insurance is not purchased by an 
                        employer, and
                          ``(II) provide related coverage which 
                        is incidental to workmen's compensation 
                        insurance,
                  ``(ii) such organization must provide 
                workmen's compensation insurance to any 
                employer in the State (for employees in the 
                State or temporarily assigned out-of-State) 
                which seeks such insurance and meets other 
                reasonable requirements relating thereto,
                  ``(iii)(I) the State makes a financial 
                commitment with respect to such organization 
                either by extending the full faith and credit 
                of the State to debt of such organization or by 
                providing the initial operating capital of such 
                organization and (II) in the case of periods 
                after the date of enactment of this 
                subparagraph, the assets of such organization 
                revert to the State upon dissolution, and
                  ``(iv) the majority of the board of directors 
                or oversight body of such organization are 
                appointed by the chief executive officer or 
                other executive branch official of the State, 
                by the State legislature, or by both.''
    (b) Conforming Amendments.--Section 501(c)(27) of such Code 
is amended by inserting ``(A)'' after ``(27)'', by 
redesignating subparagraphs (A), (B), and (C) as clauses (i), 
(ii), and (iii), respectively, and by redesignating clauses (i) 
and (ii) of subparagraphs (B) and (C) (before redesignation) as 
subclauses (I) and (II), respectively.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 954. ELECTION TO CONTINUE EXCEPTION FROM TREATMENT OF PUBLICLY 
                    TRADED PARTNERSHIPS AS CORPORATIONS.

    (a) In General.--Section 7704 is amended by adding at the 
end thereof the following new subsection:
    ``(g) Exception for Existing Publicly Traded 
Partnerships.--
          ``(1) In general.--Subsection (a) shall not apply to 
        an existing publicly traded partnership which elects 
        the application of this subsection and consents to the 
        application of the tax imposed by paragraph (3).
          ``(2) Existing publicly traded partnership.--For 
        purposes of this section, the term `existing publicly 
        traded partnership' means any publicly traded 
        partnership to which subsection (a) does not apply as 
        of the date of the enactment of this paragraph (other 
        than by reason of subsection (c)(1)).
          ``(3) Additional tax on electing publicly traded 
        partnerships.--
                  ``(A) Imposition of tax.--There is hereby 
                imposed for each taxable year on the income of 
                every electing publicly traded partnership a 
                tax equal to 15 percent of the gross income for 
                such taxable year from the active conduct of 
                trades and businesses by the partnership.
                  ``(B) Electing publicly traded partnership.--
                For purposes of this paragraph, the term 
                `electing publicly traded partnership' means 
                any partnership for which the consent under 
                paragraph (1) is in effect.
                  ``(C) Adjustments in the case of tiered 
                partnerships.--For purposes of this paragraph, 
                if the income of the partnership includes its 
                distributive share of income from another 
                partnership for any taxable year, the gross 
                income referred to in subparagraph (A) shall 
                include the gross income of such other 
                partnership from the active conduct of trades 
                and businesses of such other partnership (in 
                lieu of such distributive share). A similar 
                rule shall apply in the case of lower-tiered 
                partnerships.
                  ``(D) Treatment of tax.--For purposes of this 
                title, the tax imposed by this paragraph shall 
                be treated as imposed by chapter 1 other than 
                for purposes of determining the amount of any 
                credit allowable under chapter 1.
          ``(4) Election.--An election and consent under this 
        subsection shall apply to the taxable year for which 
        made and all subsequent taxable years unless revoked by 
        the partnership. Such revocation may be made without 
        the consent of the Secretary, but, once so revoked, may 
        not be reinstated.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 955. EXCLUSION FROM UNRELATED BUSINESS TAXABLE INCOME FOR CERTAIN 
                    SPONSORSHIP PAYMENTS.

    (a) In General.--Section 513 (relating to unrelated trade 
or business income) is amended by adding at the end the 
following new subsection:
    ``(i) Treatment of Certain Sponsorship Payments.--
          ``(1) In general.--The term `unrelated trade or 
        business' does not include the activity of soliciting 
        and receiving qualified sponsorship payments.
          ``(2) Qualified sponsorship payments.--For purposes 
        of this subsection--
                  ``(A) In general.--The term `qualified 
                sponsorship payment' means any payment made by 
                any person engaged in a trade or business with 
                respect to which there is no arrangement or 
                expectation that such person will receive any 
                substantial return benefit other than the use 
                or acknowledgement of the name or logo (or 
                product lines) of such person's trade or 
                business in connection with the activities of 
                the organization that receives such payment. 
                Such a use or acknowledgement does not include 
                advertising such person's products or services 
                (including messages containing qualitative or 
                comparative language, price information or 
                other indications of savings or value, an 
                endorsement, or an inducement to purchase, 
                sell, or use such products or services).
                  ``(B) Limitations.--
                          ``(i) Contingent payments.--The term 
                        `qualified sponsorship payment' does 
                        not include any payment if the amount 
                        of such payment is contingent upon the 
                        level of attendance at one or more 
                        events, broadcast ratings, or other 
                        factors indicating the degree of public 
                        exposure to one or more events.
                          ``(ii) Acknowledgements or 
                        advertising in periodicals.--The term 
                        `qualified sponsorship payment' does 
                        not include any payment which entitles 
                        the payor to an acknowledgement or 
                        advertising in regularly scheduled and 
                        printed material published by or on 
                        behalf of the payee organization that 
                        is not related to and primarily 
                        distributed in connection with a 
                        specific event conducted by the payee 
                        organization.
          ``(3) Allocation of portions of single payment.--For 
        purposes of this subsection, to the extent that a 
        portion of a payment would (if made as a separate 
        payment) be a qualified sponsorship payment, such 
        portion of such payment and the other portion of such 
        payment shall be treated as separate payments.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to payments solicited or received after December 
31, 1997.

SEC. 956. ASSOCIATIONS OF HOLDERS OF TIMESHARE INTERESTS TO BE TAXED 
                    LIKE OTHER HOMEOWNERS ASSOCIATIONS.

    (a) Timeshare Associations Included as Homeowner 
Associations.--
          (1) In general.--Paragraph (1) of section 528(c) 
        (defining homeowners association) is amended--
                  (A) by striking ``or a residential real 
                estate management association'' and inserting 
                ``, a residential real estate management 
                association, or a timeshare association'' in 
                the material preceding subparagraph (A),
                  (B) by striking ``or'' at the end of clause 
                (i) of subparagraph (B), by striking the period 
                at the end of clause (ii) of subparagraph (B) 
                and inserting ``, or'', and by adding at the 
                end of subparagraph (B) the following new 
                clause:
                          ``(iii) owners of timeshare rights to 
                        use, or timeshare ownership interests 
                        in, association property in the case of 
                        a timeshare association,'', and
                  (C) by inserting ``and, in the case of a 
                timeshare association, for activities provided 
                to or on behalf of members of the association'' 
                before the comma at the end of subparagraph 
                (C).
          (2) Timeshare association defined.--Subsection (c) of 
        section 528 is amended by redesignating paragraph (4) 
        as paragraph (5) and by inserting after paragraph (3) 
        the following new paragraph:
          ``(4) Timeshare association.--The term `timeshare 
        association' means any organization (other than a 
        condominium management association) meeting the 
        requirement of subparagraph (A) of paragraph (1) if any 
        member thereof holds a timeshare right to use, or a 
        timeshare ownership interest in, real property 
        constituting association property.''
    (b) Exempt Function Income.--Paragraph (3) of section 
528(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 adding at the end the following new 
subparagraph:
                  ``(C) owners of timeshare rights to use, or 
                timeshare ownership interests in, real property 
                in the case of a timeshare association.''
    (c) Rate of Tax.--Subsection (b) of section 528 (relating 
to certain homeowners associations) is amended by inserting 
before the period ``(32 percent of such income in the case of a 
timeshare association)''.
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996.

SEC. 957. ADDITIONAL ADVANCE REFUNDING OF CERTAIN VIRGIN ISLAND BONDS.

    Subclause (I) of section 149(d)(3)(A)(i) of the Internal 
Revenue Code of 1986 shall not apply to the second advance 
refunding of any issue of the Virgin Islands which was first 
advance refunded before June 9, 1997, if the debt provisions of 
the refunding bonds are changed to repeal the priority first 
lien requirement of the refunded bonds.

SEC. 958. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN FARMERS' 
                    COOPERATIVES.

    (a) In General.--Section 1042 (relating to sales of stock 
to employee stock ownership plans or certain cooperatives) is 
amended by adding at the end the following new subsection:
    ``(g) Application of Section to Sales of Stock in 
Agricultural Refiners and Processors to Eligible Farm 
Cooperatives.--
          ``(1) In general.--This section shall apply to the 
        sale of stock of a qualified refiner or processor to an 
        eligible farmers' cooperative.
          ``(2) Qualified refiner or processor.--For purposes 
        of this subsection, the term `qualified refiner or 
        processor' means a domestic corporation--
                  ``(A) substantially all of the activities of 
                which consist of the active conduct of the 
                trade or business of refining or processing 
                agricultural or horticultural products, and
                  ``(B) which purchases more than one-half of 
                such products to be refined or processed from--
                          ``(i) farmers who make up the 
                        eligible farmers' cooperative which is 
                        purchasing stock in the corporation in 
                        a transaction to which this subsection 
                        is to apply, and
                          ``(ii) such cooperative.
          ``(3) Eligible farmers' cooperative.--For purposes of 
        this section, the term `eligible farmers' cooperative' 
        means an organization to which part I of subchapter T 
        applies which is engaged in the marketing of 
        agricultural or horticultural products.
          ``(4) Special rules.--In applying this section to a 
        sale to which paragraph (1) applies--
                  ``(A) the eligible farmers' cooperative shall 
                be treated in the same manner as a cooperative 
                described in subsection (b)(1)(B),
                  ``(B) subsection (b)(2) shall be applied by 
                substituting `100 percent' for `30 percent' 
                each place it appears,
                  ``(C) the determination as to whether any 
                stock in the domestic corporation is a 
                qualified security shall be made without regard 
                to whether the stock is an employer security or 
                to subsection (c)(1)(A), and
                  ``(D) paragraphs (2)(D) and (7) of subsection 
                (c) shall not apply.''
    (b) Effective Date.--The amendment made by this section 
shall apply to sales after December 31, 1997.

SEC. 959. EXCEPTION FROM REPORTING OF REAL ESTATE TRANSACTIONS FOR 
                    SALES AND EXCHANGES OF CERTAIN PRINCIPAL 
                    RESIDENCES.

    (a) In General.--Subsection (e) of section 6045 (relating 
to return required in the case of real estate transactions) is 
amended by adding at the end the following new paragraph:
          ``(5) Exception for sales or exchanges of certain 
        principal residences.--
                  ``(A) In general.--Paragraph (1) shall not 
                apply to any sale or exchange of a residence 
                for $250,000 or less if the person referred to 
                in paragraph (2)(A) receives written assurance 
                in a form acceptable to the Secretary from the 
                seller that--
                          ``(i) such residence is the principal 
                        residence (within the meaning of 
                        section 121) of the seller,
                          ``(ii) there is no federally 
                        subsidized mortgage financing 
                        assistance with respect to the mortgage 
                        on such residence, and
                          ``(iii) the seller meets the 
                        requirements of section 121(a) with 
                        respect to such sale or exchange.
                If such assurance includes an assurance that 
                the seller is married, the preceding sentence 
                shall be applied by substituting `$500,000' for 
                `$250,000'.
                  ``(B) Seller.--For purposes of this 
                paragraph, the term `seller' includes the 
                person relinquishing the residence in an 
                exchange.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to sales and exchanges after the date of the 
enactment of this Act.

SEC. 960. INCREASED DEDUCTIBILITY OF BUSINESS MEAL EXPENSES FOR 
                    INDIVIDUALS SUBJECT TO FEDERAL HOURS OF SERVICE.

    (a) In General.--Section 274(n) (relating to only 50 
percent of meal and entertainment expenses allowed as 
deduction) is amended by adding at the end the following new 
paragraph:
          ``(3) Special rule for individuals subject to federal 
        hours of service.--
                  ``(A) In general.--In the case of any 
                expenses for food or beverages consumed while 
                away from home (within the meaning of section 
                162(a)(2)) by an individual during, or incident 
                to, the period of duty subject to the hours of 
                service limitations of the Department of 
                Transportation, paragraph (1) shall be applied 
                by substituting `the applicable percentage' for 
                `50 percent'.
                  ``(B) Applicable percentage.--For purposes of 
                this paragraph, the term `applicable 
                percentage' means the percentage determined 
                under the following table:

``For taxable years beginning                             The applicable
  in calendar year--                                     percentage is--
    1998 or 1999..............................................       55 
    2000 or 2001..............................................       60 
    2002 or 2003..............................................       65 
    2004 or 2005..............................................       70 
    2006 or 2007..............................................       75 
    2008 or thereafter........................................     80.''

    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

SEC. 961. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR SHORT-TERM 
                    LEASES.

    (a) In General.--Part III of subchapter B of chapter 1 is 
amended by inserting after section 109 the following new 
section:

``SEC. 110. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR SHORT-TERM 
                    LEASES.

    ``(a) In General.--Gross income of a lessee does not 
include any amount received in cash (or treated as a rent 
reduction) by a lessee from a lessor--
          ``(1) under a short-term lease of retail space, and
          ``(2) for the purpose of such lessee's constructing 
        or improving qualified long-term real property for use 
        in such lessee's trade or business at such retail 
        space,
but only to the extent that such amount does not exceed the 
amount expended by the lessee for such construction or 
improvement.
    ``(b) Consistent Treatment by Lessor.--Qualified long-term 
real property constructed or improved in connection with any 
amount excluded from a lessee's income by reason of subsection 
(a) shall be treated as nonresidential real property by the 
lessor.
    ``(c) Definitions.--For purposes of this section--
          ``(1) Qualified long-term real property.--The term 
        `qualified long-term real property' means 
        nonresidential real property which is part of, or 
        otherwise present at, the retail space referred to in 
        subsection (a) and which reverts to the lessor at the 
        termination of the lease.
          ``(2) Short-term lease.--The term `short-term lease' 
        means a lease (or other agreement for occupancy or use) 
        of retail space for 15 years or less (as determined 
        under the rules of section 168(i)(3)).
          ``(3) Retail space.--The term `retail space' means 
        real property leased, occupied, or otherwise used by a 
        lessee in its trade or business of selling tangible 
        personal property or services to the general public.
    ``(d) Information Required To Be Furnished to Secretary.--
Under regulations, the lessee and lessor described in 
subsection (a) shall, at such times and in such manner as may 
be provided in such regulations, furnish to the Secretary--
          ``(1) information concerning the amounts received (or 
        treated as a rent reduction) and expended as described 
        in subsection (a), and
          ``(2) any other information which the Secretary deems 
        necessary to carry out the provisions of this 
        section.''
    (b) Treatment as Information Return.--Subparagraph (A) of 
section 6724(d)(1)(A) is amended by striking ``or'' at the end 
of clause (vii), by adding ``or'' at the end of clause (viii), 
and by adding at the end the following new clause:
                          ``(ix) section 110(d) (relating to 
                        qualified lessee construction 
                        allowances for short-term leases),''.
    (c) Cross Reference.--Paragraph (8) of section 168(i) 
(relating to treatment of leasehold improvements) is amended by 
adding at the end the following new subparagraph:
                  ``(C) Cross reference.--

          ``For treatment of qualified long-term real property 
        constructed or improved in connection with cash or rent 
        reduction from lessor to lessee, see section 110(b).''

    (d) Clerical Amendment.--The table of sections for part III 
of subchapter B of chapter 1 is amended by inserting after the 
item relating to section 109 the following new item:

        ``Sec. 110. Qualified lessee construction allowances for short-
                  term leases.''

    (e) Effective Date.--The amendments made by this section 
shall apply to leases entered into after the date of the 
enactment of this Act.

SEC. 962. TAX TREATMENT OF CONSOLIDATIONS OF LIFE INSURANCE DEPARTMENTS 
                    OF MUTUAL SAVINGS BANKS.

    (a) General Rule.--Section 594 (relating to alternative tax 
for mutual savings banks conducting life insurance business) is 
amended by adding at the end thereof the following new 
subsection:
    ``(c) Treatment of Consolidations.--If 2 or more life 
insurance departments to which subsection (a) applied are 
consolidated into a single life insurance company pursuant to a 
requirement of State law--
          ``(1) such consolidation shall be treated as a 
        reorganization described in section 368(a)(1)(E), and
          ``(2) any payments required to be made to 
        policyholders in connection with such consolidation 
        shall be treated as policyholder dividends deductible 
        under section 808 but only if--
                  ``(A) such payments are only with respect to 
                policies in effect immediately before such 
                consolidation,
                  ``(B) such payments are only with respect to 
                policies which are participating before and 
                after such consolidation,
                  ``(C) such payments shall cease with respect 
                to any policy if such policy lapses after such 
                consolidation,
                  ``(D) the policyholders before such 
                consolidation had no divisible right to the 
                surplus of any such department and had no right 
                to vote, and
                  ``(E) the approval of such policyholders was 
                not required for such consolidation.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on December 31, 1991.

SEC. 963. OFFSET OF PAST-DUE, LEGALLY ENFORCEABLE STATE TAX OBLIGATIONS 
                    AGAINST OVERPAYMENTS.

    (a) In General.--Section 6402 is amended by redesignating 
subsections (e) through (i) as subsections (f) through (j), 
respectively, and by inserting after subsection (d) the 
following new subsection:
    ``(e) Collection of Past-Due, Legally Enforceable State Tax 
Obligations.--
          ``(1) In general.--Upon receiving notice from any 
        State that a named person owes a past-due, legally 
        enforceable State tax obligation to such State, the 
        Secretary shall, under such conditions as may be 
        prescribed by the Secretary--
                  ``(A) reduce the amount of any overpayment 
                payable to such person by the amount of such 
                State tax obligation;
                  ``(B) pay the amount by which such 
                overpayment is reduced under subparagraph (A) 
                to such State and notify such State of such 
                person's name, taxpayer identification number, 
                address, and the amount collected; and
                  ``(C) notify the person making such 
                overpayment that the overpayment has been 
                reduced by an amount necessary to satisfy a 
                past-due, legally enforceable State tax 
                obligation.
        If an offset is made pursuant to a joint return, the 
        notice under subparagraph (B) shall include the names, 
        taxpayer identification numbers, and addresses of each 
        person filing such return.
          ``(2) Offset permitted only against residents of 
        state seeking offset.--Paragraph (1) shall apply to an 
        overpayment by any person for a taxable year only if 
        the address shown on the return for such taxable year 
        is an address within the State seeking the offset.
          ``(3) Priorities for offset.--Any overpayment by a 
        person shall be reduced pursuant to this subsection--
                  ``(A) after such overpayment is reduced 
                pursuant to--
                          ``(i) subsection (a) with respect to 
                        any liability for any internal revenue 
                        tax on the part of the person who made 
                        the overpayment,
                          ``(ii) subsection (c) with respect to 
                        past-due support, and
                          ``(iii) subsection (d) with respect 
                        to any past-due, legally enforceable 
                        debt owed to a Federal agency, and
                  ``(B) before such overpayment is credited to 
                the future liability for any Federal internal 
                revenue tax of such person pursuant to 
                subsection (b).
        If the Secretary receives notice from 1 or more 
        agencies of the State of more than 1 debt subject to 
        paragraph (1) that is owed by such person to such an 
        agency, any overpayment by such person shall be applied 
        against such debts in the order in which such debts 
        accrued.
          ``(4) Notice; consideration of evidence.--No State 
        may take action under this subsection until such 
        State--
                  ``(A) notifies the person owing the past-due 
                State tax liability that the State proposes to 
                take action pursuant to this section,
                  ``(B) gives such person at least 60 days to 
                present evidence that all or part of such 
                liability is not past-due or not legally 
                enforceable,
                  ``(C) considers any evidence presented by 
                such person and determines that an amount of 
                such debt is past-due and legally enforceable, 
                and
                  ``(D) satisfies such other conditions as the 
                Secretary may prescribe to ensure that the 
                determination made under subparagraph (C) is 
                valid and that the State has made reasonable 
                efforts to obtain payment of such State tax 
                obligation.
          ``(5) Past-due, legally enforceable state tax 
        obligation.--For purposes of this subsection, the term 
        `past-due, legally enforceable State tax obligation' 
        means a debt--
                  ``(A)(i) which resulted from--
                          ``(I) a judgment rendered by a court 
                        of competent jurisdiction which has 
                        determined an amount of State tax to be 
                        due, or
                          ``(II) a determination after an 
                        administrative hearing which has 
                        determined an amount of State tax to be 
                        due, and
                  ``(ii) which is no longer subject to judicial 
                review, or
                  ``(B) which resulted from a State tax which 
                has been assessed but not collected, the time 
                for redetermination of which has expired, and 
                which has not been delinquent for more than 10 
                years.
        For purposes of this paragraph, the term `State tax' 
        includes any local tax administered by the chief tax 
        administration agency of the State.
          ``(6) Regulations.--The Secretary shall issue 
        regulations prescribing the time and manner in which 
        States must submit notices of past-due, legally 
        enforceable State tax obligations and the necessary 
        information that must be contained in or accompany such 
        notices. The regulations shall specify the types of 
        State taxes and the minimum amount of debt to which the 
        reduction procedure established by paragraph (1) may be 
        applied. The regulations may require States to pay a 
        fee to reimburse the Secretary for the cost of applying 
        such procedure. Any fee paid to the Secretary pursuant 
        to the preceding sentence shall be used to reimburse 
        appropriations which bore all or part of the cost of 
        applying such procedure.
          ``(7) Erroneous payment to state.--Any State 
        receiving notice from the Secretary that an erroneous 
        payment has been made to such State under paragraph (1) 
        shall pay promptly to the Secretary, in accordance with 
        such regulations as the Secretary may prescribe, an 
        amount equal to the amount of such erroneous payment 
        (without regard to whether any other amounts payable to 
        such State under such paragraph have been paid to such 
        State).''
    (b) Disclosure of Certain Information to States Requesting 
Refund Offsets for Past-Due, Legally Enforceable State Tax 
Obligations.--
          (1) Paragraph (10) of section 6103(l) is amended by 
        striking ``(c) or (d)'' each place it appears and 
        inserting ``(c), (d), or (e)''.
          (2) The paragraph heading for such paragraph (10) is 
        amended by striking ``section 6402(c) or 6402(d)'' and 
        inserting ``subsection (c), (d), or (e) of section 
        6402''.
    (c) Conforming Amendments.--
          (1) Subsection (a) of section 6402 is amended by 
        striking ``(c) and (d)'' and inserting ``(c), (d), and 
        (e)''.
          (2) Paragraph (2) of section 6402(d) is amended by 
        striking ``and before such overpayment'' and inserting 
        ``and before such overpayment is reduced pursuant to 
        subsection (e) and before such overpayment''.
          (3) Subsection (f) of section 6402, as redesignated 
        by subsection (a), is amended--
                  (A) by striking ``(c) or (d)'' and inserting 
                ``(c), (d), or (e)'', and
                  (B) by striking ``Federal agency'' and 
                inserting ``Federal agency or State''.
          (4) Subsection (h) of section 6402, as redesignated 
        by subsection (a), is amended by striking ``subsection 
        (c)'' and inserting ``subsection (c) or (e)''.
    (d) Amendments Applied After Technical Corrections to 
Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996.--
          (1) Section 110(l) of the Personal Responsibility and 
        Work Opportunity Reconciliation Act of 1996 is 
amendedby striking paragraphs (4), (5), and (7) (and the amendments 
made by such paragraphs), and the Internal Revenue Code of 1986 shall 
be applied as if such paragraphs (and amendments) had never been 
enacted.
          (2) For purposes of applying the amendments made by 
        this section other than this subsection, the provisions 
        of this subsection shall be treated as having been 
        enacted immediately before the other provisions of this 
        section.
    (e) Effective Date.--The amendments made by this section 
(other than subsection (d)) shall apply to refunds payable 
under section 6402 of the Internal Revenue Code of 1986 after 
December 31, 1998.

SEC. 964. EXEMPTION OF THE INCREMENTAL COST OF A CLEAN FUEL VEHICLE 
                    FROM THE LIMITS ON DEPRECIATION FOR VEHICLES.

    (a) In General.--Section 280F(a)(1) (relating to limiting 
depreciation on luxury automobiles) is amended by adding at the 
end the following new subparagraph:
                  ``(C) Special rule for certain clean-fuel 
                passenger automobiles.--
                          ``(i) Modified automobiles.--In the 
                        case of a passenger automobile which is 
                        propelled by a fuel which is not a 
                        clean-burning fuel to which is 
                        installed qualified clean-fuel vehicle 
                        property (as defined in section 
                        179A(c)(1)(A)) for purposes of 
                        permitting such vehicle to be propelled 
                        by a clean burning fuel (as defined in 
                        section 179A(e)(1)), subparagraph (A) 
                        shall not apply to the cost of the 
                        installed qualified clean burning 
                        vehicle property as depreciated 
                        pursuant to section 168 by applying the 
                        rules under subsections (b)(1), (d)(1), 
                        and (e)(3)(B) thereof.
                          ``(ii) Purpose built passenger 
                        vehicles.--In the case of a purpose 
                        built passenger vehicle (as defined in 
                        section 4001(a)(2)(C)(ii)), each of the 
                        annual limitations specified in 
                        subparagraph (A) shall be tripled.''
    (b) Effective Date.--The amendments made by this section 
shall apply to property placed in service on or after the date 
of enactment of this Act and before January 1, 2005.

SEC. 965. TAX BENEFITS FOR LAW ENFORCEMENT OFFICERS KILLED IN THE LINE 
                    OF DUTY.

    (a) In General.--Part III of subchapter B of chapter 1 
(relating to items specifically excluded from gross income) is 
amended by redesignating section 138 as section 139 and by 
inserting after section 137 the following new section:

``SEC. 138. SURVIVOR BENEFITS ATTRIBUTABLE TO SERVICE BY A LAW 
                    ENFORCEMENT OFFICER WHO IS KILLED IN THE LINE OF 
                    DUTY.

    ``(a) In General.--Gross income shall not include any 
amount paid as a survivor annuity on account of the death of a 
law enforcement officer killed in the line of duty--
          ``(1) if such annuity is provided under a 
        governmental plan which meets the requirements of 
        section 401(a) to the spouse (or a former spouse) of 
        the law enforcement officer or to a child of such 
        officer, and
          ``(2) to the extent such annuity is attributable to 
        such officer's service as a law enforcement officer.
    ``(b) Exceptions.--
          ``(1) In general.--Subsection (a) shall not apply 
        with respect to the death of any law enforcement 
        officer if--
                  ``(A) the death was caused by the intentional 
                misconduct of the officer or by such officer's 
                intention to bring about such officer's death,
                  ``(B) the officer was voluntarily intoxicated 
                (as defined in section 1204 of the Omnibus 
                Crime Control and Safe Streets Act of 1968) at 
                the time of death, or
                  ``(C) the officer was performing such 
                officer's duties in a grossly negligent manner 
                at the time of death.
          ``(2) Exception for benefits paid to certain 
        individuals.--Subsection (a) shall not apply to any 
        payment to an individual whose actions were a 
        substantial contributing factor to the death of the 
        officer.
    ``(c) Law Enforcement Officer.--For purposes of this 
section, the term `law enforcement officer' means an individual 
serving a public agency (as defined in section 1204 of the 
Omnibus Crime Control and Safe Streets Act of 1968) in an 
official capacity, with or without compensation, as a law 
enforcement officer (as defined in such section).''
    (b) Clerical Amendment.--The table of sections for part III 
of subchapter B of chapter 1 is amended by striking the last 
item and inserting the following new items:

        ``Sec. 138. Survivor benefits attributable to service by a law 
                  enforcement officer who is killed in the line of duty.
        ``Sec. 139. Cross references to other Acts.''

    (c) Effective Date.--The amendments made by this subsection 
shall apply to amounts received in taxable years beginning 
after December 31, 1996, with respect to individuals dying 
after such date.

SEC. 966. TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT ON PERCENTAGE 
                    DEPLETION FOR MARGINAL PRODUCTION.

    In the case of taxable years beginning after December 31, 
1997, and before January 1, 2000, paragraph (1) of section 
613A(d) of the Internal Revenue Code of 1986 shall not apply to 
so much of the allowance for depletion computed under section 
613A(c) of such Code as is attributable to paragraph (6) 
thereof.

 Subtitle G--Extension of Duty-Free Treatment Under Generalized System 
  of Preferences; Tariff Treatment of Certain Equipment and Repair of 
                                Vessels

SEC. 971. GENERALIZED SYSTEM OF PREFERENCES.

    (a) Extension of Duty-Free Treatment Under System.--Section 
505 of the Trade Act of 1974 (19 U.S.C. 2465) is amended by 
striking ``May 31, 1997'' and inserting ``May 31, 1999''.
    (b) Retroactive Application for Certain Liquidations and 
Reliquidations.--
          (1) In general.--Notwithstanding section 514 of the 
        Tariff Act of 1930 or any other provision of law and 
        subject to paragraph (2), the entry--
                  (A) 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 May 31, 1997, and
                  (B) that was made after May 31, 1997, and 
                before the date of the enactment of this Act,
        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. As used in this 
        subsection, the term ``entry'' includes a withdrawal 
        from warehouse for consumption.
          (2) Requests.--Liquidation or reliquidation may be 
        made under paragraph (1) 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--
                  (A) to locate the entry; or
                  (B) to reconstruct the entry if it cannot be 
                located.

SEC. 972. EQUIPMENT AND REPAIR OF VESSELS.

    (a) Tariff Treatment.--Section 466 of the Tariff Act of 
1930 (19 U.S.C. 1466), is amended by adding at the end the 
following new subsection:
    ``(i)(1) The duty imposed by subsection (a) shall not apply 
with respect to activities occurring in a Shipbuilding 
Agreement Party, with respect to--
          ``(A) self-propelled seagoing vessels of 100 gross 
        tons or more that are used for transportation of goods 
        or persons or for performance of a specialized service 
        (including, but not limited to, ice breakers and 
        dredges), and
          ``(B) tugs of 365 kilowatts or more.
A vessel shall be considered `self-propelled seagoing' if its 
permanent propulsion and steering provide it all the 
characteristics of self-navigability in the high seas.
    ``(2) As used in this subsection--
          ``(A) the term `Shipbuilding Agreement Party' means a 
        state or separate customs territory that is a signatory 
        to the Shipbuilding Agreement; and
          ``(B) the term `Shipbuilding Agreement' means The 
        Agreement Respecting Normal Competitive Conditions in 
        the Commercial Shipbuilding and Repair Industry, 
        resulting from negotiations under the auspices of the 
        Organization for Economic Cooperation and Development, 
        and entered into on December 21, 1994.''.
    (b) Applicability.--The amendment made by subsection (a) 
applies only with respect to activities occurring in a 
Shipbuilding Agreement Party (as defined in section 466(i) of 
the Tariff Act of 1930) during the 1-year period beginning on 
the date of the enactment of this Act.

    Subtitle H--United States-Caribbean Basin Trade Partnership Act

SEC. 981. SHORT TITLE.

    This subtitle may be cited as the ``United States-Caribbean 
Basin Trade Partnership Act''.

SEC. 982. FINDINGS AND POLICY.

    (a) Findings.--The Congress makes the following findings:
          (1) The United States apparel industry is a major 
        component of the United States manufacturing sector of 
        the United States, employing nearly 825,000 people who 
        are located in every State in the country. The United 
        States apparel industry consumes 42 percent of the 
        fabric produced by United States textile mills, which 
        employ more than 650,000 people.
          (2) In 1973 the United States apparel industry 
        supplied 88 percent of the garments consumed by 
        Americans, and in 1995 that share fell to less than 50 
        percent.
          (3) Countries in the Western Hemisphere offer the 
        greatest opportunities for increased exports of United 
        States textile and apparel products.
          (4) Given the greater propensity of countries located 
        in the Western Hemisphere to use United States 
        components and to purchase United States products 
        compared to other countries, increased trade and 
        economic activity between the United States and 
        countries in the Western Hemisphere will create new 
        jobs in the United States as a result of expanding 
        export opportunities.
          (5) The Caribbean Basin Economic Recovery Act 
        represents a permanent commitment by the United States 
        to encourage the development of strong democratic 
        governments and revitalized economies in neighboring 
        countries in the Caribbean Basin.
          (6) The economic security of the countries in the 
        Caribbean Basin is potentially threatened by the 
        diversion of investment to Mexico as a result of the 
        North American Free Trade Agreement.
          (7) Offering NAFTA equivalent benefits to Caribbean 
        Basin beneficiary countries, pending their eventual 
        accession to the NAFTA or a free trade agreement 
        comparable to the NAFTA, will promote the growth of 
        free enterprise and economic opportunity in the region, 
        and thereby enhance the national security interests of 
        the United States.
    (b) Policy.--It is the policy of the United States--
          (1) to assure that the domestic textile and apparel 
        industry remains competitive in the global marketplace 
        by encouraging the formation and expansion of 
        ``partnerships'' between the textile and apparel 
        industry of the United States and the textile and 
        apparel industry of various countries located in the 
        Western Hemisphere; and
          (2) to offer to the products of Caribbean Basin 
        partnership countries tariffs and quota treatment 
        equivalent to that accorded to products of NAFTA 
        countries, and to seek the accession of these 
        partnership countries to the NAFTA or a free trade 
        agreement comparable to the NAFTA at the earliest 
        possible date, with the goal of achieving full 
        participation in the NAFTA or in a free trade agreement 
        comparable to the NAFTA by all partnership countries by 
        not later than January 1, 2005.

SEC. 983. DEFINITIONS.

    As used in this Act:
          (1) Partnership country.--The term ``partnership 
        country'' means a beneficiary country as defined in 
        section 212(a)(1)(A) of the Caribbean Basin Economic 
        Recovery Act (19 U.S.C. 2702(a)(1)(A)).
          (2) NAFTA.--The term ``NAFTA'' means the North 
        American Free Trade Agreement entered into between the 
        United States, Mexico, and Canada on December 17, 1992.
          (3) Trade representative.--The term ``Trade 
        Representative'' means the United States Trade 
        Representative.
          (4) WTO and wto member.--The terms ``WTO'' and ``WTO 
        member'' have the meanings given those terms in section 
        2 of the Uruguay Round Agreements Act (19 U.S.C. 3501).

SEC. 984. TEMPORARY PROVISIONS TO PROVIDE NAFTA PARITY TO PARTNERSHIP 
                    COUNTRIES.

    (a) Temporary Provisions.--Section 213(b) of the Caribbean 
Basin Economic Recovery Act (19 U.S.C. 2703(b)) is amended to 
read as follows:
    ``(b) Import-Sensitive Articles.--
          ``(1) In general.--Subject to paragraphs (2) through 
        (5), the duty-free treatment provided under this title 
        does not apply to--
                  ``(A) textile and apparel articles which are 
                subject to textile agreements;
                  ``(B) footwear not designated at the time of 
                the effective date of this title as eligible 
                articles for the purpose of the generalized 
                system of preferences under title V of the 
                Trade Act of 1974;
                  ``(C) tuna, prepared or preserved in any 
                manner, in airtight containers;
                  ``(D) petroleum, or any product derived from 
                petroleum, provided for in headings 2709 and 
                2710 of the HTS;
                  ``(E) watches and watch parts (including 
                cases, bracelets and straps), of whatever type 
                including, but not limited to, mechanical, 
                quartz digital, or quartz analog, if such 
                watches or watch parts contain any material 
                which is the product of any country with 
                respect to which HTS column 2 rates of duty 
                apply; or
                  ``(F) articles to which reduced rates of duty 
                apply under subsection (h).
          ``(2) NAFTA transition period treatment of certain 
        textile and apparel articles.--
                  ``(A) Equivalent tariff and quota 
                treatment.--During the transition period--
                          ``(i) the tariff treatment accorded 
                        at any time to any textile or apparel 
                        article that originates in the 
                        territory of a partnership country 
                        shall be identical to the tariff 
                        treatment that is accorded at such time 
                        under section 2 of the Annex to an 
                        article described in the same 8-digit 
                        subheading of the HTS that is an 
                        originating good of Mexico and is 
                        imported into the United States;
                          ``(ii) duty-free treatment under this 
                        title shall apply to any textile or 
                        apparel article that is imported into 
                        the United States from a partnership 
                        country and that--
                                  ``(I) is assembled in a 
                                partnership country, from 
                                fabrics wholly formed and cut 
                                in the United States from yarns 
                                formed in the United States, 
                                and is entered--
                                          ``(aa) under 
                                        subheading 9802.00.80 
                                        of the HTS; or
                                          ``(bb) under chapter 
                                        61 or 62 of the HTS if, 
                                        after such assembly, 
                                        the article would have 
                                        qualified for treatment 
                                        under subheading 
                                        9802.00.80 of the HTS, 
                                        but for the fact the 
                                        article was subjected 
                                        to bleaching, dyeing, 
                                        stone-washing, enzyme-
                                        washing, acid-washing, 
                                        perma-pressing, or 
                                        similar processes or 
                                        embroidery; or
                                  ``(II) is knit-to-shape in a 
                                partnership country from yarns 
                                wholly formed in the United 
                                States;
                                  ``(III) is made from fabric 
                                knit in a partnership country 
                                from yarns wholly formed in the 
                                United States;
                                  ``(IV) is cut and assembled 
                                in a partnership country from 
                                yarns wholly formed in the 
                                United States; or
                                  ``(V) is identified under 
                                subparagraph (C) as a 
                                handloomed, handmade, or 
                                folklore article of such 
                                country and is certified as 
                                such by the competent authority 
                                of such country; and
                          ``(iii) no quantitative restriction 
                        under any bilateral textile agreement 
                        may be applied to the importation into 
                        the United States of any textile or 
                        apparel article that--
                                  ``(I) originates in the 
                                territory of a partnership 
                                country, or
                                  ``(II) qualifies for duty-
                                free treatment under subclause 
                                (I), (II), (III), (IV), or (V) 
                                of clause (ii).
                  ``(B) NAFTA transition period treatment of 
                nonoriginating textile and apparel articles.--
                          ``(i) Preferential tariff 
                        treatment.--Subject to clause (ii), the 
                        President may place in effect at any 
                        time during the transition period with 
                        respect to any textile or apparel 
                        article that--
                                  ``(I) is a product of a 
                                partnership country, but
                                  ``(II) does not qualify as a 
                                good that originates in the 
                                territory of a partnership 
                                country,
                        tariff treatment that is identical to 
                        the in-preference-level tariff 
                        treatment accorded at such time under 
                        Appendix 6.B of the Annex to an article 
                        described in the same 8-digit 
                        subheading of the HTS that is a product 
                        of Mexico and is imported into the 
                        United States. For purposes of this 
                        clause, the `in-preference-level tariff 
                        treatment' accorded to an article that 
                        is a product of Mexico is the rate of 
                        duty applied to that article when 
                        imported in quantities less than or 
                        equal to the quantities specified in 
                        Schedule 6.B.1, 6.B.2., or 6.B.3. of 
                        the Annex for imports of that article 
                        from Mexico into the United States.
                          ``(ii) Limitations on certain 
                        articles.--(I) Tariff treatment under 
                        clause (i) may be extended, during any 
                        calendar year, to not more than 
                        45,000,000 square meter equivalents of 
                        cotton or man-made fiber apparel, to 
                        not more than 1,500,000 square meter 
                        equivalents of wool apparel, and to not 
                        more than 25,000,000 square meter 
                        equivalents of goods entered under 
                        subheading 9802.00.80 of the HTS.
                          ``(II) Except as provided in 
                        subclause (III), the amounts set forth 
                        in subclause (I) shall be allocated 
                        among the 7 partnership countries with 
                        the largest volume of exports to the 
                        United States of textile and apparel 
                        goods in calendar year 1996, based upon 
                        a pro rata share of the volume of 
                        textile and apparel goods of each of 
                        those 7 countries that entered the 
                        United States under subheading 
                        9802.00.80 of the HTS during the first 
                        12 months of the 14-month period ending 
                        on the date of the enactment of the 
                        United States-Caribbean Basin Trade 
                        Partnership Act.
                          ``(III) Five percent of the amounts 
                        set forth in subclause (I) shall be 
                        allocated among the partnership 
                        countries, other than those to which 
                        subclause (II) applies, based upon a 
                        pro rata share of the exports to the 
                        United States of textile and apparel 
                        goods of each of those countries during 
                        the first 12 months of the 14-month 
                        period ending on the date of the 
                        enactment of the United States-
                        Caribbean Basin Trade Partnership Act.
                          ``(iii) Prior consultation.--The 
                        President may implement the 
                        preferential tariff treatment described 
                        in clause (i) only after consultation 
                        with representatives of the United 
                        States textile and apparel industry and 
                        other interested parties regarding--
                                  ``(I) the specific articles 
                                to which such treatment will be 
                                extended,
                                  ``(II) the annual quantities 
                                of such articles that may be 
                                imported at the preferential 
                                duty rates described in clause 
                                (i), and
                                  ``(III) the allocation of 
                                such annual quantities among 
                                beneficiary countries.
                  ``(C) Handloomed, handmade, and folklore 
                articles.--For purposes of subparagraph (A), 
                the Trade Representative shall consult with 
                representatives of the partnership country for 
                the purpose of identifying particular textile 
                and apparel goods that are mutually agreed upon 
                as being handloomed, handmade, or folklore 
                goods of a kind described in section 2.3 (a), 
                (b), or (c) or Appendix 3.1.B.11 of the Annex.
                  ``(D) Bilateral emergency actions.--(i) The 
                President may take--
                          ``(I) bilateral emergency tariff 
                        actions of a kind described in section 
                        4 of the Annex with respect to any 
                        textile or apparel article imported 
                        from a partnership country if the 
                        application of tariff treatment under 
                        subparagraph (A) to such article 
                        results in conditions that would be 
                        cause for the taking of such actions 
                        under such section 4 with respect to an 
                        article described in the same 8-digit 
                        subheading of the HTS that is imported 
                        from Mexico; or
                          ``(II) bilateral emergency 
                        quantitative restriction actions of a 
                        kind described in section 5 of the 
                        Annex with respect to imports of any 
                        textile or apparel article described in 
                        subparagraph (B)(i) (I) and (II) if the 
                        importation of such article into the 
                        United States results in conditions 
                        that would be cause for the taking of 
                        such actions under such section 5 with 
                        respect to a like article that is a 
                        product of Mexico.
                  ``(ii) The requirement in paragraph (5) of 
                section 4 of the Annex (relating to providing 
                compensation) shall not be deemed to apply to a 
                bilateral emergency action taken under this 
                subparagraph.
                  ``(iii) For purposes of applying bilateral 
                emergency action under this subparagraph--
                          ``(I) the term `transition period' in 
                        sections 4 and 5 of the Annex shall be 
                        deemed to be the period defined in 
                        paragraph (5)(D); and
                          ``(II) any requirements to consult 
                        specified in section 4 or 5 of the 
                        Annex are deemed to be satisfied if the 
                        President requests consultations with 
                        the partnership country in question and 
                        the country does not agree to consult 
                        within the time period specified in 
                        such section.
          ``(3) NAFTA transition period treatment of certain 
        other articles originating in beneficiary countries.--
                  ``(A) Equivalent tariff treatment.--
                          ``(i) In general.--Subject to clause 
                        (ii), the tariff treatment accorded at 
                        any time during the transition period 
                        to any article referred to in any of 
                        subparagraphs (B) through (F) of 
                        paragraph (1) that originates in the 
                        territory of a partnership country 
                        shall be identical to the tariff 
                        treatment that is accorded at such time 
                        under Annex 302.2 of the NAFTA to an 
                        article described in the same 8-digit 
                        subheading of the HTS that is an 
                        originating good of Mexico and is 
                        imported into the United States.
                          ``(ii) Exception.--Clause (i) does 
                        not apply to any article accorded duty-
                        free treatment under U.S. Note 2(b) to 
                        subchapter II of chapter 98 of the HTS.
                  ``(B) Relationship to subsection (h) duty 
                reductions.--If at any time during the 
                transition period the rate of duty that would 
                (but for action taken under subparagraph (A)(i) 
                in regard to such period) apply with respect to 
                any article under subsection (h) is a rate of 
                duty that is lower than the rate of duty 
                resulting from such action, then such lower 
                rate of duty shall be applied for the purposes 
                of implementing such action.
          ``(4) Customs procedures.--
                  ``(A) In general.--
                          ``(i) The obligations under chapter 5 
                        of the NAFTA regarding customs 
                        procedures, as such obligations apply 
                        to the exporting country, shall applyto 
importations under paragraphs (2) and (3) of articles from partnership 
countries.
                          ``(ii) The Secretary of the Treasury 
                        shall prescribe regulations that 
                        require, as a condition of entry, that 
                        any importer of record that claims 
                        preferential treatment under paragraph 
                        (2) or (3) must comply with 
                        requirements similar in all material 
                        respects to the requirements of article 
                        502.1 of the NAFTA. The certificate of 
                        origin that otherwise would be required 
                        under this subparagraph shall not be 
                        required in the case of an article 
                        imported under paragraph (2) or (3) if 
                        such certificate of origin would not be 
                        required under article 503 of the NAFTA 
                        for a similar importation from Mexico.
                  ``(B) Penalties for engaging in transshipment 
                or other customs fraud.--If an exporter is 
                determined under the laws of the United States 
                to have engaged in illegal transshipment of 
                textile or apparel products from a partnership 
                country, then the President shall deny all 
                benefits under this title to such exporter, and 
                any successors of such exporter, for a period 
                of 2 years.
                  ``(C) Study by USTR on Cooperation of Other 
                Countries Concerning Circumvention.--The Trade 
                Representative, in consultation with the United 
                States Commissioner of Customs, shall conduct a 
                study analyzing the extent to which each 
                partnership country--
                          ``(i) has cooperated fully with the 
                        United States, consistent with its 
                        domestic laws and procedures, in 
                        instances of circumvention or alleged 
                        circumvention of existing quotas on 
                        imports of textile and apparel goods, 
                        to establish necessary relevant facts 
                        in the places of import, export, and, 
                        where applicable, transshipment, 
                        including investigation of 
                        circumvention practices, exchanges of 
                        documents, correspondence, reports, and 
                        other relevant information, to the 
                        extent such information is available;
                          ``(ii) has taken appropriate 
                        measures, consistent with its domestic 
                        laws and procedures, against exporters 
                        and importers involved in instances of 
                        false declaration concerning fiber 
                        content, quantities, description, 
                        classification, or origin of textile 
                        and apparel goods; and
                          ``(iii) has penalized the individuals 
                        and entities involved in any such 
                        circumvention, consistent with its 
                        domestic laws and procedures, and has 
                        worked closely to seek the cooperation 
                        of any third country to prevent such 
                        circumvention from taking place in that 
                        third country.
                The Trade Representative shall submit to the 
                Congress, not later than October 1, 1998, a 
                report on the study conducted under this 
                subparagraph.
          ``(5) Definitions.--For purposes of this subsection--
                  ``(A) The term `the Annex' means Annex 300-B 
                of the NAFTA.
                  ``(B) The term `NAFTA' means the North 
                American Free Trade Agreement entered into 
                between the United States, Mexico, and Canada 
                on December 17, 1992.
                  ``(C) The term `partnership country' means a 
                beneficiary country.
                  ``(D) The term `textile or apparel article' 
                means any article referred to in paragraph 
                (1)(A) that is a good listed in Appendix 1.1 of 
                the Annex.
                  ``(E) The term `transition period' means, 
                with respect to a partnership country, the 
                period that begins on January 1, 1998, and ends 
                on the earlier of--
                          ``(i) December 31, 1998; or
                          ``(ii) the date on which--
                                  ``(I) the United States first 
                                applies the NAFTA to the 
                                partnership country upon its 
                                accession to the NAFTA, or
                                  ``(II) there enters into 
                                force with respect to the 
                                United States and the 
                                partnership country a free 
                                trade agreement comparable to 
                                the NAFTA that makes 
                                substantial progress in 
                                achieving the negotiating 
                                objectives set forth in section 
                                108(b)(5) of the North American 
                                Free Trade Agreement 
                                Implementation Act (19 U.S.C. 
                                3317(b)(5)).
                  ``(F) An article shall be deemed as 
                originating in the territory of a partnership 
                country if the article meets the rules of 
                origin for a good set forth in chapter 4 of the 
                NAFTA, and, in the case of an article described 
                in Appendix 6.A of the Annex, the requirements 
                stated in such Appendix 6.A for such article to 
                be treated as if it were an originating good. 
                In applying such chapter 4 or Appendix 6.A with 
                respect to a partnership country for purposes 
                of this subsection--
                          ``(i) no countries other than the 
                        United States and partnership countries 
                        may be treated as being Parties to the 
                        NAFTA,
                          ``(ii) references to trade between 
                        the United States and Mexico shall be 
                        deemed to refer to trade between the 
                        United States and partnership 
                        countries, and
                          ``(iii) references to a Party shall 
                        be deemed to refer to the United States 
                        or a partnership country, and 
                        references to the Parties shall be 
                        deemed to refer to any combination of 
                        partnership countries or the United 
                        States.''.
    (b) Determination Regarding Retention of Designation.--
Section 212(e)(1) of the Caribbean Basin Economic Recovery Act 
(19 U.S.C. 2702(e)) is amended--
          (1) by inserting ``(A)'' after ``(1)'';
          (2) by redesignating subparagraphs (A) and (B) as 
        clauses (i) and (ii), respectively;
          (3) by adding at the end the following:
          ``(B)(i) Based on the President's review and analysis 
        described in subsection (f), the President may 
        determine if the preferential treatment under section 
        213(b) (2) and (3) should be withdrawn, suspended, or 
        limited with respect to any article of a partnership 
        country. Such determination shall be included in the 
        report required by subsection (f).
          ``(ii) Withdrawal, suspension, or limitation of the 
        preferential treatment under section 213(b) (2) and (3) 
        with respect to a partnership country shall be taken 
        only after the requirements of subsection (a)(2) and 
        paragraph (2) of this subsection have been met.''.
    (c) Reporting Requirements.--Section 212(f) of the 
Caribbean Basin Economic Recovery Act (19 U.S.C. 2702(f)) is 
amended to read as follows:
    ``(f) Reporting Requirements.--Not later than 1 year after 
the date of the enactment of the United States-Caribbean Basin 
Trade Partnership Act and at the close of each 3-year period 
thereafter, the President shall submit to the Congress a 
complete report regarding the operation of this title, 
including--
          ``(1) with respect to subsections (b) and (c) of this 
        section, the results of a general review of beneficiary 
        countries based on the considerations described in such 
        subsections;
          ``(2) with respect to subsection (c)(4), the degree 
        to which a country follows accepted rules of 
        international trade provided for under the General 
        Agreement on Tariffs and Trade and the World Trade 
        Organization;
          ``(3) with respect to subsection (c)(9), the extent 
        to which beneficiary countries are providing or taking 
        steps to provide protection of intellectual property 
        rights comparable to the protection provided to the 
        United States in bilateral intellectual property rights 
        agreements;
          ``(4) with respect to subsection (b)(2) and 
        subsection (c)(5), the extent that beneficiary 
        countries are providing or taking steps to provide 
        protection of investment and investors comparable to 
        the protection provided to the United States in 
        bilateral investment treaties;
          ``(5) with respect to subsection (c)(3), the extent 
        that beneficiary countries are providing the United 
        States with equitable and reasonable market access in 
        the product sectors for which benefits are provided 
        under this title;
          ``(6) with respect to subsection (c)(11), the extent 
        that beneficiary countries are cooperating with the 
        United States in administering the provisions of 
        section 213(b); and
          ``(7) with respect to subsection (c)(8), the extent 
        that beneficiary countries are meeting the 
        internationally recognized worker rights criteria under 
        such subsection.
In the first report under this subsection, the President shall 
include a review of the implementation of section 213(b), and 
his analysis of whether the benefits under paragraphs (2) and 
(3) of such section further the objectives of this title and 
whether such benefits should be continued.''.
    (d) Conforming Amendment.--Section 213(a)(1) of the 
Caribbean Basin Economic Recovery Act is amended by inserting 
``and except as provided in section 213(b)(2) and (3),'' after 
``Tax Reform Act of 1986,''.

SEC. 985. EFFECT OF NAFTA ON SUGAR IMPORTS FROM BENEFICIARY COUNTRIES.

    The President shall monitor the effects, if any, that the 
implementation of the NAFTA has on the access of beneficiary 
countries under the Caribbean Basin Economic Recovery Act to 
the United States market for sugars, syrups, and molasses. If 
the President considers that the implementation of the NAFTA is 
affecting, or will likely affect, in an adverse manner the 
access of such countries to the United States market, the 
President shall promptly--
          (1) take such actions, after consulting with 
        interested parties and with the appropriate committees 
        of the House of Representatives and the Senate, or
          (2) propose to the Congress such legislative actions,
as may be necessary or appropriate to ameliorate such adverse 
effect.

SEC. 986. DUTY-FREE TREATMENT FOR CERTAIN BEVERAGES MADE WITH CARIBBEAN 
                    RUM.

    Section 213(a) of the Caribbean Basin Economic Recovery Act 
(19 U.S.C. 2703(a)) is amended--
          (1) in paragraph (5), by striking ``chapter'' and 
        inserting ``title''; and
          (2) by adding at the end the following new paragraph:
    ``(6) Notwithstanding paragraph (1), the duty-free 
treatment provided under this title shall apply to liqueurs and 
spirituous beverages produced in the territory of Canada from 
rum if--
          ``(A) such rum is the growth, product, or manufacture 
        of a beneficiary country or of the Virgin Islands of 
        the United States;
          ``(B) such rum is imported directly from a 
        beneficiary country or the Virgin Islands of the United 
        States into the territory of Canada, and such liqueurs 
        and spirituous beverages are imported directly from the 
        territory of Canada into the customs territory of the 
        United States;
          ``(C) when imported into the customs territory of the 
        United States, such liqueurs and spirituous beverages 
        are classified in subheading 2208.90 or 2208.40 of the 
        HTS; and
          ``(D) such rum accounts for at least 90 percent by 
        volume of the alcoholic content of such liqueurs and 
        spiritous beverages.''.

SEC. 987. MEETINGS OF TRADE MINISTERS AND USTR.

    (a) Schedule of Meetings.--The President shall take the 
necessary steps to convene a meeting with the trade ministers 
of the partnership countries in order to establish a schedule 
of regular meetings, to commence as soon as is practicable, of 
the trade ministers and the Trade Representative, for the 
purpose set forth in subsection (b).
    (b) Purpose.--The purpose of the meetings scheduled under 
subsection (a) is to reach agreement between the United States 
and partnership countries on the likely timing and procedures 
for initiating negotiations for partnership to accede to the 
NAFTA, or to enter into mutually advantageous free trade 
agreements with the United States that contain provisions 
comparable to those in the NAFTA and would make substantial 
progress in achieving the negotiating objectives set forth in 
section 108(b)(5) of the North American Free Trade Agreement 
Implementation Act (19 U.S.C. 3317(b)(5)).

SEC. 988. REPORT ON ECONOMIC DEVELOPMENT AND MARKET ORIENTED REFORMS IN 
                    THE CARIBBEAN.

    (a) In General.--The Trade Representative shall make an 
assessment of the economic development efforts and market 
oriented reforms in each partnership country and the ability of 
each such country, on the basis of such efforts and reforms, to 
undertake the obligations of the NAFTA. The Trade 
Representative shall, not later than July 1, 1998, submit to 
the President and to the Committee on Finance of the Senate and 
the Committee on Ways and Means of the House of Representatives 
a report on that assessment.
    (b) Accession to NAFTA.--
          (1) Ability of countries to implement nafta.--The 
        Trade Representative shall include in the report under 
        subsection (a) a discussion of possible timetables and 
        procedures pursuant to which partnership countries can 
        complete the economic reforms necessary to enable them 
        to negotiate accession to the NAFTA. The Trade 
        Representative shall also include an assessment of the 
        potential phase-in periods that may be necessary for 
        those partnership countries with less developed 
        economies to implement the obligations of the NAFTA.
          (2) Factors in assessing ability to implement 
        nafta.--In assessing the ability of each partnership 
        country to undertake the obligations of the NAFTA, the 
        Trade Representative should consider, among other 
        factors--
                  (A) whether the country has joined the WTO;
                  (B) the extent to which the country provides 
                equitable access to the markets of that 
                country;
                  (C) the degree to which the country uses 
                export subsidies or imposes export performance 
                requirements or local content requirements;
                  (D) macroeconomic reforms in the country such 
                as the abolition of price controls on traded 
                goods and fiscal discipline;
                  (E) progress the country has made in the 
                protection of intellectual property rights;
                  (F) progress the country has made in the 
                elimination of barriers to trade in services;
                  (G) whether the country provides national 
                treatment to foreign direct investment;
                  (H) the level of tariffs bound by the country 
                under the WTO (if the country is a WTO member);
                  (I) the extent to which the country has taken 
                other trade liberalization measures; and
                  (J) the extent which the country works to 
                accommodate market access objectives of the 
                United States.
    (c) Parity Review in the Event a New Country Accedes to 
NAFTA.--If--
          (1) a country or group of countries accedes to the 
        NAFTA, or
          (2) the United States negotiates a comparable free 
        trade agreement with another country or group of 
        countries,
the Trade Representative shall provide to the committees 
referred to in subsection (a) a separate report on the economic 
impact of the new trade relationship on partnership countries. 
The report shall include any measures the Trade Representative 
proposes to minimize the potential for the diversion of 
investment from partnership countries to the new NAFTA member 
or free trade agreement partner.

                           TITLE X--REVENUES

                     Subtitle A--Financial Products

SEC. 1001. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED FINANCIAL 
                    POSITIONS.

    (a) In General.--Part IV of subchapter P of chapter 1 is 
amended by adding at the end the following new section:

``SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED FINANCIAL 
                    POSITIONS.

    ``(a) In General.--If there is a constructive sale of an 
appreciated financial position--
          ``(1) the taxpayer shall recognize gain as if such 
        position were sold, assigned, or otherwise terminated 
        at its fair market value on the date of such 
        constructive sale (and any gain shall be taken into 
        account for the taxable year which includes such date), 
        and
          ``(2) for purposes of applying this title for periods 
        after the constructive sale--
                  ``(A) proper adjustment shall be made in the 
                amount of any gain or loss subsequently 
                realized with respect to such position for any 
                gain taken into account by reason of paragraph 
                (1), and
                  ``(B) the holding period of such position 
                shall be determined as if such position were 
                originally acquired on the date of such 
                constructive sale.
    ``(b) Appreciated Financial Position.--For purposes of this 
section--
          ``(1) In general.--Except as provided in paragraph 
        (2), the term `appreciated financial position' means 
        any position with respect to any stock, debt 
        instrument, or partnership interest if there would be 
        gain were such position sold, assigned, or otherwise 
        terminated at its fair market value.
          ``(2) Exceptions.--The term `appreciated financial 
        position' shall not include--
                  ``(A) any position with respect to straight 
                debt (as defined in section 1361(c)(5)(B) 
                without regard to clause (iii) thereof), and
                  ``(B) any position which is marked to market 
                under any provision of this title or the 
                regulations thereunder.
          ``(3) Position.--The term `position' means an 
        interest, including a futures or forward contract, 
        short sale, or option.
    ``(c) Constructive Sale.--For purposes of this section--
          ``(1) In general.--A taxpayer shall be treated as 
        having made a constructive sale of an appreciated 
        financial position if the taxpayer (or a related 
        person)--
                  ``(A) enters into a short sale of the same or 
                substantially identical property,
                  ``(B) enters into an offsetting notional 
                principal contract with respect to the same or 
                substantially identical property,
                  ``(C) enters into a futures or forward 
                contract to deliver the same or substantially 
                identical property,
                  ``(D) in the case of an appreciated financial 
                position that is a short sale or a contract 
                described in subparagraph (B) or (C) with 
                respect to any property, acquires the same or 
                substantially identical property, or
                  ``(E) to the extent prescribed by the 
                Secretary in regulations, enters into 1 or more 
                other transactions (or acquires 1 or more 
                positions) that have substantially the same 
                effect as a transaction described in any of the 
                preceding subparagraphs.
          ``(2) Exception for sales of nonpublicly traded 
        property.--The term `constructive sale' shall not 
        include any contract for sale of any stock, debt 
        instrument, or partnership interest which is not a 
        marketable security (as defined in section 453(f)) if 
        the contract settles within 1 year after the date such 
        contract is entered into.
          ``(3) Exception for certain closed transactions.--In 
        applying this section, there shall be disregarded any 
        transaction (which would otherwise be treated as a 
        constructive sale) during the taxable year if--
                  ``(A) such transaction is closed before the 
                end of the 30th day after the close of such 
                taxable year, and
                  ``(B) in the case of a transaction which is 
                closed during the 90-day period ending on such 
                30th day--
                          ``(i) the taxpayer holds the 
                        appreciated financial position 
                        throughout the 60-day period beginning 
                        on the date such transaction is closed, 
                        and
                          ``(ii) at no time during such 60-day 
                        period is the taxpayer's risk of loss 
                        with respect to such position reduced 
                        by reason of a circumstance which would 
                        be described in section 246(c)(4) if 
                        references to stock included references 
                        to such position.
          ``(4) Related person.--A person is related to another 
        person with respect to a transaction if--
                  ``(A) the relationship is described in 
                section 267 or 707(b), and
                  ``(B) such transaction is entered into with a 
                view toward avoiding the purposes of this 
                section.
    ``(d) Other Definitions.--For purposes of this section--
          ``(1) Forward contract.--The term `forward contract' 
        means a contract to deliver a substantially fixed 
        amount of property for a substantially fixed price.
          ``(2) Offsetting notional principal contract.--The 
        term `offsetting notional principal contract' means, 
        with respect to any property, an agreement which 
        includes--
                  ``(A) a requirement to pay (or provide credit 
                for) all or substantially all of the investment 
                yield (including appreciation) on such property 
                for a specified period, and
                  ``(B) a right to be reimbursed for (or 
                receive credit for) all or substantially all of 
                any decline in the value of such property.
    ``(e) Special Rules.--
          ``(1) Treatment of subsequent sale of position which 
        was deemed sold.--If--
                  ``(A) there is a constructive sale of any 
                appreciated financial position,
                  ``(B) such position is subsequently disposed 
                of, and
                  ``(C) at the time of such disposition, the 
                transaction resulting in the constructive sale 
                of such position is open with respect to the 
                taxpayer or any related person,
        solely for purposes of determining whether the taxpayer 
        has entered into a constructive sale of any other 
        appreciated financial position held by the taxpayer, 
        the taxpayer shall be treated as entering into such 
        transaction immediately after such disposition. For 
        purposes of the preceding sentence, an assignment or 
        other termination shall be treated as a disposition.
          ``(2) Certain trust instruments treated as stock.--
        For purposes of this section, an interest in a trust 
        which is actively traded (within the meaning of section 
        1092(d)(1)) shall be treated as stock.
          ``(3) Multiple positions in property.--If a taxpayer 
        holds multiple positions in property, the determination 
        of whether a specific transaction is a constructive 
        sale and, if so, which appreciated financial position 
        is deemed sold shall be made in the same manner as 
        actual sales.
    ``(f) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.''
    (b) Election of Mark to Market for Securities Traders and 
for Traders and Dealers in Commodities.--Subsection (d) of 
section 475 (relating to mark to market accounting method for 
dealers in securities) is amended by adding at the end the 
following new paragraph:
          ``(4) Election of mark to market for securities 
        traders and for traders and dealers in commodities.--
                  ``(A) In general.--In the case of a person--
                          ``(i) who is engaged in a trade or 
                        business to which this paragraph 
                        applies, and
                          ``(ii) who elects to be treated as a 
                        dealer in securities for purposes of 
                        this section with respect to such trade 
                        or business,
                subsections (a), (b)(3), (c)(3), and (e) and 
                the preceding provisions of this subsection 
                (or, in the case of a dealer in commodities, 
                this section) shall apply to all commodities 
                and securities held by such person in any trade 
                or business with respect to which such election 
                is in effect in the same manner as if such 
                person were a dealer in securities and all 
                references to securities included references to 
                commodities.
                  ``(B) Application of paragraph.--This 
                paragraph shall apply to any active trade or 
                business--
                          ``(i) as a trader in securities, or
                          ``(ii) as a trader or dealer in 
                        commodities.
                  ``(C) Exception for certain holdings of 
                traders.--In the case of a trader in securities 
                or commodities, subsection (a) shall not apply 
                to any security or commodity (to which 
                subsection (a) would otherwise apply solely by 
                reason of this paragraph) if such security or 
                commodity is clearly identified in the trader's 
                records (before the close of the day applicable 
                under subsection (b)(2)) as being held other 
                than in a trade or business to which the 
                election under subparagraph(A) is in effect. A 
security or commodity so identified shall be treated as described in 
subsection (b)(1).
                  ``(D) Commodity.--For purposes of this 
                paragraph, the term `commodities' includes only 
                commodities of a kind customarily dealt in on 
                an organized commodity exchange.
                  ``(E) Election.--An election under this 
                paragraph may be made separately for each trade 
                or business and without the consent of the 
                Secretary. Such an election, once made, shall 
                apply to the taxable year for which made and 
                all subsequent taxable years unless revoked 
                with the consent of the Secretary.''
    (c) Clerical Amendment.--The table of sections for part IV 
of subchapter P of chapter 1 is amended by adding at the end 
the following new item:

        ``Sec. 1259. Constructive sales treatment for appreciated 
                  financial positions.''

    (d) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall 
        apply to any constructive sale after June 8, 1997.
          (2) Exception for sales of positions, etc. held 
        before june 9, 1997.--A constructive sale before June 
        9, 1997, and the property to which the position 
        involved in the transaction relates, shall not be taken 
        into account in determining whether any other 
        constructive sale after June 8, 1997, has occurred if, 
        within before the close of the 30-day period beginning 
        on the date of the enactment of this Act, such position 
        and property are clearly identified in the taxpayer's 
        records as offsetting. The preceding sentence shall 
        cease to apply as of the date the taxpayer ceases to 
        hold such position or property.
          (3) Special rule.--In the case of a decedent dying 
        after June 8, 1997, if--
                  (A) there was a constructive sale on or 
                before such date of any appreciated financial 
                position,
                  (B) the transaction resulting in such 
                constructive sale of such position remains open 
                (with respect to the decedent or any related 
                person) for not less than 2 years after the 
                date of such transaction (whether such period 
                is before or after such date), and
                  (C) such transaction is not closed within the 
                30-day period beginning on the date of the 
                enactment of this Act,
        then, for purposes of such Code, such position (and any 
        property related thereto, as determined under the 
        principles of section 1259(d)(1) of such Code (as so 
        added)) shall be treated as property constituting 
        rights to receive an item of income in respect of a 
        decedent under section 691 of such Code.
          (4) Election of securities traders, and for traders 
        and dealers in commodities, to be treated as dealers in 
        securities.--
                  (A) In general.--The amendment made by 
                subsection (b) shall apply to taxable years 
                ending after the date of the enactment of this 
                Act.
                  (B) 4-year spread of adjustments.--In the 
                case of a taxpayer who elects under section 
                475(d)(4) of the Internal Revenue Code of 1986 
                (as added by this section) to change its method 
                of accounting for its first taxable year ending 
                after the date of the enactment of this Act, 
                the net amount of the adjustments required to 
                be taken into account by the taxpayer under 
                section 481 of the Internal Revenue Code of 
                1986 shall be taken into account ratably over 
                the 4-taxable year period beginning with such 
                first taxable year.

SEC. 1002. LIMITATION ON EXCEPTION FOR INVESTMENT COMPANIES UNDER 
                    SECTION 351.

    (a) In General.--Paragraph (1) of section 351(e) (relating 
to exceptions) is amended by adding at the end the following: 
``For purposes of the preceding sentence, the determination of 
whether a company is an investment company shall be made--
                  ``(A) by taking into account all stock and 
                securities held by the company, whether or not 
                readily marketable, and
                  ``(B) by treating all of the following as 
                securities:
                          ``(i) Money.
                          ``(ii) Any financial instrument (as 
                        defined in section 731(c)(2)(C)).
                          ``(iii) Any foreign currency.
                          ``(iv) Any interest in a real estate 
                        investment trust, a common trust fund, 
                        a regulated investment company, or a 
                        publicly traded partnership (as defined 
                        in section 7704(b)).
                          ``(v) Any interest described in 
                        clause (iv), (v), or (vi) of section 
                        731(c)(2)(B) (or which would be so 
                        described without regard to any 
                        reference to active trading or 
                        marketability).
                          ``(vi) Any other asset specified in 
                        regulations prescribed by the 
                        Secretary.''
    (b) Effective Date.--
          (1) In general.--The amendment made by subsection (a) 
        shall apply to transfers after June 8, 1997, in taxable 
        years ending after such date.
          (2) Binding contracts.--The amendment made by 
        subsection (a) shall not apply to any transfer pursuant 
        to a written binding contract in effect on June 8, 
        1997, that provides for the transfer of a fixed amount 
        of property, and at all times thereafter before such 
        transfer.

SEC. 1003. MODIFICATION OF RULES FOR ALLOCATING INTEREST EXPENSE TO 
                    TAX-EXEMPT INTEREST.

    (a) Pro Rata Allocation Rules Applicable to Corporations.--
          (1) In general.--Paragraph (1) of section 265(b) is 
        amended by striking ``In the case of a financial 
        institution'' and inserting ``In the case of a 
        corporation''.
          (2) Only obligations acquired after june 8, 1997, 
        taken into account.--Subparagraph (A) of section 
        265(b)(2) is amended by striking ``August 7, 1986'' and 
        inserting ``June 8, 1997 (August 7, 1986, in the case 
        of a financial institution)''.
          (3) Small issuer exception not to apply.--
        Subparagraph (A) of section 265(b)(3) is amended by 
        striking ``Any qualified'' and inserting ``In the case 
        of a financial institution, any qualified''.
          (4) Exception for certain bonds acquired on sale of 
        goods or services.--Subparagraph (B) of section 
        265(b)(4) is amended by adding at the end the following 
        new sentence: ``In the case of a taxpayer other than a 
        financial institution, such term shall not include a 
        nonsalable obligation acquired by such taxpayer in the 
        ordinary course of business as payment for goods or 
        services provided by such taxpayer to any State or 
        local government.''
          (5) Look-thru rules for partnerships.--Paragraph (6) 
        of section 265(b) is amended by adding at the end the 
        following new subparagraph:
                  ``(C) Look-thru rules for partnerships.--In 
                the case of a corporation which is a partner in 
                a partnership, such corporation shall be 
                treated for purposes of this subsection as 
                holding directly its allocable share of the 
                assets of the partnership.''
          (6) Application of pro rata disallowance on 
        affiliated group basis.--Subsection (b) of section 265 
        is amended by adding at the end the following new 
        paragraph:
          ``(7) Application of disallowance on affiliated group 
        basis.--
                  ``(A) In general.--For purposes of this 
                subsection, all members of an affiliated group 
                filing a consolidated return under section 1501 
                shall be treated as 1 taxpayer.
                  ``(B) Treatment of insurance companies.--This 
                subsection shall not apply to an insurance 
                company, and subparagraph (A) shall be applied 
                without regard to any member of an affiliated 
                group which is an insurance company.''
          (6) De minimis exception for nonfinancial 
        institutions.--Subsection (b) of section 265 is amended 
        by adding at the end the following new paragraph:
          ``(8) De minimis exception for nonfinancial 
        institutions.--In the case of a corporation, paragraph 
        (1) shall not apply for any taxable year if the amount 
        described in paragraph (2)(A) with respect to such 
        corporation does not exceed the lesser of--
                  ``(A) 2 percent of the amount described in 
                paragraph (2)(B), or
                  ``(B) $1,000,000.
        The preceding sentence shall not apply to a financial 
        institution or to a dealer in tax-exempt obligations.''
          (7) Clerical amendment.--The subsection heading for 
        section 265(b) is amended by striking ``Financial 
        Institutions'' and inserting ``Corporations''.
    (b) Application of Section 265(a)(2) With Respect to 
Controlled Groups.--Paragraph (2) of section 265(a) is amended 
after ``obligations'' by inserting ``held by the taxpayer (or 
any corporation which is a member of a controlled group (as 
defined in section 267(f)(1)) which includes the taxpayer)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1004. GAINS AND LOSSES FROM CERTAIN TERMINATIONS WITH RESPECT TO 
                    PROPERTY.

    (a) Application of Capital Treatment to Property Other Than 
Personal Property.--
          (1) In general.--Paragraph (1) of section 1234A 
        (relating to gains and losses from certain 
        terminations) is amended by striking ``personal 
        property (as defined in section 1092(d)(1))'' and 
        inserting ``property''.
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to terminations more than 30 days after 
        the date of the enactment of this Act.
    (b) Application of Capital Treatment, Etc. to Obligations 
Issued by Natural Persons.--
          (1) In general.--Section 1271(b) is amended to read 
        as follows:
    ``(b) Exception for Certain Obligations.--
          ``(1) In general.--This section shall not apply to--
                  ``(A) any obligation issued by a natural 
                person before June 9, 1997, and
                  ``(B) any obligation issued before July 2, 
                1982, by an issuer which is not a corporation 
                and is not a government or political 
                subdivision thereof.
          ``(2) Termination.--Paragraph (1) shall not apply to 
        any obligation purchased (within the meaning of section 
        179(d)(2)) after June 8, 1997.''
          (2) Effective date.--The amendment made by paragraph 
        (1) shall take effect on the date of enactment of this 
        Act.

SEC. 1005. DETERMINATION OF ORIGINAL ISSUE DISCOUNT WHERE POOLED DEBT 
                    OBLIGATIONS SUBJECT TO ACCELERATION.

    (a) In General.--Subparagraph (C) of section 1272(a)(6) 
(relating to debt instruments to which the paragraph applies) 
is amended by striking ``or'' at the end of clause (i), by 
striking the period at the end of clause (ii) and inserting ``, 
or'', and by inserting after clause (i) the following:
                          ``(iii) any pool of debt instruments 
                        the yield on which may be reduced by 
                        reason of prepayments (or to the extent 
                        provided in regulations, by reason of 
                        other events).
                To the extent provided in regulations 
                prescribed by the Secretary, in the case of a 
                small business engaged in the trade or business 
                of selling tangible personal property at 
                retail, clause (iii) shall not apply to debt 
                instruments incurred in the ordinary course of 
                such trade or business while held by such 
                business.''
    (b) Effective Dates.--
          (1) In general.--The amendment made by this section 
        shall apply to taxable years beginning after the date 
        of the enactment of this Act.
          (2) Change in method of accounting.--In the case of 
        any taxpayer required by this section to change its 
        method of accounting for its first taxable year 
        beginning after the date of the enactment of this Act--
                  (A) such change shall be treated as initiated 
                by the taxpayer,
                  (B) such change shall be treated as 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 of the Internal 
                Revenue Code of 1986 shall be taken into 
                account ratably over the 4-taxable year period 
                beginning with such first taxable year.

SEC. 1006. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT INSTRUMENTS.

    (a) In General.--Section 163 (relating to deduction for 
interest) is amended by redesignating subsection (k) as 
subsection (l) and by inserting after subsection (j) the 
following new subsection:
    ``(k) Disallowance of Deduction on Certain Debt Instruments 
of Corporations.--
          ``(1) In general.--No deduction shall be allowed 
        under this chapter for any interest paid or accrued on 
        a disqualified debt instrument.
          ``(2) Disqualified debt instrument.--For purposes of 
        this subsection, the term `disqualified debt 
        instrument' means any indebtedness of a corporation 
        which is payable in equity of the issuer or a related 
        party.
          ``(3) Special rules for amounts payable in equity.--
        For purposes of paragraph (2), indebtedness shall be 
        treated as payable in equity of the issuer or a related 
        party only if--
                  ``(A) a substantial amount of the principal 
                or interest is required to be paid or 
                converted, or at the option of the issuer or a 
                related party is payable in, or convertible 
                into, such equity,
                  ``(B) a substantial amount of the principal 
                or interest is required to be determined, or at 
                the option of the issuer or a related party is 
                determined, by reference to the value of such 
                equity, or
                  ``(C) the indebtedness is part of an 
                arrangement which is reasonably expected to 
                result in a transaction described in 
                subparagraph (A) or (B).
        For purposes of subparagraphs (A) and (B), principal or 
        interest shall be treated as required to be so paid, 
        converted, or determined if it may be required at the 
        option of the holder or a related party and there is a 
        substantial certainty the option will be exercised.
          ``(4) Related party.--For purposes of this 
        subsection, a person is a related party with respect to 
        another person if such person bears a relationship to 
        such other person described in section 267(b) or 
        707(b).
          ``(5) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to 
        carry out the purposes of this subsection, including 
        regulations preventing avoidance of this subsection 
        through the use of an issuer other than a 
        corporation.''
    (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to disqualified debt instruments issued 
        after June 8, 1997.
          (2) Transition rule.--The amendment made by this 
        section shall not apply to any instrument issued after 
        June 8, 1997, if such instrument is--
                  (A) issued pursuant to a written agreement 
                which was binding on such date and at all times 
                thereafter,
                  (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                  (C) described on or before such date in a 
                public announcement or in a filing with the 
                Securities and Exchange Commission required 
                solely by reason of the distribution.

        Subtitle B--Corporate Organizations and Reorganizations

SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY DIVIDENDS.

    (a) Treatment of Extraordinary Dividends in Excess of 
Basis.--Paragraph (2) of section 1059(a) (relating to corporate 
shareholder's recognition of gain attributable to nontaxed 
portion of extraordinary dividends) is amended to read as 
follows:
          ``(2) Amounts in excess of basis.--If the nontaxed 
        portion of such dividends exceeds such basis, such 
        excess shall be treated as gain from the sale or 
        exchange of such stock for the taxable year in which 
        the extraordinary dividend is received.''
    (b) Treatment of Redemptions Where Options Involved.--
Paragraph (1) of section 1059(e) (relating to treatment of 
partial liquidations and non-pro rata redemptions) is amended 
to read as follows:
          ``(1) Treatment of partial liquidations and certain 
        redemptions.--Except as otherwise provided in 
        regulations--
                  ``(A) Redemptions.--In the case of any 
                redemption of stock--
                          ``(i) which is part of a partial 
                        liquidation (within the meaning of 
                        section 302(e)) of the redeeming 
                        corporation,
                          ``(ii) which is not pro rata as to 
                        all shareholders, or
                          ``(iii) which would not have been 
                        treated (in whole or in part) as a 
                        dividend if any options had not been 
                        taken into account under section 
                        318(a)(4),
                any amount treated as a dividend with respect 
                to such redemption shall be treated as an 
                extraordinary dividend to which paragraphs (1) 
                and (2) of subsection (a) apply without regard 
                to the period the taxpayer held such stock. In 
                the case of a redemption described in clause 
                (iii), only the basis in the stock redeemed 
                shall be taken into account under subsection 
                (a).
                  ``(B) Reorganizations, etc.--An exchange 
                described in section 356 which is treated as a 
                dividend shall be treated as a redemption of 
                stock for purposes of applying subparagraph 
                (A).''
    (c) Time for Reduction.--Paragraph (1) of section 1059(d) 
is amended to read as follows:
          ``(1) Time for reduction.--Any reduction in basis 
        under subsection (a)(1) shall be treated as occurring 
        at the beginning of the ex-dividend date of the 
        extraordinary dividend to which the reduction 
        relates.''
    (d) Effective Dates.--
          (1) In general.--The amendments made by this section 
        shall apply to distributions after May 3, 1995.
          (2) Transition rule.--The amendments made by this 
        section shall not apply to any distribution made 
        pursuant to the terms of--
                  (A) a written binding contract in effect on 
                May 3, 1995, and at all times thereafter before 
                such distribution, or
                  (B) a tender offer outstanding on May 3, 
                1995.
          (3) Certain dividends not pursuant to certain 
        redemptions.--In determining whether the amendment made 
        by subsection (a) applies to any extraordinary dividend 
        other than a dividend treated as an extraordinary 
        dividend under section 1059(e)(1) of the Internal 
        Revenue Code of 1986 (as amended by this Act), 
        paragraphs (1) and (2) shall be applied by substituting 
        ``September 13, 1995'' for ``May 3, 1995''.

SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBUTIONS FOLLOWED BY 
                    ACQUISITIONS AND TO INTRAGROUP TRANSACTIONS.

    (a) Distributions Followed by Acquisitions.--Section 355 
(relating to distribution of stock and securities of a 
controlled corporation) is amended by adding at the end the 
following new subsection:
    ``(e) Recognition of Gain Where Certain Distributions of 
Stock or Securities Are Followed by Acquisition.--
          ``(1) General rule.--If there is a distribution to 
        which this subsection applies, the following rules 
        shall apply:
                  ``(A) Acquisition of controlled 
                corporation.--If there is an acquisition 
                described in paragraph (2)(A)(ii) with respect 
                to any controlled corporation, any stock or 
                securities in the controlled corporation shall 
                not be treated as qualified property for 
                purposes of subsection (c)(2) of this section 
                or section 361(c)(2).
                  ``(B) Acquisition of distributing 
                corporation.--If there is an acquisition 
                described in paragraph (2)(A)(ii) with respect 
                to the distributing corporation, the controlled 
                corporation shall recognize gain in an amount 
                equal to the amount of net gain which would be 
                recognized if all the assets of the 
                distributing corporation (immediately after the 
                distribution) were sold (at such time) for fair 
                market value. Any gain recognized under the 
                preceding sentence shall be treated as long-
                term capital gain and shall be taken into 
                account for the taxable year which includes the 
                day after the date of such distribution.
          ``(2) Distributions to which subsection applies.--
                  ``(A) In general.--This subsection shall 
                apply to any distribution--
                          ``(i) to which this section (or so 
                        much of section 356 as relates to this 
                        section) applies, and
                          ``(ii) which is part of a plan (or 
                        series of related transactions) 
                        pursuant to which 1 or more persons 
                        acquire directly or indirectly stock 
                        representing a 50-percent or greater 
                        interest in the distributing 
                        corporation or any controlled 
                        corporation.
                  ``(B) Plan presumed to exist in certain 
                cases.--If 1 or more persons acquire directly 
                or indirectly stock representing a 50-percent 
                or greater interest in the distributing 
                corporation or any controlled corporation 
                during the 4-year period beginning on the date 
                which is 2 years before the date of the 
                distribution, such acquisition shall be treated 
                as pursuant to a plan described in subparagraph 
                (A)(ii) unless it is established that the 
                distribution and the acquisition are not 
                pursuant to a plan or series of related 
                transactions.
                  ``(C) Coordination with subsection (d).--This 
                subsection shall not apply to any distribution 
                to which subsection (d) applies.
          ``(3) Special rules relating to acquisitions.--
                  ``(A) Certain acquisitions not taken into 
                account.--Except as provided in regulations, 
                the following acquisitions shall not be treated 
                as described in paragraph (2)(A)(ii):
                          ``(i) The acquisition of stock in any 
                        controlled corporation by the 
                        distributing corporation.
                          ``(ii) The acquisition by a person of 
                        stock in any controlled corporation by 
                        reason of holding stock in the 
                        distributing corporation.
                          ``(iii) The acquisition by a person 
                        of stock in any successor corporation 
                        of the distributing corporation or any 
                        controlled corporation by reason of 
                        holding stock in such distributing or 
                        controlled corporation.
                          ``(iv) The acquisition of stock in a 
                        corporation if shareholders owning 
                        directly or indirectly a 50-percent or 
                        greater interest in the distributing 
                        corporation or any controlled 
                        corporation before such acquisition own 
                        indirectly a 50-percent or greater 
                        interest in such distributing or 
                        controlled corporation after such 
                        acquisition.
                This subparagraph shall not apply to any 
                acquisition if the stock held before the 
                acquisition was acquired pursuant to a plan 
                described in subparagraph (A)(ii).
                  ``(B) Asset acquisitions.--Except as provided 
                in regulations, for purposes of this 
                subsection, if the assets of the distributing 
                corporation or any controlled corporation are 
                acquired by a successor corporation in a 
                transaction described in subparagraph (A), (C), 
                or (D) of section 368(a)(1) or any other 
                transaction specified in regulations by the 
                Secretary, the shareholders (immediately before 
                the acquisition) of the corporation acquiring 
                such assets shall be treated as acquiring stock 
                in the corporation from which the assets were 
                acquired.
          ``(4) Definition and special rules.--For purposes of 
        this subsection--
                  ``(A) 50-percent or greater interest.--The 
                term `50-percent or greater interest' has the 
                meaning given such term by subsection (d)(4).
                  ``(B) Distributions in title 11 or similar 
                case.--Paragraph (1) shall not apply to any 
                distribution made in a title 11 or similar case 
                (as defined in section 368(a)(3)).
                  ``(C) Aggregation and attribution rules.--
                          ``(i) Aggregation.--The rules of 
                        paragraph (7)(A) of subsection (d) 
                        shall apply.
                          ``(ii) Attribution.--Section 
                        355(d)(8)(A) shall apply in determining 
                        whether a person holds stock or 
                        securities in any corporation.
                  ``(D) Successors and predecessors.--For 
                purposes of this subsection, any reference to a 
                controlled corporation or a distributing 
                corporation shall include a reference to any 
                predecessor or successor of such corporation.
                  ``(E) Statute of limitations.--If there is an 
                acquisition to which paragraph (1) (A) or (B) 
                applies--
                          ``(i) the statutory period for the 
                        assessment of any deficiency 
                        attributable to any part of the gain 
                        recognized under this subsection by 
                        reason of such acquisition 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 by regulations prescribe) 
                        that such acquisition occurred, and
                          ``(ii) 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.
          ``(5) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary to carry out the 
        purposes of this subsection, including regulations--
                  ``(A) providing for the application of this 
                subsection where there is more than 1 
                controlled corporation,
                  ``(B) treating 2 or more distributions as 1 
                distribution where necessary to prevent the 
                avoidance of such purposes, and
                  ``(C) providing for the application of rules 
                similar to the rules of subsection (d)(6) where 
                appropriate for purposes of paragraph (2)(B).''
    (b) Section 355 Not To Apply to Certain Intragroup 
Transactions.--Section 355, as amended by subsection (a), is 
amended by adding at the end the following new subsection:
    ``(f) Section Not To Apply to Certain Intragroup 
Transactions.--Except as provided in regulations, this section 
shall not apply to the distribution of stock from 1 member of 
an affiliated group filing a consolidated return to another 
member of such group, and the Secretary shall provide proper 
adjustments for the treatment of such distribution, including 
(if necessary) adjustments to--
          ``(1) the adjusted basis of any stock which--
                  ``(A) is in a corporation which is a member 
                of such group, and
                  ``(B) is held by another member of such 
                group, and
          ``(2) the earnings and profits of any member of such 
        group.''
    (c) Determination of Control in Certain Divisive 
Transactions.--
          (1) Section 351 transactions.--Section 351(c) 
        (relating to special rule) is amended to read as 
        follows:
    ``(c) Special Rules Where Distribution to Shareholders.--
          ``(1) In general.--In determining control for 
        purposes of this section--
                  ``(A) the fact that any corporate transferor 
                distributes part or all of the stock in the 
                corporation which it receives in the exchange 
                to its shareholders shall not be taken into 
                account, and
                  ``(B) if the requirements of section 355 are 
                met with respect to such distribution, the 
                shareholders shall be treated as in control of 
                such corporation immediately after the exchange 
                if the shareholders hold at least a 50-percent 
                interest in such corporation immediately after 
                the distribution.
          ``(2) 50-percent interest.--For purposes of this 
        subsection, the term `50-percent interest' means stock 
        possessing 50 percent of the total combined voting 
        power of all classes of stock entitled to vote and 50 
        percent of the total value of shares of all classes of 
        stock.''
          (2) D reorganizations.--Section 368(a)(2)(H) 
        (relating to special rule for determining whether 
        certain transactions are qualified under paragraph 
        (1)(D)) is amended to read as follows:
                  ``(H) Special rules for determining whether 
                certain transactions are qualified under 
                paragraph (1)(d).--For purposes of determining 
                whether a transaction qualifies under paragraph 
                (1)(D)--
                          ``(i) in the case of a transaction 
                        with respect to which the requirements 
                        of subparagraphs (A) and (B) of section 
                        354(b)(1) are met, the term `control' 
                        has the meaning given such term by 
                        section 304(c), and
                          ``(ii) in the case of a transaction 
                        with respect to which the requirements 
                        of section 355 are met, the 
                        shareholders described in paragraph 
                        (1)(D) shall be treated as having 
                        control of the corporation to which the 
                        assets are transferred if such 
                        shareholders hold a 50-percent or 
                        greater interest (as defined in section 
                        351(c)(2)) in such corporation 
                        immediately after the transfer.''
    (d) Effective Dates.--
          (1) Section 355 rules.--The amendments made by 
        subsections (a) and (b) shall apply to distributions 
        after April 16, 1997.
          (2) Divisive transactions.--The amendments made by 
        subsection (c) shall apply to transfers after the date 
        of the enactment of this Act.
          (3) Transition rule.--The amendments made by this 
        section shall not apply to any distribution after April 
        16, 1997, if such distribution is--
                  (A) made pursuant to a written agreement 
                which was binding on such date and at all times 
                thereafter,
                  (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                  (C) described on or before such date in a 
                public announcement or in a filing with the 
                Securities and Exchange Commission required 
                solely by reason of the distribution.
        This paragraph shall not apply to any written 
        agreement, ruling request, or public announcement or 
        filing unless it identifies the unrelated acquirer of 
        the distributing corporation or of any controlled 
        corporation, whichever is applicable.

SEC. 1013. TAX TREATMENT OF REDEMPTIONS INVOLVING RELATED CORPORATIONS.

    (a) Stock Purchases by Related Corporations.--The last 
sentence of section 304(a)(1) (relating to acquisition by 
related corporation other than subsidiary) is amended to read 
as follows: ``To the extent that such distribution is treated 
as a distribution to which section 301 applies, the transferor 
and the acquiring corporation shall be treated in the same 
manner as if the transferor had transferred the stock so 
acquired to the acquiring corporation in exchange for stock of 
the acquiring corporation in a transaction to which section 
351(a) applies, and then the acquiring corporation had redeemed 
the stock it was treated as issuing in such transaction.''
    (b) Coordination With Section 1059.--Clause (iii) of 
section 1059(e)(1)(A), as amended by this title, is amended to 
read as follows:
                          ``(iii) which would not have been 
                        treated (in whole or in part) as a 
                        dividend if--
                                  ``(I) any options had not 
                                been taken into account under 
                                section 318(a)(4), or
                                  ``(II) section 304(a) had not 
                                applied,''.
    (c) Special Rule for Acquisitions by Foreign 
Corporations.--Section 304(b) (relating to special rules for 
application of subsection (a)) is amended by adding at the end 
the following new paragraph:
          ``(5) Acquisitions by foreign corporations.--
                  ``(A) In general.--In the case of any 
                acquisition to which subsection (a) applies in 
                which the acquiring corporation is a foreign 
                corporation, the only earnings and profits 
                taken into account under paragraph (2)(A) shall 
                be those earnings and profits--
                          ``(i) which are attributable (under 
                        regulations prescribed by the 
                        Secretary) to stock of the acquiring 
                        corporation owned (within the meaning 
                        of section 958(a)) by a corporation or 
                        individual which is--
                                  ``(I) a United States 
                                shareholder (within the meaning 
                                of section 951(b)) of the 
                                acquiring corporation, and
                                  ``(II) the transferor or a 
                                person who bears a relationship 
                                to the transferor described in 
                                section 267(b) or 707(b), and
                          ``(ii) which were accumulated during 
                        the period or periods such stock was 
                        owned by such person while the 
                        acquiring corporation was a controlled 
                        foreign corporation.
                  ``(B) Application of section 1248.--For 
                purposes of subparagraph (A), the rules of 
                section 1248(d) shall apply except to the 
                extent otherwise provided by the Secretary.
                  ``(C) Regulations.--The Secretary shall 
                prescribe such regulations as are appropriate 
                to carry out the purposes of this paragraph.''
    (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to distributions and acquisitions after 
        June 8, 1997.
          (2) Transition rule.--The amendments made by this 
        section shall not apply to any distribution or 
        acquisition after June 8, 1997, if such distribution or 
        acquisition is--
                  (A) made pursuant to a written agreement 
                which was binding on such date and at all times 
                thereafter,
                  (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                  (C) described in a public announcement or 
                filing with the Securities and Exchange 
                Commission on or before such date.

SEC. 1014. MODIFICATION OF HOLDING PERIOD APPLICABLE TO DIVIDENDS 
                    RECEIVED DEDUCTION.

    (a) In General.--Subparagraph (A) of section 246(c)(1) is 
amended to read as follows:
                  ``(A) which is held by the taxpayer for 45 
                days or less during the 90-day period beginning 
                on the date which is 45 days before the date on 
                which such share becomes ex-dividend with 
                respect to such dividend, or''.
    (b) Conforming Amendments.--
          (1) Paragraph (2) of section 246(c) is amended to 
        read as follows:
          ``(2) 90-day rule in the case of certain preference 
        dividends.--In the case of stock having preference in 
        dividends, if the taxpayer receives dividends with 
        respect to such stock which are attributable to a 
        period or periods aggregating in excess of 366 days, 
        paragraph (1)(A) shall be applied--
                  ``(A) by substituting `90 days' for `45 days' 
                each place it appears, and
                  ``(B) by substituting `180-day period' for 
                `90-day period'.''
          (2) Paragraph (3) of section 246(c) is amended by 
        adding ``and'' at the end of subparagraph (A), by 
        striking subparagraph (B), and by redesignating 
        subparagraph (C) as subparagraph (B).
    (c) Effective Date.--The amendments made by this section 
shall apply to dividends received or accrued after the 30th day 
after the date of the enactment of this Act.

                 Subtitle C--Other Corporate Provisions

SEC. 1021. REGISTRATION AND OTHER PROVISIONS RELATING TO CONFIDENTIAL 
                    CORPORATE TAX SHELTERS.

    (a) In General.--Section 6111 (relating to registration of 
tax shelters) is amended by redesignating subsections (d) and 
(e) as subsections (e) and (f), respectively, and by inserting 
after subsection (c) the following new subsection:
    ``(d) Certain Confidential Arrangements Treated as Tax 
Shelters.--
          ``(1) In general.--For purposes of this section, the 
        term `tax shelter' includes any entity, plan, 
        arrangement, or transaction--
                  ``(A) a significant purpose of the structure 
                of which is the avoidance or evasion of Federal 
                income tax for a direct or indirect participant 
                which is a corporation,
                  ``(B) which is offered to any potential 
                participant under conditions of 
                confidentiality, and
                  ``(C) for which the tax shelter promoters may 
                receive fees in excess of $100,000 in the 
                aggregate.
          ``(2) Conditions of confidentiality.--For purposes of 
        paragraph (1)(B), an offer is under conditions of 
        confidentiality if--
                  ``(A) the potential participant to whom the 
                offer is made (or any other person acting on 
                behalf of such participant) has an 
                understanding or agreement with or for the 
                benefit of any promoter of the tax shelter that 
                such participant (or such other person) will 
                limit disclosure of the tax shelter or any 
                significant tax features of the tax shelter, or
                  ``(B) any promoter of the tax shelter--
                          ``(i) claims, knows, or has reason to 
                        know,
                          ``(ii) knows or has reason to know 
                        that any other person (other than the 
                        potential participant) claims, or
                          ``(iii) causes another person to 
                        claim,
                that the tax shelter (or any aspect thereof) is 
                proprietary to any person other than the 
                potential participant or is otherwise protected 
                from disclosure to or use by others.
        For purposes of this subsection, the term `promoter' 
        means any person or any related person (within the 
        meaning of section 267 or 707) who participates in the 
        organization, management, or sale of the tax shelter.
          ``(3) Persons other than promoter required to 
        register in certain cases.--
                  ``(A) In general.--If--
                          ``(i) the requirements of subsection 
                        (a) are not met with respect to any tax 
                        shelter (as defined in paragraph (1)) 
                        by any tax shelter promoter, and
                          ``(ii) no tax shelter promoter is a 
                        United States person,
                then each United States person who discussed 
                participation in such shelter shall register 
                such shelter under subsection (a).
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply to a United States person who discussed 
                participation in a tax shelter if--
                          ``(i) such person notified the 
                        promoter in writing (not later than the 
                        close of the 90th day after the day on 
                        which such discussions began) that such 
                        person would not participate in such 
                        shelter, and
                          ``(ii) such person does not 
                        participate in such shelter.
          ``(4) Offer to participate treated as offer for 
        sale.--For purposes of subsections (a) and (b), an 
        offer to participate in a tax shelter (as defined in 
        paragraph (1)) shall be treated as an offer for sale.''
    (b) Penalty.--Subsection (a) of section 6707 (relating to 
failure to furnish information regarding tax shelters) is 
amended by adding at the end the following new paragraph:
          ``(3) Confidential arrangements.--
                  ``(A) In general.--In the case of a tax 
                shelter (as defined in section 6111(d)), the 
                penalty imposed under paragraph (1) shall be an 
                amount equal to the greater of--
                          ``(i) 50 percent of the fees paid to 
                        all promoters of the tax shelter with 
                        respect to offerings made before the 
                        date such shelter is registered under 
                        section 6111, or
                          ``(ii) $10,000.
                Clause (i) shall be applied by substituting `75 
                percent' for `50 percent' in the case of an 
                intentional failure or act described in 
                paragraph (1).
                  ``(B) Special rule for participants required 
                to register shelter.--In the case of a person 
                required to register such a tax shelter by 
                reason of section 6111(d)(3)--
                          ``(i) such person shall be required 
                        to pay the penalty under paragraph (1) 
                        only if such person actually 
                        participated in such shelter,
                          ``(ii) the amount of such penalty 
                        shall be determined by taking into 
                        account under subparagraph (A)(i) only 
                        the fees paid by such person, and
                          ``(iii) such penalty shall be in 
                        addition to the penalty imposed on any 
                        other person for failing to register 
                        such shelter.''
    (c) Modifications to Substantial Understatement Penalty.--
          (1) Restriction on reasonable basis for corporate 
        understatement of income tax.--Subparagraph (B) of 
        section 6662(d)(2) is amended by adding at the end the 
        following new flush sentence:
                ``For purposes of clause (ii)(II), in no event 
                shall a corporation be treated as having a 
                reasonable basis for its tax treatment of an 
                item attributable to a multiple-party financing 
                transaction if such treatment does not clearly 
                reflect the income of the corporation.''
          (2) Modification to definition of tax shelter.--
        Clause (iii) of section 6662(d)(2)(C) is amended by 
        striking ``the principal purpose'' and inserting ``a 
        significant purpose''.
    (d) Conforming Amendments.--
          (1) Paragraph (2) of section 6707(a) is amended by 
        striking ``The penalty'' and inserting ``Except as 
        provided in paragraph (3), the penalty''.
          (2) Subparagraph (A) of section 6707(a)(1) is amended 
        by striking ``paragraph (2)'' and inserting ``paragraph 
        (2) or (3), as the case may be''.
    (e) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to any 
        tax shelter (as defined in section 6111(d) of the 
        Internal Revenue Code of 1986, as amended by this 
        section) interests in which are offered to potential 
        participants after the Secretary of the Treasury 
        prescribes guidance with respect to meeting 
        requirements added by such amendments.
          (2) Modifications to substantial understatement 
        penalty.--The amendments made by subsection (c) shall 
        apply to items with respect to transactions entered 
        into after the date of the enactment of this Act.

SEC. 1022. CERTAIN PREFERRED STOCK TREATED AS BOOT.

    (a) Section 351.--Section 351 (relating to transfer to 
corporation controlled by transferor) is amended by 
redesignating subsection (g) as subsection (h) and by inserting 
after subsection (f) the following new subsection:
    ``(g) Nonqualified Preferred Stock Not Treated as Stock.--
          ``(1) In general.--For purposes of subsections (a) 
        and (b), the term `stock' shall not include 
        nonqualified preferred stock.
          ``(2) Nonqualified preferred stock.--For purposes of 
        paragraph (1)--
                  ``(A) In general.--The term `nonqualified 
                preferred stock' means preferred stock if--
                          ``(i) the holder of such stock has 
                        the right to require the issuer or a 
                        related person to redeem or purchase 
                        the stock,
                          ``(ii) the issuer or a related person 
                        is required to redeem or purchase such 
                        stock,
                          ``(iii) the issuer or a related 
                        person has the right to redeem or 
                        purchase the stock and, as of the issue 
                        date, it is more likely than not that 
                        such right will be exercised, or
                          ``(iv) the dividend rate on such 
                        stock varies in whole or in part 
                        (directly or indirectly) with reference 
                        to interest rates, commodity prices, or 
                        other similar indices.
                  ``(B) Limitations.--Clauses (i), (ii), and 
                (iii) of subparagraph (A) shall apply only if 
                the right or obligation referred to therein may 
                be exercised within the 20-year period 
                beginning on the issue date of such stock and 
                such right or obligation is not subject to a 
                contingency which, as of the issue date, makes 
                remote the likelihood of the redemption or 
                purchase.
                  ``(C) Exceptions for certain rights or 
                obligations.--
                          ``(i) In general.--A right or 
                        obligation shall not be treated as 
                        described in clause (i), (ii), or (iii) 
                        of subparagraph (A) if--
                                  ``(I) it may be exercised 
                                only upon the death, 
                                disability, or mental 
                                incompetency of the holder, or
                                  ``(II) in the case of a right 
                                or obligation to redeem or 
                                purchase stock transferred in 
                                connection with the performance 
                                of services for the issuer or a 
                                related person (and which 
                                represents reasonable 
                                compensation), it may be 
                                exercised only upon the 
                                holder's separation from 
                                service from the issuer or a 
                                related person.
                          ``(ii) Exception.--Clause (i)(I) 
                        shall not apply if the stock 
                        relinquished in the exchange, or the 
                        stock acquired in the exchange is in--
                                  ``(I) a corporation if any 
                                class of stock in such 
                                corporation or a related party 
                                is readily tradable on an 
                                established securities market 
                                or otherwise, or
                                  ``(II) any other corporation 
                                if such exchange is part of a 
                                transaction or series of 
                                transactions in which such 
                                corporation is to become a 
                                corporation described in 
                                subclause (I).
          ``(3) Definitions.--For purposes of this subsection--
                  ``(A) Preferred stock.--The term `preferred 
                stock' means stock which is limited and 
                preferred as to dividends and does not 
                participate (including through a conversion 
                privilege) in corporate growth to any 
                significant extent.
                  ``(B) Related person.--A person shall be 
                treated as related to another person if they 
                bear a relationship to such other person 
                described in section 267(b) or 707(b).
          ``(4) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection and sections 
        354(a)(2)(C), 355(a)(3)(D), and 356(e). The Secretary 
        may also prescribe regulations, consistent with the 
        treatment under this subsection and such sections, for 
        the treatment of nonqualified preferred stock under 
        other provisions of this title.''
    (b) Section 354.--Paragraph (2) of section 354(a) (relating 
to exchanges of stock and securities in certain 
reorganizations) is amended by adding at the end the following 
new subparagraph:
                  ``(C) Nonqualified preferred stock.--
                          ``(i) In general.--Nonqualified 
                        preferred stock (as defined in section 
                        351(g)(2)) received in exchange for 
                        stock other than nonqualified preferred 
                        stock (as so defined) shall not be 
                        treated as stock or securities.
                          ``(ii) Recapitalizations of family-
                        owned corporations.--
                                  ``(I) In general.--Clause (i) 
                                shall not apply in the case of 
                                a recapitalization under 
                                section 368(a)(1)(E) of a 
                                family-owned corporation.
                                  ``(II) Family-owned 
                                corporation.--For purposes of 
                                this clause, except as provided 
                                in regulations, the term 
                                `family-owned corporation' 
                                means any corporation which is 
                                described in clause (i) of 
                                section 447(d)(2)(C) throughout 
                                the 8-year period beginning on 
                                the date which is 5 years 
                                before the date of the 
                                recapitalization. For purposes 
                                of the preceding sentence,stock 
shall not be treated as owned by a family member during any period 
described in section 355(d)(6)(B).''
    (c) Section 355.--Paragraph (3) of section 355(a) is 
amended by adding at the end the following new subparagraph:
                  ``(D) Nonqualified preferred stock.--
                Nonqualified preferred stock (as defined in 
                section 351(g)(2)) received in a distribution 
                with respect to stock other than nonqualified 
                preferred stock (as so defined) shall not be 
                treated as stock or securities.''
    (d) Section 356.--Section 356 is amended by redesignating 
subsections (e) and (f) as subsections (f) and (g), 
respectively, and by inserting after subsection (d) the 
following new subsection:
    ``(e) Nonqualified Preferred Stock Treated as Other 
Property.--For purposes of this section--
          ``(1) In general.--Except as provided in paragraph 
        (2), the term `other property' includes nonqualified 
        preferred stock (as defined in section 351(g)(2)).
          ``(2) Exception.--The term `other property' does not 
        include nonqualified preferred stock (as so defined) to 
        the extent that, under section 354 or 355, such 
        preferred stock would be permitted to be received 
        without the recognition of gain.''
    (e) Conforming Amendments.--
          (1) Subparagraph (B) of section 354(a)(2) and 
        subparagraph (C) of section 355(a)(3)(C) are each 
        amended by inserting ``(including nonqualified 
        preferred stock, as defined in section 351(g)(2))'' 
        after ``stock''.
          (2) Subparagraph (A) of section 354(a)(3) and 
        subparagraph (A) of section 355(a)(4) are each amended 
        by inserting ``nonqualified preferred stock and'' after 
        ``including''.
          (3) Section 1036 is amended by redesignating 
        subsection (b) as subsection (c) and by inserting after 
        subsection (a) the following new subsection:
    ``(b) Nonqualified Preferred Stock Not Treated as Stock.--
For purposes of this section, nonqualified preferred stock (as 
defined in section 351(g)(2)) shall be treated as property 
other than stock.''
    (f) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to transactions after June 8, 1997.
          (2) Transition rule.--The amendments made by this 
        section shall not apply to any transaction after June 
        8, 1997, if such transaction is--
                  (A) made pursuant to a written agreement 
                which was binding on such date and at all times 
                thereafter,
                  (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                  (C) described on or before such date in a 
                public announcement or in a filing with the 
                Securities and Exchange Commission required 
                solely by reason of the distribution.

                 Subtitle D--Administrative Provisions

SEC. 1031. REPORTING OF CERTAIN PAYMENTS MADE TO ATTORNEYS.

    (a) In General.--Section 6045 (relating to returns of 
brokers) is amended by adding at the end the following new 
subsection:
    ``(f) Return Required in the Case of Payments to 
Attorneys.--
          ``(1) In general.--Any person engaged in a trade or 
        business and making a payment (in the course of such 
        trade or business) to which this subsection applies 
        shall file a return under subsection (a) and a 
        statement under subsection (b) with respect to such 
        payment.
          ``(2) Application of subsection.--
                  ``(A) In general.--This subsection shall 
                apply to any payment to an attorney in 
                connection with legal services (whether or not 
                such services are performed for the payor).
                  ``(B) Exception.--This subsection shall not 
                apply to the portion of any payment which is 
                required to be reported under section 6041(a) 
                (or would be so required but for the dollar 
                limitation contained therein) or section 
                6051.''
    (b) Reporting of Attorneys' Fees Payable to Corporations.--
The regulations providing an exception under section 6041 of 
the Internal Revenue Code of 1986 for payments made to 
corporations shall not apply to payments of attorneys' fees.
    (c) Effective Date.--The amendment made by this section 
shall apply to payments made after December 31, 1997.

SEC. 1032. DECREASE OF THRESHOLD FOR REPORTING PAYMENTS TO CORPORATIONS 
                    PERFORMING SERVICES FOR FEDERAL AGENCIES.

    (a) In General.--Subsection (d) of section 6041A (relating 
to returns regarding payments of remuneration for services and 
direct sales) is amended by adding at the end the following new 
paragraph:
          ``(3) Payments to corporations by federal executive 
        agencies.--
                  ``(A) In general.--Notwithstanding any 
                regulation prescribed by the Secretary before 
                the date of the enactment of this paragraph, 
                subsection (a) shall apply to remuneration paid 
                to a corporation by any Federal executive 
                agency (as defined in section 6050M(b)).
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply to--
                          ``(i) services under contracts 
                        described in section 6050M(e)(3) with 
                        respect to which the requirements of 
                        section 6050M(e)(2) are met, and
                          ``(ii) such other services as the 
                        Secretary may specify in regulations 
                        prescribed after the date of the 
                        enactment of this paragraph.''
    (b) Effective Date.--The amendment made by this section 
shall apply to returns the due date for which (determined 
without regard to any extension) is more than 90 days after the 
date of the enactment of this Act.

SEC. 1033. DISCLOSURE OF RETURN INFORMATION FOR ADMINISTRATION OF 
                    CERTAIN VETERANS PROGRAMS.

    (a) General Rule.--Subparagraph (D) of section 6103(l)(7) 
(relating to disclosure of return information to Federal, 
State, and local agencies administering certain programs) is 
amended by striking ``Clause (viii) shall not apply after 
September 30, 1998.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the date of the enactment of this Act.

SEC. 1034. CONTINUOUS LEVY ON CERTAIN PAYMENTS.

    (a) In General.--Section 6331 (relating to levy and 
distraint) is amended--
          (1) by redesignating subsection (h) as subsection 
        (i), and
          (2) by inserting after subsection (g) the following 
        new subsection:
    ``(h) Continuing Levy on Certain Payments.--
          ``(1) In general.--The effect of a levy on specified 
        payments to or received by a taxpayer shall be 
        continuous from the date such levy is first made until 
        such levy is released. Notwithstanding section 6334, 
        such continuous levy shall attach to up to 15 percent 
        of any specified payment due to the taxpayer.
          ``(2) Specified payment.--For the purposes of 
        paragraph (1), the term `specified payment' means--
                  ``(A) any Federal payment other than a 
                payment for which eligibility is based on the 
                income or assets (or both) of a payee,
                  ``(B) any payment described in paragraph (4), 
                (7), (9), or (11) of section 6334(a), and
                  ``(C) any annuity or pension payment under 
                the Railroad Retirement Act or benefit under 
                the Railroad Unemployment Insurance Act 
                described in subsection (a)(6) of this 
                section.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to levies issued after the date of the enactment of 
this Act.

SEC. 1035. MODIFICATION OF LEVY EXEMPTION.

    (a) In General.--Section 6334 (relating to property exempt 
from levy) is amended by redesignating subsection (f) as 
subsection (g) and by inserting after subsection (e) the 
following new subsection:
    ``(f) Levy Allowed on Certain Specified Payments.--Any 
payment described in subparagraph (B) or (C) of section 
6331(h)(2) shall not be exempt from levy if the Secretary 
approves the levy thereon under section 6331(h).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to levies issued after the date of the enactment of 
this Act.

SEC. 1036. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN 
                    INFORMATION.

    (a) In General.--Subsection (k) of section 6103 is amended 
by adding at the end the following new paragraph:
          ``(8) Levies on certain government payments.--
                  ``(A) Disclosure of return information in 
                levies on financial management service.--In 
                serving a notice of levy, or release of such 
                levy, with respect to any applicable government 
                payment, the Secretary may disclose to officers 
                and employees of the Financial Management 
                Service--
                          ``(i) return information, including 
                        taxpayer identity information,
                          ``(ii) the amount of any unpaid 
                        liability under this title (including 
                        penalties and interest), and
                          ``(iii) the type of tax and tax 
                        period to which such unpaid liability 
                        relates.
                  ``(B) Restriction on use of disclosed 
                information.--Return information disclosed 
                under subparagraph (A) may be used by officers 
                and employees of the Financial Management 
                Service only for the purpose of, and to the 
                extent necessary in, transferring levied funds 
                in satisfaction of the levy, maintaining 
                appropriate agency records in regard to such 
                levy or the release thereof, notifying the 
                taxpayer and the agency certifying such payment 
                that the levy has been honored, or in the 
                defense of any litigation ensuing from the 
                honor of such levy.
                  ``(C) Applicable government payment.--For 
                purposes of this paragraph, the term 
                `applicable government payment' means--
                          ``(i) any Federal payment (other than 
                        a payment for which eligibility is 
                        based on the income or assets (or both) 
                        of a payee) certified to the Financial 
                        Management Service for disbursement, 
                        and
                          ``(ii) any other payment which is 
                        certified to the Financial Management 
                        Service for disbursement and which the 
                        Secretary designates by published 
                        notice.''.
    (b) Conforming Amendments.--
          (1) Section 6301(p) is amended--
                  (A) in paragraph (3)(A), by striking ``(2), 
                or (6)'' and inserting ``(2), (6), or (8), and
                  (B) in paragraph (4), by inserting 
                ``(k)(8),'' after ``(j) (1) or (2),'' each 
                place it appears.
          (2) Section 552a(a)(8)(B) of title 5, United States 
        Code, is amended by striking ``or'' at the end of 
        clause (v), by adding ``or'' at the end of clause (vi), 
        and by adding at the end the following new clause:
                          ``(vii) matches performed incident to 
                        a levy described in section 6103(k)(8) 
                        of the Internal Revenue Code of 
                        1986;''.
    (c) Effective Date.--The amendments made by this section 
shall apply to levies issued after the date of the enactment of 
this Act.

SEC. 1037. RETURNS OF BENEFICIARIES OF ESTATES AND TRUSTS REQUIRED TO 
                    FILE RETURNS CONSISTENT WITH ESTATE OR TRUST RETURN 
                    OR TO NOTIFY SECRETARY OF INCONSISTENCY.

    (a) Domestic Estates and Trusts.--Section 6034A (relating 
to information to beneficiaries of estates and trusts) is 
amended by adding at the end the following new subsection:
    ``(c) Beneficiary's Return Must be Consistent with Estate 
or Trust Return or Secretary Notified of Inconsistency.--
          ``(1) In general.--A beneficiary of any estate or 
        trust to which subsection (a) applies shall, on such 
        beneficiary's return, treat any reported item in a 
        manner which is consistent with the treatment of such 
        item on the applicable entity's return.
          ``(2) Notification of inconsistent treatment.--
                  ``(A) In general.--In the case of any 
                reported item, if--
                          ``(i)(I) the applicable entity has 
                        filed a return but the beneficiary's 
                        treatment on such beneficiary's return 
                        is (or may be) inconsistent with the 
                        treatment of the item on the applicable 
                        entity's return, or
                          ``(II) the applicable entity has not 
                        filed a return, and
                          ``(ii) the beneficiary files with the 
                        Secretary a statement identifying the 
                        inconsistency,
                paragraph (1) shall not apply to such item.
                  ``(B) Beneficiary receiving incorrect 
                information.--A beneficiary shall be treated as 
                having complied with clause (ii) of 
                subparagraph (A) with respect to a reported 
                item if the beneficiary--
                          ``(i) demonstrates to the 
                        satisfaction of the Secretary that the 
                        treatment of the reported item on the 
                        beneficiary's return is consistent with 
                        the treatment of the item on the 
                        statement furnished under subsection 
                        (a) to the beneficiary by the 
                        applicable entity, 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 beneficiary does not 
                comply with subparagraph (A)(ii) of paragraph 
                (2),
        any adjustment required to make the treatment of the 
        items by such beneficiary consistent with the treatment 
        of the items on the applicable entity's 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) Definitions.--For purposes of this subsection--
                  ``(A) Reported item.--The term `reported 
                item' means any item for which information is 
                required to be furnished under subsection (a).
                  ``(B) Applicable entity.--The term 
                `applicable entity' means the estate or trust 
                of which the taxpayer is the beneficiary.
          ``(5) Addition to tax for failure to comply with 
        section.--For addition to tax in the case of a 
        beneficiary's negligence in connection with, or 
        disregard of, the requirements of this section, see 
        part II of subchapter A of chapter 68.''
    (b) Foreign Trusts.--Subsection (d) of section 6048 
(relating to information with respect to certain foreign 
trusts) is amended by adding at the end the following new 
paragraph:
          ``(5) United states person's return must be 
        consistent with trust return or secretary notified of 
        inconsistency.--Rules similar to the rules of section 
        6034A(c) shall apply to items reported by a trust under 
        subsection (b)(1)(B) and to United States persons 
        referred to in such subsection.''
    (c) Effective Date.--The amendments made by this section 
shall apply to returns of beneficiaries and owners filed after 
the date of the enactment of this Act.

                   Subtitle E--Excise Tax Provisions

SEC. 1041. EXTENSION AND MODIFICATION OF AIRPORT AND AIRWAY TRUST FUND 
                    TAXES.

    (a) Fuel Taxes.--
          (1) Aviation fuel.--Clause (ii) of section 
        4091(b)(3)(A) is amended by striking ``September 30, 
        1997'' and inserting ``September 30, 2007''.
          (2) Aviation gasoline.--Subparagraph (B) of section 
        4081(d)(2) is amended by striking ``September 30, 
        1997'' and inserting ``September 30, 2007''.
          (3) Noncommercial aviation.--Subparagraph (B) of 
        section 4041(c)(3) is amended by striking ``September 
        30, 1997'' and inserting ``September 30, 2007''.
    (b) Ticket Taxes.--
          (1) Persons.--Clause (ii) of section 4261(g)(1)(A) is 
        amended by striking ``September 30, 1997'' and 
        inserting ``September 30, 2007''.
          (2) Property.--Clause (ii) of section 4271(d)(1)(A) 
        is amended by striking ``September 30, 1997'' and 
        inserting ``September 30, 2007''.
    (c) Modifications to Tax on Transportation of Persons by 
Air.--
          (1) In general.--Section 4261 (relating to imposition 
        of tax) is amended by striking subsections (a), (b), 
        and (c) and inserting the following new subsections:
    ``(a) In General.--There is hereby imposed on the amount 
paid for taxable transportation of any person a tax equal to 
7.5 percent of the amount so paid.
    ``(b) Domestic Segments of Taxable Transportation.--
          ``(1) In general.--There is hereby imposed on the 
        amount paid for each domestic segment of taxable 
        transportation by air a tax in the amount determined in 
        accordance with the following table for the calendar 
        year in which the segment begins:

        In the case of segments
          beginning during:                                  The tax is:
          1997 or 1998..................................           $2.00
          1999..........................................           $2.25
          2000..........................................           $2.50
          2001..........................................           $2.75
          2002 or thereafter............................           $3.00

          ``(2) Domestic segment.--For purposes of this 
        section, the term `domestic segment' means any segment 
        which is taxable transportation described in section 
        4262(a)(1).
          ``(3) Changes in segments by reason of rerouting.--
        If--
                  ``(A) a ticket is purchased for 
                transportation between 2 locations on specified 
                flights, and
                  ``(B) at the initiation of the air carrier 
                after such purchase, there is a change in the 
                route taken which changes the number of 
                domestic segments, but there is no change in 
                the amount charged for such transportation,
        the tax imposed by paragraph (1) shall be determined 
        without regard to such change in route.
    ``(c) Use of International Travel Facilities.--
          ``(1) In general.--There is hereby imposed a tax of 
        $15.50 on any amount paid (whether within or without 
        the United States) for any transportation of any person 
        by air, if such transportation begins or ends in the 
        United States.
          ``(2) Exception for transportation entirely taxable 
        under subsection (a).--This subsection shall not apply 
        to any transportation all of which is taxable under 
        subsection (a) (determined without regard to sections 
        4281 and 4282).
          ``(3) Special rule for alaska and hawaii.--In any 
        case in which the tax imposed by paragraph (1) applies 
        to a domestic segment, such tax shall apply only on 
        departure.''
          (2) Special rules.--Section 4261 is amended by 
        redesignating subsections (e), (f), and (g), as 
        subsections (f), (g), and (h), respectively, and by 
        inserting after subsection (d) the following new 
        subsection:
    ``(e) Special Rules.--
          ``(1) Amounts paid outside the united states.--In the 
        case of amounts paid outside the United States for 
        taxable transportation, the taxes imposed by 
        subsections (a) and (b) shall apply only to segments of 
        such transportation which begin and end in the United 
        States.
          ``(2) Amounts paid for right to award free or reduced 
        rate air transportation.--Any amount paid (and the 
        value of any other benefit provided) to an air carrier 
        (or any related person) for the right to provide 
        mileage awards for (or other reductions in the cost of) 
        any transportation of persons by air shall be treated 
        for purposes of subsection (a) as an amount paid for 
        taxable transportation, and such amount shall be 
        taxable under subsection (a) without regard to any 
        other provision of this subchapter. The Secretary shall 
        prescribe rules which reallocate items of income, 
        deduction, credit, exclusion, or other allowance to the 
        extent necessary to prevent the avoidance of tax 
        imposed by reason of this paragraph.
          ``(3) Inflation adjustment of dollar rates of tax.--
                  ``(A) In general.--In the case of taxable 
                events in a calendar year after the last 
                nonindexed year, the dollar amount contained in 
                subsection (b) and the dollar amount contained 
                in subsection (c) shall each be increased by an 
                amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting the 
                        year before the last nonindexed year 
                        for `calendar year 1992' in 
                        subparagraph (B) thereof.
                If any increase determined under the preceding 
                sentence is not a multiple of 10 cents, such 
                increase shall be rounded to the nearest 
                multiple of 10 cents.
                  ``(B) Last nonindexed year.--For purposes of 
                subparagraph (A), the last nonindexed year is--
                          ``(i) 2002 in the case of a dollar 
                        amount contained in subsection (b), and
                          ``(ii) 1998 in the case of a dollar 
                        amount contained in subsection (c).
                  ``(C) Taxable event.--For purposes of 
                subparagraph (A), in the case of the tax 
                imposed subsection (b), the beginning of the 
                domestic segment shall be treated as the 
                taxable event.''
          (3) Secondary liability of carrier for unpaid tax.--
        Subsection (c) of section 4263 is amended by striking 
        ``subchapter--'' and all that follows and inserting ``, 
        such tax shall be paid by the carrier providing the 
        initial segment of such transportation which begins or 
        ends in the United States.''
    (d) Modification of Rules on Airline Fare Advertising.--
Subsection (b) of section 7275 (relating to advertising) is 
amended by striking ``shall--'' and all that follows and 
inserting ``shall--
          ``(1) separately state--
                  ``(A) the amount to be paid for such 
                transportation, and
                  ``(B) the amount of the taxes imposed by 
                subsections (a), (b), and (c) of section 4261 
                at a location proximate to (and in a type size 
                not less than half the type size of) the 
                statement of the amount described in 
                subparagraph (A), and
          ``(2) describe such taxes substantially as: `user 
        taxes to pay for airport construction and airway safety 
        and operations'.''
    (e) Increased Airport and Airway Trust Fund Deposits.--
          (1) Paragraph (1) of section 9502(b) is amended--
                  (A) by striking ``(to the extent that the 
                rate of the tax on such gasoline exceeds 4.3 
                cents per gallon)'' in subparagraph (C), and
                  (B) by striking ``to the extent attributable 
                to the Airport and Airway Trust Fund financing 
                rate'' in subparagraph (C).
          (2) Section 9502 is amended by striking subsection 
        (f).
    (f) Effective Dates.--
          (1) Fuel taxes.--The amendments made by subsection 
        (a) shall apply take effect on October 1, 1997.
          (2) Ticket taxes.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, the amendments made by 
                subsections (b) and (c) shall apply to 
                transportation beginning on or after October 1, 
                1997.
                  (B) Treatment of amounts paid for tickets 
                purchased before date of enactment.--The 
                amendments made by subsection (c) shall not 
                apply to amounts paid for a ticket purchased 
                before the date of the enactment of this Act 
                for a specified flight beginning on or after 
                October 1, 1997.
                  (C) Amounts paid for right to award mileage 
                awards.--
                          (i) In general.--Paragraph (2) of 
                        section 4261(e) of the Internal Revenue 
                        Code of 1986 (as added by the amendment 
                        made by subsection (c)) shall apply to 
                        amounts paid after September 30, 1997.
                          (ii) Payments within controlled 
                        group.--For purposes of clause (i), any 
                        amount paid after June 11, 1997, and 
                        before October 1, 1997, by 1 member of 
                        a controlled group for a right which is 
                        described in such section 4261(e)(2) 
                        and is furnished by another member of 
                        such group after September 30, 1997, 
                        shall be treated as paid after 
                        September 30, 1997. For purposes of the 
                        preceding sentence, all persons treated 
                        as a single employer under subsection 
                        (a) or (b) of section 52 of such Code 
                        shall be treated as members of a 
                        controlled group.
          (3) Advertising.--The amendment made by subsection 
        (d) shall take effect on October 1, 1997.
          (4) Increased deposits into airport and airway trust 
        fund.--The amendments made by subsection (e) shall 
        apply with respect to taxes received in the Treasury on 
        and after October 1, 1997.
    (g) Delayed Deposits of Airline Ticket Tax Revenues.--In 
the case of deposits of taxes imposed by section 4261 of the 
Internal Revenue Code of 1986, the due date for any such 
deposit which would (but for this subsection) be required to be 
made after August 14, 1997, and before October 1, 1997, shall 
be October 10, 1997.

SEC. 1042. KEROSENE TAXED AS DIESEL FUEL.

    (a) In General.--Subsection (a) of section 4083 (defining 
taxable fuel) 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 adding at the 
end the following new subparagraph:
                  ``(C) kerosene.''
    (b) Rate of Tax.--Clause (iii) of section 4081(a)(2)(A) is 
amended by inserting ``or kerosene'' after ``diesel fuel''.
    (c) Exemptions From Tax; Refunds to Vendors.--
          (1) In general.--Section 4082 (relating to exemptions 
        for diesel fuel) is amended by striking ``diesel fuel'' 
        each place it appears in subsections (a) and (c) and 
        inserting ``diesel fuel and kerosene''.
          (2) Certain kerosene exempt from dyeing 
        requirement.--Section 4082 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) Exceptions to Dyeing Requirements.--
          ``(1) Aviation-grade kerosene.--Subsection (a)(2) 
        shall not apply to a removal, entry, or sale of 
        aviation-grade kerosene (as determined under 
        regulations prescribed by the Secretary) if the person 
        receiving the kerosene is registered under section 4101 
        with respect to the tax imposed by section 4091.
          ``(2) Use for non-fuel feedstock purposes.--
        Subsection (a)(2) shall not apply to kerosene--
                  ``(A) received by pipeline or barge for use 
                by the person receiving the kerosene in the 
                manufacture or production of any substance 
                (other than gasoline, diesel fuel, or special 
                fuels referred to in section 4041), or
                  ``(B) to the extent provided in regulations, 
                removed or entered--
                          ``(i) for such a use by the person 
                        removing or entering the kerosene, or
                          ``(ii) for resale by such person for 
                        such a use by the purchaser,
        but only if the person receiving, removing, or entering 
        the kerosene and such purchaser (if any) are registered 
        under section 4101 with respect to the tax imposed by 
        section 4081.''
          (3) Refunds.--
                  (A) Subsection (l) of section 6427 is amended 
                by inserting ``or kerosene'' after ``diesel 
                fuel'' each place it appears in paragraphs (1), 
                (2), and (5) (including the heading for 
                paragraph (5)).
                  (B) Paragraph (5) of section 6427(l) is 
                amended by redesignating subparagraph (B) as 
                subparagraph (C) and by inserting after 
                subparagraph (A) the following new 
                subparagraph:
                  ``(B) Sales of kerosene not for use in motor 
                fuel.--Paragraph (1)(A) shall not apply to 
                kerosene sold by a vendor--
                          ``(i) for any use if such sale is 
                        from a pump which (as determined under 
                        regulations prescribed by the 
                        Secretary) is not suitable for use in 
                        fueling any diesel-powered highway 
                        vehicle or train, or
                          ``(ii) to the extent provided by the 
                        Secretary, for blending with heating 
                        oil to be used during periods of 
                        extreme or unseasonable cold.''
                  (C) Subparagraph (C) of section 6427(l)(5), 
                as redesignated by subparagraph (B) of this 
                paragraph, is amended by striking 
                ``subparagraph (A)'' and inserting 
                ``subparagraph (A) or (B)''.
                  (D) The heading for subsection (l) of section 
                6427 is amended by inserting ``, Kerosene,'' 
                after ``Diesel Fuel''.
    (d) Conforming Amendments.--
          (1) Paragraph (2) of section 4041(a) is amended by 
        striking ``kerosene, gas oil, or fuel oil'' and 
        inserting ``gas oil, fuel oil''.
          (2) Paragraph (1) of section 4041(c) is amended by 
        striking ``any liquid'' and inserting ``kerosene and 
        any other liquid''.
          (3)(A) The heading for section 4082 is amended by 
        inserting ``AND KEROSENE'' after ``DIESEL FUEL''.
          (B) The table of sections for subpart A of part III 
        of subchapter A of chapter 32 is amended by inserting 
        ``and kerosene'' after ``diesel fuel'' in the item 
        relating to section 4082.
          (4) Subsection (b) of section 4083 is amended by 
        striking ``gasoline, diesel fuel,'' and inserting 
        ``taxable fuels''.
          (5) Subsection (a) of section 4093 is amended by 
        striking ``any liquid'' and inserting ``kerosene and 
        any other liquid''.
          (6) The material following subparagraph (F) of 
        section 6416(b)(2) is amended by inserting ``or 
        kerosene'' after ``diesel fuel''.
          (7) Paragraphs (1) and (3) of section 6427(f), and 
        the heading for section 6427(f), are each amended by 
        inserting ``kerosene,'' after ``diesel fuel,''.
          (8) Paragraph (2) of section 6427(f) is amended by 
        striking ``or diesel fuel'' each place it appears and 
        inserting ``, diesel fuel, or kerosene''.
          (9) Subparagraph (A) of section 6427(i)(3) is amended 
        by striking ``or diesel fuel'' and inserting ``, diesel 
        fuel, or kerosene''.
          (10) The heading for paragraph (4) of section 6427(i) 
        is amended to read as follows:
          ``(4) Special rule for refunds under subsection 
        (l).--''
          (11) Paragraph (1) of section 6715(c) is amended by 
        inserting ``or kerosene'' after ``diesel fuel''.
          (12)(A) The text of section 7232 is amended by 
        striking ``gasoline, lubricating oil, diesel fuel'' and 
        inserting ``any taxable fuel (as defined in section 
        4083)''.
          (B) The section heading for section 7232 is amended 
        to read as follows:

``SEC. 7232. FAILURE TO REGISTER UNDER SECTION 4101, FALSE 
                    REPRESENTATIONS OF REGISTRATION STATUS, ETC.''

          (C) The table of sections for part II of subchapter A 
        of chapter 75 is amended by striking the item relating 
        to section 7232 and inserting the following:

        ``Sec. 7232. Failure to register under section 4101, false 
                  representations of registration status, etc.''

          (13) Sections 9503(b)(1)(E) and 9508(b)(2) are each 
        amended by striking ``and diesel fuel'' and inserting 
        ``, diesel fuel, and kerosene''.
          (14) Subparagraph (B) of section 9503(b)(5) is 
        amended by striking ``or diesel fuel'' and inserting 
        ``, diesel fuel, or kerosene''.
          (15) Paragraphs (1)(B) and (2) of section 9503(f) are 
        each amended by inserting ``or kerosene'' after 
        ``diesel fuel'' each place it appears.
    (e) Effective Date.--The amendments made by this section 
shall take effect on July 1, 1998.
    (f) Floor Stock Taxes.--
          (1) Imposition of tax.--In the case of kerosene which 
        is held on July 1, 1998, by any person, there is hereby 
        imposed a floor stocks tax of 24.3 cents per gallon.
          (2) Liability for tax and method of payment.--
                  (A) Liability for tax.--A person holding 
                kerosene on July 1, 1998, 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) shall be paid on or before August 
                31, 1998.
          (3) Definitions.--For purposes of this subsection--
                  (A) Held by a person.--Kerosene 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).
                  (B) 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 kerosene held by any 
        person exclusively for any use to the extent a credit 
        or refund of the tax imposed by section 4081 of the 
        Internal Revenue Code of 1986 is allowable for such 
        use.
          (5) Exception for fuel held in vehicle tank.--No tax 
        shall be imposed by paragraph (1) on kerosene held in 
        the tank of a motor vehicle or motorboat.
          (6) Exception for certain amounts of fuel.--
                  (A) In general.--No tax shall be imposed by 
                paragraph (1) on kerosene held on July 1, 1998, 
                by any person if the aggregate amount of 
                kerosene 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) or (5).
                  (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.
          (7) Coordination with section 4081.--No tax shall be 
        imposed by paragraph (1) on kerosene to the extent that 
        tax has been (or will be) imposed on such kerosene 
        under section 4081 or 4091 of such Code.
          (8) Other laws applicable.--All provisions of law, 
        including penalties, applicable with respect to the 
        taxes imposed by section 4081 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 4081.

SEC. 1043. REDUCTION OF INCENTIVES FOR ALCOHOL FUELS.

    (a) Denial of Credit for Alcohol Used To Produce Ether.--
Subsection (b) of section 40 is amended by adding at the end 
the following new paragraph:
          ``(6) Denial of credit for alcohol used to produce 
        ether.--No credit shall be allowed under this section 
        for alcohol used to produce any ether.''
    (b) Limitation on Alcohol Eligible for Credit for Alcohol 
Used as Fuel--
          (1) In general.--Subparagraph (A) of section 40(d)(1) 
        (defining alcohol) is amended by striking ``or'' at the 
        end of clause (i), by striking the period at the end of 
        clause (ii) and inserting ``, or'', and by adding at 
        the end the following new clause:
                          ``(iii) alcohol produced by a still 
                        (or other distilling apparatus) placed 
                        in service after June 8, 1997.''
          (2) Future credit limited to average historical 
        production.--Section 40 is amended by adding at the end 
        the following new subsection:
    ``(i) Expanded Production Ineligible for Credit.--
          ``(1) In general.--Subsection (a) shall apply to 
        alcohol produced after December 31, 1997, only if the 
        alcohol is designated under this subsection by a 
        producer who is registered under section 4101.
          ``(2) Designation based on historical production.--
                  ``(A) In general.--The amount of alcohol 
                produced by a producer during any calendar year 
                which may be designated under this subsection 
                by any producer other than an eligible small 
                ethanol producer is the amount equal to the 
                average annual amount of alcohol (as defined in 
                subsection (d)(1)(A) without regard to clause 
                (iii))--
                          ``(i) which was produced by such 
                        producer (other than casual off-farm 
                        production) during each of the base 
                        period years, and
                          ``(ii) which was sold or used by such 
                        producer for any purpose described in 
                        clause (i) of subsection (b)(4)(B).
                For purposes of the preceding sentence, a rule 
                similar to the rule of subsection (b)(4)(D) 
                shall apply.
                  ``(B) Base period year.--For purposes of 
                subparagraph (A), the term `base period year' 
                means each of 3 years which are among the 5-
                year period ending on May 31, 1997, determined 
                by disregarding--
                          ``(i) one year for which the 
                        production described in subparagraph 
                        (A)(i) was the largest, and
                          ``(ii) one year for which the 
                        production described in subparagraph 
                        (A)(i) was the smallest.
          ``(3) Production for less than entire base period.--
        If alcohol is produced by a producer for less than 3 
        base period years, the average referred to in paragraph 
        (2) shall be treated as being not less than 50 percent 
        of the annual productive capacity of such producer as 
        of June 8, 1997.
          ``(4) 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.''
          (3) Conforming amendment.--Paragraph (1) of section 
        40(g) is amended by striking ``clauses (i) and (ii)'' 
        and inserting ``clauses (i), (ii), and (iii)''.
    (c) Reduction of Credit For Ethanol By Reason of Carbon 
Dioxide Byproduct Benefit.--
          (1) Subsection (h) of section 40 is amended--
                  (A) by striking ``54 cents'' each place it 
                appears and inserting ``51 cents'', and
                  (B) by striking ``40 cents'' each place it 
                appears and inserting ``38.25 cents''.
          (2) Subparagraph (A) of section 4041(b)(2) is amended 
        by striking ``5.4 cents'' and inserting ``5.1 cents''.
          (3) Paragraphs (4)(A) and (5) of section 4081(c) are 
        each amended by striking ``5.4 cents'' each place it 
        appears and inserting ``5.1 cents''.
          (4) Paragraph (1) of section 4091(c) is amended by 
        striking ``13.4 cents'' and inserting ``13.1 cents''.
    (d) Excise Tax on Excess Production of Fuel Alcohol.--
          (1) In general.--Chapter 36 (relating to certain 
        other excise taxes) is amended by inserting after 
        subchapter B the following new subchapter:

           ``Subchapter C--Excess Production of Fuel Alcohol

        ``Sec. 4476. Imposition of tax.

``SEC. 4476. IMPOSITION OF TAX.

    ``(a) General Rule.--There is hereby imposed a tax of 51 
cents for each gallon of excess fuel alcohol produced, 
imported, or brought into the United States.
    ``(b) Liability for Tax.--The tax imposed by subsection (a) 
shall be paid by the person who would be liable for the tax 
imposed by section 5001 on the alcohol but for paragraph (1)(C) 
or (12) of section 5214(a).
    ``(c) Excess Fuel Alcohol.--For purposes of this section--
          ``(1) Domestic production.--In the case of alcohol 
        produced in the United States, the term `excess fuel 
        alcohol' means any alcohol--
                  ``(A) which is withdrawn free of tax under 
                paragraph (1)(C) or (12) of section 5214(a) 
                during any calendar year, and
                  ``(B) which is not designated under section 
                40(i).
          ``(2) Other production.--In the case of alcohol 
        imported or brought into the United States--
                  ``(A) In general.--The term `excess fuel 
                alcohol' means, with respect to the person 
                importing or bringing such alcohol into the 
                United States, the excess of--
                          ``(i) the amount of alcohol so 
                        imported or brought into the United 
                        States by such person during any year, 
                        over
                          ``(ii) such person's historical 
                        average determined under rules similar 
                        to the rules of section 40(i)(2).
                  ``(B) Exception.--Such term shall not include 
                any alcohol which the person importing or 
                bringing such alcohol into the United States 
                establishes to the satisfaction of the 
                Secretary that such alcohol is not to be used 
                as a fuel or in a mixture to be used as a fuel.
          ``(3) Alcohol.--The term `alcohol' includes methanol 
        and ethanol but does not include alcohol produced from 
        petroleum, natural gas, or coal (including lignite).
    ``(d) Special Rules.--
          ``(1) Exception for casual off-farm production.--The 
        tax imposed by this section shall not apply to casual 
        off-farm production (within the meaning of section 40).
          ``(2) Alcohol must be withdrawn for fuel use.--
        Alcohol withdrawn free of tax under section 
        5214(a)(1)(C) shall be taken into account under this 
        section only if withdrawn for fuel use.
          ``(3) Certain rules to apply.--The tax imposed by 
        this section shall attach, and be determined and paid, 
        as if it were tax imposed by section 5001.
    ``(e) Application of Tax Dependent on Availability of Other 
Fuel Alcohol Subsidies.--
          ``(1) Application if fuel alcohol subsidies 
        continue.--Paragraphs (1)(B) and (2)(A)(ii) of 
        subsection (c) shall not apply after December 31, 2000, 
        if this section is in effect after such date.
          ``(2) Application if fuel alcohol subsidies 
        terminate.--This section shall not apply after December 
        31, 2000, if none of the fuel alcohol subsidies apply 
        to any sale or use after such date. For purposes of the 
        preceding sentence, the fuel alcohol subsidies are 
        sections 40, 4041(b)(2), 4081(c), 4091(c), 6427(f), and 
        6427(q).''
          (2) Tax to be nondeductible.--Subsection (a) of 
        section 275 is amended by adding at the end the 
        following new paragraph:
          ``(7) Taxes imposed by section 4476 (relating to 
        excess production of fuel alcohol).''
          (3) Tax to be deposited into highway trust fund.--
        Paragraph (1) of section 9503(b) is amended by striking 
        ``and'' at the end of subparagraph (E), by 
        redesignating subparagraph (F) as subparagraph (G), and 
        by inserting after subparagraph (E) the following new 
        subparagraph:
                  ``(F) section 4476 (relating to excess 
                production of fuel alcohol), and''.
          (4) Clerical amendment.--The table of subchapters for 
        chapter 36 is amended by inserting after the item 
        relating to subchapter B the following new item:
        ``Subchapter C. Excess production of fuel alcohol.''
    (e) Increase in Small Ethanol Producer Credit.--
Subparagraph (A) of section 40(b)(4) is amended by striking 
``10 cents'' and inserting ``13 cents''.
    (f) Effective Date.--
          (1) Amendments relating to credit.--The amendments 
        made by subsections (a), (b), (c)(1), and (e) shall 
        apply to alcohol produced after December 31, 1997, in 
        taxable years ending after such date.
          (2) Amendments relating to excise taxes.--The 
        amendments made by subsections (c)(2) and (d) shall 
        take effect on January 1, 1998.
          (3) Stills placed in service pursuant to binding 
        contracts.--For purposes of subsections (d)(1)(A)(iii) 
        and (i)(3) of section 40 of the Internal Revenue Code 
        of 1986, as amended by this section, a still (or other 
        distilling apparatus) shall be treated as placed in 
        service before June 9, 1997, if such still (or other 
        apparatus) is constructed or acquired by the taxpayer 
        pursuant to a written contract which was binding on 
        June 8, 1997, and at all times thereafter before such 
        construction or acquisition.

SEC. 1044. RESTORATION OF LEAKING UNDERGROUND STORAGE TANK TRUST FUND 
                    TAXES.

    Paragraph (3) of section 4081(d) is amended by striking 
``shall not apply after December 31, 1995'' and inserting 
``shall apply after the date of the enactment of the Revenue 
Reconciliation Act of 1997 and before October 1, 2002''.

SEC. 1045. APPLICATION OF COMMUNICATIONS TAX TO LONG-DISTANCE PREPAID 
                    TELEPHONE CARDS.

    (a) In General.--Subsection (b) of section 4251 is 
amended--
          (1) by adding at the end the following new paragraph:
          ``(3) Long-distance prepaid telephone cards and 
        similar arrangements.--Any amount paid (and the value 
        of any other benefit provided) to a provider of 
        communications services (or any related person) for the 
        right to award, sell, or otherwise make available 
        telephone service (or reductions in the cost of such 
        service) other than local telephone service through 
        prepaid telephone cards or any similar arrangement 
        shall be treated as an amount paid for communications 
        services. The Secretary shall prescribe rules which 
        reallocate items of income, deduction, credit, 
        exclusion, or other allowance to the extent necessary 
        to prevent the avoidance of tax imposed by reason of 
        this paragraph.'', and
          (2) by inserting ``And Special Rule'' after 
        ``Definitions'' in the heading.
    (b) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to amounts paid on or after the date of the 
        enactment of this Act.
          (2) Payments within controlled group.--For purposes 
        of paragraph (1), any amount paid after June 11, 1997, 
        and before the date of the enactment of this Act by 1 
        member of a controlled group for a right which is 
        described in section 4251(b)(3) of the Internal Revenue 
        Code of 1986 (as added by this section) and is 
        furnished by another member of such group shall be 
        treated as paid on the date of the enactment of this 
        Act. For purposes of the preceding sentence, all 
        persons treated as a single employer under subsection 
        (a) or (b) of section 52 of such Code shall be treated 
        as members of a controlled group.

         Subtitle F--Provisions Relating to Tax-Exempt Entities

SEC. 1051. EXPANSION OF LOOK-THRU RULE FOR INTEREST, ANNUITIES, 
                    ROYALTIES, AND RENTS DERIVED BY SUBSIDIARIES OF 
                    TAX-EXEMPT ORGANIZATIONS.

    (a) In General.--Paragraph (13) of section 512(b) is 
amended to read as follows:
          ``(13) Special rules for certain amounts received 
        from controlled entities.--
                  ``(A) In general.--If an organization (in 
                this paragraph referred to as the `controlling 
                organization') receives (directly or 
                indirectly) a specified payment from another 
                entity which it controls (in this paragraph 
                referred to as the `controlled entity'), 
                notwithstanding paragraphs (1), (2), and (3), 
                the controlling organization shall include such 
                payment as an item of gross income derived from 
                an unrelated trade or business to the extent 
                such payment reduces the net unrelated income 
                of the controlled entity (or increases any net 
                unrelated loss of the controlled entity). There 
                shall be allowed all deductions of the 
                controlling organization directly connected 
                with amounts treated as derived from an 
                unrelated trade or business under the preceding 
                sentence.
                  ``(B) Net unrelated income or loss.--For 
                purposes of this paragraph--
                          ``(i) Net unrelated income.--The term 
                        `net unrelated income' means--
                                  ``(I) in the case of a 
                                controlled entity which is not 
                                exempt from tax under section 
                                501(a), the portion of such 
                                entity's taxable income which 
                                would be unrelated business 
                                taxable income if such entity 
                                were exempt from tax under 
                                section 501(a) and had the same 
                                exempt purposes (as defined in 
                                section 513A(a)(5)(A)) as the 
                                controlling organization, or
                                  ``(II) in the case of a 
                                controlled entity which is 
                                exempt from tax under section 
                                501(a), the amount of the 
                                unrelated business taxable 
                                income of the controlled 
                                entity.
                          ``(ii) Net unrelated loss.--The term 
                        `net unrelated loss' means the net 
                        operating loss adjusted under rules 
                        similar to the rules of clause (i).
                  ``(C) Specified payment.--For purposes of 
                this paragraph, the term `specified payment' 
                means any interest, annuity, royalty, or rent.
                  ``(D) Definition of control.--For purposes of 
                this paragraph--
                          ``(i) Control.--The term `control' 
                        means--
                                  ``(I) in the case of a 
                                corporation, ownership (by vote 
                                or value) of more than 50 
                                percent of the stock in such 
                                corporation,
                                  ``(II) in the case of a 
                                partnership, ownership of more 
                                than 50 percent of the profits 
                                interests or capital interests 
                                in such partnership, or
                                  ``(III) in any other case, 
                                ownership of more than 50 
                                percent of the beneficial 
                                interests in the entity.
                          ``(ii) Constructive ownership.--
                        Section 318 (relating to constructive 
                        ownership of stock) shall apply for 
                        purposes of determining ownership of 
                        stock in a corporation. Similar 
                        principles shall apply for purposes of 
                        determining ownership of interests in 
                        any other entity.
                  ``(E) Related persons.--The Secretary shall 
                prescribe such rules as may be necessary or 
                appropriate to prevent avoidance of the 
                purposes of this paragraph through the use of 
                related persons.''
    (b) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        taxable years beginning after the date of the enactment 
        of this Act.
          (2) Control test.--In the case of taxable years 
        beginning before January 1, 1999, an organization shall 
        be treated as controlling another organization for 
        purposes of section 512(b)(13) of the Internal Revenue 
        Code of 1986 (as amended by this section) only if it 
        controls such organization within the meaning of such 
        section, determined by substituting ``80 percent'' for 
        ``50 percent'' each place it appears in subparagraph 
        (D) thereof.

SEC. 1052. LIMITATION ON INCREASE IN BASIS OF PROPERTY RESULTING FROM 
                    SALE BY TAX-EXEMPT ENTITY TO A RELATED PERSON.

    (a) In General.--Part IV of subchapter O of chapter 1 
(relating to special rules for gain or loss on disposition of 
property) is amended by redesignating section 1061 as section 
1062 and by inserting after section 1060 the following new 
section:

``SEC. 1061. BASIS LIMITATION FOR SALE OR EXCHANGE OF PROPERTY BY TAX-
                    EXEMPT ENTITY TO RELATED PERSON.

    ``(a) General Rule.--In the case of a sale or exchange of 
property directly or indirectly between a tax-exempt entity and 
a related person, the basis of the related person in the 
property acquired shall not exceed the adjusted basis of such 
property (immediately before the exchange) in the hands of the 
tax-exempt entity, increased by the amount of gain recognized 
to the tax-exempt entity on the transfer which is subject to 
tax under section 511.
    ``(b) Definitions.--For purposes of this section--
          ``(1) Tax-exempt entity.--The term `tax-exempt 
        entity' means any entity which is exempt from the tax 
        imposed by this chapter.
          ``(2) Related person.--The term `related person' 
        means any person bearing a relationship to the tax-
        exempt entity which is described in section 267(b) or 
        707(b)(1).For purposes of applying section 267(b)(2) 
under the preceding sentence, such an entity shall be treated as if it 
were an individual.''
    (b) Clerical Amendment.--The table of sections for part IV 
of subchapter O of chapter 1 is amended by striking the last 
item and inserting the following:

        ``Sec. 1061. Basis limitation for sale or exchange of property 
                  by tax-exempt entity to related person.
        ``Sec. 1062. Cross references.''

    (c) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to sales and exchanges after June 8, 1997.
          (2) Binding contracts.--The amendments made by this 
        section shall not apply to any sale or exchange 
        pursuant to a written contract which was binding on 
        June 8, 1997, and at all times thereafter before the 
        sale or exchange.

SEC. 1053. MODIFICATIONS TO EXCEPTION FROM REPORTING, ETC. OF LOBBYING 
                    ACTIVITIES.

    (a) In General.--Paragraph (3) of section 6033(e) (relating 
to exception where dues generally nondeductible) is amended to 
read as follows:
          ``(3) Exception where dues generally nondeductible.--
                  ``(A) In general.--Paragraph (1)(A) shall not 
                apply to an organization if more than 90 
                percent of the amount of the aggregate annual 
                dues (or similar payments) paid to such 
                organization are paid--
                          ``(i) by individuals or families 
                        whose annual dues (or similar amounts) 
                        are less than $100, or
                          ``(ii) by organizations which are 
                        exempt from tax.
                For purposes of the preceding sentence, all 
                organizations sharing a name, charter, historic 
                affiliation, or similar characteristics and 
                coordinating their lobbying activities shall be 
                treated as 1 organization.
                  ``(B) Inflation adjustment.--In the case of 
                dues for annual periods beginning in any 
                calendar year after 1998, the dollar amount 
                contained in subparagraph (A)(i) shall be 
                increased by an amount equal to--
                          ``(i) such dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting 
                        `calendar year 1997' for `calendar year 
                        1992' in subparagraph (B) thereof.
                If any increase determined under the preceding 
                sentence is not a multiple of $5, such increase 
                shall be rounded to the nearest multiple of 
                $5.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1054. TERMINATION OF CERTAIN EXCEPTIONS FROM RULES RELATING TO 
                    EXEMPT ORGANIZATIONS WHICH PROVIDE COMMERCIAL-TYPE 
                    INSURANCE.

    (a) In General.--Subparagraphs (A) and (B) of section 
1012(c)(4) of the Tax Reform Act of 1986 shall not apply to any 
taxable year beginning after December 31, 1997.
    (b) Special Rules.--In the case of an organization to which 
section 501(m) of the Internal Revenue Code of 1986 applies 
solely by reason of the amendment made by subsection (a)--
          (1) no adjustment shall be made under section 481 (or 
        any other provision) of such Code on account of a 
        change in its method of accounting for its first 
        taxable year beginning after December 31, 1997, and
          (2) for purposes of determining gain or loss, the 
        adjusted basis of any asset held on the 1st day of such 
        taxable year shall be treated as equal to its fair 
        market value as of such day.
    (c) Reserve Weakening after June 8, 1997.--Any reserve 
weakening after June 8, 1997, by an organization described in 
subsection (b) shall be treated as occurring in such 
organizations 1st taxable year beginning after December 31, 
1997.
    (d) Regulations.--The Secretary of the Treasury or his 
delegate may prescribe rules for providing proper adjustments 
for organizations described in subsection (b) with respect to 
short taxable years which begin during 1998 by reason of 
section 843 of the Internal Revenue Code of 1986.

                  Subtitle G--Other Revenue Provisions

SEC. 1061. TERMINATION OF SUSPENSE ACCOUNTS FOR FAMILY CORPORATIONS 
                    REQUIRED TO USE ACCRUAL METHOD OF ACCOUNTING.

    (a) In General.--Subsection (i) of section 447 (relating to 
method of accounting for corporations engaged in farming) is 
amended by adding at the end the following new paragraph:
          ``(7) Termination.--
                  ``(A) In general.--No suspense account may be 
                established under this subsection by any 
                corporation required by this section to change 
                its method of accounting for any taxable year 
                ending after June 8, 1997.
                  ``(B) Phaseout of existing suspense 
                accounts.--
                          ``(i) In general.--Each suspense 
                        account under this subsection shall be 
                        reduced (but not below zero) for each 
                        taxable year beginning after June 8, 
                        1997, by an amount equal to the lesser 
                        of--
                                  ``(I) the applicable portion 
                                of such account, or
                                  ``(II) 50 percent of the 
                                taxable income of the 
                                corporation for the taxable 
                                year, or, if the corporation 
                                has no taxable income for such 
                                year, the amount of any net 
                                operating loss (as defined in 
                                section 172(c)) for such 
                                taxable year.
                        For purposes of the preceding sentence, 
                        the amount of taxable income and net 
                        operating loss shall be determined 
                        without regard to this paragraph.
                          ``(ii) Coordination with other 
                        reductions.--The amount of the 
                        applicable portion for any taxable year 
                        shall be reduced (but not below zero) 
                        by the amount of any reduction required 
                        for such taxable year under any other 
                        provision of this subsection.
                          ``(iv) Inclusion in income.--Any 
                        reduction in a suspense account under 
                        this paragraph shall be included in 
                        gross income for the taxable year of 
                        the reduction.
                  ``(C) Applicable portion.--For purposes of 
                subparagraph (B), the term `applicable portion' 
                means, for any taxable year, the amount which 
                would ratably reduce the amount in the account 
                (after taking into account prior reductions) to 
                zero over the period consisting of such taxable 
                year and the remaining taxable years in such 
                first 20 taxable years.
                  ``(D) Amounts after 20th year.--Any amount in 
                the account as of the close of the 20th year 
                referred to in subparagraph (C) shall be 
                treated as the applicable portion for each 
                succeeding year thereafter to the extent not 
                reduced under this paragraph for any prior 
                taxable year after such 20th year.''
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years ending after June 8, 1997.

SEC. 1062. MODIFICATION OF TAXABLE YEARS TO WHICH NET OPERATING LOSSES 
                    MAY BE CARRIED.

    (a) In General.--Subparagraph (A) of section 172(b)(1) 
(relating to years to which loss may be carried) is amended--
          (1) by striking ``3'' in clause (i) and inserting 
        ``2'', and
          (2) by striking ``15'' in clause (ii) and inserting 
        ``20''.
    (b) Retention of 3-Year Carryback for Casualty Losses of 
Individuals.--Paragraph (1) of section 172(b) is amended by 
adding at the end the following new subparagraph:
                  ``(F) Casualty losses of individuals.--
                Subparagraph (A)(i) shall be applied by 
                substituting `3 years' for `2 years' with 
                respect to the portion of the net operating 
                loss of an individual for the taxable year 
                which is attributable to losses of property 
                arising from fire, storm, shipwreck, or other 
                casualty, or from theft.''
    (c) Effective Date.--The amendments made by this section 
shall apply to net operating losses for taxable years beginning 
after the date of the enactment of this Act.

SEC. 1063. EXPANSION OF DENIAL OF DEDUCTION FOR CERTAIN AMOUNTS PAID IN 
                    CONNECTION WITH INSURANCE.

    (a) Denial of Deduction for Premiums.--Paragraph (1) of 
section 264(a) is amended to read as follows:
          ``(1) Premiums on any life insurance policy, or 
        endowment or annuity contract, if the taxpayer is 
        directly or indirectly a beneficiary under the policy 
        or contract.''
    (b) Interest on Policy Loans.--Paragraph (4) of section 
264(a) is amended by striking ``individual, who'' and all that 
follows and inserting ``individual.''
    (c) Pro Rata Allocation of Interest Expense to Policy Cash 
Values.--Section 264 is amended by adding at the end the 
following new subsection:
    ``(e) Pro Rata Allocation of Interest Expense to Policy 
Cash Values.--
          ``(1) In general.--No deduction shall be allowed for 
        that portion of the taxpayer's interest expense which 
        is allocable to unborrowed policy cash values.
          ``(2)  Allocation.--For purposes of paragraph (1), 
        the portion of the taxpayer's interest expense which is 
        allocable to unborrowed policy cash values is an amount 
        which bears the same ratio to such interest expense 
        as--
                  ``(A) the taxpayer's average unborrowed 
                policy cash values of life insurance policies, 
                and annuity and endowment contracts, issued 
                after June 8, 1997, bears to
                  ``(B) the average adjusted bases (within the 
                meaning of section 1016) for all assets of the 
                taxpayer.
          ``(3) Unborrowed policy cash values.--The term 
        `unborrowed policy cash value' means, with respect to 
        any life insurance policy or annuity or endowment 
        contract, the excess of--
                  ``(A) the cash surrender value of such policy 
                or contract determined without regard to any 
                surrender charge, over
                  ``(B) the amount of any loan in respect of 
                such policy or contract.
          ``(4) Exception for certain policies and contracts 
        covering officers, directors, and employees.--Paragraph 
        (1) shall not apply to any policy or contract owned by 
        an entity engaged in a trade or business which covers 
        any individual who is an officer, director, or employee 
        of such trade or business at the time first covered by 
        the policy or contract, and such policies and contracts 
        shall not be taken into account under paragraph (2).
          ``(5) Exception for policies and contracts held by 
        natural persons; treatment of partnerships and s 
        corporations.--
                  ``(A) Policies and contracts held by natural 
                persons.--
                          ``(i) In general.--This subsection 
                        shall not apply to any policy or 
                        contract held by a natural person.
                          ``(ii) Exception where business is 
                        beneficiary.--If a trade or business is 
                        directly or indirectly the beneficiary 
                        under any policy or contract, to the 
                        extent of the unborrowed cash value of 
                        such policy or contract, such policy or 
                        contract shall be treated as held by 
                        such trade or business and not by a 
                        natural person.
                          ``(iii) Special rules.--
                                  ``(I) Certain trades or 
                                businesses not taken into 
                                account.--Clause (ii) shall not 
                                apply to any trade or business 
                                carried on as a sole 
                                proprietorship and to any trade 
                                or business performing services 
                                as an employee.
                                  ``(II) Limitation on 
                                unborrowed cash value.--The 
                                amount of the unborrowed cash 
                                value of any policy or contract 
                                which is taken into account by 
                                reason of clause (ii) shall not 
                                exceed the benefit to which the 
                                trade or business is entitled 
                                under the policy or contract.
                          ``(iv) Reporting.--The Secretary 
                        shall require such reporting from 
                        policyholders and issuers as is 
                        necessary to carry out clause (ii). Any 
                        report required under the preceding 
                        sentence shall be treated as a 
                        statement referred to in section 
                        6724(d)(1).
                  ``(B) Treatment of partnerships and s 
                corporations.--In the case of a partnership or 
                S corporation, this subsection shall be applied 
                at the partnership and corporate levels.
          ``(6) Special rules.--
                  ``(A) Coordination with subsection (a) and 
                section 265.--If interest on any indebtedness 
                is disallowed under subsection (a) or section 
                265--
                          ``(i) such disallowed interest shall 
                        not be taken into account for purposes 
                        of applying this subsection, and
                          ``(ii) for purposes of applying 
                        paragraph (2)(B), the adjusted bases 
                        otherwise taken into account shall be 
                        reduced (but not below zero) by the 
                        amount of such indebtedness.
                  ``(B) Coordination with section 263a.--This 
                subsection shall be applied before the 
                application of section 263A (relating to 
                capitalization of certain expenses where 
                taxpayer produces property).''
          ``(7) Interest expense.--The term `interest expense' 
        means the aggregate amount allowable to the taxpayer as 
        a deduction for interest (within the meaning of section 
        265(b)(4)) for the taxable year (determined without 
        regard to this subsection, section 265(b), and section 
        291).
          ``(8) Aggregation rules.--
                  ``(A) In general.--All members of a 
                controlled group (within the meaning of 
                subsection (d)(5)(B)) shall be treated as 1 
                taxpayer for purposes of this subsection.
                  ``(B) Treatment of insurance companies.--This 
                subsection shall not apply to an insurance 
                company, and subparagraph (A) shall be applied 
                without regard to any insurance company.''
    (b) Treatment of Insurance Companies.--
          (1) Clause (ii) of section 805(a)(4)(C) is amended by 
        inserting ``, or out of the increase for the taxable 
        year in policy cash values (within the meaning of 
        section 264(e)(3)(A)) of life insurance policies and 
        annuity and endowment contracts to which section 264(e) 
        applies'' after ``tax-exempt interest''.
          (2) Clause (iii) of section 805(a)(4)(D) is amended 
        by striking ``and'' and inserting ``, the increase for 
        the taxable year in policy cash values (within the 
        meaning of section 264(e)(3)(A)) of life insurance 
        policies and annuity and endowment contracts to which 
        section 264(e) applies, and''.
          (3) Subparagraph (B) of section 807(a)(2) is amended 
        by striking ``interest,'' and inserting ``interest and 
        the amount of the policyholder's share of the increase 
        for the taxable year in policy cash values (within the 
        meaning ofsection 264(e)(3)(A)) of life insurance 
policies and annuity and endowment contracts to which section 264(e) 
applies,''.
          (4) Subparagraph (B) of section 807(b)(1) is amended 
        by striking ``interest,'' and inserting ``interest and 
        the amount of the policyholder's share of the increase 
        for the taxable year in policy cash values (within the 
        meaning of section 264(e)(3)(A)) of life insurance 
        policies and annuity and endowment contracts to which 
        section 264(e) applies,''.
          (5) Paragraph (1) of section 812(d) 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 at the end the 
        following new subparagraph:
                  ``(D) the increase for any taxable year in 
                the policy cash values (within the meaning of 
                section 264(e)(3)(A)) of life insurance 
                policies and annuity and endowment contracts to 
                which section 264(e) applies.''
          (6) Subparagraph (B) of section 832(b)(5) 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) the increase for the taxable 
                        year in policy cash values (within the 
                        meaning of section 264(e)(3)(A)) of 
                        life insurance policies and annuity and 
                        endowment contracts to which section 
                        264(e) applies.''
    (c) Conforming Amendment.--Subparagraph (A) of section 
265(b)(4) is amended by inserting ``, section 264,'' before 
``and section 291''.
    (d) Effective Date.--The amendments made by this section 
shall apply to contracts issued after June 8, 1997, in taxable 
years ending after such date. For purposes of the preceding 
sentence, any material increase in the death benefit or other 
material change in the contract shall be treated as a new 
contract but the addition of covered lives shall be treated as 
a new contract only with respect to such additional covered 
lives. For purposes of this subsection, an increase in the 
death benefit under a policy or contract issued in connection 
with a lapse described in section 501(d)(2) of the Health 
Insurance Portability and Accountability Act of 1996 shall not 
be treated as a new contract.

SEC. 1064. ALLOCATION OF BASIS AMONG PROPERTIES DISTRIBUTED BY 
                    PARTNERSHIP.

    (a) In General.--Subsection (c) of section 732 is amended 
to read as follows:
    ``(c) Allocation of Basis.--
          ``(1) In general.--The basis of distributed 
        properties to which subsection (a)(2) or (b) is 
        applicable shall be allocated--
                  ``(A)(i) first to any unrealized receivables 
                (as defined in section 751(c)) and inventory 
                items (as defined in section 751(d)(2)) in an 
                amount equal to the adjusted basis of each such 
                property to the partnership, and
                  ``(ii) if the basis to be allocated is less 
                than the sum of the adjusted bases of such 
                properties to the partnership, then, to the 
                extent any decrease is required in order to 
                have the adjusted bases of such properties 
                equal the basis to be allocated, in the manner 
                provided in paragraph (3), and
                  ``(B) to the extent of any basis not 
                allocated under subparagraph (A), to other 
                distributed properties--
                          ``(i) first by assigning to each such 
                        other property such other property's 
                        adjusted basis to the partnership, and
                          ``(ii) then, to the extent any 
                        increase or decrease in basis is 
                        required in order to have the adjusted 
                        bases of such other distributed 
                        properties equal such remaining basis, 
                        in the manner provided in paragraph (2) 
                        or (3), whichever is appropriate.
          ``(2) Method of allocating increase.--Any increase 
        required under paragraph (1)(B) shall be allocated 
        among the properties--
                  ``(A) first to properties with unrealized 
                appreciation in proportion to their respective 
                amounts of unrealized appreciation before such 
                increase (but only to the extent of each 
                property's unrealized appreciation), and
                  ``(B) then, to the extent such increase is 
                not allocated under subparagraph (A), in 
                proportion to their respective fair market 
                values.
          ``(3) Method of allocating decrease.--Any decrease 
        required under paragraph (1)(A) or (1)(B) shall be 
        allocated--
                  ``(A) first to properties with unrealized 
                depreciation in proportion to their respective 
                amounts of unrealized depreciation before such 
                decrease (but only to the extent of each 
                property's unrealized depreciation), and
                  ``(B) then, to the extent such decrease is 
                not allocated under subparagraph (A), in 
                proportion to their respective adjusted bases 
                (as adjusted under subparagraph (A)).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to distributions after the date of the enactment of 
this Act.

SEC. 1065. REPEAL OF REQUIREMENT THAT INVENTORY BE SUBSTANTIALLY 
                    APPRECIATED.

    (a) In General.--Paragraph (2) of section 751(a) is amended 
to read as follows:
          ``(2) inventory items of the partnership,''.
    (b) Conforming Amendments.--
          (1) Subsection (d) of section 751 is amended to read 
        as follows:
    ``(d) Inventory Items.--For purposes of this subchapter, 
the term `inventory items' means--
          ``(1) property of the partnership of the kind 
        described in section 1221(1),
          ``(2) any other property of the partnership which, on 
        sale or exchange by the partnership, would be 
        considered property other than a capital asset and 
        other than property described in section 1231,
          ``(3) any other property of the partnership which, if 
        sold or exchanged by the partnership, would result in a 
        gain taxable under subsection (a) of section 1246 
        (relating to gain on foreign investment company stock), 
        and
          ``(4) any other property held by the partnership 
        which, if held by the selling or distributee partner, 
        would be considered property of the type described in 
        paragraph (1), (2), or (3).''
          (2) Sections 724(d)(2), 731(a)(2)(B), 731(c)(6), 
        732(c)(1)(A) (as amended by the preceding section), 
        735(a)(2), and 735(c)(1) are each amended by striking 
        ``section 751(d)(2)'' and inserting ``section 751(d)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to sales, exchanges, and distributions after the 
date of the enactment of this Act.

SEC. 1066. EXTENSION OF TIME FOR TAXING PRECONTRIBUTION GAIN.

    (a) In General.--Sections 704(c)(1)(B) and 737(b)(1) are 
each amended by striking ``5 years'' and inserting ``10 
years''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to property contributed to a partnership after June 
8, 1997.

SEC. 1067. RESTRICTIONS ON AVAILABILITY OF EARNED INCOME CREDIT FOR 
                    TAXPAYERS WHO IMPROPERLY CLAIMED CREDIT IN PRIOR 
                    YEAR.

    (a) In General.--Section 32 is amended by redesignating 
subsections (k) and (l) as subsections (l) and (m), 
respectively, and by inserting after subsection (j) the 
following new subsection:
    ``(k) Restrictions on Taxpayers Who Improperly Claimed 
Credit in Prior Year.--
          ``(1) Taxpayers making prior fraudulent or reckless 
        claims.--
                  ``(A) In general.--No credit shall be allowed 
                under this section for any taxable year in the 
                disallowance period.
                  ``(B) Disallowance period.--For purposes of 
                paragraph (1), the disallowance period is--
                          ``(i) the period of 10 taxable years 
                        after the most recent taxable year for 
                        which there was a final determination 
                        that the taxpayer's claim of credit 
                        under this section was due to fraud, 
                        and
                          ``(ii) the period of 2 taxable years 
                        after the most recent taxable year for 
                        which there was a final determination 
                        that the taxpayer's claim of credit 
                        under this section was due to reckless 
                        or intentional disregard of rules and 
                        regulations (but not due to fraud).
          ``(2) Taxpayers making improper prior claims.--In the 
        case of a taxpayer who is denied credit under this 
        section for any taxable year as a result of the 
        deficiency procedures under subchapter B of chapter 63, 
        no credit shall be allowed under this section for any 
        subsequent taxable year unless the taxpayer provides 
        such information as the Secretary may require to 
        demonstrate eligibility for such credit.''
    (b) Due Diligence Requirement on Income Tax Return 
Preparers.--Section 6695 is amended by adding at the end the 
following new subsection:
    ``(g) Failure To Be Diligent in Determining Eligibility for 
Earned Income Credit.--Any person who is an income tax preparer 
with respect to any return or claim for refund who fails to 
comply with due diligence requirements imposed by the Secretary 
by regulations with respect to determining eligibility for, or 
the amount of, the credit allowable by section 32 shall pay a 
penalty of $100 for each such failure.''
    (c) Extension Procedures Applicable to Mathematical or 
Clerical Errors.--Paragraph (2) of section 6213(g) (relating to 
the definition of mathematical or clerical errors) is amended 
by striking ``and'' at the end of subparagraph (H), by striking 
the period at the end of subparagraph (I) and inserting ``, 
and'', and by inserting after subparagraph (I) the following 
new subparagraph:
                  ``(J) an omission of information required by 
                section 32(k)(2) (relating to taxpayers making 
                improper prior claims of earned income 
                credit).''
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996.

SEC. 1068. LIMITATION ON PROPERTY FOR WHICH INCOME FORECAST METHOD MAY 
                    BE USED.

    (a) Limitation.--Subsection (g) of section 167 is amended 
by adding at the end the following new paragraph:
          ``(6) Limitation on property for which income 
        forecast method may be used.--The depreciation 
        deduction allowable under this section may be 
        determined under the income forecast method or any 
        similar method only with respect to--
                  ``(A) property described in paragraph (3) or 
                (4) of section 168(f),
                  ``(B) copyrights,
                  ``(C) books,
                  ``(D) patents, and
                  ``(E) other property specified in 
                regulations.
        Such methods may not be used with respect to any 
        amortizable section 197 intangible (as defined in 
        section 197(c)).''
    (b) Depreciation Period for Rent-To-Own Property.--
          (1) In general.--Subparagraph (A) of section 
        168(e)(3) (relating to 3-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 qualified rent-to-own 
                        property.''
          (2) 4-year class life.--The table contained in 
        section 168(g)(3)(B) is amended by inserting before the 
        first item the following new item:

  ``(A)(iii)............................................         4''    

          (3) Definition of qualified rent-to-own property.--
        Subsection (i) of section 168 is amended by adding at 
        the end the following new paragraph:
          ``(14) Qualified rent-to-own property.--
                  ``(A) In general.--The term `qualified rent-
                to-own property' means property held by a rent-
                to-own dealer for purposes of being subject to 
                a rent-to-own contract.
                  ``(B) Rent-to-own dealer.--The term `rent-to-
                own dealer' means a person that, in the 
                ordinary course of business, regularly enters 
                into rent-to-own contracts with customers for 
                the use of consumer property, if a substantial 
                portion of those contracts terminate and the 
                property is returned to such person before the 
                receipt of all payments required to transfer 
                ownership of the property from such person to 
                the customer.
                  ``(C) Consumer property.--The term `consumer 
                property' means tangible personal property of a 
                type generally used within the home. Such term 
                shall not include cellular telephones and any 
                computer or peripheral equipment (as defined in 
                section 168(i)).
                  ``(D) Rent-to-own contract.--The term `rent-
                to-own contract' means any lease for the use of 
                consumer property between a rent-to-own dealer 
                and a customer who is an individual which--
                          ``(i) is titled `Rent-to-Own 
                        Agreement' or `Lease Agreement with 
                        Ownership Option,' or uses other 
                        similar language,
                          ``(ii) provides for level, regular 
                        periodic payments (for a payment period 
                        which is a week or month),
                          ``(iii) provides that legal title to 
                        such property remains with the rent-to-
                        own dealer until the customer makes all 
                        the payments described in clause (ii) 
                        or early purchase payments required 
                        under the contract to acquire legal 
                        title to the item of property,
                          ``(iv) provides a beginning date and 
                        a maximum period of time for which the 
                        contract may be in effect that does not 
                        exceed 156 weeks or 36 months from such 
                        beginning date (including renewals or 
                        options to extend),
                          ``(v) provides for level payments 
                        within the 156-week or 36-month period 
                        that, in the aggregate, generally 
                        exceed the normal retail price of the 
                        consumer property plus interest,
                          ``(vi) provides for payments under 
                        the contract that, in the aggregate, do 
                        not exceed $10,000 per item of consumer 
                        property,
                          ``(vii) provides that the customer 
                        does not have any legal obligation to 
                        make all the payments referred to in 
                        clause (ii) set forth under the 
                        contract, and that at the end of each 
                        payment period the customer may either 
                        continue to use the consumer property 
                        by making the payment for the next 
                        payment period or return such property 
                        to the rent-to-own dealer in good 
                        working order, in which case the 
                        customer does not incur any further 
                        obligations under the contract and is 
                        not entitled to a return of any 
                        payments previously made under the 
                        contract, and
                          ``(viii) provides that the customer 
                        has no right to sell, sublease, 
                        mortgage, pawn, pledge, encumber, or 
                        otherwise dispose of the consumer 
                        property until all the payments stated 
                        in the contract have been made.''
    (c) Effective Date.--The amendment made by this section 
shall apply to property placed in service after the date of the 
enactment of this Act.

SEC. 1069. REPEAL OF SPECIAL RULE FOR RENTAL USE OF VACATION HOMES, 
                    ETC., FOR LESS THAN 15 DAYS.

    (a) In General.--Section 280A (relating to disallowance of 
certain expenses in connection with business use of home, 
rental of vacation homes, etc.) is amended by striking 
subsection (g).
    (b) No Basis Reduction Unless Depreciation Claimed.--
Section 1016 is amended by redesignating subsection (e) as 
subsection (f) and by inserting after subsection (d) the 
following new subsection:
    ``(e) Special Rule Where Rental Use of Vacation Home, Etc., 
for Less Than 15 Days.--If a dwelling unit is used during the 
taxable year by the taxpayer as a residence and such dwelling 
unit is actually rented for less than 15 days during the 
taxable year, the reduction under subsection (a)(2) by reason 
of such rental use in any taxable year beginning after December 
31, 1997, shall not exceed the depreciation deduction allowed 
for such rental use.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1070. EXPANSION OF REQUIREMENT THAT INVOLUNTARILY CONVERTED 
                    PROPERTY BE REPLACED WITH PROPERTY ACQUIRED FROM AN 
                    UNRELATED PERSON.

    (a) In General.--Subsection (i) of section 1033 is amended 
to read as follows:
    ``(i) Replacement Property Must Be Acquired From Unrelated 
Person in Certain Cases.--
          ``(1) In general.--If the property which is 
        involuntarily converted is held by a taxpayer to which 
        this subsection applies, subsection (a) shall not apply 
        if the replacement property or stock is acquired from a 
        related person. The preceding sentence shall not apply 
        to the extent that the related person acquired the 
        replacement property or stock from an unrelated person 
        during the period applicable under subsection 
        (a)(2)(B).
          ``(2) Taxpayers to which subsection applies.--This 
        subsection shall apply to--
                  ``(A) a C corporation,
                  ``(B) a partnership in which 1 or more C 
                corporations own, directly or indirectly 
                (determined in accordance with section 
                707(b)(3)), more than 50 percent of the capital 
                interest, or profits interest, in such 
                partnership at the time of the involuntary 
                conversion, and
                  ``(C) any other taxpayer if, with respect to 
                property which is involuntarily converted 
                during the taxable year, the aggregate of the 
                amount of realized gain on such property on 
                which there is realized gain exceeds $100,000.
        In the case of a partnership, subparagraph (C) shall 
        apply with respect to the partnership and with respect 
        to each partner. A similar rule shall apply in the case 
        of an S corporation and its shareholders.
          ``(3) Related person.--For purposes of this 
        subsection, a person is related to another person if 
        the person bears a relationship to the other person 
        described in section 267(b) or 707(b)(1).''
    (b) Effective Date.--The amendment made by this section 
shall apply to involuntary conversions occurring after June 8, 
1997.

SEC. 1071. TREATMENT OF EXCEPTION FROM INSTALLMENT SALES RULES FOR 
                    SALES OF PROPERTY BY A MANUFACTURER TO A DEALER.

    (a) In General.--Paragraph (2) of section 811(c) of the Tax 
Reform Act of 1986 is hereby repealed.
    (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to taxable years beginning after the date 
        of the enactment of this Act.
          (2) Coordination with section 481.--In the case of 
        any taxpayer required by this section to change its 
        method of accounting for any taxable year--
                  (A) such changes shall be treated as 
                initiated by the taxpayer,
                  (B) such changes shall be treated as made 
                with the consent of the Secretary, and
                  (C) the net amount of the adjustments 
                required to be taken into account under section 
                481(a) of the Internal Revenue Code of 1986 
                shall be taken into account ratably over the 4 
                taxable year period beginning with the first 
                taxable year beginning after the date of the 
                enactment of this Act.

     TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                     Subtitle A--General Provisions

SEC. 1101. TREATMENT OF COMPUTER SOFTWARE AS FSC EXPORT PROPERTY.

    (a) In General.--Subparagraph (B) of section 927(a)(2) 
(relating to property excluded from eligibility as FSC export 
property) is amended by inserting ``, and other than computer 
software (whether or not patented)'' before ``, for commercial 
or home use''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to gross receipts attributable to periods after 
December 31, 1997, in taxable years ending after such date.
    (c) Phasein of Treatment.--For purposes of the Internal 
Revenue Code of 1986--
          (1) 1998.--In the case of gross receipts attributable 
        to calendar year 1998, the amendment made by subsection 
        (a) shall apply to only \1/3\ of such gross receipts.
          (2) 1999.--In the case of gross receipts attributable 
        to calendar year 1999, the amendment made by subsection 
        (a) shall apply to only \2/3\ of such gross receipts.

SEC. 1102. ADJUSTMENT OF DOLLAR LIMITATION ON SECTION 911 EXCLUSION.

    (a) General Rule.--Paragraph (2) of section 911(b) is 
amended by--
          (1) by striking ``of $70,000'' in subparagraph (A) 
        and inserting ``equal to the exclusion amount for the 
        calendar year in which such taxable year begins'', and
          (2) by adding at the end the following new 
        subparagraph:
                  ``(D) Exclusion amount.--
                          ``(i) In general.--The exclusion 
                        amount for any calendar year is the 
                        exclusion amount determined in 
                        accordance with the following table (as 
                        adjusted by clause (ii)):

``For calendar year--                          The exclusion amount is--
    1998......................................................  $72,000 
    1999......................................................   74,000 
    2000......................................................   76,000 
    2001......................................................   78,000 
    2002 and thereafter.......................................   80,000.

                          ``(ii) Inflation adjustment.--In the 
                        case of any taxable year beginning in a 
                        calendar year after 2007, the $80,000 
                        amount in clause (i) shall be increased 
                        by an amount equal to the product of--
                                  ``(I) such dollar amount, and
                                  ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting `2006' for 
                                `1992' in subparagraph (B) 
                                thereof.
                        If any increase determined under the 
                        preceding sentence is not a multiple of 
                        $100, such increase shall be rounded to 
                        the next lowest multiple of $100.''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1103. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN TAX CREDIT 
                    LIMITATION.

    (a) General Rule.--Section 904 (relating to limitations on 
foreign tax credit) is amended by redesignating subsection (j) 
as subsection (k) and by inserting after subsection (i) the 
following new subsection:
    ``(j) Certain Individuals Exempt.--
          ``(1) In general.--In the case of an individual to 
        whom this subsection applies for any taxable year--
                  ``(A) the limitation of subsection (a) shall 
                not apply,
                  ``(B) no taxes paid or accrued by the 
                individual during such taxable year may be 
                deemed paid or accrued under subsection (c) in 
                any other taxable year, and
                  ``(C) no taxes paid or accrued by the 
                individual during any other taxable year may be 
                deemed paid or accrued under subsection (c) in 
                such taxable year.
          ``(2) Individuals to whom subsection applies.--This 
        subsection shall apply to an individual for any taxable 
        year if--
                  ``(A) the entire amount of such individual's 
                gross income for the taxable year from sources 
                without the United States consists of qualified 
                passive income,
                  ``(B) the amount of the creditable foreign 
                taxes paid or accrued by the individual during 
                the taxableyear does not exceed $300 ($600 in 
the case of a joint return), and
                  ``(C) such individual elects to have this 
                subsection apply for the taxable year.
          ``(3) Definitions.--For purposes of this subsection--
                  ``(A) Qualified passive income.--The term 
                `qualified passive income' means any item of 
                gross income if--
                          ``(i) such item of income is passive 
                        income (as defined in subsection 
                        (d)(2)(A) without regard to clause 
                        (iii) thereof), and
                          ``(ii) such item of income is shown 
                        on a payee statement furnished to the 
                        individual.
                  ``(B) Creditable foreign taxes.--The term 
                `creditable foreign taxes' means any taxes for 
                which a credit is allowable under section 901; 
                except that such term shall not include any tax 
                unless such tax is shown on a payee statement 
                furnished to such individual.
                  ``(C) Payee statement.--The term `payee 
                statement' has the meaning given to such term 
                by section 6724(d)(2).
                  ``(D) Estates and trusts not eligible.--This 
                subsection shall not apply to any estate or 
                trust.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1104. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES.

    (a) Accrued Taxes Translated by Using Average Rate for Year 
to Which Taxes Relate.--
          (1) In general.--Subsection (a) of section 986 
        (relating to translation of foreign taxes) is amended 
        to read as follows:
    ``(a) Foreign Income Taxes.--
          ``(1) Translation of accrued taxes.--
                  ``(A) In general.--For purposes of 
                determining the amount of the foreign tax 
                credit, in the case of a taxpayer who takes 
                foreign income taxes into account when accrued, 
                the amount of any foreign income taxes (and any 
                adjustment thereto) shall be translated into 
                dollars by using the average exchange rate for 
                the taxable year to which such taxes relate.
                  ``(B) Exception for certain taxes.--
                Subparagraph (A) shall not apply to any foreign 
                income taxes--
                          ``(i) paid after the date 2 years 
                        after the close of the taxable year to 
                        which such taxes relate, or
                          ``(ii) paid before the beginning of 
                        the taxable year to which such taxes 
                        relate.
                  ``(C) Exception for inflationary 
                currencies.--Subparagraph (A) shall not apply 
                to any foreign income taxes the liability for 
                which is denominated in any inflationary 
                currency (as determined under regulations).
                  ``(D) Cross reference.--

          ``For adjustments where tax is not paid within 2 years, see 
        section 905(c).

          ``(2) Translation of taxes to which paragraph (1) 
        does not apply.--For purposes of determining the amount 
        of the foreign tax credit, in the case of any foreign 
        income taxes to which subparagraph (A) of paragraph (1) 
        does not apply--
                  ``(A) such taxes shall be translated into 
                dollars using the exchange rates as of the time 
                such taxes were paid to the foreign country or 
                possession of the United States, and
                  ``(B) any adjustment to the amount of such 
                taxes shall be translated into dollars using--
                          ``(i) except as provided in clause 
                        (ii), the exchange rate as of the time 
                        when such adjustment is paid to the 
                        foreign country or possession, or
                          ``(ii) in the case of any refund or 
                        credit of foreign income taxes, using 
                        the exchange rate as of the time of the 
                        original payment of such foreign income 
                        taxes.
          ``(3) Foreign income taxes.--For purposes of this 
        subsection, the term `foreign income taxes' means any 
        income, war profits, or excess profits taxes paid or 
        accrued to any foreign country or to any possession of 
        the United States.''
          (2) Adjustment when not paid within 2 years after 
        year to which taxes relate.--Subsection (c) of section 
        905 is amended to read as follows:
    ``(c) Adjustments to Accrued Taxes.--
          ``(1) In general.--If--
                  ``(A) accrued taxes when paid differ from the 
                amounts claimed as credits by the taxpayer,
                  ``(B) accrued taxes are not paid before the 
                date 2 years after the close of the taxable 
                year to which such taxes relate, or
                  ``(C) any tax paid is refunded in whole or in 
                part,
        the taxpayer shall notify the Secretary, who shall 
        redetermine the amount of the tax for the year or years 
        affected. The Secretary may prescribe adjustments to 
        tax pools under sections 902 and 960 in lieu of the 
        redetermination under the preceding sentence.
          ``(2) Special rule for taxes not paid within 2 
        years.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), in making the redetermination 
                under paragraph (1), no credit shall be allowed 
                for accrued taxes not paid before the date 
                referred to in subparagraph (B) of paragraph 
                (1).
                  ``(B) Taxes subsequently paid.--Any such 
                taxes if subsequently paid shall be taken into 
                account for the taxable year to which such 
                taxes relate (and translated as provided in 
                section 986(a)(2)(A)).
          ``(3) Adjustments.--The amount of tax (if any) due on 
        any redetermination under paragraph (1) shall be paid 
        by the taxpayer on notice and demand by the Secretary, 
        and the amount of tax overpaid (if any) shall be 
        credited or refunded to the taxpayer in accordance with 
        subchapter B of chapter 66 (section 6511 et seq.).
          ``(4) Bond requirements.--In the case of any tax 
        accrued but not paid, the Secretary, as a condition 
        precedent to the allowance of the credit provided in 
        this subpart, may require the taxpayer to give a bond, 
        with sureties satisfactory to and approved by the 
        Secretary, in such sum as the Secretary may require, 
        conditioned on the payment by the taxpayer of any 
        amount of tax found due on any such redetermination. 
        Any such bond shall contain such further conditions as 
        the Secretary may require.
          ``(5) Other special rules.--In any redetermination 
        under paragraph (1) by the Secretary of the amount of 
        tax due from the taxpayer for the year or years 
        affected by a refund, the amount of the taxes refunded 
        for which credit has been allowed under this section 
        shall be reduced by the amount of any tax described in 
        section 901 imposed by the foreign country or 
        possession of the United States with respect to such 
        refund; but no credit under this subpart, or deduction 
        under section 164, shall be allowed for any taxable 
        year with respect to any such tax imposed on the 
        refund. No interest shall be assessed or collected on 
        any amount of tax due on any redetermination by the 
        Secretary, resulting from a refund to the taxpayer, for 
        any period before the receipt of such refund, except to 
        the extent interest was paid by the foreign country or 
        possession of the United States on such refund for such 
        period.''
    (b) Authority To Use Average Rates.--
          (1) In general.--Subsection (a) of section 986 (as 
        amended by subsection (a)) is amended by redesignating 
        paragraph (3) as paragraph (4) and inserting after 
        paragraph (2) the following new paragraph:
          ``(3) Authority to permit use of average rates.--To 
        the extent prescribed in regulations, the average 
        exchange rate for the period (specified in such 
        regulations) during which the taxes or adjustment is 
        paid may be used instead of the exchange rate as of the 
        time of such payment.''
          (2) Determination of average rates.--Subsection (c) 
        of section 989 is amended by striking ``and'' at the 
        end of paragraph (4), by striking the period at the end 
        of paragraph (5) and inserting ``, and'', and by adding 
        at the end thereof the following new paragraph:
          ``(6) setting forth procedures for determining the 
        average exchange rate for any period.''
          (3) Conforming amendments.--Subsection (b) of section 
        989 is amended by striking ``weighted'' each place it 
        appears.
    (c) Effective Dates.--
          (1) In general.--The amendments made by subsections 
        (a)(1) and (b) shall apply to taxes paid or accrued in 
        taxable years beginning after December 31, 1997.
          (2) Subsection (a)(2).--The amendment made by 
        subsection (a)(2) shall apply to taxes which relate to 
        taxable years beginning after December 31, 1997.

SEC. 1105. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION FOR 
                    ALTERNATIVE MINIMUM TAX.

    (a) General Rule.--Subsection (a) of section 59 (relating 
to alternative minimum tax foreign tax credit) is amended by 
adding at the end thereof the following new paragraph:
          ``(3) Election to use simplified section 904 
        limitation.--
                  ``(A) In general.--In determining the 
                alternative minimum tax foreign tax credit for 
                any taxable year to which an election under 
                this paragraph applies--
                          ``(i) subparagraph (B) of paragraph 
                        (1) shall not apply, and
                          ``(ii) the limitation of section 904 
                        shall be based on the proportion 
                        which--
                                  ``(I) the taxpayer's taxable 
                                income (as determined for 
                                purposes of the regular tax) 
                                from sources without the United 
                                States (but not in excess of 
                                the taxpayer's entire 
                                alternative minimum taxable 
                                income), bears to
                                  ``(II) the taxpayer's entire 
                                alternative minimum taxable 
                                income for the taxable year.
                  ``(B) Election.--
                          ``(i) In general.--An election under 
                        this paragraph may be made only for the 
                        taxpayer's first taxable year which 
                        begins after December 31, 1997, and for 
                        which the taxpayer claims an 
                        alternative minimum tax foreign tax 
                        credit.
                          ``(ii) Election revocable only with 
                        consent.--An election under this 
                        paragraph, once made, shall apply to 
                        the taxable year for which made and all 
                        subsequent taxable years unless revoked 
                        with the consent of the Secretary.''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1106. TREATMENT OF PERSONAL TRANSACTIONS BY INDIVIDUALS UNDER 
                    FOREIGN CURRENCY RULES.

    (a) General Rule.--Subsection (e) of section 988 (relating 
to application to individuals) is amended to read as follows:
    ``(e) Application to Individuals.--
          ``(1) In general.--The preceding provisions of this 
        section shall not apply to any section 988 transaction 
        entered into by an individual which is a personal 
        transaction.
          ``(2) Exclusion for certain personal transactions.--
        If--
                  ``(A) nonfunctional currency is disposed of 
                by an individual in any transaction, and
                  ``(B) such transaction is a personal 
                transaction,
        no gain shall be recognized for purposes of this 
        subtitle by reason of changes in exchange rates after 
        such currency was acquired by such individual and 
        before such disposition. The preceding sentence shall 
        not apply if the gain which would otherwise be 
        recognized on the transaction exceeds $200.
          ``(3) Personal transactions.--For purposes of this 
        subsection, the term `personal transaction' means any 
        transaction entered into by an individual, except that 
        such term shall not include any transaction to the 
        extent that expenses properly allocable to such 
        transaction meet the requirements of section 162 or 212 
        (other than that part of section 212 dealing with 
        expenses incurred in connection with taxes).''
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1107. ALL NONCONTROLLED SECTION 902 CORPORATIONS WHICH ARE NOT 
                    PASSIVE FOREIGN INVESTMENT COMPANIES IN ONE FOREIGN 
                    TAX LIMITATION BASKET.

    (a) In General.--Subparagraph (E) of section 904(d)(2) 
(relating to noncontrolled section 902 corporations) is amended 
by adding at the end the following new clause:
                          ``(iv) All non-pfic's treated as 
                        one.--All noncontrolled section 902 
                        corporations which are not passive 
                        foreign investment companies (as 
                        defined in section 1297) shall be 
                        treated as one noncontrolled section 
                        902 corporation for purposes of 
                        paragraph (1). The Secretary may 
                        prescribe regulations regarding the 
                        treatment of distributions out of 
                        earnings and profits for periods prior 
                        to the taxpayer's acquisition of such 
                        stock.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 2001.

        Subtitle B--Treatment of Controlled Foreign Corporations

SEC. 1111. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN 
                    CORPORATIONS TREATED AS DIVIDENDS.

    (a) General Rule.--Section 964 (relating to miscellaneous 
provisions) is amended by adding at the end thereof the 
following new subsection:
    ``(e) Gain on Certain Stock Sales by Controlled Foreign 
Corporations Treated as Dividends.--
          ``(1) In general.--If a controlled foreign 
        corporation sells or exchanges stock in any other 
        foreign corporation, gain recognized on such sale or 
        exchange shall be included in the gross income of such 
        controlled foreign corporation as a dividend to the 
        same extent that it would have been so included under 
        section 1248(a) if such controlled foreign corporation 
        were a United States person. For purposes of 
        determining the amount which would have been so 
        includible, the determination of whether such other 
        foreign corporation was a controlled foreign 
        corporation shall be made without regard to the 
        preceding sentence.
          ``(2) Same country exception not applicable.--Clause 
        (i) of section 954(c)(3)(A) shall not apply to any 
        amount treated as a dividend by reason of paragraph 
        (1).
          ``(3) Clarification of deemed sales.--For purposes of 
        this subsection, a controlled foreign corporation shall 
        be treated as having sold or exchanged any stock if, 
        under any provision of this subtitle, such controlled 
        foreign corporation is treated as having gain from the 
        sale or exchange of such stock.''
    (b) Amendment of Section 904(d).--Clause (i) of section 
904(d)(2)(E) is amended by striking ``and except as provided in 
regulations, the taxpayer was a United States shareholder in 
such corporation''.
    (c) Effective Dates.--
          (1) The amendment made by subsection (a) shall apply 
        to gain recognized on transactions occurring after the 
        date of the enactment of this Act.
          (2) The amendment made by subsection (b) shall apply 
        to distributions after the date of the enactment of 
        this Act.

SEC. 1112. MISCELLANEOUS MODIFICATIONS TO SUBPART F.

    (a) Section 1248 Gain Taken Into Account in Determining Pro 
Rata Share.--
          (1) In general.--Paragraph (2) of section 951(a) 
        (defining pro rata share of subpart F income) is 
        amended by adding at the end thereof the following new 
        sentence: ``For purposes of subparagraph (B), any gain 
        included in the gross income of any person as a 
        dividend under section 1248 shall be treated as a 
        distribution received by such person with respect to 
        the stock involved.''
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to dispositions after the date of the 
        enactment of this Act.
    (b) Basis Adjustments in Stock Held by Foreign 
Corporation.--
          (1) In general.--Section 961 (relating to adjustments 
        to basis of stock in controlled foreign corporations 
        and of other property) is amended by adding at the end 
        thereof the following new subsection:
    ``(c) Basis Adjustments in Stock Held by Foreign 
Corporation.--Under regulations prescribed by the Secretary, if 
a United States shareholder is treated under section 958(a)(2) 
as owning any stock in a controlled foreign corporation which 
is actually owned by another controlled foreign corporation, 
adjustments similar to the adjustments provided by subsections 
(a) and (b) shall be made to the basis of such stock in the 
hands of such other controlled foreign corporation, but only 
for the purposes of determining the amount included under 
section 951 in the gross income of such United States 
shareholder (or any other United States shareholder who 
acquires from any person any portion of the interest of such 
United States shareholder by reason of which such shareholder 
was treated as owning such stock, but only to the extent of 
such portion, and subject to such proof of identity of such 
interest as the Secretary may prescribe by regulations).''
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply for purposes of determining inclusions 
        for taxable years of United States shareholders 
        beginning after December 31, 1997.
    (c) Clarification of Treatment of Branch Tax Exemptions or 
Reductions.--
          (1) In general.--Subsection (b) of section 952 is 
        amended by adding at the end thereof the following new 
        sentence: ``For purposes of this subsection, any 
        exemption (or reduction) with respect to the tax 
        imposed by section 884 shall not be taken into 
        account.''.
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to taxable years beginning after 
        December 31, 1986.

SEC. 1113. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN LOWER TIER 
                    COMPANIES.

    (a) Section 902 Credit.--
          (1) In general.--Subsection (b) of section 902 
        (relating to deemed taxes increased in case of certain 
        2nd and 3rd tier foreign corporations) is amended to 
        read as follows:
    ``(b) Deemed Taxes Increased in Case of Certain Lower Tier 
Corporations.--
          ``(1) In general.--If--
                  ``(A) any foreign corporation is a member of 
                a qualified group, and
                  ``(B) such foreign corporation owns 10 
                percent or more of the voting stock of another 
                member of such group from which it receives 
                dividends in any taxable year,
        such foreign corporation shall be deemed to have paid 
        the same proportion of such other member's post-1986 
        foreign income taxes as would be determined under 
        subsection (a) if such foreign corporation were a 
        domestic corporation.
          ``(2) Qualified group.--For purposes of paragraph 
        (1), the term `qualified group' means--
                  ``(A) the foreign corporation described in 
                subsection (a), and
                  ``(B) any other foreign corporation if--
                          ``(i) the domestic corporation owns 
                        at least 5 percent of the voting stock 
                        of such other foreign corporation 
                        indirectly through a chain of foreign 
                        corporations connected through stock 
                        ownership of at least 10 percent of 
                        their voting stock,
                          ``(ii) the foreign corporation 
                        described in subsection (a) is the 
                        first tier corporation in such chain, 
                        and
                          ``(iii) such other corporation is not 
                        below the sixth tier in such chain.
        The term `qualified group' shall not include any 
        foreign corporation below the third tier in the chain 
        referred to in clause (i) unless such foreign 
        corporation is a controlled foreign corporation (as 
        defined in section 957) and the domestic corporation is 
        a United States shareholder (as defined in section 
        951(b)) in such foreign corporation. Paragraph (1) 
        shall apply to those taxes paid by a member of the 
        qualified group below the third tier only with respect 
        to periods during which it was a controlled foreign 
        corporation.''
          (2) Conforming amendments.--
                  (A) Subparagraph (B) of section 902(c)(3) is 
                amended by adding ``or'' at the end of clause 
                (i) and by striking clauses (ii) and (iii) and 
                inserting the following new clause:
                          ``(ii) the requirements of subsection 
                        (b)(2) are met with respect to such 
                        foreign corporation.''
                  (B) Subparagraph (B) of section 902(c)(4) is 
                amended by striking ``3rd foreign corporation'' 
                and inserting ``sixth tier foreign 
                corporation''.
                  (C) The heading for paragraph (3) of section 
                902(c) is amended by striking ``where domestic 
                corporation acquires 10 percent of foreign 
                corporation'' and inserting ``where foreign 
                corporation first qualifies''.
                  (D) Paragraph (3) of section 902(c) is 
                amended by striking ``ownership'' each place it 
                appears.
    (b) Section 960 Credit.--Paragraph (1) of section 960(a) 
(relating to special rules for foreign tax credits) is amended 
to read as follows:
          ``(1) Deemed paid credit.--For purposes of subpart A 
        of this part, if there is included under section 951(a) 
        in the gross income of a domestic corporation any 
        amount attributable to earnings and profits of a 
        foreign corporation which is a member of a qualified 
        group (as defined in section 902(b)) with respect to 
        the domestic corporation, then, except to the extent 
        provided in regulations, section 902 shall be applied 
        as if the amount so included were a dividend paid by 
        such foreign corporation (determined by applying 
        section 902(c) in accordance with section 
        904(d)(3)(B)).''
    (c) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to taxes of foreign corporations for 
        taxable years of such corporations beginning after the 
        date of enactment of this Act.
          (2) Special rule.--In the case of any chain of 
        foreign corporations described in clauses (i) and (ii) 
        of section 902(b)(2)(B) of the Internal Revenue Code of 
        1986 (as amended by this section), no liquidation, 
        reorganization, or similar transaction in a taxable 
        year beginning after the date of the enactment of this 
        Act shall have the effect of permitting taxes to be 
        taken into account under section902 of the Internal 
Revenue Code of 1986 which could not have been taken into account under 
such section but for such transaction.

     Subtitle C--Treatment of Passive Foreign Investment Companies

SEC. 1121. UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN 
                    CORPORATIONS NOT SUBJECT TO PFIC INCLUSION.

    Section 1296 is amended by adding at the end the following 
new subsection:
    ``(e) Exception for United States Shareholders of 
Controlled Foreign Corporations.--
          ``(1) In general.--For purposes of this part, a 
        corporation shall not be treated with respect to a 
        shareholder as a passive foreign investment company 
        during the qualified portion of such shareholder's 
        holding period with respect to stock in such 
        corporation.
          ``(2) Qualified portion.--For purposes of this 
        subsection, the term `qualified portion' means the 
        portion of the shareholder's holding period--
                  ``(A) which is after December 31, 1997, and
                  ``(B) during which the shareholder is a 
                United States shareholder (as defined in 
                section 951(b)) of the corporation and the 
                corporation is a controlled foreign 
                corporation.
          ``(3) New holding period if qualified portion ends.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), if the qualified portion of a 
                shareholder's holding period with respect to 
                any stock ends after December 31, 1997, solely 
                for purposes of this part, the shareholder's 
                holding period with respect to such stock shall 
                be treated as beginning as of the first day 
                following such period.
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply if such stock was, with respect to such 
                shareholder, stock in a passive foreign 
                investment company at any time before the 
                qualified portion of the shareholder's holding 
                period with respect to such stock and no 
                election under section 1298(b)(1) is made.''

SEC. 1122. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK IN PASSIVE 
                    FOREIGN INVESTMENT COMPANY.

    (a) In General.--Part VI of subchapter P of chapter 1 is 
amended by redesignating subpart C as subpart D, by 
redesignating sections 1296 and 1297 as sections 1297 and 1298, 
respectively, and by inserting after subpart B the following 
new subpart:

      ``Subpart C--Election of Mark to Market For Marketable Stock

        ``Sec. 1296. Election of mark to market for marketable stock.

``SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.

    ``(a) General Rule.--In the case of marketable stock in a 
passive foreign investment company which is owned (or treated 
under subsection (g) as owned) by a United States person at the 
close of any taxable year of such person, at the election of 
such person--
          ``(1) If the fair market value of such stock as of 
        the close of such taxable year exceeds its adjusted 
        basis, such United States person shall include in gross 
        income for such taxable year an amount equal to the 
        amount of such excess.
          ``(2) If the adjusted basis of such stock exceeds the 
        fair market value of such stock as of the close of such 
        taxable year, such United States person shall be 
        allowed a deduction for such taxable year equal to the 
        lesser of--
                  ``(A) the amount of such excess, or
                  ``(B) the unreversed inclusions with respect 
                to such stock.
    ``(b) Basis Adjustments.--
          ``(1) In general.--The adjusted basis of stock in a 
        passive foreign investment company--
                  ``(A) shall be increased by the amount 
                included in the gross income of the United 
                States person under subsection (a)(1) with 
                respect to such stock, and
                  ``(B) shall be decreased by the amount 
                allowed as a deduction to the United States 
                person under subsection (a)(2) with respect to 
                such stock.
          ``(2) Special rule for stock constructively owned.--
        In the case of stock in a passive foreign investment 
        company which the United States person is treated as 
        owning under subsection (g)--
                  ``(A) the adjustments under paragraph (1) 
                shall apply to such stock in the hands of the 
                person actually holding such stock but only for 
                purposes of determining the subsequent 
                treatment under this chapter of the United 
                States person with respect to such stock, and
                  ``(B) similar adjustments shall be made to 
                the adjusted basis of the property by reason of 
                which the United States person is treated as 
                owning such stock.
    ``(c) Character and Source Rules.--
          ``(1) Ordinary treatment.--
                  ``(A) Gain.--Any amount included in gross 
                income under subsection (a)(1), and any gain on 
                the sale or other disposition of marketable 
                stock in a passive foreign investment company 
                (with respect to which an election under this 
                section is in effect), shall be treated as 
                ordinary income.
                  ``(B) Loss.--Any--
                          ``(i) amount allowed as a deduction 
                        under subsection (a)(2), and
                          ``(ii) loss on the sale or other 
                        disposition of marketable stock in a 
                        passive foreign investment company 
                        (with respect to which an election 
                        under this section is in effect) to the 
                        extent that the amount of such loss 
                        does not exceed the unreversed 
                        inclusions with respect to such stock,
                shall be treated as an ordinary loss. The 
                amount so treated shall be treated as a 
                deduction allowable in computing adjusted gross 
                income.
          ``(2) Source.--The source of any amount included in 
        gross income under subsection (a)(1) (or allowed as a 
        deduction under subsection (a)(2)) shall be determined 
        in the same manner as if such amount were gain or loss 
        (as the case may be) from the sale of stock in the 
        passive foreign investment company.
    ``(d) Unreversed Inclusions.--For purposes of this section, 
the term `unreversed inclusions' means, with respect to any 
stock in a passive foreign investment company, the excess (if 
any) of--
          ``(1) the amount included in gross income of the 
        taxpayer under subsection (a)(1) with respect to such 
        stock for prior taxable years, over
          ``(2) the amount allowed as a deduction under 
        subsection (a)(2) with respect to such stock for prior 
        taxable years.
The amount referred to in paragraph (1) shall include any 
amount which would have been included in gross income under 
subsection (a)(1) with respect to such stock for any prior 
taxable year but for section 1291.
    ``(e) Marketable Stock.--For purposes of this section--
          ``(1) In general.--The term `marketable stock' 
        means--
                  ``(A) any stock which is regularly traded 
                on--
                          ``(i) a national securities exchange 
                        which is registered with the Securities 
                        and Exchange Commission or the national 
                        market system established pursuant to 
                        section 11A of the Securities and 
                        Exchange Act of 1934, or
                          ``(ii) any exchange or other market 
                        which the Secretary determines has 
                        rules adequate to carry out the 
                        purposes of this part,
                  ``(B) to the extent provided in regulations, 
                stock in any foreign corporation which is 
                comparable to a regulated investment company 
                and which offers for sale or has outstanding 
                any stock of which it is the issuer and which 
                is redeemable at its net asset value, and
                  ``(C) to the extent provided in regulations, 
                any option on stock described in subparagraph 
                (A) or (B).
          ``(2) Special rule for regulated investment 
        companies.--In the case of any regulated investment 
        company which is offering for sale or has outstanding 
        any stock of which it is the issuer and which is 
        redeemable at its net asset value, all stock in a 
        passive foreign investment company which it owns 
        directly or indirectly shall be treated as marketable 
        stock for purposes of this section. Except as provided 
        in regulations, similar treatment as marketable stock 
        shall apply in the case of any other regulated 
        investment company which publishes net asset valuations 
        at least annually.
    ``(f) Treatment of Controlled Foreign Corporations Which 
are Shareholders in Passive Foreign Investment Companies.--In 
the case of a foreign corporation which is a controlled foreign 
corporation and which owns (or is treated under subsection (g) 
as owning) stock in a passive foreign investment company--
          ``(1) this section (other than subsection (c)(2)) 
        shall apply to such foreign corporation in the same 
        manner as if such corporation were a United States 
        person, and
          ``(2) for purposes of subpart F of part III of 
        subchapter N--
                  ``(A) any amount included in gross income 
                under subsection (a)(1) shall be treated as 
                foreign personal holding company income 
                described in section 954(c)(1)(A), and
                  ``(B) any amount allowed as a deduction under 
                subsection (a)(2) shall be treated as a 
                deduction allocable to foreign personal holding 
                company income so described.
    ``(g) Stock Owned Through Certain Foreign Entities.--Except 
as provided in regulations--
          ``(1) In general.--For purposes of this section, 
        stock owned, directly or indirectly, by or for a 
        foreign partnership or foreign trust or foreign estate 
        shall be considered as being owned proportionately by 
        its partners or beneficiaries. Stock considered to be 
        owned by a person by reason of the application of the 
        preceding sentence shall, for purposes of applying such 
        sentence, be treated as actually owned by such person.
          ``(2) Treatment of certain dispositions.--In any case 
        in which a United States person is treated as owning 
        stock in a passive foreign investment company by reason 
        of paragraph (1)--
                  ``(A) any disposition by the United States 
                person or by any other person which results in 
                the United States person being treated as no 
                longer owning such stock, and
                  ``(B) any disposition by the person owning 
                such stock,
        shall be treated as a disposition by the United States 
        person of the stock in the passive foreign investment 
        company.
    ``(h) Coordination With Section 851(b).--For purposes of 
paragraphs (2) and (3) of section 851(b), any amount included 
in gross income under subsection (a) shall be treated as a 
dividend.
    ``(i) Stock Acquired From a Decedent.--In the case of stock 
of a passive foreign investment company which is acquired by 
bequest, devise, or inheritance (or by the decedent's estate) 
and with respect to which an election under this section was in 
effect as of the date of the decedent's death, notwithstanding 
section 1014, the basis of such stock in the hands of the 
person so acquiring it shall be the adjusted basis of such 
stock in the hands of the decedent immediately before his death 
(or, if lesser, the basis which would have been determined 
under section 1014 without regard to this subsection).
    ``(j) Coordination With Section 1291 for First Year of 
Election.--
          ``(1) Taxpayers other than regulated investment 
        companies.--
                  ``(A) In general.--If the taxpayer elects the 
                application of this section with respect to any 
                marketable stock in a corporation after the 
                beginning of the taxpayer's holding period in 
                such stock, and if the requirements of 
                subparagraph (B) are not satisfied, section 
                1291 shall apply to--
                          ``(i) any distributions with respect 
                        to, or disposition of, such stock in 
                        the first taxable year of the taxpayer 
                        for which such election is made, and
                          ``(ii) any amount which, but for 
                        section 1291, would have been included 
                        in gross income under subsection (a) 
                        with respect to such stock for such 
                        taxable year in the same manner as if 
                        such amount were gain on the 
                        disposition of such stock.
                  ``(B) Requirements.--The requirements of this 
                subparagraph are met if, with respect to each 
                of such corporation's taxable years for which 
                such corporation was a passive foreign 
                investment company and which begin after 
                December 31, 1986, and included any portion of 
                the taxpayer's holding period in such stock, 
                such corporation was treated as a qualified 
                electing fund under this part with respect to 
                the taxpayer.
          ``(2) Special rules for regulated investment 
        companies.--
                  ``(A) In general.--If a regulated investment 
                company elects the application of this section 
                with respect to any marketable stock in a 
                corporation after the beginning of the 
                taxpayer's holding period in such stock, then, 
                with respect to such company's first taxable 
                year for which such company elects the 
                application of this section with respect to 
                such stock--
                          ``(i) section 1291 shall not apply to 
                        such stock with respect to any 
                        distribution or disposition during, or 
                        amount included in gross income under 
                        this section for, such first taxable 
                        year, but
                          ``(ii) such regulated investment 
                        company's tax under this chapter for 
                        such first taxable year shall be 
                        increased by the aggregate amount of 
                        interest which would have been 
                        determined under section 1291(c)(3) if 
                        section 1291 were applied without 
                        regard to this subparagraph.
                Clause (ii) shall not apply if for the 
                preceding taxable year the company elected to 
                mark to market the stock held by such company 
                as of the last day of such preceding taxable 
                year.
                  ``(B) Disallowance of deduction.--No 
                deduction shall be allowed to any regulated 
                investment company for the increase in tax 
                under subparagraph (A)(ii).
    ``(k) Election.--This section shall apply to marketable 
stock in a passive foreign investment company which is held by 
a United States person only if such person elects to apply this 
section with respect to such stock. Such an election shall 
apply to the taxable year for which made and all subsequent 
taxable years unless--
          ``(1) such stock ceases to be marketable stock, or
          ``(2) the Secretary consents to the revocation of 
        such election.
    ``(l) Transition Rule for Individuals Becoming Subject to 
United States Tax.--If any individual becomes a United States 
person in a taxable year beginning after December 31, 1997, 
solely for purposes of this section, the adjusted basis (before 
adjustments under subsection (b)) of any marketable stock in a 
passive foreign investment company owned by such individual on 
the first day of such taxable yearshall be treated as being the 
greater of its fair market value on such first day or its adjusted 
basis on such first day.''
    (b) Coordination With Interest Charge, Etc.--
          (1) Paragraph (1) of section 1291(d) is amended by 
        adding at the end the following new flush sentence:
        ``Except as provided in section 1296(j), this section 
        also shall not apply if an election under section 
        1296(k) is in effect for the taxpayer's taxable year.''
          (2) The subsection heading for subsection (d) of 
        section 1291 is amended by striking ``Subpart B'' and 
        inserting ``Subparts B and C''.
          (3) Subparagraph (A) of section 1291(a)(3) is amended 
        to read as follows:
                  ``(A) Holding period.--The taxpayer's holding 
                period shall be determined under section 1223; 
                except that--
                          ``(i) for purposes of applying this 
                        section to an excess distribution, such 
                        holding period shall be treated as 
                        ending on the date of such 
                        distribution, and
                          ``(ii) if section 1296 applied to 
                        such stock with respect to the taxpayer 
                        for any prior taxable year, such 
                        holding period shall be treated as 
                        beginning on the first day of the first 
                        taxable year beginning after the last 
                        taxable year for which section 1296 so 
                        applied.''
    (c) Treatment of Mark-to-Market Gain Under Section 4982.--
          (1) Subsection (e) of section 4982 is amended by 
        adding at the end thereof the following new paragraph:
          ``(6) Treatment of gain recognized under section 
        1296.--For purposes of determining a regulated 
        investment company's ordinary income--
                  ``(A) notwithstanding paragraph (1)(C), 
                section 1296 shall be applied as if such 
                company's taxable year ended on October 31, and
                  ``(B) any ordinary gain or loss from an 
                actual disposition of stock in a passive 
                foreign investment company during the portion 
                of the calendar year after October 31 shall be 
                taken into account in determining such 
                regulated investment company's ordinary income 
                for the following calendar year.
        In the case of a company making an election under 
        paragraph (4), the preceding sentence shall be applied 
        by substituting the last day of the company's taxable 
        year for October 31.''
          (2) Subsection (b) of section 852 is amended by 
        adding at the end thereof the following new paragraph:
          ``(10) Special rule for certain losses on stock in 
        passive foreign investment company.--To the extent 
        provided in regulations, the taxable income of a 
        regulated investment company (other than a company to 
        which an election under section 4982(e)(4) applies) 
        shall be computed without regard to any net reduction 
        in the value of any stock of a passive foreign 
        investment company with respect to which an election 
        under section 1296(k) is in effect occurring after 
        October 31 of the taxable year, and any such reduction 
        shall be treated as occurring on the first day of the 
        following taxable year.''
          (3) Subsection (c) of section 852 is amended by 
        inserting after ``October 31 of such year'' the 
        following: ``, without regard to any net reduction in 
        the value of any stock of a passive foreign investment 
        company with respect to which an election under section 
        1296(k) is in effect occurring after October 31 of such 
        year,''.
    (d) Conforming Amendments.--
          (1) Sections 532(b)(4) and 542(c)(10) are each 
        amended by striking ``section 1296'' and inserting 
        ``section 1297''.
          (2) Subsection (f) of section 551 is amended by 
        striking ``section 1297(b)(5)'' and inserting ``section 
        1298(b)(5)''
          (3) Subsections (a)(1) and (d) of section 1293 are 
        each amended by striking ``section 1297(a)'' and 
        inserting ``section 1298(a)''.
          (4) Paragraph (3) of section 1297(b), as redesignated 
        by subsection (a), is hereby repealed.
          (5) The table of sections for subpart D of part VI of 
        subchapter P of chapter 1, as redesignated by 
        subsection (a), is amended to read as follows:

        ``Sec. 1297. Passive foreign investment company.
        ``Sec. 1298. Special rules.''

          (6) The table of subparts for part VI of subchapter P 
        of chapter 1 is amended by striking the last item and 
        inserting the following new items:

        ``Subpart C. Election of mark to market for marketable stock.
        ``Subpart D. General provisions.''

    (e) Clarification of Gain Recognition Election.--The last 
sentence of section 1298(b)(1), as so redesignated, is amended 
by inserting ``(determined without regard to the preceding 
sentence)'' after ``investment company''.

SEC. 1123. EFFECTIVE DATE.

    The amendments made by this subtitle shall apply to--
          (1) taxable years of United States persons beginning 
        after December 31, 1997, and
          (2) taxable years of foreign corporations ending with 
        or within such taxable years of United States persons.

   Subtitle D--Repeal of Excise Tax on Transfers to Foreign Entities

SEC. 1131. REPEAL OF EXCISE TAX ON TRANSFERS TO FOREIGN ENTITIES; 
                    RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO FOREIGN 
                    TRUSTS AND ESTATES.

    (a) Repeal of Excise Tax.--Chapter 5 (relating to transfers 
to avoid income tax) is hereby repealed.
    (b) Recognition of Gain on Certain Transfers to Foreign 
Trusts and Estates.--Subpart F of part I of subchapter J of 
chapter 1 is amended by adding at the end the following new 
section:

``SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO CERTAIN FOREIGN 
                    TRUSTS AND ESTATES.

    ``(a) In general.--In the case of any transfer of property 
by a United States person to a foreign estate or trust, for 
purposes of this subtitle, such transfer shall be treated as a 
sale or exchange for an amount equal to the fair market value 
of the property transferred, and the transferor shall recognize 
as gain the excess of--
          ``(1) the fair market value of the property so 
        transferred, over
          ``(2) the adjusted basis (for purposes of determining 
        gain) of such property in the hands of the transferor.
    ``(b) Exception.--Subsection (a) shall not apply to a 
transfer to a trust by a United States person if such person is 
treated as the owner of such trust under section 671.''
    (c) Other Anti-Avoidance Provisions Replacing Repealed 
Excise Tax.--
          (1) Gain recognition on exchanges involving foreign 
        persons.--Section 1035 is amended by redesignating 
        subsection (c) as subsection (d) and by inserting after 
        subsection (b) the following new subsection:
    ``(c) Exchanges Involving Foreign Persons.--To the extent 
provided in regulations, subsection (a) shall not apply to any 
exchange having the effect of transferring property to any 
person other than a United States person.''
          (2) Transfers to foreign corporations.--Section 367 
        is amended by adding at the end the following new 
        subsection:
    ``(f) Other Transfers.--To the extent provided in 
regulations, if a United States person transfers property to a 
foreign corporation as paid-in surplus or as a contribution to 
capital (in a transaction not otherwise described in this 
section), such foreign corporation shall not, for purposes of 
determiningthe extent to which gain shall be recognized on such 
transfer, be considered to be a corporation.''
          (3) Certain transfers to partnerships.--Section 721 
        is amended by adding at the end the following new 
        subsection:
    ``(c) Regulations Relating to Transfers to Foreign 
Persons.--The Secretary may provide by regulations that 
subsection (a) shall not apply to gain realized on the transfer 
of property to a partnership if such gain, when recognized, 
will be includible in the gross income of a person other than a 
United States person.''
          (4) Repeal of u.s. source treatment of deemed 
        royalties.--Subparagraph (C) of section 367(d)(2) is 
        amended to read as follows:
                  ``(C) Amounts received treated as ordinary 
                income.--For purposes of this chapter, any 
                amount included in gross income by reason of 
                this subsection shall be treated as ordinary 
                income.''
          (5) Transfers of intangibles to partnerships.--
                  (A) Subsection (d) of section 367 is amended 
                by adding at the end the following new 
                paragraph:
          ``(3) Regulations relating to transfers of 
        intangibles to partnerships.--The Secretary may provide 
        by regulations that the rules of paragraph (2) also 
        apply to the transfer of intangible property by a 
        United States person to a partnership in circumstances 
        consistent with the purposes of this subsection.''
                  (B) Section 721 is amended by adding at the 
                end the following new subsection:
    ``(d) Transfers of Intangibles.--

          ``For regulatory authority to treat intangibles transferred to 
        a partnership as sold, see section 367(d)(3).''

    (d) Technical and Conforming Amendments.--
          (1) Subsection (h) of section 814 is amended by 
        striking ``or 1491''.
          (2) Section 1057 (relating to election to treat 
        transfer to foreign trust, etc., as taxable exchange) 
        is hereby repealed.
          (3) Section 6422 is amended by striking paragraph (5) 
        and by redesignating paragraphs (6) through (13) as 
        paragraphs (5) through (12), respectively.
          (4) The table of chapters for subtitle A is amended 
        by striking the item relating to chapter 5.
          (5) The table of sections for part IV of subchapter O 
        of chapter 1 is amended by striking the item relating 
        to section 1057.
          (6) The table of sections for subpart F of part I of 
        subchapter J of chapter 1 is amended by adding at the 
        end the following new item:

        ``Sec. 684. Recognition of gain on certain transfers to certain 
                  foreign trusts and estates.''

    (e) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

                   Subtitle E--Information Reporting

SEC. 1141. CLARIFICATION OF APPLICATION OF RETURN REQUIREMENT TO 
                    FOREIGN PARTNERSHIPS.

    (a) In General.--Section 6031 (relating to return of 
partnership income) is amended by adding at the end the 
following new subsection:
    ``(e) Foreign Partnerships.--
          ``(1) Exception for foreign partnership.--Except as 
        provided in paragraph (2), the preceding provisions of 
        this section shall not apply to a foreign partnership.
          ``(2) Certain foreign partnerships required to file 
        return.--Except as provided in regulations prescribed 
        by the Secretary, this section shall apply to a foreign 
        partnership for any taxable year if for such year, such 
        partnership has--
                  ``(A) gross income derived from sources 
                within the United States, or
                  ``(B) gross income which is effectively 
                connected with the conduct of a trade or 
                business within the United States.
        The Secretary may provide simplified filing procedures 
        for foreign partnerships to which this section 
        applies.''
    (b) Sanction for Failure by Foreign Partnership To Comply 
With Section 6031 To Include Denial of Deductions.--Subsection 
(f) of section 6231 is amended--
          (1) by striking ``Losses and'' in the heading and 
        inserting ``Deductions, Losses, and'', and
          (2) by striking ``loss or'' each place it appears and 
        inserting ``deduction, loss, or''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1142. CONTROLLED FOREIGN PARTNERSHIPS SUBJECT TO INFORMATION 
                    REPORTING COMPARABLE TO INFORMATION REPORTING FOR 
                    CONTROLLED FOREIGN CORPORATIONS.

    (a) In General.--So much of section 6038 (relating to 
information with respect to certain foreign corporations) as 
precedes paragraph (2) of subsection (a) is amended to read as 
follows:

``SEC. 6038. INFORMATION REPORTING WITH RESPECT TO CERTAIN FOREIGN 
                    CORPORATIONS AND PARTNERSHIPS.

    ``(a) Requirement.--
          ``(1) In general.--Every United States person shall 
        furnish, with respect to any foreign business entity 
        which such person controls, such information as the 
        Secretary may prescribe relating to--
                  ``(A) the name, the principal place of 
                business, and the nature of business of such 
                entity, and the country under whose laws such 
                entity is incorporated (or organized in the 
                case of a partnership);
                  ``(B) in the case of a foreign corporation, 
                its post-1986 undistributed earnings (as 
                defined in section 902(c));
                  ``(C) a balance sheet for such entity listing 
                assets, liabilities, and capital;
                  ``(D) transactions between such entity and--
                          ``(i) such person,
                          ``(ii) any corporation or partnership 
                        which such person controls, and
                          ``(iii) any United States person 
                        owning, at the time the transaction 
                        takes place--
                                  ``(I) in the case of a 
                                foreign corporation, 10 percent 
                                or more of the value of any 
                                class of stock outstanding of 
                                such corporation, and
                                  ``(II) in the case of a 
                                foreign partnership, at least a 
                                10-percent interest in such 
                                partnership; and
                  ``(E)(i) in the case of a foreign 
                corporation, a description of the various 
                classes of stock outstanding, and a list 
                showing the name and address of, and number of 
                shares held by, each United States person who 
                is a shareholder of record owning at any time 
                during the annual accounting period 5 percent 
                or more in value of any class of stock 
                outstanding of such foreign corporation, and
                  ``(ii) information comparable to the 
                information described in clause (i) in the case 
                of a foreign partnership.
        The Secretary may also require the furnishing of any 
        other information which is similar or related in nature 
        to that specified in the preceding sentence or which 
        the Secretary determines to be appropriate to carry out 
        the provisions of this title.''
    (b) Definitions.--
          (1) In general.--Subsection (e) of section 6038 
        (relating to definitions) is amended--
                  (A) by redesignating paragraphs (1) and (2) 
                as paragraphs (2) and (4), respectively,
                  (B) by inserting before paragraph (2) (as so 
                redesignated) the following new paragraph:
          ``(1) Foreign business entity.--The term `foreign 
        business entity' means a foreign corporation and a 
        foreign partnership.'', and
                  (C) by inserting after paragraph (2) (as so 
                redesignated) the following new paragraph:
          ``(3) Partnership-related definitions.--
                  ``(A) Control.--A person is in control of a 
                partnership if such person owns directly or 
                indirectly more than a 50 percent interest in 
                such partnership.
                  ``(B) 50-percent interest.--For purposes of 
                subparagraph (A), a 50-percent interest in a 
                partnership is--
                          ``(i) an interest equal to 50 percent 
                        of the capital interest, or 50 percent 
                        of the profits interest, in such 
                        partnership, or
                          ``(ii) to the extent provided in 
                        regulations, an interest to which 50 
                        percent of the deductions or losses of 
                        such partnership are allocated.
                For purposes of the preceding sentence, rules 
                similar to the rules of section 267(c) (other 
                than paragraph (3)) shall apply, except so as 
                to consider a United States person as owning 
                such an interest which is owned by a person 
                which is not a United States person.
                  ``(C) 10-percent interest.--A 10-percent 
                interest in a partnership is an interest which 
                would be described in subparagraph (B) if `10 
                percent' were substituted for `50 percent' each 
                place it appears.''
          (2) Clerical amendment.--The paragraph heading for 
        paragraph (2) of section 6038(e) (as so redesignated) 
        is amended by inserting ``of corporation'' after 
        ``Control''.
    (c) Modification of Sanctions on Partnerships and 
Corporations for Failure To Furnish Information.--
          (1) In general.--Subsection (b) of section 6038 is 
        amended--
                  (A) by striking ``$1,000'' each place it 
                appears and inserting ``$10,000'', and
                  (B) by striking ``$24,000'' in paragraph (2) 
                and inserting ``$50,000''.
    (d) Reporting by 10-Percent Partners.--Subsection (a) of 
section 6038 is amended by adding at the end the following new 
paragraph:
          ``(5) Information required from 10-percent partner of 
        controlled foreign partnership.--In the case of a 
        foreign partnership which is controlled by United 
        States persons holding at least 10-percent interests 
        (but not by any one United States person), the 
        Secretary may require each United States person who 
        holds a 10-percent interest in such partnership to 
        furnish information relating to such partnership, 
        including information relating to such partner's 
        ownership interests in the partnership and allocations 
        to such partner of partnership items.''
    (e) Technical Amendments.--
          (1) The following provisions of section 6038 are each 
        amended by striking ``foreign corporation'' each place 
        it appears and inserting ``foreign business entity'':
                  (A) Paragraphs (2) and (3) of subsection (a).
                  (B) Subsection (b).
                  (C) Subsection (c) other than paragraph 
                (1)(B) thereof.
                  (D) Subsection (d).
                  (E) Subsection (e)(4) (as redesignated by 
                subsection (b)).
          (2) Subparagraph (B) of section 6038(c)(1) is amended 
        by inserting ``in the case of a foreign business entity 
        which is a foreign corporation,'' after ``(B)''.
          (3) Paragraph (8) of section 318(b) is amended by 
        striking ``6038(d)(1)'' and inserting ``6038(d)(2)''.
          (4) Paragraph (4) of section 901(k) is amended by 
        striking ``foreign corporation'' and inserting 
        ``foreign corporation or partnership''.
          (5) The table of sections for subpart A of part III 
        of subchapter A of chapter 61 is amended by striking 
        the item relating to section 6038 and inserting the 
        following new item:

        ``Sec. 6038. Information reporting with respect to certain 
                  foreign corporations and partnerships.''

    (f) Effective Date.--The amendments made by this section 
shall apply to annual accounting periods of foreign 
partnerships beginning after the date of the enactment of this 
Act.

SEC. 1143. MODIFICATIONS RELATING TO RETURNS REQUIRED TO BE FILED BY 
                    REASON OF CHANGES IN OWNERSHIP INTERESTS IN FOREIGN 
                    PARTNERSHIP.

    (a) No Return Required Unless Changes Involve 10-Percent 
Interest in Partnership.--
          (1) In general.--Subsection (a) of section 6046A 
        (relating to returns as to interests in foreign 
        partnerships) is amended by adding at the end the 
        following new sentence: ``Paragraphs (1) and (2) shall 
        apply to any acquisition or disposition only if the 
        United States person directly or indirectly holds at 
        least a 10-percent interest in such partnership either 
        before or after such acquisition or disposition, and 
        paragraph (3) shall apply to any change only if the 
        change is equivalent to at least a 10-interest in such 
        partnership.''
          (2) 10-percent interest.--Section 6046A is amended by 
        redesignating subsection (d) as subsection (e) and by 
        inserting after subsection (c) the following new 
        subsection:
    ``(d) 10-Percent Interest.--For purposes of subsection (a), 
a 10-percent interest in a partnership is an interest described 
in section 6038(e)(3)(C).''
    (b) Modification of Penalty on Failure to Report Changes in 
Ownership Interests in Foreign Corporations and Partnerships.--
Subsection (a) of section 6679 (relating to failure to file 
returns, etc., with respect to foreign corporations or foreign 
partnerships) is amended to read as follows:
    ``(a) Civil Penalty.--
          ``(1) In general.--In addition to any criminal 
        penalty provided by law, any person required to file a 
        return under section 6035, 6046, or 6046A who fails to 
        file such return at the time provided in such section, 
        or who files a return which does not show the 
        information required pursuant to such section, shall 
        pay a penalty of $10,000, unless it is shown that such 
        failure is due to reasonable cause.
          ``(2) Increase in penalty where failure continues 
        after notification.--If any failure described in 
        paragraph (1) continues for more than 90 days after the 
        day on which the Secretary mails notice of such failure 
        to the United States person, such person shall pay a 
        penalty (in addition to the amount required under 
        paragraph (1)) of $10,000 for each 30-day period (or 
        fraction thereof) during which such failure continues 
        after the expiration of such 90-day period. The 
        increase in any penalty under this paragraph shall not 
        exceed $50,000.
          ``(3) Reduced penalty for returns relating to foreign 
        personal holding companies.--In the case of a return 
        required under section 6035, paragraph (1) shall be 
        applied by substituting `$1,000' for `$10,000', and 
        paragraph (2) shall not apply.''
    (c) Effective Date.--The amendments made by this section 
shall apply to transfers and changes after the date of the 
enactment of this Act.

SEC. 1144. TRANSFERS OF PROPERTY TO FOREIGN PARTNERSHIPS SUBJECT TO 
                    INFORMATION REPORTING COMPARABLE TO INFORMATION 
                    REPORTING FOR SUCH TRANSFERS TO FOREIGN 
                    CORPORATIONS.

    (a) In General.--Paragraph (1) of section 6038B(a) 
(relating to notice of certain transfers to foreign 
corporations) is amended to read as follows:
          ``(1) transfers property to--
                  ``(A) a foreign corporation in an exchange 
                described in section 332, 351, 354, 355, 356, 
                or 361, or
                  ``(B) a foreign partnership in a contribution 
                described in section 721 or in any other 
                contribution described in regulations 
                prescribed by the Secretary,''.
    (b) Exceptions.--Section 6038B is amended by redesignating 
subsection (b) as subsection (c) and by inserting after 
subsection (a) the following new subsection:
    ``(b) Exceptions for Certain Transfers to Foreign 
Partnerships; Special Rule.--
          ``(1) Exceptions.--Subsection (a)(1)(B) shall apply 
        to a transfer by a United States person to a foreign 
        partnership only if--
                  ``(A) the United States person holds 
                (immediately after the transfer) directly or 
                indirectly at least a 10-percent interest (as 
                defined in section 6046A(d)) in the 
                partnership, or
                  ``(B) the value of the property transferred 
                (when added to the value of the property 
                transferred by such person or any related 
                person to such partnership or a related 
                partnership during the 12-month period ending 
                on the date of the transfer) exceeds $100,000.
        For purposes of the preceding sentence, the value of 
        any transferred property is its fair market value at 
        the time of its transfer.
          ``(2) Special rule.--If by reason of an adjustment 
        under section 482 or otherwise, a contribution 
        described in subsection (a)(1) is deemed to have been 
        made, such contribution shall be treated for purposes 
        of this section as having been made not earlier than 
        the date specified by the Secretary.''
     (c) Modification of Penalty Applicable to Foreign 
Corporations and Partnerships.--Paragraph (1) of section 
6038B(b) is amended by striking ``equal to'' and all that 
follows and inserting ``equal to 10 percent of the fair market 
value of the property at the time of the exchange (and, in the 
case of a contribution described in subsection (a)(1)(B), such 
person shall recognize gain as if the contributed property had 
been sold for such value at the time of such contribution).''
    (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to transfers made after the date of the 
        enactment of this Act.
          (2) Election of retroactive effect.--Section 1494(c) 
        of the Internal Revenue Code of 1986 shall not apply to 
        any transfer after August 20, 1996, if the person 
        otherwise required to file a return with respect to 
        such transfer elects to apply the amendments made by 
        this section to transfers after August 20, 1996. The 
        Secretary of the Treasury or his delegate may prescribe 
        simplified reporting under the preceding sentence.

SEC. 1145. EXTENSION OF STATUTE OF LIMITATION FOR FOREIGN TRANSFERS.

    (a) In General.--Paragraph (8) of section 6501(c) (relating 
to failure to notify Secretary under section 6038B) is amended 
to read as follows:
          ``(8) Failure to notify secretary of certain foreign 
        transfers.--In the case of any information which is 
        required to be reported to the Secretary under section 
        6038, 6038A, 6038B, 6046, 6046A, or 6048, the time for 
        assessment of any tax imposed by this title with 
        respect to any event or period to which such 
        information relates shall not expire before the date 
        which is 3 years after the date on which the Secretary 
        is furnished the information required to be reported 
        under such section.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to information the due date for the reporting of 
which is after the date of the enactment of this Act.

SEC. 1146. INCREASE IN FILING THRESHOLDS FOR RETURNS AS TO ORGANIZATION 
                    OF FOREIGN CORPORATIONS AND ACQUISITIONS OF STOCK 
                    IN SUCH CORPORATIONS.

    (a) In General.--Subsection (a) of section 6046 (relating 
to returns as to organization or reorganization of foreign 
corporations and as to acquisitions of their stock) is amended 
to read as follows:
    ``(a) Requirement of Return.--
          ``(1) In general.--A return complying with the 
        requirements of subsection (b) shall be made by--
                  ``(A) each United States citizen or resident 
                who becomes an officer or director of a foreign 
                corporation if a United States person (as 
                defined in section 7701(a)(30)) meets the stock 
                ownership requirements of paragraph (2) with 
                respect to such corporation,
                  ``(B) each United States person--
                          ``(i) who acquires stock which, when 
                        added to any stock owned on the date of 
                        such acquisition, meets the stock 
                        ownership requirements of paragraph (2) 
                        with respect to a foreign corporation, 
                        or
                          ``(ii) who acquires stock which, 
                        without regard to stock owned on the 
                        date of such acquisition, meets the 
                        stock ownership requirements of 
                        paragraph (2) with respect to a foreign 
                        corporation,
                  ``(C) each person (not described in 
                subparagraph (B)) who is treated as a United 
                States shareholder under section 953(c) with 
                respect to a foreign corporation, and
                  ``(D) each person who becomes a United States 
                person while meeting the stock ownership 
                requirements of paragraph (2) with respect to 
                stock of a foreign corporation.
        In the case of a foreign corporation with respect to 
        which any person is treated as a United States 
        shareholder under section 953(c), subparagraph (A) 
        shall be treated as including a reference to each 
        United States person who is an officer or director of 
        such corporation.
          ``(2) Stock ownership requirements.--A person meets 
        the stock ownership requirements of this paragraph with 
        respect to any corporation if such person owns 10 
        percent or more of--
                  ``(A) the total combined voting power of all 
                classes of stock of such corporation entitled 
                to vote, or
                  ``(B) the total value of the stock of such 
                corporation.''
    (b) Effective Date.--The amendment made by this section 
shall take effect on January 1, 1998.

Subtitle F--Determination of Foreign or Domestic Status of Partnerships

SEC. 1151. DETERMINATION OF FOREIGN OR DOMESTIC STATUS OF PARTNERSHIPS.

    (a) In General.--Paragraph (4) of section 7701(a) is 
amended by inserting before the period ``unless, in the case of 
a partnership, the partnership is more properly treated as a 
foreign partnership under regulations prescribed by the 
Secretary''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

              Subtitle G--Other Simplification Provisions

SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS.

    (a) In General.--Paragraph (3) of section 1907(a) of the 
Small Business Job Protection Act of 1996 is amended by adding 
at the end the following flush sentence:
        ``To the extent prescribed in regulations by the 
        Secretary of the Treasury or his delegate, a trust 
        which was in existence on August 20, 1996 (other than a 
        trust treated as owned by the grantor under subpart E 
        of part I of subchapter J of chapter 1 of the Internal 
        Revenue Code of 1986), and which was treated as a 
        United States person on the day before the date of the 
        enactment of this Act may elect to continue to be 
        treated as a United States person notwithstanding 
        section 7701(a)(30)(E) of such Code.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect as if included in the amendments made by 
section 1907(a) of the Small Business Job Protection Act of 
1996.

SEC. 1162. REPEAL OF STOCK AND SECURITIES SAFE HARBOR REQUIREMENT THAT 
                    PRINCIPAL OFFICE BE OUTSIDE THE UNITED STATES.

    (a) In General.--The last sentence of clause (ii) of 
section 864(b)(2)(A) (relating to stock or securities) is 
amended by striking ``, or in the case of a corporation'' and 
all that follows and inserting a period.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

                      Subtitle H--Other Provisions

SEC. 1171. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY INCOME.

    (a) Income From Notional Principal Contracts and Payments 
in Lieu of Dividends.--
          (1) In general.--Paragraph (1) of section 954(c) 
        (defining foreign personal holding company income) is 
        amended by adding at the end the following new 
        subparagraphs:
                  ``(F) Income from notional principal 
                contracts.--Net income from notional principal 
                contracts. Any item of income, gain, deduction, 
                or loss from a notional principal contract 
                entered into for purposes of hedging any item 
                described in any preceding subparagraph shall 
                not be taken into account for purposes of this 
                subparagraph but shall be taken into account 
                under such other subparagraph.
                  ``(G) Payments in lieu of dividends.--
                Payments in lieu of dividends which are made 
                pursuant to an agreement to which section 1058 
                applies.''
          (2) Conforming amendment.--Subparagraph (B) of 
        section 954(c)(1) is amended--
                  (A) by striking the second sentence, and
                  (B) by striking ``also'' in the last 
                sentence.
    (b) Exception for Dealers.--Paragraph (2) of section 954(c) 
is amended by adding at the end the following new subparagraph:
                  ``(C) Exception for dealers.--Except as 
                provided in subparagraph (A), (E), or (G) of 
                paragraph (1) or by regulations, in the case of 
                a regular dealer in property (within the 
                meaning of paragraph (1)(B)), forward 
                contracts, option contracts, or similar 
                financial instruments (including notional 
                principal contracts and all instruments 
                referenced to commodities), there shall not be 
                taken into account in computing foreign 
                personal holding income any item of income, 
                gain, deduction, or loss from any transaction 
                (including hedging transactions) entered into 
                in the ordinary course of such dealer's trade 
                or business as such a dealer.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1172. PERSONAL PROPERTY USED PREDOMINANTLY IN THE UNITED STATES 
                    TREATED AS NOT PROPERTY OF A LIKE KIND WITH RESPECT 
                    TO PROPERTY USED PREDOMINANTLY OUTSIDE THE UNITED 
                    STATES.

    (a) In General.--Subsection (h) of section 1031 (relating 
to exchange of property held for productive use or investment) 
is amended to read as follows:
    ``(h) Special Rules for Foreign Real and Personal 
Property.--For purposes of this section--
          ``(1) Real property.--Real property located in the 
        United States and real property located outside the 
        United States are not property of a like kind.
          ``(2) Personal property.--
                  ``(A) In general.--Personal property used 
                predominantly within the United States and 
                personal property used predominantly outside 
                the United States are not property of a like 
                kind.
                  ``(B) Predominant use.--Except as provided in 
                subparagraph (C) and (D), the predominant use 
                of any property shall be determined based on--
                          ``(i) in the case of the property 
                        relinquished in the exchange, the 2-
                        year period ending on the date of such 
                        relinquishment, and
                          ``(ii) in the case of the property 
                        acquired in the exchange, the 2-year 
                        period beginning on the date of such 
                        acquisition.
                  ``(C) Property held for less than 2 years.--
                Except in the case of an exchange which is part 
                of a transaction (or series of transactions) 
                structured to avoid the purposes of this 
                subsection--
                          ``(i) only the periods the property 
                        was held by the person relinquishing 
                        the property (or any related person) 
                        shall be taken into account under 
                        subparagraph (B)(i), and
                          ``(ii) only the periods the property 
                        was held by the person acquiring the 
                        property (or any related person) shall 
                        be taken into account under 
                        subparagraph (B)(ii).
                  ``(D) Special rule for certain property.--
                Property described in any subparagraph of 
                section 168(g)(4) shall be treated as used 
                predominantly in the United States.''
    (b) Effective Date.--
          (1) In general.--The amendment made by this section 
        shall apply to transfers after June 8, 1997, in taxable 
        years ending after such date.
          (2) Binding contracts.--The amendment made by this 
        section shall not apply to any transfer pursuant to a 
        written binding contract in effect on June 8, 1997, and 
        at all times thereafter before the disposition of 
        property. A contract shall not fail to meet the 
        requirements of the preceding sentence solely because--
                  (A) it provides for a sale in lieu of an 
                exchange, or
                  (B) the property to be acquired as 
                replacement property was not identified under 
                such contract before June 9, 1997.

SEC. 1173. HOLDING PERIOD REQUIREMENT FOR CERTAIN FOREIGN TAXES.

    (a) In General.--Section 901 is amended by redesignating 
subsection (k) as subsection (l) and by inserting after 
subsection (j) the following new subsection:
    ``(k) Minimum Holding Period for Certain Taxes.--
          ``(1) Withholding taxes.--
                  ``(A) In general.--In no event shall a credit 
                be allowed under subsection (a) for any 
                withholding tax on a dividend with respect to 
                stock in a corporation if--
                          ``(i) such stock is held by the 
                        recipient of the dividend for 15 days 
                        or less during the 30-day period 
                        beginning on the date which is 15 days 
                        before the date on which such share 
                        becomes ex-dividend with respect to 
                        such dividend, or
                          ``(ii) to the extent that the 
                        recipient of the dividend is under an 
                        obligation (whether pursuant to a short 
                        sale or otherwise) to make related 
                        payments with respect to positions in 
                        substantially similar or related 
                        property.
                  ``(B) Withholding tax.--For purposes of this 
                paragraph, the term `withholding tax' includes 
                any taxdetermined on a gross basis; but does 
not include any tax which is in the nature of a prepayment of a tax 
imposed on a net basis.
          ``(2) Deemed paid taxes.--In the case of income, war 
        profits, or excess profits taxes deemed paid under 
        section 853, 902, or 960 through a chain of ownership 
        of stock in 1 or more corporations, no credit shall be 
        allowed under subsection (a) for such taxes if--
                  ``(A) any stock of any corporation in such 
                chain (the ownership of which is required to 
                obtain credit under subsection (a) for such 
                taxes) is held for less than the period 
                described in paragraph (1)(A)(i), or
                  ``(B) the corporation holding the stock is 
                under an obligation referred to in paragraph 
                (1)(A)(ii).
          ``(3) 45-day rule in the case of certain preference 
        dividends.--In the case of stock having preference in 
        dividends and dividends with respect to such stock 
        which are attributable to a period or periods 
        aggregating in excess of 366 days, paragraph (1)(A)(i) 
        shall be applied--
                  ``(A) by substituting `45 days' for `15 days' 
                each place it appears, and
                  ``(B) by substituting `90-day period' for 
                `30-day period'.
          ``(4) Exception for certain taxes paid by securities 
        dealers.--
                  ``(A) In general.--Paragraphs (1) and (2) 
                shall not apply to any qualified tax with 
                respect to any security held in the active 
                conduct in a foreign country of a securities 
                business of any person--
                          ``(i) who is registered as a 
                        securities broker or dealer under 
                        section 15(a) of the Securities 
                        Exchange Act of 1934,
                          ``(ii) who is registered as a 
                        Government securities broker or dealer 
                        under section 15C(a) of such Act, or
                          ``(iii) who is licensed or authorized 
                        in such foreign country to conduct 
                        securities activities in such country 
                        and is subject to bona fide regulation 
                        by a securities regulating authority of 
                        such country.
                  ``(B) Qualified tax.--For purposes of 
                subparagraph (A), the term `qualified tax' 
                means a tax paid to a foreign country (other 
                than the foreign country referred to in 
                subparagraph (A)) if--
                          ``(i) the dividend to which such tax 
                        is attributable is subject to taxation 
                        on a net basis by the country referred 
                        to in subparagraph (A), and
                          ``(ii) such country allows a credit 
                        against its net basis tax for the full 
                        amount of the tax paid to such other 
                        foreign country.
                  ``(C) Regulations.--The Secretary may 
                prescribe such regulations as may be 
                appropriate to prevent the abuse of the 
                exception provided by this paragraph.
          ``(5) Certain rules to apply.--For purposes of this 
        subsection, the rules of paragraphs (3) and (4) of 
        section 246(c) shall apply.
          ``(6) Treatment of bona fide sales.--If a person's 
        holding period is reduced by reason of the application 
        of the rules of section 246(c)(4) to any contract for 
        the bona fide sale of stock, the determination of 
        whether such person's holding period meets the 
        requirements of paragraph (2) shall be made as of the 
        date such contract is entered into.
          ``(7) Taxes allowed as deduction, etc.--Sections 275 
        and 78 shall not apply to any tax which is not 
        allowable as a credit under subsection (a) by reason of 
        this subsection.''
    (b) Notice of Withholding Taxes Paid by Regulated 
Investment Company.--Subsection (c) of section 853 (relating to 
foreign tax credit allowed to shareholders) is amended by 
adding at the end the following new sentence: ``Such notice 
shall also include the amount of such taxes which (without 
regard to the election under this section) would not be 
allowable as a credit under section 901(a) to the regulated 
investment company by reason of section 901(k).''
    (c) Effective Date.--The amendments made by this section 
shall apply to dividends paid or accrued more than 30 days 
after the date of the enactment of this Act.

SEC. 1174. PENALTIES FOR FAILURE TO DISCLOSE POSITION THAT CERTAIN 
                    INTERNATIONAL TRANSPORTATION INCOME IS NOT 
                    INCLUDIBLE IN GROSS INCOME.

    (a) In General.--Section 883 is amended by adding at the 
end the following new subsection:
    ``(d) Penalties for Failure to Disclose Position That 
Certain International Transportation Income Is Not Includible 
in Gross Income.--
          ``(1) In general.--A taxpayer who, with respect to 
        any tax imposed by this title, takes the position that 
        any of its gross income derived from the international 
        operation of 1 or more ships or aircraft is not 
        includible in gross income by reason of paragraph (1) 
        or (2) of subsection (a) or paragraph (1) or (2) of 
        section 872(b) (or by reason of any applicable treaty) 
        shall be entitled to such treatment only if such 
        position is disclosed (in such manner as the Secretary 
        may prescribe) on the return of tax for such tax (or 
        any statement attached to such return).
          ``(2) Additional penalties for failing to disclose 
        position.--If a taxpayer fails to meet the requirement 
        of paragraph (1) for any taxable year with respect to 
        the international operation of 1 or more ships or 1 or 
        more aircraft--
                  ``(A) the amount of the income from the 
                international operation to which such failure 
                relates--
                          ``(i) which is from sources without 
                        the United States, and
                          ``(ii) which is attributable to a 
                        fixed place of business in the United 
                        States,
                shall be treated for purposes of this title as 
                effectively connected with the conduct of a 
                trade or business within the United States, and
                  ``(B) no deductions or credits shall be 
                allowed which are attributable to income from 
                the international operation to which the 
                failure relates.
          ``(3) Reasonable cause exception.--This subsection 
        shall not apply to a failure to disclose a position if 
        it is shown that such failure is due to reasonable 
        cause and not due to willful neglect.''
    (b) Conforming Amendments.--Paragraphs (1) and (2) of 
section 872(b), and paragraphs (1) and (2) of section 883(a), 
are each amended by striking ``Gross income'' each place it 
appears and inserting ``Except as provided in section 883(d), 
gross income''.
    (c) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to taxable years beginning after December 
        31, 1997.
          (2) Coordination with treaties.--The amendments made 
        by this section shall not apply in any case where their 
        application would be contrary to any treaty obligation 
        of the United States.
    (d) Information To Be Provided by Customs Service.--The 
United States Custom Service shall provide the Secretary of the 
Treasury or his delegate with such information as may be 
specified by such Secretary in order to enable such Secretary 
to determine whether ships which are not registered in the 
United States are engaged in transportation to or from the 
United States.

SEC. 1175. DENIAL OF TREATY BENEFITS FOR CERTAIN PAYMENTS THROUGH 
                    HYBRID ENTITIES.

    A foreign person shall be entitled under any income tax 
treaty of the United States with a foreign country to any 
reduced rate of any withholding tax imposed by the Internal 
Revenue Code of 1986 on an item of income derived through 
anypartnership or other pass-thru entity only to the extent that such 
item is treated for purposes of the taxation laws of such foreign 
country as an item of income of such person. The preceding sentence 
shall not apply if--
          (1) the treaty contains a provision addressing the 
        applicability of the treaty in the case of an item of 
        income derived through a partnership, or
          (2) the foreign country imposes tax on a distribution 
        of such item of income from such partnership to such 
        person.

SEC. 1176. INTEREST ON UNDERPAYMENTS NOT REDUCED BY FOREIGN TAX CREDIT 
                    CARRYBACKS.

    (a) In General.--Subsection (d) of section 6601 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) Foreign tax credit carrybacks.--If any credit 
        allowed for any taxable year is increased by reason of 
        a carryback of tax paid or accrued to foreign countries 
        or possessions of the United States, such increase 
        shall not affect the computation of interest under this 
        section for the period ending with the filing date for 
        the taxable year in which such taxes were in fact paid 
        or accrued, or, with respect to any portion of such 
        credit carryback from a taxable year attributable to a 
        net operating loss carryback or a capital loss 
        carryback from a subsequent taxable year, such increase 
        shall not affect the computation of interest under this 
        section for the period ending with the filing date for 
        such subsequent taxable year.''
    (b) Conforming Amendment to Refunds Attributable to Foreign 
Tax Credit Carrybacks.--
          (1) In general.--Subsection (f) of section 6611 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) Foreign tax credit carrybacks.--For purposes of 
        subsection (a), if any overpayment of tax imposed by 
        subtitle A results from a carryback of tax paid or 
        accrued to foreign countries or possessions of the 
        United States, such overpayment shall be deemed not to 
        have been made before the filing date for the taxable 
        year in which such taxes were in fact paid or accrued, 
        or, with respect to any portion of such credit 
        carryback from a taxable year attributable to a net 
        operating loss carryback or a capital loss carryback 
        from a subsequent taxable year, such overpayment shall 
        be deemed not to have been made before the filing date 
        for such subsequent taxable year.''
          (2) Conforming amendments.--
                  (A) Paragraph (4) of section 6611(f) (as so 
                redesignated) is amended--
                          (i) by striking ``paragraphs (1) and 
                        (2)'' and inserting ``paragraphs (1), 
                        (2), and (3)'', and
                          (ii) by striking ``paragraph (1) or 
                        (2)'' each place it appears and 
                        inserting ``paragraph (1), (2), or 
                        (3)''.
                  (B) Clause (ii) of section 6611(f)(4)(B) (as 
                so redesignated) is amended by striking ``and'' 
                at the end of subclause (I), by redesignating 
                subclause (II) as subclause (III), and by 
                inserting after subclause (I) the following new 
                subclause:
                                  ``(II) in the case of a 
                                carryback of taxes paid or 
                                accrued to foreign countries or 
                                possessions of the United 
                                States, the taxable year in 
                                which such taxes were in fact 
                                paid or accrued (or, with 
                                respect to any portion of such 
                                carryback from a taxable year 
                                attributable to a net operating 
                                loss carryback or a capital 
                                loss carryback from a 
                                subsequent taxable year, such 
                                subsequent taxable year), 
                                and''.
                  (C) Subclause (III) of section 
                6611(f)(4)(B)(ii) (as so redesignated) is 
                amended by inserting ``(as defined in paragraph 
                (3)(B))'' after ``credit carryback'' the first 
                place it appears.
                  (D) Section 6611 is amended by striking 
                subsection (g) and by redesignating subsections 
                (h) and (i) as subsections (g) and (h), 
                respectively.
    (c) Effective Date.--The amendments made by this section 
shall apply to carrybacks arising in taxable years beginning 
after the date of the enactment of this Act.

SEC. 1177. CLARIFICATION OF PERIOD OF LIMITATIONS ON CLAIM FOR CREDIT 
                    OR REFUND ATTRIBUTABLE TO FOREIGN TAX CREDIT 
                    CARRYFORWARD.

    (a) In General.--Subparagraph (A) of section 6511(d)(3) is 
amended by striking ``for the year with respect to which the 
claim is made'' and inserting ``for the year in which such 
taxes were actually paid or accrued''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxes paid or accrued in taxable years beginning 
after the date of the enactment of this Act.

SEC. 1178. MISCELLANEOUS CLARIFICATIONS.

    (a) Attribution of Deemed Paid Foreign Taxes to Prior 
Distributions.--Subparagraph (B) of section 902(c)(2) is 
amended by striking ``deemed paid with respect to'' and 
inserting ``attributable to''.
    (b) Financial Services Income Determined Without Regard to 
High-Taxed Income.--Subclause (II) of section 904(d)(2)(C)(i) 
is amended by striking ``subclause (I)'' and inserting 
``subclauses (I) and (III)''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

   TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND 
                               BUSINESSES

             Subtitle A--Provisions Relating to Individuals

SEC. 1201. BASIC STANDARD DEDUCTION AND MINIMUM TAX EXEMPTION AMOUNT 
                    FOR CERTAIN DEPENDENTS.

    (a) Basic Standard Deduction.--
          (1) In general.--Paragraph (5) of section 63(c) 
        (relating to limitation on basic standard deduction in 
        the case of certain dependents) is amended by striking 
        ``shall not exceed'' and all that follows and inserting 
        ``shall not exceed the greater of--
                  ``(A) $500, or
                  ``(B) the sum of $250 and such individual's 
                earned income.''
          (2) Conforming amendment.--Paragraph (4) of section 
        63(c) is amended--
                  (A) by striking ``(5)(A)'' in the material 
                preceding subparagraph (A) and inserting 
                ``(5)'', and
                  (B) by striking ``by substituting'' and all 
                that follows in subparagraph (B) and inserting 
                ``by substituting for `calendar year 1992' in 
                subparagraph (B) thereof--
                          ``(i) `calendar year 1987' in the 
                        case of the dollar amounts contained in 
                        paragraph (2) or (5)(A) or subsection 
                        (f), and
                          ``(ii) `calendar year 1997' in the 
                        case of the dollar amount contained in 
                        paragraph (5)(B).''
    (b) Minimum Tax Exemption Amount.--Subsection (j) of 
section 59 is amended to read as follows:
    ``(j) Treatment of Unearned Income of Minor Children.--
          ``(1) In general.--In the case of a child to whom 
        section 1(g) applies, the exemption amount for purposes 
        of section 55 shall not exceed the sum of--
                  ``(A) such child's earned income (as defined 
                in section 911(d)(2)) for the taxable year, 
                plus
                  ``(B) $5,000.
          ``(2) Inflation adjustment.--In the case of any 
        taxable year beginning in a calendar year after 1998, 
        the dollar amount in paragraph (1)(B) shall be 
        increased by an amount equal to the product of--
                  ``(A) such dollar amount, and
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                determined by substituting `1997' for `1992' in 
                subparagraph (B) thereof.
        If any increase determined under the preceding sentence 
        is not a multiple of $50, such increase shall be 
        rounded to the nearest multiple of $50.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1202. INCREASE IN AMOUNT OF TAX EXEMPT FROM ESTIMATED TAX 
                    REQUIREMENTS.

    (a) In General.--Paragraph (1) of section 6654(e) (relating 
to exception where tax is small amount) is amended by striking 
``$500'' and inserting ``$1,000''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1203. OPTIONAL METHODS FOR COMPUTING SECA TAX COMBINED.

    (a) Internal Revenue Code.--
          (1) In general.--Subsection (h) of section 1402 is 
        amended to read as follows:
    ``(h) Optional Method for Computing Self-Employment 
Income.--
          ``(1) Individuals.--In the case of any trade or 
        business which is carried on by an individual--
                  ``(A) if the gross income derived by him from 
                such trade or business is not more than the 
                upper limit for the taxable year, the net 
                earnings from self-employment derived by him 
                from such trade or business may, at his option, 
                be deemed to be 66\2/3\ percent of such gross 
                income, or
                  ``(B) if the gross income derived by him from 
                such trade or business is more than the upper 
                limit for the taxable year and the net earnings 
                from self-employment derived by him from such 
                trade or business (computed under subsection 
                (a) without regard to this sentence) are less 
                than the lower limit for the taxable year, the 
                net earnings from self-employment derived by 
                him from such trade or business may, at his 
                option, be deemed to be the lower limit for the 
                taxable year.
          ``(2) Member of a partnership.--In the case of a 
        member of a partnership carrying on any trade or 
        business--
                  ``(A) if his distributive share of the gross 
                income of the partnership derived from such 
                trade or business (after such gross income has 
                been reduced by the sum of all payments to 
                which section 707(c) applies) is not more than 
                the upper limit for the taxable year, his 
                distributive share of income described in 
                section 702(a)(8) derived from such trade or 
                business may, at his option, be deemed to be an 
                amount equal to 66\2/3\ percent of his 
                distributive share of such gross income (after 
                such gross income has been so reduced), or
                  ``(B) if his distributive share of the gross 
                income of the partnership derived from such 
                trade or business (after such gross income has 
                been reduced by the sum of all payments to 
                which section 707(c) applies) is more than the 
                upper limit for the taxable year and his 
                distributive share (whether or not distributed) 
                of income described in section 702(a)(8) 
                derived from such trade or business (computed 
                under this subsection without regard to this 
                sentence) is less than the lower limit for the 
                taxable year, his distributive share of income 
                described in section 702(a)(8) derived from 
                such trade or business may, at his option, be 
                deemed to be the lower limit for the taxable 
                year.
          ``(3) Upper and lower limits.--For purposes of this 
        subsection--
                  ``(A) Lower limit.--The lower limit for any 
                taxable year is the sum of the amounts 
                applicable under section 213(d) of the Social 
                Security Act for calendar quarters ending with 
                or within such taxable year.
                  ``(B) Upper limit.--The upper limit for any 
                taxable year is the amount equal to 150 percent 
                of the lower limit for such taxable year.
          ``(4) Determination of gross income.--For purposes of 
        this subsection, the term `gross income' means--
                  ``(A) in the case of any such trade or 
                business in which the income is computed under 
                a cash receipts and disbursements method, the 
                gross receipts from such trade or business 
                reduced by the cost or other basis of property 
                which was purchased and sold in carrying on 
                such trade or business, adjusted (after such 
                reduction) in accordance with the provisions of 
                paragraphs (1) through (7) and paragraph (9) of 
                subsection (a), and
                  ``(B) in the case of any such trade or 
                business in which the income is computed under 
                an accrual method, the gross income from such 
                trade or business, adjusted in accordance with 
                the provisions of paragraphs (1) through (7) 
                and paragraph (9) of subsection (a).
          ``(5) Income derived from more than 1 trade or 
        business.--For purposes of this subsection, if an 
        individual (including a member of a partnership) 
        derives gross income from more than 1 such trade or 
        business, such gross income (including his distributive 
        share of the gross income of any partnership derived 
        from any such trade or business) shall be deemed to 
        have been derived from one trade or business.
          ``(6) Election.--The option under this subsection 
        shall be allowed for any taxable year only if elected 
        on the first return filed for such taxable year.''
          (2) Conforming amendment.--Subsection (a) of section 
        1402 is amended by striking all that follows the first 
        sentence following paragraph (15) and inserting ``For 
        optional method of determining net earnings from self-
        employment, see subsection (h).''
    (b) Social Security Act.--Subsection (g) of section 211 of 
the Social Security Act is amended to read as follows:
    ``(g) Optional Method for Computing Self-Employment 
Income.--
          ``(1) Individuals.--In the case of any trade or 
        business which is carried on by an individual--
                  ``(A) if the gross income derived by him from 
                such trade or business is not more than the 
                upper limit for the taxable year, the net 
                earnings from self-employment derived by him 
                from such trade or business may, at his option, 
                be deemed to be 66\2/3\ percent of such gross 
                income, or
                  ``(B) if the gross income derived by him from 
                such trade or business is more than the upper 
                limit for the taxable year and the net earnings 
                from self-employment derived by him from such 
                trade or business (computed under subsection 
                (a) without regard to this sentence) are less 
                than the lower limit for the taxable year, the 
                net earnings from self-employment derived by 
                him from such trade or business may, at his 
                option, be deemed to be the lower limit for the 
                taxable year.
          ``(2) Member of a partnership.--In the case of a 
        member of a partnership carrying on any trade or 
        business--
                  ``(A) if his distributive share of the gross 
                income of the partnership derived from such 
                trade or business (after such gross income has 
                been reduced by the sum of all payments to 
                which section 707(c) of the Internal Revenue 
                Code of 1986 applies) is not more than the 
                upper limit for the taxable year, his 
                distributive share of income described in 
                section 702(a)(8) of such Code derived from 
                such trade or business may, at his option, be 
                deemed to be an amount equal to 66\2/3\ percent 
                of his distributive share of such gross income 
                (after such gross income has been so reduced), 
                or
                  ``(B) if his distributive share of the gross 
                income of the partnership derived from such 
                trade or business (after such gross income has 
                been reduced by the sum of all payments to 
                which section 707(c) of such Code applies) is 
                more than the upper limit for the taxable year 
                and his distributive share (whether or not 
                distributed) of income described in section 
                702(a)(8) of such Code derived from such trade 
                or business (computed under this subsection 
                without regard to this sentence) is less than 
                the lower limit for the taxable year, his 
                distributive share of income described in 
                section 702(a)(8) of such Code derived from 
                such trade or business may, at his option, be 
                deemed to be the lower limit for the taxable 
                year.
          ``(3) Upper and lower limits.--For purposes of this 
        subsection--
                  ``(A) Lower limit.--The lower limit for any 
                taxable year is the sum of the amounts 
                applicable under section 213(d) for calendar 
                quarters ending with or within such taxable 
                year.
                  ``(B) Upper limit.--The upper limit for any 
                taxable year is the amount equal to 150 percent 
                of the lower limit for such taxable year.
          ``(4) Determination of gross income.--For purposes of 
        this subsection, the term `gross income' means--
                  ``(A) in the case of any such trade or 
                business in which the income is computed under 
                a cash receipts and disbursements method, the 
                gross receipts from such trade or business 
                reduced by the cost or other basis of property 
                which was purchased and sold in carrying on 
                such trade or business, adjusted (after such 
                reduction) in accordance with the provisions of 
                paragraphs (1) through (6) and paragraph (8) of 
                subsection (a), and
                  ``(B) in the case of any such trade or 
                business in which the income is computed under 
                an accrual method, the gross income from such 
                trade or business, adjusted in accordance with 
                the provisions of paragraphs (1) through (6) 
                and paragraph (8) of subsection (a).
          ``(5) Income derived from more than 1 trade or 
        business.--For purposes of this subsection, if an 
        individual (including a member of a partnership) 
        derives gross income from more than 1 such trade or 
        business, such gross income (including his distributive 
        share of the gross income of any partnership derived 
        from any such trade or business) shall be deemed to 
        have been derived from one trade or business.
          ``(6) Election.--The option under this subsection 
        shall be allowed for any taxable year only if elected 
        on the first return filed for such taxable year.''
          (2) Conforming amendment.--Subsection (a) of section 
        211 of the Social Security Act is amended by striking 
        all that follows the first sentence following paragraph 
        (15) and inserting ``For optional method of determining 
        net earnings from self-employment, see subsection 
        (g).''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1204. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL MAIL 
                    CARRIERS.

    (a) In General.--Section 162 (relating to trade or business 
expenses) is amended by redesignating subsection (o) as 
subsection (p) and by inserting after subsection (n) the 
following new subsection:
    ``(o) Treatment of Certain Reimbursed Expenses of Rural 
Mail Carriers.--
          ``(1) General rule.--In the case of any employee of 
        the United States Postal Service who performs services 
        involving the collection and delivery of mail on a 
        rural route and who receives qualified reimbursements 
        for the expenses incurred by such employee for the use 
        of a vehicle in performing such services--
                  ``(A) the amount allowable as a deduction 
                under this chapter for the use of a vehicle in 
                performing such services shall be equal to the 
                amount of such qualified reimbursements; and
                  ``(B) such qualified reimbursements shall be 
                treated as paid under a reimbursement or other 
                expense allowance arrangement for purposes of 
                section 62(a)(2)(A) (and section 62(c) shall 
                not apply to such qualified reimbursements).
          ``(2) Definition of qualified reimbursements.--For 
        purposes of this subsection, the term `qualified 
        reimbursements' means the amounts paid by the United 
        States Postal Service to employees as an equipment 
        maintenance allowance under the 1991 collective 
        bargaining agreement between the United States Postal 
        Service and the National Rural Letter Carriers' 
        Association. Amounts paid as an equipment maintenance 
        allowance by such Postal Service under later collective 
        bargaining agreements that supersede the 1991 agreement 
        shall be considered qualified reimbursements if such 
        amounts do not exceed the amounts that would have been 
        paid under the 1991 agreement, adjusted for changes in 
        the Consumer Price Index (as defined in section 
        1(f)(5)) since 1991.''
    (b) Technical Amendment.--Section 6008 of the Technical and 
Miscellaneous Revenue Act of 1988 is hereby repealed.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1205. TREATMENT OF TRAVELING EXPENSES OF CERTAIN FEDERAL EMPLOYEES 
                    ENGAGED IN CRIMINAL INVESTIGATIONS.

    (a) In General.--Subsection (a) of section 162 is amended 
by adding at the end the following new sentence: ``The 
preceding sentence shall not apply to any Federal employee 
during any period for which such employee is certified by the 
Attorney General (or the designee thereof) as traveling on 
behalf of the United States in temporary duty status to 
investigate, or provide support services for the investigation 
of, a Federal crime.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to amounts paid or incurred with respect to taxable 
years ending after the date of the enactment of this Act.

SEC. 1206. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.

    (a) General Rule.--Section 6311 is amended to read as 
follows:

``SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.

    ``(a) Authority To Receive.--It shall be lawful for the 
Secretary to receive for internal revenue taxes (or in payment 
for internal revenue stamps) any commercially acceptable means 
that the Secretary deems appropriate to the extent and under 
the conditions provided in regulations prescribed by the 
Secretary.
    ``(b) Ultimate Liability.--If a check, money order, or 
other method of payment, including payment by credit card, 
debit card, or charge card so received is not duly paid, or is 
paid and subsequently charged back to the Secretary, the person 
by whom such check, or money order, or other method of payment 
has been tendered shall remain liable for the payment of the 
tax or for the stamps, and for all legal penalties and 
additions, to the same extent as if such check, money order, or 
other method of payment had not been tendered.
    ``(c) Liability of Banks and Others.--If any certified, 
treasurer's, or cashier's check (or other guaranteed draft), or 
any money order, or any other means of payment that has been 
guaranteed by a financial institution (such as a credit card, 
debit card, or charge card transaction which has been 
guaranteed expressly by a financial institution) so received is 
not duly paid, the United States shall, in addition to its 
right to exact payment from the party originally indebted 
therefor, have a lien for--
          ``(1) the amount of such check (or draft) upon all 
        assets of the financial institution on which drawn,
          ``(2) the amount of such money order upon all the 
        assets of the issuer thereof, or
          ``(3) the guaranteed amount of any other transaction 
        upon all the assets of the institution making such 
        guarantee,
and such amount shall be paid out of such assets in preference 
to any other claims whatsoever against such financial 
institution, issuer, or guaranteeing institution, except the 
necessary costs and expenses of administration and the 
reimbursement of the United States for the amount expended in 
the redemption of the circulating notes of such financial 
institution.
    ``(d) Payment by Other Means.--
          ``(1) Authority to prescribe regulations.--The 
        Secretary shall prescribe such regulations as the 
        Secretary deems necessary to receive payment by 
        commercially acceptable means, including regulations 
        that--
                  ``(A) specify which methods of payment by 
                commercially acceptable means will be 
                acceptable,
                  ``(B) specify when payment by such means will 
                be considered received,
                  ``(C) identify types of nontax matters 
                related to payment by such means that are to be 
                resolved by persons ultimately liable for 
                payment and financial intermediaries, without 
                the involvement of the Secretary, and
                  ``(D) ensure that tax matters will be 
                resolved by the Secretary, without the 
                involvement of financial intermediaries.
          ``(2) Authority to enter into contracts.--
        Notwithstanding section 3718(f) of title 31, United 
        States Code, the Secretary is authorized to enter into 
        contracts to obtain services related to receiving 
        payment by other means where cost beneficial to the 
        Government.
          ``(3) Special provisions for use of credit cards.--If 
        use of credit cards is accepted as a method of payment 
        of taxes pursuant to subsection (a)--
                  ``(A) a payment of internal revenue taxes (or 
                a payment for internal revenue stamps) by a 
                person by use of a credit card shall not be 
                subject to section 161 of the Truth-in-Lending 
                Act (15 U.S.C. 1666), or to any similar 
                provisions of State law, if the error alleged 
                by the person is an error relating to the 
                underlying tax liability, rather than an error 
                relating to the credit card account such as a 
                computational error or numerical transposition 
                in the credit card transaction or an issue as 
                to whether the person authorized payment by use 
                of the credit card,
                  ``(B) a payment of internal revenue taxes (or 
                a payment for internal revenue stamps) shall 
                not be subject to section 170 of the Truth-in-
                Lending Act (15 U.S.C. 1666i), or to any 
                similar provisions of State law,
                  ``(C) a payment of internal revenue taxes (or 
                a payment for internal revenue stamps) by a 
                person by use of a debit card shall not be 
                subject to section 908 of the Electronic Fund 
                Transfer Act (15 U.S.C. 1693f), or to any 
                similar provisions of State law, if the error 
                alleged by the person is an error relating to 
                the underlying tax liability, rather than an 
                error relating to the debit card account such 
                as a computational error or numerical 
                transposition in the debit card transaction or 
                an issue as to whether the person authorized 
                payment by use of the debit card,
                  ``(D) the term `creditor' under section 
                103(f) of the Truth-in-Lending Act (15 U.S.C. 
                1602(f)) shall not include the Secretary with 
                respect to credit card transactions in payment 
                of internal revenue taxes (or payment for 
                internal revenue stamps), and
                  ``(E) notwithstanding any other provision of 
                law to the contrary, in the case of payment 
                made by credit card or debit card transaction 
                of an amount owed to a person as the result of 
                the correction of an error under section 161 of 
                the Truth-in-Lending Act (15 U.S.C. 1666) or 
                section 908 of the Electronic Fund Transfer Act 
                (15 U.S.C. 1693f), the Secretary is authorized 
                to provide such amount to such person as a 
                credit to that person's credit card or debit 
                cardaccount through the applicable credit card 
or debit card system.
    ``(e) Confidentiality of Information.--
          ``(1) In general.--Except as otherwise authorized by 
        this subsection, no person may use or disclose any 
        information relating to credit or debit card 
        transactions obtained pursuant to section 6103(k)(8) 
        other than for purposes directly related to the 
        processing of such transactions, or the billing or 
        collection of amounts charged or debited pursuant 
        thereto.
          ``(2) Exceptions.--
                  ``(A) Debit or credit card issuers or others 
                acting on behalf of such issuers may also use 
                and disclose such information for purposes 
                directly related to servicing an issuer's 
                accounts.
                  ``(B) Debit or credit card issuers or others 
                directly involved in the processing of credit 
                or debit card transactions or the billing or 
                collection of amounts charged or debited 
                thereto may also use and disclose such 
                information for purposes directly related to--
                          ``(i) statistical risk and 
                        profitability assessment;
                          ``(ii) transferring receivables, 
                        accounts, or interest therein;
                          ``(iii) auditing the account 
                        information;
                          ``(iv) complying with Federal, State, 
                        or local law; and
                          ``(v) properly authorized civil, 
                        criminal, or regulatory investigation 
                        by Federal, State, or local 
                        authorities.
          ``(3) Procedures.--Use and disclosure of information 
        under this paragraph shall be made only to the extent 
        authorized by written procedures promulgated by the 
        Secretary.
          ``(4) Cross reference.--

          ``For provision providing for civil damages for violation of 
        paragraph (1), see section 7431.''

    (b) Separate Appropriation Required for Payment of Credit 
Card Fees.--No amount may be paid by the United States to a 
credit card issuer for the right to receive payments of 
internal revenue taxes by credit card without a separate 
appropriation therefor.
    (c) Clerical Amendment.--The table of sections for 
subchapter B of chapter 64 is amended by striking the item 
relating to section 6311 and inserting the following:

        ``Sec. 6311. Payment of tax by commercially acceptable means.''

    (d) Amendments to Sections 6103 and 7431 With Respect to 
Disclosure Authorization.--
          (1) Subsection (k) of section 6103 (relating to 
        confidentiality and disclosure of returns and return 
        information) is amended by adding at the end the 
        following new paragraph:
          ``(8) Disclosure of information to administer section 
        6311.--The Secretary may disclose returns or return 
        information to financial institutions and others to the 
        extent the Secretary deems necessary for the 
        administration of section 6311. Disclosures of 
        information for purposes other than to accept payments 
        by checks or money orders shall be made only to the 
        extent authorized by written procedures promulgated by 
        the Secretary.''
          (2) Section 7431 (relating to civil damages for 
        unauthorized disclosure of returns and return 
        information) is amended by adding at the end the 
        following new subsection:
    ``(g) Special Rule for Information Obtained Under Section 
6103(k)(8).--For purposes of this section, any reference to 
section 6103 shall be treated as including a reference to 
section 6311(e).''
          (3) Section 6103(p)(3)(A) is amended by striking ``or 
        (6)'' and inserting ``(6), or (8)''.
    (e) Effective Date.--The amendments made by this section 
shall take effect on the day 9 months after the date of the 
enactment of this Act.

        Subtitle B--Provisions Relating to Businesses Generally

SEC. 1211. MODIFICATIONS TO LOOK-BACK METHOD FOR LONG-TERM CONTRACTS.

    (a) Look-Back Method Not To Apply in Certain Cases.--
Subsection (b) of section 460 (relating to percentage of 
completion method) is amended by adding at the end the 
following new paragraph:
          ``(6) Election to have look-back method not apply in 
        de minimis cases.--
                  ``(A) Amounts taken into account after 
                completion of contract.--Paragraph (1)(B) shall 
                not apply with respect to any taxable year 
                (beginning after the taxable year in which the 
                contract is completed) if--
                          ``(i) the cumulative taxable income 
                        (or loss) under the contract as of the 
                        close of such taxable year, is within
                          ``(ii) 10 percent of the cumulative 
                        look-back taxable income (or loss) 
                        under the contract as of the close of 
                        the most recent taxable year to which 
                        paragraph (1)(B) applied (or would have 
                        applied but for subparagraph (B)).
                  ``(B) De minimis discrepancies.--Paragraph 
                (1)(B) shall not apply in any case to which it 
                would otherwise apply if--
                          ``(i) the cumulative taxable income 
                        (or loss) under the contract as of the 
                        close of each prior contract year, is 
                        within
                          ``(ii) 10 percent of the cumulative 
                        look-back income (or loss) under the 
                        contract as of the close of such prior 
                        contract year.
                  ``(C) Definitions.--For purposes of this 
                paragraph--
                          ``(i) Contract year.--The term 
                        `contract year' means any taxable year 
                        for which income is taken into account 
                        under the contract.
                          ``(ii) Look-back income or loss.--The 
                        look-back income (or loss) is the 
                        amount which would be the taxable 
                        income (or loss) under the contract if 
                        the allocation method set forth in 
                        paragraph (2)(A) were used in 
                        determining taxable income.
                          ``(iii) Discounting not applicable.--
                        The amounts taken into account after 
                        the completion of the contract shall be 
                        determined without regard to any 
                        discounting under the 2nd sentence of 
                        paragraph (2).
                  ``(D) Contracts to which paragraph applies.--
                This paragraph shall only apply if the taxpayer 
                makes an election under this subparagraph. 
                Unless revoked with the consent of the 
                Secretary, such an election shall apply to all 
                long-term contracts completed during the 
                taxable year for which election is made or 
                during any subsequent taxable year.''
    (b) Modification of Interest Rate.--
          (1) In general.--Subparagraph (C) of section 
        460(b)(2) is amended by striking ``the overpayment rate 
        established by section 6621'' and inserting ``the 
        adjusted overpayment rate (as defined in paragraph 
        (7))''.
          (2) Adjusted overpayment rate.--Subsection (b) of 
        section 460 is amended by adding at the end the 
        following new paragraph:
          ``(7) Adjusted overpayment rate.--
                  ``(A) In general.--The adjusted overpayment 
                rate for any interest accrual period is the 
                overpayment rate in effect under section 6621 
                for the calendar quarter in which such interest 
                accrual period begins.
                  ``(B) Interest accrual period.--For purposes 
                of subparagraph (A), the term `interest accrual 
                period' means the period--
                          ``(i) beginning on the day after the 
                        return due date for any taxable year of 
                        the taxpayer, and
                          ``(ii) ending on the return due date 
                        for the following taxable year.
                For purposes of the preceding sentence, the 
                term `return due date' means the date 
                prescribed for filing the return of the tax 
                imposed by this chapter (determined without 
                regard to extensions).''
    (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall apply to 
        contracts completed in taxable years ending after the 
        date of the enactment of this Act.
          (2) Subsection (b).--The amendments made by 
        subsection (b) shall apply for purposes of section 
        167(g) of the Internal Revenue Code of 1986 to property 
        placed in service after September 13, 1995.

SEC. 1212. MINIMUM TAX TREATMENT OF CERTAIN PROPERTY AND CASUALTY 
                    INSURANCE COMPANIES.

    (a) In General.--Clause (i) of section 56(g)(4)(B) 
(relating to inclusion of items included for purposes of 
computing earnings and profits) is amended by adding at the end 
the following new sentence: ``In the case of any insurance 
company taxable under section 831(b), this clause shall not 
apply to any amount not described in section 834(b).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

   Subtitle C--Simplification Relating to Electing Large Partnerships

                       PART I--GENERAL PROVISIONS

SEC. 1221. SIMPLIFIED FLOW-THROUGH FOR ELECTING LARGE PARTNERSHIPS.

    (a) General Rule.--Subchapter K (relating to partners and 
partnerships) is amended by adding at the end the following new 
part:

        ``PART IV--SPECIAL RULES FOR ELECTING LARGE PARTNERSHIPS

        ``Sec. 771. Application of subchapter to electing large 
                  partnerships.
        ``Sec. 772. Simplified flow-through.
        ``Sec. 773. Computations at partnership level.
        ``Sec. 774. Other modifications.
        ``Sec. 775. Electing large partnership defined.
        ``Sec. 776. Special rules for partnerships holding oil and gas 
                  properties.
        ``Sec. 777. Regulations.

``SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING LARGE PARTNERSHIPS.

    ``The preceding provisions of this subchapter to the extent 
inconsistent with the provisions of this part shall not apply 
to an electing large partnership and its partners.

``SEC. 772. SIMPLIFIED FLOW-THROUGH.

    ``(a) General Rule.--In determining the income tax of a 
partner of an electing large partnership, such partner shall 
take into account separately such partner's distributive share 
of the partnership's--
          ``(1) taxable income or loss from passive loss 
        limitation activities,
          ``(2) taxable income or loss from other activities,
          ``(3) net capital gain (or net capital loss)--
                  ``(A) to the extent allocable to passive loss 
                limitation activities, and
                  ``(B) to the extent allocable to other 
                activities,
          ``(4) tax-exempt interest,
          ``(5) applicable net AMT adjustment separately 
        computed for--
                  ``(A) passive loss limitation activities, and
                  ``(B) other activities,
          ``(6) general credits,
          ``(7) low-income housing credit determined under 
        section 42,
          ``(8) rehabilitation credit determined under section 
        47,
          ``(9) foreign income taxes,
          ``(10) the credit allowable under section 29, and
          ``(11) other items to the extent that the Secretary 
        determines that the separate treatment of such items is 
        appropriate.
    ``(b) Separate Computations.--In determining the amounts 
required under subsection (a) to be separately takeninto 
account by any partner, this section and section 773 shall be applied 
separately with respect to such partner by taking into account such 
partner's distributive share of the items of income, gain, loss, 
deduction, or credit of the partnership.
    ``(c) Treatment at Partner Level.--
          ``(1) In general.--Except as provided in this 
        subsection, rules similar to the rules of section 
        702(b) shall apply to any partner's distributive share 
        of the amounts referred to in subsection (a).
          ``(2) Income or loss from passive loss limitation 
        activities.--For purposes of this chapter, any 
        partner's distributive share of any income or loss 
        described in subsection (a)(1) shall be treated as an 
        item of income or loss (as the case may be) from the 
        conduct of a trade or business which is a single 
        passive activity (as defined in section 469). A similar 
        rule shall apply to a partner's distributive share of 
        amounts referred to in paragraphs (3)(A) and (5)(A) of 
        subsection (a).
          ``(3) Income or loss from other activities.--
                  ``(A) In general.--For purposes of this 
                chapter, any partner's distributive share of 
                any income or loss described in subsection 
                (a)(2) shall be treated as an item of income or 
                expense (as the case may be) with respect to 
                property held for investment.
                  ``(B) Deductions for loss not subject to 
                section 67.--The deduction under section 212 
                for any loss described in subparagraph (A) 
                shall not be treated as a miscellaneous 
                itemized deduction for purposes of section 67.
          ``(4) Treatment of net capital gain or loss.--For 
        purposes of this chapter, any partner's distributive 
        share of any gain or loss described in subsection 
        (a)(3) shall be treated as a long-term capital gain or 
        loss, as the case may be.
          ``(5) Minimum tax treatment.--In determining the 
        alternative minimum taxable income of any partner, such 
        partner's distributive share of any applicable net AMT 
        adjustment shall be taken into account in lieu of 
        making the separate adjustments provided in sections 
        56, 57, and 58 with respect to the items of the 
        partnership. Except as provided in regulations, the 
        applicable net AMT adjustment shall be treated, for 
        purposes of section 53, as an adjustment or item of tax 
        preference not specified in section 53(d)(1)(B)(ii).
          ``(6) General credits.--A partner's distributive 
        share of the amount referred to in paragraph (6) of 
        subsection (a) shall be taken into account as a current 
        year business credit.
    ``(d) Operating Rules.--For purposes of this section--
          ``(1) Passive loss limitation activity.--The term 
        `passive loss limitation activity' means--
                  ``(A) any activity which involves the conduct 
                of a trade or business, and
                  ``(B) any rental activity.
        For purposes of the preceding sentence, the term `trade 
        or business' includes any activity treated as a trade 
        or business under paragraph (5) or (6) of section 
        469(c).
          ``(2) Tax-exempt interest.--The term `tax-exempt 
        interest' means interest excludable from gross income 
        under section 103.
          ``(3) Applicable net amt adjustment.--
                  ``(A) In general.--The applicable net AMT 
                adjustment is--
                          ``(i) with respect to taxpayers other 
                        than corporations, the net adjustment 
                        determined by using the adjustments 
                        applicable to individuals, and
                          ``(ii) with respect to corporations, 
                        the net adjustment determined by using 
                        the adjustments applicable to 
                        corporations.
                  ``(B) Net adjustment.--The term `net 
                adjustment' means the net adjustment in the 
                items attributable to passive loss activities 
                or other activities (as the case may be) which 
                would result if such items were determined with 
                the adjustments of sections 56, 57, and 58.
          ``(4) Treatment of certain separately stated items.--
                  ``(A) Exclusion for certain purposes.--In 
                determining the amounts referred to in 
                paragraphs (1) and (2) of subsection (a), any 
                net capital gain or net capital loss (as the 
                case may be), and any item referred to in 
                subsection (a)(11), shall be excluded.
                  ``(B) Allocation rules.--The net capital gain 
                shall be treated--
                          ``(i) as allocable to passive loss 
                        limitation activities to the extent the 
                        net capital gain does not exceed the 
                        net capital gain determined by only 
                        taking into account gains and losses 
                        from sales and exchanges of property 
                        used in connection with such 
                        activities, and
                          ``(ii) as allocable to other 
                        activities to the extent such gain 
                        exceeds the amount allocated under 
                        clause (i).
                A similar rule shall apply for purposes of 
                allocating any net capital loss.
                  ``(C) Net capital loss.--The term `net 
                capital loss' means the excess of the losses 
                from sales or exchanges of capital assets over 
                the gains from sales or exchange of capital 
                assets.
          ``(5) General credits.--The term `general credits' 
        means any credit other than the low-income housing 
        credit, the rehabilitation credit, the foreign tax 
        credit, and the credit allowable under section 29.
          ``(6) Foreign income taxes.--The term `foreign income 
        taxes' means taxes described in section 901 which are 
        paid or accrued to foreign countries and to possessions 
        of the United States.
    ``(e) Special Rule for Unrelated Business Tax.--In the case 
of a partner which is an organization subject to tax under 
section 511, such partner's distributive share of any items 
shall be taken into account separately to the extent necessary 
to comply with the provisions of section 512(c)(1).
    ``(f) Special Rules for Applying Passive Loss 
Limitations.--If any person holds an interest in an electing 
large partnership other than as a limited partner--
          ``(1) paragraph (2) of subsection (c) shall not apply 
        to such partner, and
          ``(2) such partner's distributive share of the 
        partnership items allocable to passive loss limitation 
        activities shall be taken into account separately to 
        the extent necessary to comply with the provisions of 
        section 469.
The preceding sentence shall not apply to any items allocable 
to an interest held as a limited partner.

``SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.

    ``(a) General Rule.--
          ``(1) Taxable income.--The taxable income of an 
        electing large partnership shall be computed in the 
        same manner as in the case of an individual except 
        that--
                  ``(A) the items described in section 772(a) 
                shall be separately stated, and
                  ``(B) the modifications of subsection (b) 
                shall apply.
          ``(2) Elections.--All elections affecting the 
        computation of the taxable income of an electing large 
        partnership or the computation of any credit of an 
        electing large partnership shall be made by the 
        partnership; except that the election under section 
        901, and any election under section 108, shall be made 
        by each partner separately.
          ``(3) Limitations, etc.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), all limitations and other 
                provisions affecting the computation of the 
                taxable income of an electing large partnership 
                or the computation of anycredit of an electing 
large partnership shall be applied at the partnership level (and not at 
the partner level).
                  ``(B) Certain limitations applied at partner 
                level.--The following provisions shall be 
                applied at the partner level (and not at the 
                partnership level):
                          ``(i) Section 68 (relating to overall 
                        limitation on itemized deductions).
                          ``(ii) Sections 49 and 465 (relating 
                        to at risk limitations).
                          ``(iii) Section 469 (relating to 
                        limitation on passive activity losses 
                        and credits).
                          ``(iv) Any other provision specified 
                        in regulations.
          ``(4) Coordination with other provisions.--Paragraphs 
        (2) and (3) shall apply notwithstanding any other 
        provision of this chapter other than this part.
    ``(b) Modifications to Determination of Taxable Income.--In 
determining the taxable income of an electing large 
partnership--
          ``(1) Certain deductions not allowed.--The following 
        deductions shall not be allowed:
                  ``(A) The deduction for personal exemptions 
                provided in section 151.
                  ``(B) The net operating loss deduction 
                provided in section 172.
                  ``(C) The additional itemized deductions for 
                individuals provided in part VII of subchapter 
                B (other than section 212 thereof).
          ``(2) Charitable deductions.--In determining the 
        amount allowable under section 170, the limitation of 
        section 170(b)(2) shall apply.
          ``(3) Coordination with section 67.--In lieu of 
        applying section 67, 70 percent of the amount of the 
        miscellaneous itemized deductions shall be disallowed.
    ``(c) Special Rules for Income From Discharge of 
Indebtedness.--If an electing large partnership has income from 
the discharge of any indebtedness--
          ``(1) such income shall be excluded in determining 
        the amounts referred to in section 772(a), and
          ``(2) in determining the income tax of any partner of 
        such partnership--
                  ``(A) such income shall be treated as an item 
                required to be separately taken into account 
                under section 772(a), and
                  ``(B) the provisions of section 108 shall be 
                applied without regard to this part.

``SEC. 774. OTHER MODIFICATIONS.

    ``(a) Treatment of Certain Optional Adjustments, Etc.--In 
the case of an electing large partnership--
          ``(1) computations under section 773 shall be made 
        without regard to any adjustment under section 743(b) 
        or 108(b), but
          ``(2) a partner's distributive share of any amount 
        referred to in section 772(a) shall be appropriately 
        adjusted to take into account any adjustment under 
        section 743(b) or 108(b) with respect to such partner.
    ``(b) Credit Recapture Determined at Partnership Level.--
          ``(1) In general.--In the case of an electing large 
        partnership--
                  ``(A) any credit recapture shall be taken 
                into account by the partnership, and
                  ``(B) the amount of such recapture shall be 
                determined as if the credit with respect to 
                which the recapture is made had been fully 
                utilized to reduce tax.
          ``(2) Method of taking recapture into account.--An 
        electing large partnership shall take into account a 
        credit recapture by reducing the amount of the 
        appropriate current year credit to the extent thereof, 
        and if such recapture exceeds the amount of such 
        current year credit, the partnership shall be liable to 
        pay such excess.
          ``(3) Dispositions not to trigger recapture.--No 
        credit recapture shall be required by reason of any 
        transfer of an interest in an electing large 
        partnership.
          ``(4) Credit recapture.--For purposes of this 
        subsection, the term `credit recapture' means any 
        increase in tax under section 42(j) or 50(a).
    ``(c) Partnership Not Terminated by Reason of Change in 
Ownership.--Subparagraph (B) of section 708(b)(1) shall not 
apply to an electing large partnership.
    ``(d) Partnership Entitled to Certain Credits.--The 
following shall be allowed to an electing large partnership and 
shall not be taken into account by the partners of such 
partnership:
          ``(1) The credit provided by section 34.
          ``(2) Any credit or refund under section 
        852(b)(3)(D).
    ``(e) Treatment of REMIC Residuals.--For purposes of 
applying section 860E(e)(6) to any electing large partnership--
          ``(1) all interests in such partnership shall be 
        treated as held by disqualified organizations,
          ``(2) in lieu of applying subparagraph (C) of section 
        860E(e)(6), the amount subject to tax under section 
        860E(e)(6) shall be excluded from the gross income of 
        such partnership, and
          ``(3) subparagraph (D) of section 860E(e)(6) shall 
        not apply.
    ``(f) Special Rules for Applying Certain Installment Sale 
Rules.--In the case of an electing large partnership--
          ``(1) the provisions of sections 453(l)(3) and 453A 
        shall be applied at the partnership level, and
          ``(2) in determining the amount of interest payable 
        under such sections, such partnership shall be treated 
        as subject to tax under this chapter at the highest 
        rate of tax in effect under section 1 or 11.

``SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.

    ``(a) General Rule.--For purposes of this part--
          ``(1) In general.--The term `electing large 
        partnership' means, with respect to any partnership 
        taxable year, any partnership if--
                  ``(A) the number of persons who were partners 
                in such partnership in the preceding 
                partnership taxable year equaled or exceeded 
                100, and
                  ``(B) such partnership elects the application 
                of this part.
        To the extent provided in regulations, a partnership 
        shall cease to be treated as an electing large 
        partnership for any partnership taxable year if in such 
        taxable year fewer than 100 persons were partners in 
        such partnership.
          ``(2) Election.--The election under this subsection 
        shall apply to the taxable year for which made and all 
        subsequent taxable years unless revoked with the 
        consent of the Secretary.
    ``(b) Special Rules for Certain Service Partnerships.--
          ``(1) Certain partners not counted.--For purposes of 
        this section, the term `partner' does not include any 
        individual performing substantial services in 
        connection with the activities of the partnership and 
        holding an interest in such partnership, or an 
        individual who formerly performed substantial services 
        in connection with such activities and who held an 
        interest in such partnership at the time the individual 
        performed such services.
          ``(2) Exclusion.--For purposes of this part, an 
        election under subsection (a) shall not be effective 
        with respect to any partnership if substantially all 
        the partners of such partnership--
                  ``(A) are individuals performing substantial 
                services in connection with the activities of 
                such partnership or are personal service 
                corporations (as defined in section 269A(b)) 
                the owner-employees (as defined in section 
                269A(b)) of which perform such substantial 
                services,
                  ``(B) are retired partners who had performed 
                such substantial services, or
                  ``(C) are spouses of partners who are 
                performing (or had previously performed) such 
                substantial services.
          ``(3) Special rule for lower tier partnerships.--For 
        purposes of this subsection, the activities of a 
        partnership shall include the activities of any other 
        partnership in which the partnership owns directly an 
        interest in the capital and profits of at least 80 
        percent.
    ``(c) Exclusion of Commodity Pools.--For purposes of this 
part, an election under subsection (a) shall not be effective 
with respect to any partnership the principal activity of which 
is the buying and selling of commodities (not described in 
section 1221(1)), or options, futures, or forwards with respect 
to such commodities.
    ``(d) Secretary May Rely on Treatment on Return.--If, on 
the partnership return of any partnership, such partnership is 
treated as an electing large partnership, such treatment shall 
be binding on such partnership and all partners of such 
partnership but not on the Secretary.

``SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING OIL AND GAS 
                    PROPERTIES.

    ``(a) Computation of Percentage Depletion.--In the case of 
an electing large partnership, except as provided in subsection 
(b)--
          ``(1) the allowance for depletion under section 611 
        with respect to any partnership oil or gas property 
        shall be computed at the partnership level without 
        regard to any provision of section 613A requiring such 
        allowance to be computed separately by each partner,
          ``(2) such allowance shall be determined without 
        regard to the provisions of section 613A(c) limiting 
        theamount of production for which percentage depletion 
is allowable and without regard to paragraph (1) of section 613A(d), 
and
          ``(3) paragraph (3) of section 705(a) shall not 
        apply.
    ``(b) Treatment of Certain Partners.--
          ``(1) In general.--In the case of a disqualified 
        person, the treatment under this chapter of such 
        person's distributive share of any item of income, 
        gain, loss, deduction, or credit attributable to any 
        partnership oil or gas property shall be determined 
        without regard to this part. Such person's distributive 
        share of any such items shall be excluded for purposes 
        of making determinations under sections 772 and 773.
          ``(2) Disqualified person.--For purposes of paragraph 
        (1), the term `disqualified person' means, with respect 
        to any partnership taxable year--
                  ``(A) any person referred to in paragraph (2) 
                or (4) of section 613A(d) for such person's 
                taxable year in which such partnership taxable 
                year ends, and
                  ``(B) any other person if such person's 
                average daily production of domestic crude oil 
                and natural gas for such person's taxable year 
                in which such partnership taxable year ends 
                exceeds 500 barrels.
          ``(3) Average daily production.--For purposes of 
        paragraph (2), a person's average daily production of 
        domestic crude oil and natural gas for any taxable year 
        shall be computed as provided in section 613A(c)(2)--
                  ``(A) by taking into account all production 
                of domestic crude oil and natural gas 
                (including such person's proportionate share of 
                any production of a partnership),
                  ``(B) by treating 6,000 cubic feet of natural 
                gas as a barrel of crude oil, and
                  ``(C) by treating as 1 person all persons 
                treated as 1 taxpayer under section 613A(c)(8) 
                or among whom allocations are required under 
                such section.

``SEC. 777. REGULATIONS.

    ``The Secretary shall prescribe such regulations as may be 
appropriate to carry out the purposes of this part.''
    (b) Clerical Amendment.--The table of parts for subchapter 
K of chapter 1 is amended by adding at the end the following 
new item:

        ``Part IV. Special rules for electing large partnerships.''

    (c) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years beginning after 
December 31, 1997.

SEC. 1222. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING LARGE PARTNERSHIPS.

    (a) General Rule.--Chapter 63 is amended by adding at the 
end thereof the following new subchapter:

        ``Subchapter D--Treatment of electing large partnerships

        ``Part I. Treatment of partnership items and adjustments.
        ``Part II. Partnership level adjustments.
        ``Part III. Definitions and special rules.

        ``PART I--TREATMENT OF PARTNERSHIP ITEMS AND ADJUSTMENTS

        ``Sec. 6240. Application of subchapter.
        ``Sec. 6241. Partner's return must be consistent with 
                  partnership return.
        ``Sec. 6242. Procedures for taking partnership adjustments into 
                  account.

``SEC. 6240. APPLICATION OF SUBCHAPTER.

    ``(a) General Rule.--This subchapter shall only apply to 
electing large partnerships and partners in such partnerships.
    ``(b) Coordination With Other Partnership Audit 
Procedures.--
          ``(1) In general.--Subchapter C of this chapter shall 
        not apply to any electing large partnership other than 
        in its capacity as a partner in another partnership 
        which is not an electing large partnership.
          ``(2) Treatment where partner in other partnership.--
        If an electing large partnership is a partner in 
        another partnership which is not an electing large 
        partnership--
                  ``(A) subchapter C of this chapter shall 
                apply to items of such electing large 
                partnership which are partnership items with 
                respect to such other partnership, but
                  ``(B) any adjustment under such subchapter C 
                shall be taken into account in the manner 
                provided by section 6242.

``SEC. 6241. PARTNER'S RETURN MUST BE CONSISTENT WITH PARTNERSHIP 
                    RETURN.

    ``(a) General Rule.--A partner of any electing large 
partnership shall, on the partner's return, treat each 
partnership item attributable to such partnership in a manner 
which is consistent with the treatment of such partnership item 
on the partnership return.
    ``(b) Underpayment Due to Inconsistent Treatment Assessed 
as Math Error.--Any underpayment of tax by a partner by reason 
of failing to comply with the requirements of subsection (a) 
shall be assessed and collected in the same manner as if such 
underpayment were on account of a mathematical or clerical 
error appearing on the partner's return. Paragraph (2) of 
section 6213(b) shall not apply to any assessment of an 
underpayment referred to in the preceding sentence.
    ``(c) Adjustments Not To Affect Prior Year of Partners.--
          ``(1) In general.--Except as provided in paragraph 
        (2), subsections (a) and (b) shall apply without regard 
        to any adjustment to the partnership item under part 
        II.
          ``(2) Certain changes in distributive share taken 
        into account by partner.--
                  ``(A) In general.--To the extent that any 
                adjustment under part II involves a change 
                under section 704 in a partner's distributive 
                share of the amount of any partnership item 
                shown on the partnership return, such 
                adjustment shall be taken into account in 
                applying this title to such partner for the 
                partner's taxable year for which such item was 
                required to be taken into account.
                  ``(B) Coordination with deficiency 
                procedures.--
                          ``(i) In general.--Subchapter B shall 
                        not apply to the assessment or 
                        collection of any underpayment of tax 
                        attributable to an adjustment referred 
                        to in subparagraph (A).
                          ``(ii) Adjustment not precluded.--
                        Notwithstanding any other law or rule 
                        of law, nothing in subchapter B (or in 
                        any proceeding under subchapter B) 
                        shall preclude the assessment or 
                        collection of any underpayment of tax 
                        (or the allowance of any credit or 
                        refund of any overpayment of tax) 
                        attributable to an adjustment referred 
                        to in subparagraph (A) and such 
                        assessment or collection or allowance 
                        (or any notice thereof) shall not 
                        preclude any notice, proceeding, or 
                        determination under subchapter B.
                  ``(C) Period of limitations.--The period 
                for--
                          ``(i) assessing any underpayment of 
                        tax, or
                          ``(ii) filing a claim for credit or 
                        refund of any overpayment of tax,
                attributable to an adjustment referred to in 
                subparagraph (A) shall not expire before the 
                close of the period prescribed by section 6248 
                for making adjustments with respect to the 
                partnership taxable year involved.
                  ``(D) Tiered structures.--If the partner 
                referred to in subparagraph (A) is another 
                partnership or an S corporation, the rules of 
                this paragraph shall also apply to persons 
                holding interests in such partnership or S 
                corporation (as the case may be); except that, 
                if such partner is an electing large 
                partnership, the adjustment referred to in 
                subparagraph (A) shall betaken into account in 
the manner provided by section 6242.
    ``(d) Addition to Tax for Failure to Comply With Section.--

          ``For addition to tax in case of partner's disregard of 
        requirements of this section, see part II of subchapter A of 
        chapter 68.

``SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP ADJUSTMENTS INTO 
                    ACCOUNT.

    ``(a) Adjustments Flow Through To Partners for Year in 
Which Adjustment Takes Effect.--
          ``(1) In general.--If any partnership adjustment with 
        respect to any partnership item takes effect (within 
        the meaning of subsection (d)(2)) during any 
        partnership taxable year and if an election under 
        paragraph (2) does not apply to such adjustment, such 
        adjustment shall be taken into account in determining 
        the amount of such item for the partnership taxable 
        year in which such adjustment takes effect. In applying 
        this title to any person who is (directly or 
        indirectly) a partner in such partnership during such 
        partnership taxable year, such adjustment shall be 
        treated as an item actually arising during such taxable 
        year.
          ``(2) Partnership liable in certain cases.--If--
                  ``(A) a partnership elects under this 
                paragraph to not take an adjustment into 
                account under paragraph (1),
                  ``(B) a partnership does not make such an 
                election but in filing its return for any 
                partnership taxable year fails to take fully 
                into account any partnership adjustment as 
                required under paragraph (1), or
                  ``(C) any partnership adjustment involves a 
                reduction in a credit which exceeds the amount 
                of such credit determined for the partnership 
                taxable year in which the adjustment takes 
                effect,
        the partnership shall pay to the Secretary an amount 
        determined by applying the rules of subsection (b)(4) 
        to the adjustments not so taken into account and any 
        excess referred to in subparagraph (C).
          ``(3) Offsetting adjustments taken into account.--If 
        a partnership adjustment requires another adjustment in 
        a taxable year after the adjusted year and before the 
        partnership taxable year in which such partnership 
        adjustment takes effect, such other adjustment shall be 
        taken into account under this subsection for the 
        partnership taxable year in which such partnership 
        adjustment takes effect.
          ``(4) Coordination with part ii.--Amounts taken into 
        account under this subsection for any partnership 
        taxable year shall continue to be treated as 
        adjustments for the adjusted year for purposes of 
        determining whether such amounts may be readjusted 
        under part II.
    ``(b) Partnership Liable for Interest and Penalties.--
          ``(1) In general.--If a partnership adjustment takes 
        effect during any partnership taxable year and such 
        adjustment results in an imputed underpayment for the 
        adjusted year, the partnership--
                  ``(A) shall pay to the Secretary interest 
                computed under paragraph (2), and
                  ``(B) shall be liable for any penalty, 
                addition to tax, or additional amount as 
                provided in paragraph (3).
          ``(2) Determination of amount of interest.--The 
        interest computed under this paragraph with respect to 
        any partnership adjustment is the interest which would 
        be determined under chapter 67--
                  ``(A) on the imputed underpayment determined 
                under paragraph (4) with respect to such 
                adjustment,
                  ``(B) for the period beginning on the day 
                after the return due date for the adjusted year 
                and ending on the return due date for the 
                partnership taxable year in which such 
                adjustment takes effect (or, if earlier, in the 
                case of any adjustment to which subsection 
                (a)(2) applies, the date on which the payment 
                under subsection (a)(2) is made).
        Proper adjustments in the amount determined under the 
        preceding sentence shall be made for adjustments 
        required for partnership taxable years after the 
        adjusted year and before the year in which the 
        partnership adjustment takes effect by reason of such 
        partnership adjustment.
          ``(3) Penalties.--A partnership shall be liable for 
        any penalty, addition to tax, or additional amount for 
        which it would have been liable if such partnership had 
        been an individual subject to tax under chapter 1 for 
        the adjusted year and the imputed underpayment 
        determined under paragraph (4) were an actual 
        underpayment (or understatement) for such year.
          ``(4) Imputed underpayment.--For purposes of this 
        subsection, the imputed underpayment determined under 
        this paragraph with respect to any partnership 
        adjustment is the underpayment (if any) which would 
        result--
                  ``(A) by netting all adjustments to items of 
                income, gain, loss, or deduction and by 
                treating any net increase in income as an 
                underpayment equal to the amount of such net 
                increase multiplied by the highest rate of tax 
                in effect under section 1 or 11 for the 
                adjusted year, and
                  ``(B) by taking adjustments to credits into 
                account as increases or decreases (whichever is 
                appropriate) in the amount of tax.
        For purposes of the preceding sentence, any net 
        decrease in a loss shall be treated as an increase in 
        income and a similar rule shall apply to a net increase 
        in a loss.
    ``(c) Administrative Provisions.--
          ``(1) In general.--Any payment required by subsection 
        (a)(2) or (b)(1)(A)--
                  ``(A) shall be assessed and collected in the 
                same manner as if it were a tax imposed by 
                subtitle C, and
                  ``(B) shall be paid on or before the return 
                due date for the partnership taxable year in 
                which the partnership adjustment takes effect.
          ``(2) Interest.--For purposes of determining 
        interest, any payment required by subsection (a)(2) or 
        (b)(1)(A) shall be treated as an underpayment of tax.
          ``(3) Penalties.--
                  ``(A) In general.--In the case of any failure 
                by any partnership to pay on the date 
                prescribed therefor any amount required by 
                subsection (a)(2) or (b)(1)(A), there is hereby 
                imposed on such partnership a penalty of 10 
                percent of the underpayment. For purposes of 
                the preceding sentence, the term `underpayment' 
                means the excess of any payment required under 
                this section over the amount (if any) paid on 
                or before the date prescribed therefor.
                  ``(B) Accuracy-related and fraud penalties 
                made applicable.--For purposes of part II of 
                subchapter A of chapter 68, any payment 
                required by subsection (a)(2) shall be treated 
                as an underpayment of tax.
    ``(d) Definitions and Special Rules.--For purposes of this 
section--
          ``(1) Partnership adjustment.--The term `partnership 
        adjustment' means any adjustment in the amount of any 
        partnership item of an electing large partnership.
          ``(2) When adjustment takes effect.--A partnership 
        adjustment takes effect--
                  ``(A) in the case of an adjustment pursuant 
                to the decision of a court in a proceeding 
                brought under part II, when such decision 
                becomes final,
                  ``(B) in the case of an adjustment pursuant 
                to any administrative adjustment request under 
                section 6251, when such adjustment is allowed 
                by the Secretary, or
                  ``(C) in any other case, when such adjustment 
                is made.
          ``(3) Adjusted year.--The term `adjusted year' means 
        the partnership taxable year to which the item being 
        adjusted relates.
          ``(4) Return due date.--The term `return due date' 
        means, with respect to any taxable year, the date 
        prescribed for filing the partnership return for such 
        taxable year (determined without regard to extensions).
          ``(5) Adjustments involving changes in character.--
        Under regulations, appropriate adjustments in the 
        application of this section shall be made for purposes 
        of taking into account partnership adjustments which 
        involve a change in the character of any item of 
        income, gain, loss, or deduction.
    ``(e) Payments Nondeductible.--No deduction shall be 
allowed under subtitle A for any payment required to be made by 
an electing large partnership under this section.

                ``PART II--PARTNERSHIP LEVEL ADJUSTMENTS

        ``Subpart A. Adjustments by Secretary.
        ``Subpart B. Claims for adjustments by partnership.

                 ``Subpart A--Adjustments by Secretary

        ``Sec. 6245. Secretarial authority.
        ``Sec. 6246. Restrictions on partnership adjustments.
        ``Sec. 6247. Judicial review of partnership adjustment.
        ``Sec. 6248. Period of limitations for making adjustments.

``SEC. 6245. SECRETARIAL AUTHORITY.

    ``(a) General Rule.--The Secretary is authorized and 
directed to make adjustments at the partnership level in any 
partnership item to the extent necessary to have such item be 
treated in the manner required.
    ``(b) Notice of Partnership Adjustment.--
          ``(1) In general.--If the Secretary determines that a 
        partnership adjustment is required, the Secretary is 
        authorized to send notice of such adjustment to the 
        partnership by certified mail or registered mail. Such 
        notice shall be sufficient if mailed to the partnership 
        at its last known address even if the partnership has 
        terminated its existence.
          ``(2) Further notices restricted.--If the Secretary 
        mails a notice of a partnership adjustment to any 
        partnership for any partnership taxable year and the 
        partnership files a petition under section 6247 with 
        respect to such notice, in the absence of a showing of 
        fraud, malfeasance, or misrepresentation of a material 
        fact, the Secretary shall not mail another such notice 
        to such partnership with respect to such taxable year.
          ``(3) Authority to rescind notice with partnership 
        consent.--The Secretary may, with the consent of the 
        partnership, rescind any notice of a partnership 
        adjustment mailed to such partnership. Any notice so 
        rescinded shall not be treated as a notice of a 
        partnership adjustment, for purposes of this section, 
        section 6246, and section 6247, and the taxpayer shall 
        have no right to bring a proceeding under section 6247 
        with respect to such notice. Nothing in this subsection 
        shall affect any suspension of the running of any 
        period of limitations during any period during which 
        the rescinded notice was outstanding.

``SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUSTMENTS.

    ``(a) General Rule.--Except as otherwise provided in this 
chapter, no adjustment to any partnership item may be made (and 
no levy or proceeding in any court for the collection of any 
amount resulting from such adjustment may be made, begun or 
prosecuted) before--
          ``(1) the close of the 90th day after the day on 
        which a notice of a partnership adjustment was mailed 
        to the partnership, and
          ``(2) if a petition is filed under section 6247 with 
        respect to such notice, the decision of the court has 
        become final.
    ``(b) Premature Action May Be Enjoined.--Notwithstanding 
section 7421(a), any action which violates subsection (a) may 
be enjoined in the proper court, including the Tax Court. The 
Tax Court shall have no jurisdiction to enjoin any action under 
this subsection unless a timely petition has been filed under 
section 6247 and then only in respect of the adjustments that 
are the subject of such petition.
    ``(c) Exceptions to Restrictions on Adjustments.--
          ``(1) Adjustments arising out of math or clerical 
        errors.--
                  ``(A) In general.--If the partnership is 
                notified that, on account of a mathematical or 
                clerical error appearing on the partnership 
                return, an adjustment to a partnership item is 
                required, rules similar to the rules of 
                paragraphs (1) and (2) of section 6213(b) shall 
                apply to such adjustment.
                  ``(B) Special rule.--If an electing large 
                partnership is a partner in another electing 
                large partnership, any adjustment on account of 
                such partnership's failure to comply with the 
                requirements of section 6241(a) with respect to 
                its interest in such other partnership shall be 
                treated as an adjustment referred to in 
                subparagraph (A), except that paragraph (2) of 
                section 6213(b) shall not apply to such 
                adjustment.
          ``(2) Partnership may waive restrictions.--The 
        partnership shall at any time (whether or not a notice 
        of partnership adjustment has been issued) have the 
        right, by a signed notice in writing filed with the 
        Secretary, to waive the restrictions provided in 
        subsection (a) on the making of any partnership 
        adjustment.
    ``(d) Limit Where No Proceeding Begun.--If no proceeding 
under section 6247 is begun with respect to any notice of a 
partnership adjustment during the 90-day period described in 
subsection (a), the amount for which the partnership is liable 
under section 6242 (and any increase in any partner's liability 
for tax under chapter 1 by reason of any adjustment under 
section 6242(a)) shall not exceed the amount determined in 
accordance with such notice.

``SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT.

    ``(a) General Rule.--Within 90 days after the date on which 
a notice of a partnership adjustment is mailed to the 
partnership with respect to any partnership taxable year, the 
partnership may file a petition for a readjustment of the 
partnership items for such taxable year with--
          ``(1) the Tax Court,
          ``(2) the district court of the United States for the 
        district in which the partnership's principal place of 
        business is located, or
          ``(3) the Claims Court.
    ``(b) Jurisdictional Requirement for Bringing Action in 
District Court or Claims Court.--
          ``(1) In general.--A readjustment petition under this 
        section may be filed in a district court of the United 
        States or the Claims Court only if the partnership 
        filing the petition deposits with the Secretary, on or 
        before the date the petition is filed, the amount for 
        which the partnership would be liable under section 
        6242(b) (as of the date of the filing of the petition) 
        if the partnership items were adjusted as provided by 
        the notice of partnership adjustment. The court may by 
        order provide that the jurisdictional requirements of 
        this paragraph are satisfied where there has been a 
        good faith attempt to satisfy such requirement and any 
        shortfall of the amount required to be deposited is 
        timely corrected.
          ``(2) Interest payable.--Any amount deposited under 
        paragraph (1), while deposited, shall not be treated as 
        a payment of tax for purposes of this title (other than 
        chapter 67).
    ``(c) Scope of Judicial Review.--A court with which a 
petition is filed in accordance with this section shall have 
jurisdiction to determine all partnership items of the 
partnership for the partnership taxable year to which the 
notice of partnership adjustment relates and the proper 
allocation of suchitems among the partners (and the 
applicability of any penalty, addition to tax, or additional amount for 
which the partnership may be liable under section 6242(b)).
    ``(d) Determination of Court Reviewable.--Any determination 
by a court under this section shall have the force and effect 
of a decision of the Tax Court or a final judgment or decree of 
the district court or the Claims Court, as the case may be, and 
shall be reviewable as such. The date of any such determination 
shall be treated as being the date of the court's order 
entering the decision.
    ``(e) Effect of Decision Dismissing Action.--If an action 
brought under this section is dismissed other than by reason of 
a rescission under section 6245(b)(3), the decision of the 
court dismissing the action shall be considered as its decision 
that the notice of partnership adjustment is correct, and an 
appropriate order shall be entered in the records of the court.

``SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUSTMENTS.

    ``(a) General Rule.--Except as otherwise provided in this 
section, no adjustment under this subpart to any partnership 
item for any partnership taxable year may be made after the 
date which is 3 years after the later of--
          ``(1) the date on which the partnership return for 
        such taxable year was filed, or
          ``(2) the last day for filing such return for such 
        year (determined without regard to extensions).
    ``(b) Extension by Agreement.--The period described in 
subsection (a) (including an extension period under this 
subsection) may be extended by an agreement entered into by the 
Secretary and the partnership before the expiration of such 
period.
    ``(c) Special Rule in Case of Fraud, Etc.--
          ``(1) False return.--In the case of a false or 
        fraudulent partnership return with intent to evade tax, 
        the adjustment may be made at any time.
          ``(2) Substantial omission of income.--If any 
        partnership omits from gross income an amount properly 
        includible therein which is in excess of 25 percent of 
        the amount of gross income stated in its return, 
        subsection (a) shall be applied by substituting `6 
        years' for `3 years'.
          ``(3) No return.--In the case of a failure by a 
        partnership to file a return for any taxable year, the 
        adjustment may be made at any time.
          ``(4) Return filed by secretary.--For purposes of 
        this section, a return executed by the Secretary under 
        subsection (b) of section 6020 on behalf of the 
        partnership shall not be treated as a return of the 
        partnership.
    ``(d) Suspension When Secretary Mails Notice of 
Adjustment.--If notice of a partnership adjustment with respect 
to any taxable year is mailed to the partnership, the running 
of the period specified in subsection (a) (as modified by the 
other provisions of this section) shall be suspended--
          ``(1) for the period during which an action may be 
        brought under section 6247 (and, if a petition is filed 
        under section 6247 with respect to such notice, until 
        the decision of the court becomes final), and
          ``(2) for 1 year thereafter.

           ``Subpart B--Claims for Adjustments by Partnership

        ``Sec. 6251. Administrative adjustment requests.
        ``Sec. 6252. Judicial review where administrative adjustment 
                  request is not allowed in full.

``SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.

    ``(a) General Rule.--A partnership may file a request for 
an administrative adjustment of partnership items for any 
partnership taxable year at any time which is--
          ``(1) within 3 years after the later of--
                  ``(A) the date on which the partnership 
                return for such year is filed, or
                  ``(B) the last day for filing the partnership 
                return for such year (determined without regard 
                to extensions), and
          ``(2) before the mailing to the partnership of a 
        notice of a partnership adjustment with respect to such 
        taxable year.
    ``(b) Secretarial Action.--If a partnership files an 
administrative adjustment request under subsection (a), the 
Secretary may allow any part of the requested adjustments.
    ``(c) Special Rule in Case of Extension Under Section 
6248.--If the period described in section 6248(a) is extended 
pursuant to an agreement under section 6248(b), the period 
prescribed by subsection (a)(1) shall not expire before the 
date 6 months after the expiration of the extension under 
section 6248(b).

``SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE ADJUSTMENT REQUEST IS 
                    NOT ALLOWED IN FULL.

    ``(a) In General.--If any part of an administrative 
adjustment request filed under section 6251 is not allowed by 
the Secretary, the partnership may file a petition for an 
adjustment with respect to the partnership items to which such 
part of the request relates with--
          ``(1) the Tax Court,
          ``(2) the district court of the United States for the 
        district in which the principal place of business of 
        the partnership is located, or
          ``(3) the Claims Court.
    ``(b) Period for Filing Petition.--A petition may be filed 
under subsection (a) with respect to partnership items for a 
partnership taxable year only--
          ``(1) after the expiration of 6 months from the date 
        of filing of the request under section 6251, and
          ``(2) before the date which is 2 years after the date 
        of such request.
The 2-year period set forth in paragraph (2) shall be extended 
for such period as may be agreed upon in writing by the 
partnership and the Secretary.
    ``(c) Coordination With Subpart A.--
          ``(1) Notice of partnership adjustment before filing 
        of petition.--No petition may be filed under this 
        section after the Secretary mails to the partnership a 
        notice of a partnership adjustment for the partnership 
        taxable year to which the request under section 6251 
        relates.
          ``(2) Notice of partnership adjustment after filing 
        but before hearing of petition.--If the Secretary mails 
        to the partnership a notice of a partnership adjustment 
        for the partnership taxable year to which the request 
        under section 6251 relates after the filing of a 
        petition under this subsection but before the hearing 
        of such petition, such petition shall be treated as an 
        action brought under section 6247 with respect to such 
        notice, except that subsection (b) of section 6247 
        shall not apply.
          ``(3) Notice must be before expiration of statute of 
        limitations.--A notice of a partnership adjustment for 
        the partnership taxable year shall be taken into 
        account under paragraphs (1) and (2) only if such 
        notice is mailed before the expiration of the period 
        prescribed by section 6248 for making adjustments to 
        partnership items for such taxable year.
    ``(d) Scope of Judicial Review.--Except in the case 
described in paragraph (2) of subsection (c), a court with 
which a petition is filed in accordance with this section shall 
have jurisdiction to determine only those partnership items to 
which the part of the request under section 6251 not allowed by 
the Secretary relates and those items with respect to which the 
Secretary asserts adjustments as offsets to the adjustments 
requested by the partnership.
    ``(e) Determination of Court Reviewable.--Any determination 
by a court under this subsection shall have the force and 
effect of a decision of the Tax Court or a final judgment or 
decree of the district court or the Claims Court, as the case 
may be, and shall be reviewable as such. The date of any such 
determination shall be treated as being the date of the court's 
order entering the decision.

               ``PART III--DEFINITIONS AND SPECIAL RULES

        ``Sec. 6255. Definitions and special rules.

``SEC. 6255. DEFINITIONS AND SPECIAL RULES.

    ``(a) Definitions.--For purposes of this subchapter--
          ``(1) Electing large partnership.--The term `electing 
        large partnership' has the meaning given to such term 
        by section 775.
          ``(2) Partnership item.--The term `partnership item' 
        has the meaning given to such term by section 
        6231(a)(3).
    ``(b) Partners Bound by Actions of Partnership, Etc.--
          ``(1) Designation of partner.--Each electing large 
        partnership shall designate (in the manner prescribed 
        by the Secretary) a partner (or other person) who shall 
        have the sole authority to act on behalf of such 
        partnership under this subchapter. In any case in which 
        such a designation is not in effect, the Secretary may 
        select any partner as the partner with such authority.
          ``(2) Binding effect.--An electing large partnership 
        and all partners of such partnership shall be bound--
                  ``(A) by actions taken under this subchapter 
                by the partnership, and
                  ``(B) by any decision in a proceeding brought 
                under this subchapter.
    ``(c) Partnerships Having Principal Place of Business 
Outside the United States.--For purposes of sections 6247 and 
6252, a principal place of business located outside the United 
States shall be treated as located in the District of Columbia.
    ``(d) Treatment Where Partnership Ceases To Exist.--If a 
partnership ceases to exist before a partnership adjustment 
under this subchapter takes effect, such adjustment shall be 
taken into account by the former partners of such partnership 
under regulations prescribed by the Secretary.
    ``(e) Date Decision Becomes Final.--For purposes of this 
subchapter, the principles of section 7481(a) shall be applied 
in determining the date on which a decision of a district court 
or the Claims Court becomes final.
    ``(f) Partnerships in Cases Under Title 11 of the United 
States Code.--The running of any period of limitations provided 
in this subchapter on making a partnership adjustment (or 
provided by section 6501 or 6502 on the assessment or 
collection of any amount required to be paid under section 
6242) shall, in a case under title 11 of the United States 
Code, be suspended during the period during which the Secretary 
is prohibited by reason of such case from making the adjustment 
(or assessment or collection) and--
          ``(1) for adjustment or assessment, 60 days 
        thereafter, and
          ``(2) for collection, 6 months thereafter.
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this subchapter, including regulations--
          ``(1) to prevent abuse through manipulation of the 
        provisions of this subchapter, and
          ``(2) providing that this subchapter shall not apply 
        to any case described in section 6231(c)(1) (or the 
        regulations prescribed thereunder) where the 
        application of this subchapter to such a case would 
        interfere with the effective and efficient enforcement 
        of this title.
In any case to which this subchapter does not apply by reason 
of paragraph (2), rules similar to the rules of sections 
6229(f) and 6255(f) shall apply.''
    (b) Clerical Amendment.--The table of subchapters for 
chapter 63 is amended by adding at the end thereof the 
following new item:

       ``Subchapter D. Treatment of electing large partnerships.''

SEC. 1223. DUE DATE FOR FURNISHING INFORMATION TO PARTNERS OF ELECTING 
                    LARGE PARTNERSHIPS.

    (a) General Rule.--Subsection (b) of section 6031 (relating 
to copies to partners) is amended by adding at the end the 
following new sentence: ``In the case of an electing large 
partnership (as defined in section 775), such information shall 
be furnished on or before the first March 15 following the 
close of such taxable year.''
    (b) Treatment as Information Return.--Section 6724 is 
amended by adding at the end the following new subsection:
    ``(e) Special Rule for Certain Partnership Returns.--If any 
partnership return under section 6031(a) is required under 
section 6011(e) to be filed on magnetic media or in other 
machine-readable form, for purposes of this part, each schedule 
required to be included with such return with respect to each 
partner shall be treated as a separate information return.''

SEC. 1224. RETURNS MAY BE REQUIRED ON MAGNETIC MEDIA.

    Paragraph (2) of section 6011(e) (relating to returns on 
magnetic media) is amended by adding at the end thereof the 
following new sentence:
        ``Notwithstanding the preceding sentence, the Secretary 
        shall require partnerships having more than 100 
        partners to file returns on magnetic media.''

SEC. 1225. TREATMENT OF PARTNERSHIP ITEMS OF INDIVIDUAL RETIREMENT 
                    ACCOUNTS.

    Subsection (b) of section 6012 is amended by adding at the 
end thereof the following new paragraph:
          ``(6) IRA share of partnership income.--In the case 
        of a trust which is exempt from taxation under section 
        408(e), for purposes of this section, the trust's 
        distributive share of items of gross income and gain of 
        any partnership to which subchapter C or D of chapter 
        63 applies shall be treated as equal to the trust's 
        distributive share of the taxable income of such 
        partnership.''

SEC. 1226. EFFECTIVE DATE.

    The amendments made by this part shall apply to partnership 
taxable years ending on or after December 31, 1997.

      PART II--PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS

SEC. 1231. TREATMENT OF PARTNERSHIP ITEMS IN DEFICIENCY PROCEEDINGS.

    (a) In General.--Subchapter C of chapter 63 is amended by 
adding at the end the following new section:

``SEC. 6234. DECLARATORY JUDGMENT RELATING TO TREATMENT OF ITEMS OTHER 
                    THAN PARTNERSHIP ITEMS WITH RESPECT TO AN 
                    OVERSHELTERED RETURN.

    ``(a) General Rule.--If--
          ``(1) a taxpayer files an oversheltered return for a 
        taxable year,
          ``(2) the Secretary makes a determination with 
        respect to the treatment of items (other than 
        partnership items) of such taxpayer for such taxable 
        year, and
          ``(3) the adjustments resulting from such 
        determination do not give rise to a deficiency (as 
        defined in section 6211) but would give rise to a 
        deficiency if there were no net loss from partnership 
        items,
the Secretary is authorized to send a notice of adjustment 
reflecting such determination to the taxpayer by certified or 
registered mail.
    ``(b) Oversheltered Return.--For purposes of this section, 
the term `oversheltered return' means an income tax return 
which--
          ``(1) shows no taxable income for the taxable year, 
        and
          ``(2) shows a net loss from partnership items.
    ``(c) Judicial Review in the Tax Court.--Within 90 days, or 
150 days if the notice is addressed to a person outside the 
United States, after the day on which the notice of adjustment 
authorized in subsection (a) is mailed to the taxpayer, 
thetaxpayer may file a petition with the Tax Court for redetermination 
of the adjustments. Upon the filing of such a petition, the Tax Court 
shall have jurisdiction to make a declaration with respect to all items 
(other than partnership items and affected items which require partner 
level determinations as described in section 6230(a)(2)(A)(i)) for the 
taxable year to which the notice of adjustment relates, in accordance 
with the principles of section 6214(a). Any such declaration shall have 
the force and effect of a decision of the Tax Court and shall be 
reviewable as such.
    ``(d) Failure To File Petition.--
          ``(1) In general.--Except as provided in paragraph 
        (2), if the taxpayer does not file a petition with the 
        Tax Court within the time prescribed in subsection (c), 
        the determination of the Secretary set forth in the 
        notice of adjustment that was mailed to the taxpayer 
        shall be deemed to be correct.
          ``(2) Exception.--Paragraph (1) shall not apply after 
        the date that the taxpayer--
                  ``(A) files a petition with the Tax Court 
                within the time prescribed in subsection (c) 
                with respect to a subsequent notice of 
                adjustment relating to the same taxable year, 
                or
                  ``(B) files a claim for refund of an 
                overpayment of tax under section 6511 for the 
                taxable year involved.
        If a claim for refund is filed by the taxpayer, then 
        solely for purposes of determining (for the taxable 
        year involved) the amount of any computational 
        adjustment in connection with a partnership proceeding 
        under this subchapter (other than under this section) 
        or the amount of any deficiency attributable to 
        affected items in a proceeding under section 
        6230(a)(2), the items that are the subject of the 
        notice of adjustment shall be presumed to have been 
        correctly reported on the taxpayer's return during the 
        pendency of the refund claim (and, if within the time 
        prescribed by section 6532 the taxpayer commences a 
        civil action for refund under section 7422, until the 
        decision in the refund action becomes final).
    ``(e) Limitations Period.--
          ``(1) In general.--Any notice to a taxpayer under 
        subsection (a) shall be mailed before the expiration of 
        the period prescribed by section 6501 (relating to the 
        period of limitations on assessment).
          ``(2) Suspension when secretary mails notice of 
        adjustment.--If the Secretary mails a notice of 
        adjustment to the taxpayer for a taxable year, the 
        period of limitations on the making of assessments 
        shall be suspended for the period during which the 
        Secretary is prohibited from making the assessment 
        (and, in any event, if a proceeding in respect of the 
        notice of adjustment is placed on the docket of the Tax 
        Court, until the decision of the Tax Court becomes 
        final), and for 60 days thereafter.
          ``(3) Restrictions on assessment.--Except as 
        otherwise provided in section 6851, 6852, or 6861, no 
        assessment of a deficiency with respect to any tax 
        imposed by subtitle A attributable to any item (other 
        than a partnership item or any item affected by a 
        partnership item) shall be made--
                  ``(A) until the expiration of the applicable 
                90-day or 150-day period set forth in 
                subsection (c) for filing a petition with the 
                Tax Court, or
                  ``(B) if a petition has been filed with the 
                Tax Court, until the decision of the Tax Court 
                has become final.
    ``(f) Further Notices of Adjustment Restricted.--If the 
Secretary mails a notice of adjustment to the taxpayer for a 
taxable year and the taxpayer files a petition with the Tax 
Court within the time prescribed in subsection (c), the 
Secretary may not mail another such notice to the taxpayer with 
respect to the same taxable year in the absence of a showing of 
fraud, malfeasance, or misrepresentation of a material fact.
    ``(g) Coordination With Other Proceedings Under This 
Subchapter.--
          ``(1) In general.--The treatment of any item that has 
        been determined pursuant to subsection (c) or (d) shall 
        be taken into account in determining the amount of any 
        computational adjustment that is made in connection 
        with a partnership proceeding under this subchapter 
        (other than under this section), or the amount of any 
        deficiency attributable to affected items in a 
        proceeding under section 6230(a)(2), for the taxable 
        year involved. Notwithstanding any other law or rule of 
        law pertaining to the period of limitations on the 
        making of assessments, for purposes of the preceding 
        sentence, any adjustment made in accordance with this 
        section shall be taken into account regardless of 
        whether any assessment has been made with respect to 
        such adjustment.
          ``(2) Special rule in case of computational 
        adjustment.--In the case of a computational adjustment 
        that is made in connection with a partnership 
        proceeding under this subchapter (other than under this 
        section), the provisions of paragraph (1) shall apply 
        only if the computational adjustment is made within the 
        period prescribed by section 6229 for assessing any tax 
        under subtitle A which is attributable to any 
        partnership item or affected item for the taxable year 
        involved.
          ``(3) Conversion to deficiency proceeding.--If--
                  ``(A) after the notice referred to in 
                subsection (a) is mailed to a taxpayer for a 
                taxable year but before the expiration of the 
                period for filing a petition with the Tax Court 
                under subsection (c) (or, if a petition is 
                filed with the Tax Court, before the Tax Court 
                makes a declaration for that taxable year), the 
                treatment of any partnership item for the 
                taxable year is finally determined, or any such 
                item ceases to be a partnership item pursuant 
                to section 6231(b), and
                  ``(B) as a result of that final determination 
                or cessation, a deficiency can be determined 
                with respect to the items that are the subject 
                of the notice of adjustment,
        the notice of adjustment shall be treated as a notice 
        of deficiency under section 6212 and any petition filed 
        in respect of the notice shall be treated as an action 
        brought under section 6213.
          ``(4) Finally determined.--For purposes of this 
        subsection, the treatment of partnership items shall be 
        treated as finally determined if--
                  ``(A) the Secretary enters into a settlement 
                agreement (within the meaning of section 6224) 
                with the taxpayer regarding such items,
                  ``(B) a notice of final partnership 
                administrative adjustment has been issued and--
                          ``(i) no petition has been filed 
                        under section 6226 and the time for 
                        doing so has expired, or
                          ``(ii) a petition has been filed 
                        under section 6226 and the decision of 
                        the court has become final, or
                  ``(C) the period within which any tax 
                attributable to such items may be assessed 
                against the taxpayer has expired.
    ``(h) Special Rules if Secretary Incorrectly Determines 
Applicable Procedure.--
          ``(1) Special rule if secretary erroneously mails 
        notice of adjustment.--If the Secretary erroneously 
        determines that subchapter B does not apply to a 
        taxable year of a taxpayer and consistent with that 
        determination timely mails a notice of adjustment to 
        the taxpayer pursuant to subsection (a) of this 
        section, the notice of adjustment shall be treated as a 
        notice of deficiency under section 6212 and any 
        petition that is filed in respect of the notice shall 
        be treated as an action brought under section 6213.
          ``(2) Special rule if secretary erroneously mails 
        notice of deficiency.--If the Secretary erroneously 
        determines that subchapter B applies to a taxable year 
        of a taxpayer and consistent with that determination 
        timely mails a notice of deficiency to the taxpayer 
        pursuant to section 6212, the notice of deficiency 
        shall be treated as a notice of adjustment under 
        subsection (a) and any petition that is filed in 
        respect of the notice shall be treated as an action 
        brought under subsection (c).''
    (b) Treatment of Partnership Items in Deficiency 
Proceedings.--Section 6211 (defining deficiency) is amended by 
adding at the end the following new subsection:
    ``(c) Coordination With Subchapter C.--In determining the 
amount of any deficiency for purposes of this subchapter, 
adjustments to partnership items shall be made only as provided 
in subchapter C.''
    (c) Clerical Amendment.--The table of sections for 
subchapter C of chapter 63 is amended by adding at the end the 
following new item:

``Sec. 6234. Declaratory judgment relating to treatment of items other 
          than partnership items with respect to an oversheltered 
          return.''

    (d) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1232. PARTNERSHIP RETURN TO BE DETERMINATIVE OF AUDIT PROCEDURES 
                    TO BE FOLLOWED.

    (a) In General.--Section 6231 (relating to definitions and 
special rules) is amended by adding at the end the following 
new subsection:
    ``(g) Partnership Return To Be Determinative of Whether 
Subchapter Applies.--
          ``(1) Determination that subchapter applies.--If, on 
        the basis of a partnership return for a taxable year, 
        the Secretary reasonably determines that this 
        subchapter applies to such partnership for such year 
        but such determination is erroneous, then the 
        provisions of this subchapter are hereby extended to 
        such partnership (and its items) for such taxable year 
        and to partners of such partnership.
          ``(2) Determination that subchapter does not apply.--
        If, on the basis of a partnership return for a taxable 
        year, the Secretary reasonably determines that this 
        subchapter does not apply to such partnership for such 
        year but such determination is erroneous, then the 
        provisions of this subchapter shall not apply to such 
        partnership (and its items) for such taxable year or to 
        partners of such partnership.''
    (b) Effective Date.--The amendment made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1233. PROVISIONS RELATING TO STATUTE OF LIMITATIONS.

    (a) Suspension of Statute Where Untimely Petition Filed.--
Paragraph (1) of section 6229(d) (relating to suspension where 
Secretary makes administrative adjustment) is amended by 
striking all that follows ``section 6226'' and inserting the 
following: ``(and, if a petition is filed under section 6226 
with respect to such administrative adjustment, until the 
decision of the court becomes final), and''.
    (b) Suspension of Statute During Bankruptcy Proceeding.--
Section 6229 is amended by adding at the end the following new 
subsection:
    ``(h) Suspension During Pendency of Bankruptcy 
Proceeding.--If a petition is filed naming a partner as a 
debtor in a bankruptcy proceeding under title 11 of the United 
States Code, the running of the period of limitations provided 
in this section with respect to such partner shall be 
suspended--
          ``(1) for the period during which the Secretary is 
        prohibited by reason of such bankruptcy proceeding from 
        making an assessment, and
          ``(2) for 60 days thereafter.''
    (c) Tax Matters Partner in Bankruptcy.--Section 6229(b) is 
amended by redesignating paragraph (2) as paragraph (3) and by 
inserting after paragraph (1) the following new paragraph:
          ``(2) Special rule with respect to debtors in title 
        11 cases.--Notwithstanding any other law or rule of 
        law, if an agreement is entered into under paragraph 
        (1)(B) and the agreement is signed by a person who 
        would be the tax matters partner but for the fact that, 
        at the time that the agreement is executed, the person 
        is a debtor in a bankruptcy proceeding under title 11 
        of the United States Code, such agreement shall be 
        binding on all partners in the partnership unless the 
        Secretary has been notified of the bankruptcy 
        proceeding in accordance with regulations prescribed by 
        the Secretary.''
    (d) Effective Dates.--
          (1) Subsections (a) and (b).--The amendments made by 
        subsections (a) and (b) shall apply to partnership 
        taxable years with respect to which the period under 
        section 6229 of the Internal Revenue Code of 1986 for 
        assessing tax has not expired on or before the date of 
        the enactment of this Act.
          (2) Subsection (c).--The amendment made by subsection 
        (c) shall apply to agreements entered into after the 
        date of the enactment of this Act.

SEC. 1234. EXPANSION OF SMALL PARTNERSHIP EXCEPTION.

    (a) In General.--Clause (i) of section 6231(a)(1)(B) 
(relating to exception for small partnerships) is amended to 
read as follows:
                          ``(i) In general.--The term 
                        `partnership' shall not include any 
                        partnership having 10 or fewer partners 
                        each of whom is an individual (other 
                        than a nonresident alien), a C 
                        corporation, or an estate of a deceased 
                        partner. For purposes of the preceding 
                        sentence, a husband and wife (and their 
                        estates) shall be treated as 1 
                        partner.''
    (b) Effective Date.--The amendment made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1235. EXCLUSION OF PARTIAL SETTLEMENTS FROM 1-YEAR LIMITATION ON 
                    ASSESSMENT.

    (a) In General.--Subsection (f) of section 6229 (relating 
to items becoming nonpartnership items) is amended--
          (1) by striking ``(f) Items Becoming Nonpartnership 
        Items.--If'' and inserting the following:
    ``(f) Special Rules.--
          ``(1) Items becoming nonpartnership items.--If'',
          (2) by moving the text of such subsection 2 ems to 
        the right, and
          (3) by adding at the end the following new paragraph:
          ``(2) Special rule for partial settlement 
        agreements.--If a partner enters into a settlement 
        agreement with the Secretary with respect to the 
        treatment of some of the partnership items in dispute 
        for a partnership taxable year but other partnership 
        items for such year remain in dispute, the period of 
        limitations for assessing any tax attributable to the 
        settled items shall be determined as if such agreement 
        had not been entered into.''
    (b) Effective Date.--The amendment made by this section 
shall apply to settlements entered into after the date of the 
enactment of this Act.

SEC. 1236. EXTENSION OF TIME FOR FILING A REQUEST FOR ADMINISTRATIVE 
                    ADJUSTMENT.

    (a) In General.--Section 6227 (relating to administrative 
adjustment requests) is amended by redesignating subsections 
(b) and (c) as subsections (c) and (d), respectively, and by 
inserting after subsection (a) the following new subsection:
    ``(b) Special Rule in Case of Extension of Period of 
Limitations Under Section 6229.--The period prescribed by 
subsection (a)(1) for filing of a request for an administrative 
adjustment shall be extended--
          ``(1) for the period within which an assessment may 
        be made pursuant to an agreement (or any extension 
        thereof) under section 6229(b), and
          ``(2) for 6 months thereafter.''
    (b) Effective Date.--The amendment made by this section 
shall take effect as if included in the amendments made by 
section 402 of the Tax Equity and Fiscal Responsibility Act of 
1982.

SEC. 1237. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN CONTEXT OF 
                    PARTNERSHIP PROCEEDINGS.

    (a) In General.--Subsection (a) of section 6230 is amended 
by adding at the end the following new paragraph:
          ``(3) Special rule in case of assertion by partner's 
        spouse of innocent spouse relief.--
                  ``(A) Notwithstanding section 6404(b), if the 
                spouse of a partner asserts that section 
                6013(e) applies with respect to a liability 
                that is attributable to any adjustment to a 
                partnership item, then such spouse may file 
                with the Secretary within 60 days after the 
                notice of computational adjustment is mailed to 
                the spouse a request for abatement of the 
                assessment specified in such notice. Upon 
                receipt of such request, the Secretary shall 
                abate the assessment. Any reassessment of the 
                tax with respect to which an abatement is made 
                under this subparagraph shall be subject to the 
                deficiency procedures prescribed by subchapter 
                B. The period for making any such reassessment 
                shall not expire before the expiration of 60 
                days after the date of such abatement.
                  ``(B) If the spouse files a petition with the 
                Tax Court pursuant to section 6213 with respect 
                to the request for abatement described in 
                subparagraph (A), the Tax Court shall only have 
                jurisdiction pursuant to thissection to 
determine whether the requirements of section 6013(e) have been 
satisfied. For purposes of such determination, the treatment of 
partnership items under the settlement, the final partnership 
administrative adjustment, or the decision of the court (whichever is 
appropriate) that gave rise to the liability in question shall be 
conclusive.
                  ``(C) Rules similar to the rules contained in 
                subparagraphs (B) and (C) of paragraph (2) 
                shall apply for purposes of this paragraph.''
    (b) Claims for Refund.--Subsection (c) of section 6230 is 
amended by adding at the end the following new paragraph:
          ``(5) Rules for seeking innocent spouse relief.--
                  ``(A) In general.--The spouse of a partner 
                may file a claim for refund on the ground that 
                the Secretary failed to relieve the spouse 
                under section 6013(e) from a liability that is 
                attributable to an adjustment to a partnership 
                item.
                  ``(B) Time for filing claim.--Any claim under 
                subparagraph (A) shall be filed within 6 months 
                after the day on which the Secretary mails to 
                the spouse the notice of computational 
                adjustment referred to in subsection (a)(3)(A).
                  ``(C) Suit if claim not allowed.--If the 
                claim under subparagraph (B) is not allowed, 
                the spouse may bring suit with respect to the 
                claim within the period specified in paragraph 
                (3).
                  ``(D) Prior determinations are binding.--For 
                purposes of any claim or suit under this 
                paragraph, the treatment of partnership items 
                under the settlement, the final partnership 
                administrative adjustment, or the decision of 
                the court (whichever is appropriate) that gave 
                rise to the liability in question shall be 
                conclusive.''
    (c) Technical Amendments.--
          (1) Paragraph (1) of section 6230(a) is amended by 
        striking ``paragraph (2)'' and inserting ``paragraph 
        (2) or (3)''.
          (2) Subsection (a) of section 6503 is amended by 
        striking ``section 6230(a)(2)(A)'' and inserting 
        ``paragraph (2)(A) or (3) of section 6230(a)''.
    (d) Effective Date.--The amendments made by this section 
shall take effect as if included in the amendments made by 
section 402 of the Tax Equity and Fiscal Responsibility Act of 
1982.

SEC. 1238. DETERMINATION OF PENALTIES AT PARTNERSHIP LEVEL.

    (a) In General.--Section 6221 (relating to tax treatment 
determined at partnership level) is amended by striking 
``item'' and inserting ``item (and the applicability of any 
penalty, addition to tax, or additional amount which relates to 
an adjustment to a partnership item)''.
    (b) Conforming Amendments.--
          (1) Subsection (f) of section 6226 is amended--
                  (A) by striking ``relates and'' and inserting 
                ``relates,'', and
                  (B) by inserting before the period ``, and 
                the applicability of any penalty, addition to 
                tax, or additional amount which relates to an 
                adjustment to a partnership item''.
          (2) Clause (i) of section 6230(a)(2)(A) is amended to 
        read as follows:
                          ``(i) affected items which require 
                        partner level determinations (other 
                        than penalties, additions to tax, and 
                        additional amounts that relate to 
                        adjustments to partnership items), 
                        or''.
          (3)(A) Subparagraph (A) of section 6230(a)(3), as 
        added by section 14317, is amended by inserting 
        ``(including any liability for any penalty, addition to 
        tax, or additional amount relating to such 
        adjustment)'' after ``partnership item''.
          (B) Subparagraph (B) of such section is amended by 
        inserting ``(and the applicability of any penalties, 
        additions to tax, or additional amounts)'' after 
        ``partnership items''.
          (C) Subparagraph (A) of section 6230(c)(5), as added 
        by section 14317, is amended by inserting before the 
        period ``(including any liability for any penalties, 
        additions to tax, or additional amounts relating to 
        such adjustment)''.
          (D) Subparagraph (D) of section 6230(c)(5), as added 
        by section 14317, is amended by inserting ``(and the 
        applicability of any penalties, additions to tax, or 
        additional amounts)'' after ``partnership items''.
          (4) Paragraph (1) of section 6230(c) 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 adding at the end the 
        following new subparagraph:
                  ``(C) the Secretary erroneously imposed any 
                penalty, addition to tax, or additional amount 
                which relates to an adjustment to a partnership 
                item.''
          (5) So much of subparagraph (A) of section 6230(c)(2) 
        as precedes ``shall be filed'' is amended to read as 
        follows:
                  ``(A) Under paragraph (1) (a) or (c).--Any 
                claim under subparagraph (A) or (C) of 
                paragraph (1)''.
          (6) Paragraph (4) of section 6230(c) is amended by 
        adding at the end the following: ``In addition, the 
        determination under the final partnership 
        administrative adjustment or under the decision of the 
        court (whichever is appropriate) concerning the 
        applicability of any penalty, addition to tax, or 
        additional amount which relates to an adjustment to a 
        partnership item shall also be conclusive. 
        Notwithstanding the preceding sentence, the partner 
        shall be allowed to assert any partner level defenses 
        that may apply or to challenge the amount of the 
        computational adjustment.''
    (c) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1239. PROVISIONS RELATING TO COURT JURISDICTION, ETC.

    (a) Tax Court Jurisdiction To Enjoin Premature Assessments 
of Deficiencies Attributable to Partnership Items.--Subsection 
(b) of section 6225 is amended by striking ``the proper 
court.'' and inserting ``the proper court, including the Tax 
Court. The Tax Court shall have no jurisdiction to enjoin any 
action or proceeding under this subsection unless a timely 
petition for a readjustment of the partnership items for the 
taxable year has been filed and then only in respect of the 
adjustments that are the subject of such petition.''
    (b) Jurisdiction To Consider Statute of Limitations With 
Respect to Partners.--Paragraph (1) of section 6226(d) is 
amended by adding at the end the following new sentence:
        ``Notwithstanding subparagraph (B), any person treated 
        under subsection (c) as a party to an action shall be 
        permitted to participate in such action (or file a 
        readjustment petition under subsection (b) or paragraph 
        (2) of this subsection) solely for the purpose of 
        asserting that the period of limitations for assessing 
        any tax attributable to partnership items has expired 
        with respect to such person, and the court having 
        jurisdiction of such action shall have jurisdiction to 
        consider such assertion.''
    (c) Tax Court Jurisdiction To Determine Overpayments 
Attributable to Affected Items.--
          (1) Paragraph (6) of section 6230(d) is amended by 
        striking ``(or an affected item)''.
          (2) Paragraph (3) of section 6512(b) is amended by 
        adding at the end the following new sentence:
        ``In the case of a credit or refund relating to an 
        affected item (within the meaning of section 
        6231(a)(5)), the preceding sentence shall be applied by 
        substituting the periodsunder sections 6229 and 6230(d) 
for the periods under section 6511(b)(2), (c), and (d).''
    (d) Venue on Appeal.--
          (1) Paragraph (1) of section 7482(b) is amended by 
        striking ``or'' at the end of subparagraph (D), by 
        striking the period at the end of subparagraph (E) and 
        inserting ``, or'', and by inserting after subparagraph 
        (E) the following new subparagraph:
                  ``(F) in the case of a petition under section 
                6234(c)--
                          ``(i) the legal residence of the 
                        petitioner if the petitioner is not a 
                        corporation, and
                          ``(ii) the place or office applicable 
                        under subparagraph (B) if the 
                        petitioner is a corporation.''
          (2) The last sentence of section 7482(b)(1) is 
        amended by striking ``or 6228(a)'' and inserting ``, 
        6228(a), or 6234(c)''.
    (e) Other Provisions.--
          (1) Subsection (c) of section 7459 is amended by 
        striking ``or section 6228(a)'' and inserting ``, 
        6228(a), or 6234(c)''.
          (2) Subsection (o) of section 6501 is amended by 
        adding at the end the following new paragraph:
          ``(3) For declaratory judgment relating to treatment 
        of items other than partnership items with respect to 
        an oversheltered return, see section 6234.''
    (f) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act.

SEC. 1240. TREATMENT OF PREMATURE PETITIONS FILED BY NOTICE PARTNERS OR 
                    5-PERCENT GROUPS.

    (a) In General.--Subsection (b) of section 6226 (relating 
to judicial review of final partnership administrative 
adjustments) is amended by redesignating paragraph (5) as 
paragraph (6) and by inserting after paragraph (4) the 
following new paragraph:
          ``(5) Treatment of premature petitions.--If--
                  ``(A) a petition for a readjustment of 
                partnership items for the taxable year involved 
                is filed by a notice partner (or a 5-percent 
                group) during the 90-day period described in 
                subsection (a), and
                  ``(B) no action is brought under paragraph 
                (1) during the 60-day period described therein 
                with respect to such taxable year which is not 
                dismissed,
        such petition shall be treated for purposes of 
        paragraph (1) as filed on the last day of such 60-day 
        period.''
    (b) Effective Date.--The amendment made by this section 
shall apply to petitions filed after the date of the enactment 
of this Act.

SEC. 1241. BONDS IN CASE OF APPEALS FROM CERTAIN PROCEEDING.

    (a) In General.--Subsection (b) of section 7485 (relating 
to bonds to stay assessment of collection) is amended--
          (1) by inserting ``penalties,'' after ``any 
        interest,'', and
          (2) by striking ``aggregate of such deficiencies'' 
        and inserting ``aggregate liability of the parties to 
        the action''.
    (b) Effective Date.--The amendment made by this section 
shall take effect as if included in the amendments made by 
section 402 of the Tax Equity and Fiscal Responsibility Act of 
1982.

SEC. 1242. SUSPENSION OF INTEREST WHERE DELAY IN COMPUTATIONAL 
                    ADJUSTMENT RESULTING FROM CERTAIN SETTLEMENTS.

    (a) In General.--Subsection (c) of section 6601 (relating 
to interest on underpayment, nonpayment, or extension of time 
for payment, of tax) is amended by adding at the end the 
following new sentence: ``In the case of a settlement under 
section 6224(c) which results in the conversion of partnership 
items to nonpartnership items pursuant to section 
6231(b)(1)(C), the preceding sentence shall apply to a 
computational adjustment resulting from such settlement in the 
same manner as if such adjustment were a deficiency and such 
settlement were a waiver referred to in the preceding 
sentence.''
    (b) Effective Date.--The amendment made by this section 
shall apply to adjustments with respect to partnership taxable 
years beginning after the date of the enactment of this Act.

SEC. 1243. SPECIAL RULES FOR ADMINISTRATIVE ADJUSTMENT REQUESTS WITH 
                    RESPECT TO BAD DEBTS OR WORTHLESS SECURITIES.

    (a) General Rule.--Section 6227 (relating to administrative 
adjustment requests) is amended by adding at the end the 
following new subsection:
    ``(e) Requests With Respect to Bad Debts or Worthless 
Securities.--In the case of that portion of any request for an 
administrative adjustment which relates to the deductibility by 
the partnership under section 166 of a debt as a debt which 
became worthless, or under section 165(g) of a loss from 
worthlessness of a security, the period prescribed in 
subsection (a)(1) shall be 7 years from the last day for filing 
the partnership return for the year with respect to which such 
request is made (determined without regard to extensions).''
    (b) Effective Date.--
          (1) In general.--The amendment made by subsection (a) 
        shall take effect as if included in the amendments made 
        by section 402 of the Tax Equity and Fiscal 
        Responsibility Act of 1982.
          (2) Treatment of requests filed before date of 
        enactment.--In the case of that portion of any request 
        (filed before the date of the enactment of this Act) 
        for an administrative adjustment which relates to the 
        deductibility of a debt as a debt which became 
        worthless or the deductibility of a loss from the 
        worthlessness of a security--
                  (A) paragraph (2) of section 6227(a) of the 
                Internal Revenue Code of 1986 shall not apply,
                  (B) the period for filing a petition under 
                section 6228 of the Internal Revenue Code of 
                1986 with respect to such request shall not 
                expire before the date 6 months after the date 
                of the enactment of this Act, and
                  (C) such a petition may be filed without 
                regard to whether there was a notice of the 
                beginning of an administrative proceeding or a 
                final partnership administrative adjustment.

  PART III--PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE YEAR 
                 WITH RESPECT TO DECEASED PARTNER, ETC.

SEC. 1246. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH RESPECT TO DECEASED 
                    PARTNER, ETC.

    (a) General Rule.--Subparagraph (A) of section 706(c)(2) 
(relating to disposition of entire interest) is amended to read 
as follows:
                  ``(A) Disposition of entire interest.--The 
                taxable year of a partnership shall close with 
                respect to a partner whose entire interest in 
                the partnership terminates (whether by reason 
                of death, liquidation, or otherwise).''
    (b) Clerical Amendment.--The paragraph heading for 
paragraph (2) of section 706(c) is amended to read as follows:
          ``(2) Treatment of dispositions.--''.
    (c) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years beginning after 
December 31, 1997.

    Subtitle D--Provisions Relating to Real Estate Investment Trusts

SEC. 1251. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF 
                    SHAREHOLDERS.

    (a) Rules Relating to Determination of Ownership.--
          (1) Failure to issue shareholder demand letter not to 
        disqualify reit.--Section 857(a) (relating to 
        requirements applicable to real estate investment 
        trusts) is amended by striking paragraph (2) and by 
        redesignating paragraph (3) as paragraph (2).
          (2) Shareholder demand letter requirement; penalty.--
        Section 857 (relating to taxation of real estate 
        investment trusts and their beneficiaries) is amended 
        by redesignating subsection (f) as subsection (g) and 
        by inserting after subsection (e) the following new 
        subsection:
    ``(f) Real Estate Investment Trusts To Ascertain 
Ownership.--
          ``(1) In general.--Each real estate investment trust 
        shall each taxable year comply with regulations 
        prescribed by the Secretary for the purposes of 
        ascertaining the actual ownership of the outstanding 
        shares, or certificates of beneficial interest, of such 
        trust.
          ``(2) Failure to comply.--
                  ``(A) In general.--If a real estate 
                investment trust fails to comply with the 
                requirements of paragraph (1) for a taxable 
                year, such trust shall pay (on notice and 
                demand by the Secretary and in the same manner 
                as tax) a penalty of $25,000.
                  ``(B) Intentional disregard.--If any failure 
                under paragraph (1) is due to intentional 
                disregard of the requirement under paragraph 
                (1), the penalty under subparagraph (A) shall 
                be $50,000.
                  ``(C) Failure to comply after notice.--The 
                Secretary may require a real estate investment 
                trust to take such actions as the Secretary 
                determines appropriate to ascertain actual 
                ownership if the trust fails to meet the 
                requirements of paragraph (1). If the trust 
                fails to take such actions, the trust shall pay 
                (on notice and demand by the Secretary and in 
                the same manner as tax) an additional penalty 
                equal to the penalty determined under 
                subparagraph (A) or (B), whichever is 
                applicable.
                  ``(D) Reasonable cause.--No penalty shall be 
                imposed under this paragraph with respect to 
                any failure if it is shown that such failure is 
                due to reasonable cause and not to willful 
                neglect.''
    (b) Compliance With Closely Held Prohibition.--
          (1) In general.--Section 856 (defining real estate 
        investment trust) is amended by adding at the end the 
        following new subsection:
    ``(k) Requirement That Entity Not Be Closely Held Treated 
as Met in Certain Cases.--A corporation, trust, or 
association--
          ``(1) which for a taxable year meets the requirements 
        of section 857(f)(1), and
          ``(2) which does not know, or exercising reasonable 
        diligence would not have known, whether the entity 
        failed to meet the requirement of subsection (a)(6),
shall be treated as having met the requirement of subsection 
(a)(6) for the taxable year.''
          (2) Conforming amendment.--Paragraph (6) of section 
        856(a) is amended by inserting ``subject to the 
        provisions of subsection (k),'' before ``which is 
        not''.

SEC. 1252. DE MINIMIS RULE FOR TENANT SERVICES INCOME.

    (a) In General.--Paragraph (2) of section 856(d) (defining 
rents from real property) is amended by striking subparagraph 
(C) and the last sentence and inserting:
                  ``(C) any impermissible tenant service income 
                (as defined in paragraph (7)).''
    (b) Impermissible Tenant Service Income.--Section 856(d) is 
amended by adding at the end the following new paragraph:
          ``(7) Impermissible tenant service income.--For 
        purposes of paragraph (2)(C)--
                  ``(A) In general.--The term `impermissible 
                tenant service income' means, with respect to 
                any real or personal property, any amount 
                received or accrued directly or indirectly by 
                the real estate investment trust for--
                          ``(i) services furnished or rendered 
                        by the trust to the tenants of such 
                        property, or
                          ``(ii) managing or operating such 
                        property.
                  ``(B) Disqualification of all amounts where 
                more than de minimis amount.--If the amount 
                described in subparagraph (A) with respect to a 
                property for any taxable year exceeds 1 percent 
                of all amounts received or accrued during such 
                taxable year directly or indirectly by the real 
                estate investment trust with respect to such 
                property, the impermissible tenant service 
                income of the trust with respect to the 
                property shall include all such amounts.
                  ``(C) Exceptions.--For purposes of 
                subparagraph (A)--
                          ``(i) services furnished or rendered, 
                        or management or operation provided, 
                        through an independent contractor from 
                        whom the trust itself does not derive 
                        or receive any income shall not be 
                        treated as furnished, rendered, or 
                        provided by the trust, and
                          ``(ii) there shall not be taken into 
                        account any amount which would be 
                        excluded from unrelated business 
                        taxable income under section 512(b)(3) 
                        if received by an organization 
                        described in section 511(a)(2).
                  ``(D) Amount attributable to impermissible 
                services.--For purposes of subparagraph (A), 
                the amount treated as received for any service 
                (or management or operation) shall not be less 
                than 150 percent of the direct cost of the 
                trust in furnishing or rendering the service 
                (or providing the management or operation).
                  ``(E) Coordination with limitations.--For 
                purposes of paragraphs (2) and (3) of 
                subsection (c), amounts described in 
                subparagraph (A) shall be included in the gross 
                income of the corporation, trust, or 
                association.''

SEC. 1253. ATTRIBUTION RULES APPLICABLE TO TENANT OWNERSHIP.

    Section 856(d)(5) (relating to constructive ownership of 
stock) is amended by adding at the end the following: ``For 
purposes of paragraph (2)(B), section 318(a)(3)(A) shall be 
applied under the preceding sentence in the case of a 
partnership by taking into account only partners who own 
(directly or indirectly) 25 percent or more of the capital 
interest, or the profits interest, in the partnership.''

SEC. 1254. CREDIT FOR TAX PAID BY REIT ON RETAINED CAPITAL GAINS.

    (a) General Rule.--Paragraph (3) of section 857(b) 
(relating to capital gains) is amended by redesignating 
subparagraph (D) as subparagraph (E) and by inserting after 
subparagraph (C) the following new subparagraph:
                  ``(D) Treatment by shareholders of 
                undistributed capital gains.--
                          ``(i) Every shareholder of a real 
                        estate investment trust at the close of 
                        the trust's taxable year shall include, 
                        in computing his long-term capital 
                        gains in his return for his taxable 
                        year in which the last day of the 
                        trust's taxable year falls, such amount 
                        as the trust shall designate in respect 
                        of such shares in a written notice 
                        mailed to its shareholders at any time 
                        prior to the expiration of 60 days 
                        after the close of its taxable year (or 
                        mailed to its shareholders or holders 
                        of beneficial interests with its annual 
                        report for the taxable year), but the 
                        amount so includible by any shareholder 
                        shall not exceed that part of the 
                        amount subjected to tax in subparagraph 
                        (A)(ii) which he would have receivedif 
all of such amount had been distributed as capital gain dividends by 
the trust to the holders of such shares at the close of its taxable 
year.
                          ``(ii) For purposes of this title, 
                        every such shareholder shall be deemed 
                        to have paid, for his taxable year 
                        under clause (i), the tax imposed by 
                        subparagraph (A)(ii) on the amounts 
                        required by this subparagraph to be 
                        included in respect of such shares in 
                        computing his long-term capital gains 
                        for that year; and such shareholders 
                        shall be allowed credit or refund as 
                        the case may be, for the tax so deemed 
                        to have been paid by him.
                          ``(iii) The adjusted basis of such 
                        shares in the hands of the holder shall 
                        be increased with respect to the 
                        amounts required by this subparagraph 
                        to be included in computing his long-
                        term capital gains, by the difference 
                        between the amount of such includible 
                        gains and the tax deemed paid by such 
                        shareholder in respect of such shares 
                        under clause (ii).
                          ``(iv) In the event of such 
                        designation, the tax imposed by 
                        subparagraph (A)(ii) shall be paid by 
                        the real estate investment trust within 
                        30 days after the close of its taxable 
                        year.
                          ``(v) The earnings and profits of 
                        such real estate investment trust, and 
                        the earnings and profits of any such 
                        shareholder which is a corporation, 
                        shall be appropriately adjusted in 
                        accordance with regulations prescribed 
                        by the Secretary.
                          ``(vi) As used in this subparagraph, 
                        the terms `shares' and `shareholders' 
                        shall include beneficial interests and 
                        holders of beneficial interests, 
                        respectively.''
    (b) Conforming Amendments.--
          (1) Clause (i) of section 857(b)(7)(A) is amended by 
        striking ``subparagraph (B)'' and inserting 
        ``subparagraph (B) or (D)''.
          (2) Clause (iii) of section 852(b)(3)(D) is amended 
        by striking ``by 65 percent'' and all that follows and 
        inserting ``by the difference between the amount of 
        such includible gains and the tax deemed paid by such 
        shareholder in respect of such shares under clause 
        (ii).''

SEC. 1255. REPEAL OF 30-PERCENT GROSS INCOME REQUIREMENT.

    (a) General Rule.--Subsection (c) of section 856 (relating 
to limitations) is amended--
          (1) by adding ``and'' at the end of paragraph (3),
          (2) by striking paragraphs (4) and (8), and
          (3) by redesignating paragraphs (5), (6), and (7) as 
        paragraphs (4), (5), and (6), respectively.
    (b) Conforming Amendments.--
          (1) Subparagraph (G) of section 856(c)(5), as 
        redesignated by subsection (a), is amended by striking 
        ``and such agreement shall be treated as a security for 
        purposes of paragraph (4)(A)''.
          (2) Paragraph (5) of section 857(b) is amended by 
        striking ``section 856(c)(7)'' and inserting ``section 
        856(c)(6)''.
          (3) Subparagraph (C) of section 857(b)(6) is amended 
        by striking ``section 856(c)(6)(B)'' and inserting 
        ``section 856(c)(5)(B)''.

SEC. 1256. MODIFICATION OF EARNINGS AND PROFITS RULES FOR DETERMINING 
                    WHETHER REIT HAS EARNINGS AND PROFITS FROM NON-REIT 
                    YEAR.

    Subsection (d) of section 857 is amended by adding at the 
end the following new paragraph:
          ``(3) Distributions to meet requirements of 
        subsection (a)(2)(B).--Any distribution which is made 
        in order to comply with the requirements of subsection 
        (a)(2)(B)--
                  ``(A) shall be treated for purposes of this 
                subsection and subsection (a)(2)(B) as made 
                from the earliest accumulated earnings and 
                profits (other than earnings and profits to 
                which subsection (a)(2)(A) applies) rather than 
                the most recently accumulated earnings and 
                profits, and
                  ``(B) to the extent treated under 
                subparagraph (A) as made from accumulated 
                earnings and profits, shall not be treated as a 
                distribution for purposes of subsection 
                (b)(2)(B).''

SEC. 1257. TREATMENT OF FORECLOSURE PROPERTY.

    (a) Grace Periods.--
          (1) Initial period.--Paragraph (2) of section 856(e) 
        (relating to special rules for foreclosure property) is 
        amended by striking ``on the date which is 2 years 
        after the date the trust acquired such property'' and 
        inserting ``as of the close of the 3d taxable year 
        following the taxable year in which the trust acquired 
        such property''.
          (2) Extension.--Paragraph (3) of section 856(e) is 
        amended--
                  (A) by striking ``or more extensions'' and 
                inserting ``extension'', and
                  (B) by striking the last sentence and 
                inserting: ``Any such extension shall not 
                extend the grace period beyond the close of the 
                3d taxable year following the last taxable year 
                in the period under paragraph (2).''
    (b) Revocation of Election.--Paragraph (5) of section 
856(e) is amended by striking the last sentence and inserting: 
``A real estate investment trust may revoke any such election 
for a taxable year by filing the revocation (in the manner 
provided by the Secretary) on or before the due date (including 
any extension of time) for filing its return of tax under this 
chapter for the taxable year. If a trust revokes an election 
for any property, no election may be made by the trust under 
this paragraph with respect to the property for any subsequent 
taxable year.''
    (c) Certain Activities Not To Disqualify Property.--
Paragraph (4) of section 856(e) is amended by adding at the end 
the following new flush sentence:
        ``For purposes of subparagraph (C), property shall not 
        be treated as used in a trade or business by reason of 
        any activities of the real estate investment trust with 
        respect to such property to the extent that such 
        activities would not result in amounts received or 
        accrued, directly or indirectly, with respect to such 
        property being treated as other than rents from real 
        property.''

SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS.

    Section 856(c)(5)(G) (relating to treatment of certain 
interest rate agreements), as redesignated by section 1255, is 
amended to read as follows:
                  ``(G) Treatment of certain hedging 
                instruments.--Except to the extent provided by 
                regulations, any--
                          ``(i) payment to a real estate 
                        investment trust under an interest rate 
                        swap or cap agreement, option, futures 
                        contract, forward rate agreement, or 
                        any similar financial instrument, 
                        entered into by the trust in a 
                        transaction to reduce the interest rate 
                        risks with respect to any indebtedness 
                        incurred or to be incurred by the trust 
                        to acquire or carry real estate assets, 
                        and
                          ``(ii) gain from the sale or other 
                        disposition of any such investment,
                shall be treated as income qualifying under 
                paragraph (2).''

SEC. 1259. EXCESS NONCASH INCOME.

    Section 857(e)(2) (relating to determination of amount of 
excess noncash income) is amended--
          (1) by striking subparagraph (B),
          (2) by striking the period at the end of subparagraph 
        (C) and inserting a comma,
          (3) by redesignating subparagraph (C) (as amended by 
        paragraph (2)) as subparagraph (B), and
          (4) by adding at the end the following new 
        subparagraphs:
                  ``(C) the amount (if any) by which--
                          ``(i) the amounts includible in gross 
                        income with respect to instruments to 
                        which section 860E(a) or 1272 applies, 
                        exceed
                          ``(ii) the amount of money and the 
                        fair market value of other property 
                        received during the taxable year under 
                        such instruments, and
                  ``(D) amounts includible in income by reason 
                of cancellation of indebtedness.''

SEC. 1260. PROHIBITED TRANSACTION SAFE HARBOR.

    Clause (iii) of section 857(b)(6)(C) (relating to certain 
sales not to constitute prohibited transactions) is amended by 
striking ``(other than foreclosure property)'' in subclauses 
(I) and (II) and inserting ``(other than sales of foreclosure 
property or sales to which section 1033 applies)''.

SEC. 1261. SHARED APPRECIATION MORTGAGES.

    (a) Bankruptcy Safe Harbor.--Section 856(j) (relating to 
treatment of shared appreciation mortgages) is amended by 
redesignating paragraph (4) as paragraph (5) and by inserting 
after paragraph (3) the following new paragraph:
          ``(4) Coordination with 4-year holding period.--
                  ``(A) In general.--For purposes of section 
                857(b)(6)(C), if a real estate investment trust 
                is treated as having sold secured property 
                under paragraph (3)(A), the trust shall be 
                treated as having held such property for at 
                least 4 years if--
                          ``(i) the secured property is sold or 
                        otherwise disposed of pursuant to a 
                        case under title 11 of the United 
                        States Code,
                          ``(ii) the seller is under the 
                        jurisdiction of the court in such case, 
                        and
                          ``(iii) the disposition is required 
                        by the court or is pursuant to a plan 
                        approved by the court.
                  ``(B) Exception.--Subparagraph (A) shall not 
                apply if--
                          ``(i) the secured property was 
                        acquired by the trust with the intent 
                        to evict or foreclose, or
                          ``(ii) the trust knew or had reason 
                        to know that default on the obligation 
                        described in paragraph (5)(A) would 
                        occur.''
    (b) Clarification of Definition of Shared Appreciation 
Provision.--Clause (ii) of section 856(j)(5)(A) is amended by 
inserting before the period ``or appreciation in value as of 
any specified date''.

SEC. 1262. WHOLLY OWNED SUBSIDIARIES.

    Section 856(i)(2) (defining qualified REIT subsidiary) is 
amended by striking ``at all times during the period such 
corporation was in existence''.

SEC. 1263. EFFECTIVE DATE.

    The amendments made by this part shall apply to taxable 
years beginning after the date of the enactment of this Act.

   Subtitle E--Provisions Relating to Regulated Investment Companies

SEC. 1271. REPEAL OF 30-PERCENT GROSS INCOME LIMITATION.

    (a) General Rule.--Subsection (b) of section 851 (relating 
to limitations) is amended by striking paragraph (3), by adding 
``and'' at the end of paragraph (2), and by redesignating 
paragraph (4) as paragraph (3).
    (b) Technical Amendments.--
          (1) The material following paragraph (3) of section 
        851(b) (as redesignated by subsection (a)) is amended--
                  (A) by striking out ``paragraphs (2) and 
                (3)'' and inserting ``paragraph (2)'', and
                  (B) by striking out the last sentence 
                thereof.
          (2) Subsection (c) of section 851 is amended by 
        striking ``subsection (b)(4)'' each place it appears 
        (including the heading) and inserting ``subsection 
        (b)(3)''.
          (3) Subsection (d) of section 851 is amended by 
        striking ``subsections (b)(4)'' and inserting 
        ``subsections (b)(3)''.
          (4) Paragraph (1) of section 851(e) is amended by 
        striking ``subsection (b)(4)'' and inserting 
        ``subsection (b)(3)''.
          (5) Paragraph (4) of section 851(e) is amended by 
        striking ``subsections (b)(4)'' and inserting 
        ``subsections (b)(3)''.
          (6) Section 851 is amended by striking subsection (g) 
        and redesignating subsection (h) as subsection (g).
          (7) Subsection (g) of section 851 (as redesignated by 
        paragraph (6)) is amended by striking paragraph (3).
          (8) Section 817(h)(2) is amended--
                  (A) by striking ``851(b)(4)'' in subparagraph 
                (A) and inserting ``851(b)(3)'', and
                  (B) by striking ``851(b)(4)(A)(i)'' in 
                subparagraph (B) and inserting 
                ``851(b)(3)(A)(i)''.
          (9) Section 1092(f)(2) is amended by striking 
        ``Except for purposes of section 851(b)(3), the'' and 
        inserting ``The''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years ending after the date of the 
enactment of this Act.

                    Subtitle F--Taxpayer Protections

SEC. 1281. REASONABLE CAUSE EXCEPTION FOR CERTAIN PENALTIES.

    (a) Information on Deductible Employee Contributions.--
Subsection (g) of section 6652 (relating to information 
required in connection with deductible employee contributions) 
is amended by adding at the end the following new sentence: 
``No penalty shall be imposed under this subsection on any 
failure which is shown to be due to reasonable cause and not 
willful neglect.''
    (b) Reports on Status as Qualified Small Business.--
Subsection (k) of section 6652 (relating to failure to make 
reports required under section 1202) is amended by adding at 
the end the following new sentence: ``No penalty shall be 
imposed under this subsection on any failure which is shown to 
be due to reasonable cause and not willful neglect.''
    (c) Returns of Personal Holding Company Tax by Foreign 
Corporations.--Section 6683 (relating to failure of foreign 
corporation to file return of personal holding company tax) is 
amended by adding at the end the following new sentence: ``No 
penalty shall be imposed under this section on any failure 
which is shown to be due to reasonable cause and not willful 
neglect.''
    (d) Failure To Make Required Payments.--Subparagraph (A) of 
section 7519(f)(4) is amended by adding at the end the 
following new sentence: ``No penalty shall be imposed under 
this subparagraph on any failure which is shown to be due to 
reasonable cause and not willful neglect.''
    (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1282. CLARIFICATION OF PERIOD FOR FILING CLAIMS FOR REFUNDS.

    (a) In General.--Paragraph (3) of section 6512(b) (relating 
to overpayment determined by Tax Court) is amended by adding at 
the end the following flush sentence:
        ``In a case described in subparagraph (B) where the 
        date of the mailing of the notice of deficiency is 
        during the third year after the due date (with 
        extensions) for filing the return of tax and no return 
        was filed before such date, the applicable period under 
        subsections (a) and (b)(2) of section 6511 shall be 3 
        years.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to claims for credit or refund for taxable years 
ending after the date of the enactment of this Act.

SEC. 1283. REPEAL OF AUTHORITY TO DISCLOSE WHETHER PROSPECTIVE JUROR 
                    HAS BEEN AUDITED.

    (a) In General.--Subsection (h) of section 6103 (relating 
to disclosure to certain Federal officers and employees for 
purposes of tax administration, etc.) is amended by striking 
paragraph (5) and by redesignating paragraph (6) as paragraph 
(5).
    (b) Conforming Amendment.--Paragraph (4) of section 6103(p) 
is amended by striking ``(h)(6)'' each place it appears and 
inserting ``(h)(5)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to judicial proceedings commenced after the date of 
the enactment of this Act.

SEC. 1284. CLARIFICATION OF STATUTE OF LIMITATIONS.

    (a) In General.--Subsection (a) of section 6501 (relating 
to limitations on assessment and collection) is amended by 
adding at the end thereof the following new sentence: ``For 
purposes of this chapter, the term `return' means the return 
required to be filed by the taxpayer (and does not include a 
return of any person from whom the taxpayer has received an 
item of income, gain, loss, deduction, or credit).''
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1285. AWARDING OF ADMINISTRATIVE COSTS.

    (a) Right to Appeal Tax Court Decision.--Subsection (f) of 
section 7430 (relating to right of appeal) is amended by adding 
at the end the following new paragraph:
          ``(3) Appeal of tax court decision.--An order of the 
        Tax Court disposing of a petition under paragraph (2) 
        shall be reviewable in the same manner as a decision of 
        the Tax Court, but only with respect to the matters 
        determined in such order.''
    (b) Period for Applying to IRS for Costs.--Subsection (b) 
of section 7430 (relating to limitations) is amended by adding 
at the end the following new paragraph:
          ``(5) Period for applying to irs for administrative 
        costs.--An award may be made under subsection (a) by 
        the Internal Revenue Service for reasonable 
        administrative costs only if the prevailing party files 
        an application with the Internal Revenue Service for 
        such costs before the 91st day after the date on which 
        the final decision of the Internal Revenue Service as 
        to the determination of the tax, interest, or penalty 
        is mailed to such party.''
    (c) Period for Petitioning of Tax Court for Review of 
Denial of Costs.--Paragraph (2) of section 7430(f) (relating to 
right of appeal) is amended--
          (1) by striking ``appeal to'' and inserting ``the 
        filing of a petition for review with'', and
          (2) by adding at the end the following new sentence: 
        ``If the Secretary sends by certified or registered 
        mail a notice of such decision to the petitioner, no 
        proceeding in the Tax Court may be initiated under this 
        paragraph unless such petition is filed before the 91st 
        day after the date of such mailing.''
    (d) Effective Date.--The amendments made by this section 
shall apply to civil actions or proceedings commenced after the 
date of the enactment of this Act.

SEC. 1286. PENALTY FOR UNAUTHORIZED INSPECTION OF TAX RETURNS OR TAX 
                    RETURN INFORMATION.

    (a) In General.--Part I of subchapter A of chapter 75 
(relating to crimes, other offenses, and forfeitures) is 
amended by adding after section 7213 the following new section:

``SEC. 7213A. UNAUTHORIZED INSPECTION OF RETURNS OR RETURN INFORMATION.

    ``(a) Prohibitions.--
          ``(1) Federal employees and other persons.--It shall 
        be unlawful for--
                  ``(A) any officer or employee of the United 
                States, or
                  ``(B) any person described in section 6103(n) 
                or an officer or employee of any such person,
        willfully to inspect, except as authorized in this 
        title, any return or return information.
          ``(2) State and other employees.--It shall be 
        unlawful for any person (not described in paragraph 
        (1)) willfully to inspect, except as authorized in this 
        title, any return or return information acquired by 
        such person or another person under a provision of 
        section 6103 referred to in section 7213(a)(2).
    ``(b) Penalty.--
          ``(1)  In general.--Any violation of subsection (a) 
        shall be punishable upon conviction by a fine in any 
        amount not exceeding $1,000, or imprisonment of not 
        more than 1 year, or both, together with the costs of 
        prosecution.
          ``(2) Federal officers or employees.--An officer or 
        employee of the United States who is convicted of any 
        violation of subsection (a) shall, in addition to any 
        other punishment, be dismissed from office or 
        discharged from employment.
    ``(c) Definitions.--For purposes of this section, the terms 
`inspect', `return', and `return information' have the 
respective meanings given such terms by section 6103(b).''
    (b) Technical Amendments.--
          (1) Paragraph (2) of section 7213(a) is amended by 
        inserting ``(5),'' after ``(m)(2), (4),''.
          (2) The table of sections for part I of subchapter A 
        of chapter 75 is amended by inserting after the item 
        relating to section 7213 the following new item:

        ``Sec. 7213A. Unauthorized inspection of returns or return 
                  information.''

    (c) Effective Date.--The amendments made by this section 
shall apply to violations occurring on and after the date of 
the enactment of this Act.

SEC. 1287. CIVIL DAMAGES FOR UNAUTHORIZED INSPECTION OF RETURNS AND 
                    RETURN INFORMATION; NOTIFICATION OF UNLAWFUL 
                    INSPECTION OR DISCLOSURE.

    (a) Civil Damages for Unauthorized Inspection.--Subsection 
(a) of section 7431 is amended--
          (1) by striking ``Disclosure'' in the headings for 
        paragraphs (1) and (2) and inserting ``Inspection or 
        disclosure'', and
          (2) by striking ``discloses'' in paragraphs (1) and 
        (2) and inserting ``inspects or discloses''.
    (b) Notification of Unlawful Inspection or Disclosure.--
Section 7431 is amended by redesignating subsections (e) and 
(f) as subsections (f) and (g), respectively, and by inserting 
after subsection (d) the following new subsection:
    ``(e) Notification of Unlawful Inspection and Disclosure.--
If any person is criminally charged by indictment or 
information with inspection or disclosure of a taxpayer's 
return or return information in violation of--
          ``(1) paragraph (1) or (2) of section 7213(a),
          ``(2) section 7213A(a), or
          ``(3) subparagraph (B) of section 1030(a)(2) of title 
        18, United States Code,
the Secretary shall notify such taxpayer as soon as practicable 
of such inspection or disclosure.''
    (c) No Damages for Inspection Requested by Taxpayer.--
Subsection (b) of section 7431 is amended to read as follows:
    ``(b) Exceptions.--No liability shall arise under this 
section with respect to any inspection or disclosure--
          ``(1) which results from a good faith, but erroneous, 
        interpretation of section 6103, or
          ``(2) which is requested by the taxpayer.''
    (d) Conforming Amendments.--
          (1) Subsections (c)(1)(A), (c)(1)(B)(i), and (d) of 
        section 7431 are each amended by inserting ``inspection 
        or'' before ``disclosure''.
          (2) Clause (ii) of section 7431(c)(1)(B) is amended 
        by striking ``willful disclosure or a disclosure'' and 
        inserting ``willful inspection or disclosure or an 
        inspection or disclosure''.
          (3) Subsection (f) of section 7431, as redesignated 
        by subsection (b), is amended to read as follows:
    ``(f) Definitions.--For purposes of this section, the terms 
`inspect', `inspection', `return', and `return information' 
have the respective meanings given such terms by section 
6103(b).''
          (4) The section heading for section 7431 is amended 
        by inserting ``inspection or'' before ``disclosure''.
          (5) The table of sections for subchapter B of chapter 
        76 is amended by inserting ``inspection or'' before 
        ``disclosure'' in the item relating to section 7431.
          (6) Paragraph (2) of section 7431(g), as redesignated 
        by subsection (b), is amended by striking ``any use'' 
        and inserting ``any inspection or use''.
    (e) Effective Date.--The amendments made by this section 
shall apply to inspections and disclosures occurring on and 
after the date of the enactment of this Act.

TITLE XIII--SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT TAXES

SEC. 1301. GIFTS TO CHARITIES EXEMPT FROM GIFT TAX FILING REQUIREMENTS.

    (a) In General.--Section 6019 is amended by striking ``or'' 
at the end of paragraph (1), by adding ``or'' at the end of 
paragraph (2), and by inserting after paragraph (2) the 
following new paragraph:
          ``(3) a transfer with respect to which a deduction is 
        allowed under section 2522, except that this paragraph 
        shall apply with respect to a transfer of property 
        (other than a transfer described in section 2522(d)) 
        only if the entire value of such property is allowed as 
        a deduction under section 2522,''.
    (b) Effective Date.--The amendment made by this section 
shall apply to gifts made after the date of the enactment of 
this Act.

SEC. 1302. CLARIFICATION OF WAIVER OF CERTAIN RIGHTS OF RECOVERY.

    (a) Amendment to Section 2207A.--Paragraph (2) of section 
2207A(a) (relating to right of recovery in the case of certain 
marital deduction property) is amended to read as follows:
          ``(2) Decedent may otherwise direct.--Paragraph (1) 
        shall not apply with respect to any property to the 
        extent that the decedent in his will (or a revocable 
        trust) specifically indicates an intent to waive any 
        right of recovery under this subchapter with respect to 
        such property.''
    (b) Amendment to Section 2207B.--Paragraph (2) of section 
2207B(a) (relating to right of recovery where decedent retained 
interest) is amended to read as follows:
          ``(2) Decedent may otherwise direct.--Paragraph (1) 
        shall not apply with respect to any property to the 
        extent that the decedent in his will (or a revocable 
        trust) specifically indicates an intent to waive any 
        right of recovery under this subchapter with respect to 
        such property.''
    (c) Effective Date.--The amendments made by this section 
shall apply with respect to the estates of decedents dying 
after the date of the enactment of this Act.

SEC. 1303. TRANSITIONAL RULE UNDER SECTION 2056A.

    (a) General Rule.--In the case of any trust created under 
an instrument executed before the date of the enactment of the 
Revenue Reconciliation Act of 1990, such trust shall be treated 
as meeting the requirements of paragraph (1) of section 
2056A(a) of the Internal Revenue Code of 1986 if the trust 
instrument requires that all trustees of the trust be 
individual citizens of the United States or domestic 
corporations.
    (b) Effective Date.--The provisions of subsection (a) shall 
take effect as if included in the provisions of section 
11702(g) of the Revenue Reconciliation Act of 1990.

SEC. 1304. CLARIFICATIONS RELATING TO DISCLAIMERS.

    (a) Partial Transfer-Type Disclaimers Permitted.--Paragraph 
(3) of section 2518(c) (relating to certain transfers treated 
as disclaimers) is amended by inserting ``(or an undivided 
portion of such interest)'' after ``entire interest in the 
property''.
    (b) Retention of Interest by Decedent's Spouse Permitted in 
Transfer-Type Disclaimers.--Paragraph (3) of section 2518(c) is 
amended by adding at the end the following new flush sentence:
        ``For purposes of the preceding sentence, a written 
        transfer by the spouse of the decedent of property to a 
        trust shall not fail to be treated as a transfer of 
        such spouse's interest in such property by reason of 
        such spouse having an interest in such trust.''
    (c) Disclaimers Are Effective For Income Tax Purposes.--
Subsection (a) of section 2518 is amended by inserting ``and 
subtitle A'' after ``this subtitle'' each place it appears.
    (d) Effective Date.--The amendments made by this section 
shall apply to transfers creating an interest in the person 
disclaiming, and disclaimers, made after the date of the 
enactment of this Act.

SEC. 1305. INCREASE OF AMOUNT OF LAPSE OF GENERAL POWER OF APPOINTMENT 
                    NOT TREATED AS RELEASE FOR PURPOSES OF ESTATE AND 
                    GIFT TAX (5 OR 5 POWER).

    (a) Estate Tax.--Subparagraph (A) of section 2041(b)(2) 
(relating to lapse of power) is amended by striking ``$5,000'' 
and inserting ``$10,000''.
    (b) Gift Tax.--Paragraph (1) of section 2514(e) (relating 
to lapse of power) is amended by striking ``$5,000'' and 
inserting ``$10,000''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1306. TREATMENT FOR ESTATE TAX PURPOSES OF SHORT-TERM OBLIGATIONS 
                    HELD BY NONRESIDENT ALIENS.

    (a) In General.--Subsection (b) of section 2105 is amended 
by striking ``and'' at the end of paragraph (2), by striking 
the period at the end of paragraph (3) and inserting ``, and'', 
and by inserting after paragraph (3) the following new 
paragraph:
          ``(4) obligations which would be original issue 
        discount obligations as defined in section 871(g)(1) 
        but for subparagraph (B)(i) thereof, if any interest 
        thereon (were such interest received by the decedent at 
        the time of his death) would not be effectively 
        connected with the conduct of a trade or business 
        within the United States.''
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1307. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.

    (a) In General.--Subpart A of part I of subchapter J 
(relating to estates, trusts, beneficiaries, and decedents) is 
amended by adding at the end the following new section:

``SEC. 646. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.

    ``(a) General Rule.--For purposes of this subtitle, if both 
the executor (if any) of an estate and the trustee of a 
qualified revocable trust elect the treatment provided in this 
section, such trust shall be treated and taxed as part of such 
estate (and not as a separate trust) for all taxable years of 
the estate ending after the date of the decedent's death and 
before the applicable date.
    ``(b) Definitions.--For purposes of subsection (a)--
          ``(1) Qualified revocable trust.--The term `qualified 
        revocable trust' means any trust (or portion thereof) 
        which was treated under section 676 as owned by the 
        decedent of the estate referred to in subsection (a) by 
        reason of a power in the grantor (determined without 
        regard to section 672(e)).
          ``(2) Applicable date.--The term `applicable date' 
        means--
                  ``(A) if no return of tax imposed by chapter 
                11 is required to be filed, the date which is 2 
                years after the date of the decedent's death, 
                and
                  ``(B) if such a return is required to be 
                filed, the date which is 6 months after the 
                date of the final determination of the 
                liability for tax imposed by chapter 11.
    ``(c) Election.--The election under subsection (a) shall be 
made not later than the time prescribed for filing the return 
of tax imposed by this chapter for the first taxable year of 
the estate (determined with regard to extensions) and, once 
made, shall be irrevocable.''
    (b) Comparable Treatment Under Generation-Skipping Tax.--
Paragraph (1) of section 2652(b) is amended by adding at the 
end the following new sentence: ``Such term shall not include 
any trust during any period the trust is treated as part of an 
estate under section 646.''
    (c) Clerical Amendment.--The table of sections for such 
subpart A is amended by adding at the end the following new 
item:

        ``Sec. 646. Certain revocable trusts treated as part of 
                  estate.''

    (d) Effective Date.--The amendments made by this section 
shall apply with respect to estates of decedents dying after 
the date of the enactment of this Act.

SEC. 1308. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAXABLE YEAR OF 
                    ESTATE.

    (a) In General.--Subsection (b) of section 663 (relating to 
distributions in first 65 days of taxable year) is amended by 
inserting ``an estate or'' before ``a trust'' each place it 
appears.
    (b) Conforming Amendment.--Paragraph (2) of section 663(b) 
is amended by striking ``the fiduciary of such trust'' and 
inserting ``the executor of such estate or the fiduciary of 
such trust (as the case may be)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1309. SEPARATE SHARE RULES AVAILABLE TO ESTATES.

    (a) In General.--Subsection (c) of section 663 (relating to 
separate shares treated as separate trusts) is amended--
          (1) by inserting before the last sentence the 
        following new sentence: ``Rules similar to the rules of 
        the preceding provisions of this subsection shall apply 
        to treat substantially separate and independent shares 
        of different beneficiaries in an estate having more 
        than 1 beneficiary as separate estates.'', and
          (2) by inserting ``or estates'' after ``trusts'' in 
        the last sentence.
    (b) Conforming Amendment.--The subsection heading of 
section 663(c) is amended by inserting ``Estates or'' before 
``Trusts''.
    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1310. EXECUTOR OF ESTATE AND BENEFICIARIES TREATED AS RELATED 
                    PERSONS FOR DISALLOWANCE OF LOSSES, ETC.

    (a) Disallowance of Losses.--Subsection (b) of section 267 
(relating to losses, expenses, and interest with respect to 
transactions between related taxpayers) is amended by striking 
``or'' at the end of paragraph (11), by striking the period at 
the end of paragraph (12) and inserting ``; or'', and by adding 
at the end the following new paragraph:
          ``(13) Except in the case of a sale or exchange in 
        satisfaction of a pecuniary bequest, an executor of an 
        estate and a beneficiary of such estate.''
    (b) Ordinary Income From Gain From Sale of Depreciable 
Property.--Subsection (b) of section 1239 is amended by 
striking the period at the end of paragraph (2) and inserting 
``, and'' and by adding at the end the following new paragraph:
          ``(3) except in the case of a sale or exchange in 
        satisfaction of a pecuniary bequest, an executor of an 
        estate and a beneficiary of such estate.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 1311. LIMITATION ON TAXABLE YEAR OF ESTATES.

    (a) In General.--Section 645 (relating to taxable year of 
trusts) is amended to read as follows:

``SEC. 645. TAXABLE YEAR OF ESTATES AND TRUSTS.

    ``(a) Estates.--For purposes of this subtitle, the taxable 
year of an estate shall be a year ending on October 31, 
November 30, or December 31.
    ``(b) Trusts.--
          ``(1) In general.--For purposes of this subtitle, the 
        taxable year of any trust shall be the calendar year.
          ``(2) Exception for trusts exempt from tax and 
        charitable trusts.--Paragraph (1) shall not apply to a 
        trust exempt from taxation under section 501(a) or to a 
        trust described in section 4947(a)(1).''
    (b) Clerical Amendment.--The table of sections for subpart 
A of part I of subchapter J of chapter 1 is amended by striking 
the item relating to section 645 and inserting the following 
new item:

        ``Sec. 645. Taxable year of estates and trusts.''

    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1312. TREATMENT OF FUNERAL TRUSTS.

    (a) In General.--Subpart F of part I of subchapter J of 
chapter 1 is amended by adding at the end the following new 
section:

``SEC. 684. TREATMENT OF FUNERAL TRUSTS.

    ``(a) In General.--In the case of a qualified funeral 
trust--
          ``(1) subparts B, C, D, and E shall not apply, and
          ``(2) no deduction shall be allowed by section 
        642(b).
    ``(b) Qualified Funeral Trust.--For purposes of this 
subsection, the term `qualified funeral trust' means any trust 
(other than a foreign trust) if--
          ``(1) the trust arises as a result of a contract with 
        a person engaged in the trade or business of providing 
        funeral or burial services or property necessary to 
        provide such services,
          ``(2) the sole purpose of the trust is to hold, 
        invest, and reinvest funds in the trust and to use such 
        funds solely to make payments for such services or 
        property for the benefit of the beneficiaries of the 
        trust,
          ``(3) the only beneficiaries of such trust are 
        individuals who have entered into contracts described 
        in paragraph (1) to have such services or property 
        provided at their death,
          ``(4) the only contributions to the trust are 
        contributions by or for the benefit of such 
        beneficiaries,
          ``(5) the trustee elects the application of this 
        subsection, and
          ``(6) the trust would (but for the election described 
        in paragraph (5)) be treated as owned by the 
        beneficiaries under subpart E.
    ``(c) Dollar Limitation on Contributions.--
          ``(1) In general.--The term `qualified funeral trust' 
        shall not include any trust which accepts aggregate 
        contributions by or for the benefit of an individual in 
        excess of $7,000.
          ``(2) Related trusts.--For purposes of paragraph (1), 
        all trusts having trustees which are related persons 
        shall be treated as 1 trust. For purposes of the 
        preceding sentence, persons are related if--
                  ``(A) the relationship between such persons 
                is described in section 267 or 707(b),
                  ``(B) such persons are treated as a single 
                employer under subsection (a) or (b) of section 
                52, or
                  ``(C) the Secretary determines that treating 
                such persons as related is necessary to prevent 
                avoidance of the purposes of this section.
          ``(3) Inflation adjustment.--In the case of any 
        contract referred to in subsection (b)(1) which is 
        entered into during any calendar year after 1998, the 
        dollar amount referred to paragraph (1) shall be 
        increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for such 
                calendar year, by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph 
                (B) thereof.
        If any dollar amount after being increased under the 
        preceding sentence is not a multiple of $100, such 
        dollar amount shall be rounded to the nearest multiple 
        of $100.
    ``(d) Application of Rate Schedule.--Section 1(e) shall be 
applied to each qualified funeral trust by treating each 
beneficiary's interest in each such trust as a separate trust.
    ``(e) Treatment of Amounts Refunded to Beneficiary on 
Cancellation.--No gain or loss shall be recognized to a 
beneficiary described in subsection (b)(3) of any qualified 
funeral trust by reason of any payment from such trust to such 
beneficiary by reason of cancellation of a contract referred to 
in subsection (b)(1). If any payment referred to inthe 
preceding sentence consists of property other than money, the basis of 
such property in the hands of such beneficiary shall be the same as the 
trust's basis in such property immediately before the payment.
    ``(f) Simplified Reporting.--The Secretary may prescribe 
rules for simplified reporting of all trusts having a single 
trustee.''
    (b) Clerical Amendment.--The table of sections for subpart 
F of part I of subchapter J of chapter 1 is amended by adding 
at the end the following new item:

        ``Sec. 684. Treatment of funeral trusts.''

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

SEC. 1313. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF DECEDENT'S DEATH.

    (a) General Rule.--Section 2035 is amended to read as 
follows:

``SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS OF 
                    DECEDENT'S DEATH.

    ``(a) Inclusion of Certain Property in Gross Estate.--If--
          ``(1) the decedent made a transfer (by trust or 
        otherwise) of an interest in any property, or 
        relinquished a power with respect to any property, 
        during the 3-year period ending on the date of the 
        decedent's death, and
          ``(2) the value of such property (or an interest 
        therein) would have been included in the decedent's 
        gross estate under section 2036, 2037, 2038, or 2042 if 
        such transferred interest or relinquished power had 
        been retained by the decedent on the date of his death,
the value of the gross estate shall include the value of any 
property (or interest therein) which would have been so 
included.
    ``(b) Inclusion of Gift Tax on Gifts Made During 3 Years 
Before Decedent's Death.--The amount of the gross estate 
(determined without regard to this subsection) shall be 
increased by the amount of any tax paid under chapter 12 by the 
decedent or his estate on any gift made by the decedent or his 
spouse during the 3-year period ending on the date of the 
decedent's death.
    ``(c) Other Rules Relating to Transfers Within 3 Years of 
Death.--
          ``(1) In general.--For purposes of--
                  ``(A) section 303(b) (relating to 
                distributions in redemption of stock to pay 
                death taxes),
                  ``(B) section 2032A (relating to special 
                valuation of certain farms, etc., real 
                property), and
                  ``(C) subchapter C of chapter 64 (relating to 
                lien for taxes),
        the value of the gross estate shall include the value 
        of all property to the extent of any interest therein 
        of which the decedent has at any time made a transfer, 
        by trust or otherwise, during the 3-year period ending 
        on the date of the decedent's death.
          ``(2) Coordination with section 6166.--An estate 
        shall be treated as meeting the 35 percent of adjusted 
        gross estate requirement of section 6166(a)(1) only if 
        the estate meets such requirement both with and without 
        the application of paragraph (1).
          ``(3) Marital and small transfers.--Paragraph (1) 
        shall not apply to any transfer (other than a transfer 
        with respect to a life insurance policy) made during a 
        calendar year to any donee if the decedent was not 
        required by section 6019 (other than by reason of 
        section 6019(2)) to file any gift tax return for such 
        year with respect to transfers to such donee.
    ``(d) Exception.--Subsection (a) shall not apply to any 
bona fide sale for an adequate and full consideration in money 
or money's worth.
    ``(e) Treatment of Certain Transfers From Revocable 
Trusts.--For purposes of this section and section 2038, any 
transfer from any portion of a trust during any period that 
such portion was treated under section 676 as owned by the 
decedent by reason of a power in the grantor (determined 
without regard to section 672(e)) shall be treated as a 
transfer made directly by the decedent.''
    (b) Clerical Amendment.--The table of sections for part III 
of subchapter A of chapter 11 is amended by striking ``gifts'' 
in the item relating to section 2035 and inserting ``certain 
gifts''.
    (c) Effective Date.--The amendments made by this section 
shall apply to the estates of decedents dying after the date of 
the enactment of this Act.

SEC. 1314. CLARIFICATION OF TREATMENT OF SURVIVOR ANNUITIES UNDER 
                    QUALIFIED TERMINABLE INTEREST RULES.

    (a) In General.--Subparagraph (C) of section 2056(b)(7) is 
amended by inserting ``(or, in the case of an interest in an 
annuity arising under the community property laws of a State, 
included in the gross estate of the decedent under section 
2033)'' after ``section 2039''.
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1315. TREATMENT UNDER QUALIFIED DOMESTIC TRUST RULES OF FORMS OF 
                    OWNERSHIP WHICH ARE NOT TRUSTS.

    (a) In General.--Subsection (c) of section 2056A (defining 
qualified domestic trust) is amended by adding at the end the 
following new paragraph:
          ``(3) Trust.--To the extent provided in regulations 
        prescribed by the Secretary, the term `trust' includes 
        other arrangements which have substantially the same 
        effect as a trust.''
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

SEC. 1316. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER SECTION 2032A.

    (a) General Rule.--Paragraph (3) of section 2032A(d) 
(relating to modification of election and agreement to be 
permitted) is amended to read as follows:
          ``(3) Modification of election and agreement to be 
        permitted.--The Secretary shall prescribe procedures 
        which provide that in any case in which the executor 
        makes an election under paragraph (1) (and submits the 
        agreement referred to in paragraph (2)) within the time 
        prescribed therefor, but--
                  ``(A) the notice of election, as filed, does 
                not contain all required information, or
                  ``(B) signatures of 1 or more persons 
                required to enter into the agreement described 
                in paragraph (2) are not included on the 
                agreement as filed, or the agreement does not 
                contain all required information,
        the executor will have a reasonable period of time (not 
        exceeding 90 days) after notification of such failures 
        to provide such information or signatures.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to the estates of decedents dying after the date of 
the enactment of this Act.

SEC. 1317. AUTHORITY TO WAIVE REQUIREMENT OF UNITED STATES TRUSTEE FOR 
                    QUALIFIED DOMESTIC TRUSTS.

    (a) In General.--Subparagraph (A) of section 2056A(a)(1) is 
amended by inserting ``except as provided in regulations 
prescribed by the Secretary,'' before ``requires''.
    (b) Effective Date.--The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act.

  TITLE XIV--SIMPLIFICATION PROVISIONS RELATING TO EXCISE TAXES, TAX-
                    EXEMPT BONDS, AND OTHER MATTERS

                 Subtitle A--Excise Tax Simplification

          PART I--EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS

SEC. 1401. INCREASE IN DE MINIMIS LIMIT FOR AFTER-MARKET ALTERATIONS 
                    FOR HEAVY TRUCKS AND LUXURY CARS.

    (a) In General.--Sections 4003(a)(3)(C) and 4051(b)(2)(B) 
(relating to exceptions) are each amended by striking ``$200'' 
and inserting ``$1,000''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall apply to installations on vehicles sold after the date of 
the enactment of this Act.

SEC. 1402. CREDIT FOR TIRE TAX IN LIEU OF EXCLUSION OF VALUE OF TIRES 
                    IN COMPUTING PRICE.

    (a) In General.--Subsection (e) of section 4051 is amended 
to read as follows:
    ``(e) Credit Against Tax for Tire Tax.--If--
          ``(1) tires are sold on or in connection with the 
        sale of any article, and
          ``(2) tax is imposed by this subchapter on the sale 
        of such tires,
there shall be allowed as a credit against the tax imposed by 
this subchapter an amount equal to the tax (if any) imposed by 
section 4071 on such tires.''
    (b) Conforming Amendment.--Subparagraph (B) of section 
4052(b)(1) is amended by striking clause (iii), by adding 
``and'' at the end of clause (ii), and by redesignating clause 
(iv) as clause (iii).
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 1998.

   PART II--PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER

SEC. 1411. CREDIT OR REFUND FOR IMPORTED BOTTLED DISTILLED SPIRITS 
                    RETURNED TO DISTILLED SPIRITS PLANT.

    (a) In General.--Section 5008(c)(1) (relating to distilled 
spirits returned to bonded premises) is amended by striking 
``withdrawn from bonded premises on payment or determination of 
tax'' and inserting ``on which tax has been determined or 
paid''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1412. AUTHORITY TO CANCEL OR CREDIT EXPORT BONDS WITHOUT 
                    SUBMISSION OF RECORDS.

    (a) In General.--Section 5175(c) (relating to cancellation 
of credit of export bonds) is amended by striking ``on the 
submission of'' and all that follows and inserting ``if there 
is such proof of exportation as the Secretary may by 
regulations require.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1413. REPEAL OF REQUIRED MAINTENANCE OF RECORDS ON PREMISES OF 
                    DISTILLED SPIRITS PLANT.

    (a) In General.--Section 5207(c) (relating to preservation 
and inspection) is amended by striking ``shall be kept on the 
premises where the operations covered by the record are carried 
on and''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1414. FERMENTED MATERIAL FROM ANY BREWERY MAY BE RECEIVED AT A 
                    DISTILLED SPIRITS PLANT.

    (a) In General.--Section 5222(b)(2) (relating to receipt) 
is amended to read as follows:
          ``(2) beer conveyed without payment of tax from 
        brewery premises, beer which has been lawfully removed 
        from brewery premises upon determination of tax, or''.
    (b) Clarification of Authority To Permit Removal of Beer 
Without Payment of Tax for Use as Distilling Material.--Section 
5053 (relating to exemptions) is amended by redesignating 
subsection (f) as subsection (i) and by inserting after 
subsection (e) the following new subsection:
    ``(f) Removal for Use as Distilling Material.--Subject to 
such regulations as the Secretary may prescribe, beer may be 
removed from a brewery without payment of tax to any distilled 
spirits plant for use as distilling material.''
    (c) Clarification of Refund and Credit of Tax.--Section 
5056 (relating to refund and credit of tax, or relief from 
liability) is amended--
          (1) by redesignating subsection (c) as subsection (d) 
        and by inserting after subsection (b) the following new 
        subsection:
    ``(c) Beer Received at a Distilled Spirits Plant.--Any tax 
paid by any brewer on beer produced in the United States may be 
refunded or credited to the brewer, without interest, or if the 
tax has not been paid, the brewer may be relieved of liability 
therefor, under regulations as the Secretary may prescribe, if 
such beer is received on the bonded premises of a distilled 
spirits plant pursuant to the provisions of section 5222(b)(2), 
for use in the production of distilled spirits.'', and
          (2) by striking ``or rendering unmerchantable'' in 
        subsection (d) (as so redesignated) and inserting 
        ``rendering unmerchantable, or receipt on the bonded 
        premises of a distilled spirits plant''.
    (d) Effective Date.--The amendments made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1415. REPEAL OF REQUIREMENT FOR WHOLESALE DEALERS IN LIQUORS TO 
                    POST SIGN.

    (a) In General.--Section 5115 (relating to sign required on 
premises) is hereby repealed.
    (b) Conforming Amendments.--
          (1) Section 5681(a) is amended by striking ``, and 
        every wholesale dealer in liquors,'' and by striking 
        ``section 5115(a) or''.
          (2) Section 5681(c) is amended--
                  (A) by striking ``or wholesale liquor 
                establishment, on which no sign required by 
                section 5115(a) or'' and inserting ``on which 
                no sign required by'', and
                  (B) by striking ``or wholesale liquor 
                establishment, or who'' and inserting ``or 
                who''.
          (3) The table of sections for subpart D of part II of 
        subchapter A of chapter 51 is amended by striking the 
        item relating to section 5115.
    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

SEC. 1416. REFUND OF TAX TO WINE RETURNED TO BOND NOT LIMITED TO 
                    UNMERCHANTABLE WINE.

    (a) In General.--Section 5044(a) (relating to refund of tax 
on unmerchantable wine) is amended by striking ``as 
unmerchantable''.
    (b) Conforming Amendments.--
          (1) Section 5361 is amended by striking 
        ``unmerchantable''.
          (2) The section heading for section 5044 is amended 
        by striking ``unmerchantable''.
          (3) The item relating to section 5044 in the table of 
        sections for subpart C of part I of subchapter A of 
        chapter 51 is amended by striking ``unmerchantable''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1417. USE OF ADDITIONAL AMELIORATING MATERIAL IN CERTAIN WINES.

    (a) In General.--Section 5384(b)(2)(D) (relating to 
ameliorated fruit and berry wines) is amended by striking 
``loganberries, currants, or gooseberries,'' and inserting 
``any fruit or berry with a natural fixed acid of 20 parts per 
thousand or more (before any correction of such fruit or 
berry)''.
    (b) Effective Date.--The amendment made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1418. DOMESTICALLY PRODUCED BEER MAY BE WITHDRAWN FREE OF TAX FOR 
                    USE OF FOREIGN EMBASSIES, LEGATIONS, ETC.

    (a) In General.--Section 5053 (relating to exemptions), as 
amended by section 1414(b), is amended by inserting after 
subsection (f) the following new subsection:
    ``(g) Removals for Use of Foreign Embassies, Legations, 
Etc.--
          ``(1) In general.--Subject to such regulations as the 
        Secretary may prescribe--
                  ``(A) beer may be withdrawn from the brewery 
                without payment of tax for transfer to any 
                customs bonded warehouse for entry pending 
                withdrawal therefrom as provided in 
                subparagraph (B), and
                  ``(B) beer entered into any customs bonded 
                warehouse under subparagraph (A) may be 
                withdrawn for consumption in the United States 
                by, and for the official and family use of, 
                such foreign governments, organizations, and 
                individuals as are entitled to withdraw 
                imported beer from such warehouses free of tax.
        Beer transferred to any customs bonded warehouse under 
        subparagraph (A) shall be entered, stored, and 
        accounted for in such warehouse under such regulations 
        and bonds as the Secretary may prescribe, and may be 
        withdrawn therefrom by such governments, organizations, 
        and individuals free of tax under the same conditions 
        and procedures as imported beer.
          ``(2) Other rules to apply.--Rules similar to the 
        rules of paragraphs (2) and (3) of section 5362(e) 
        shall apply for purposes of this subsection.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1419. BEER MAY BE WITHDRAWN FREE OF TAX FOR DESTRUCTION.

    (a) In General.--Section 5053 (relating to exemptions), as 
amended by section 1418(a), is amended by inserting after 
subsection (g) the following new subsection:
    ``(h) Removals for Destruction.--Subject to such 
regulations as the Secretary may prescribe, beer may be removed 
from the brewery without payment of tax for destruction.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1420. AUTHORITY TO ALLOW DRAWBACK ON EXPORTED BEER WITHOUT 
                    SUBMISSION OF RECORDS.

    (a) In General.--The first sentence of section 5055 
(relating to drawback of tax on beer) is amended by striking 
``found to have been paid'' and all that follows and inserting 
``paid on such beer if there is such proof of exportation as 
the Secretary may by regulations require.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1421. TRANSFER TO BREWERY OF BEER IMPORTED IN BULK WITHOUT PAYMENT 
                    OF TAX.

    (a) In General.--Part II of subchapter G of chapter 51 is 
amended by adding at the end the following new section:

``SEC. 5418. BEER IMPORTED IN BULK.

    ``Beer imported or brought into the United States in bulk 
containers may, under such regulations as the Secretary may 
prescribe, be withdrawn from customs custody and transferred in 
such bulk containers to the premises of a brewery without 
payment of the internal revenue tax imposed on such beer. The 
proprietor of a brewery to which such beer is transferred shall 
become liable for the tax on the beer withdrawn from customs 
custody under this section upon release of the beer from 
customs custody, and the importer, or the person bringing such 
beer into the United States, shall thereupon be relieved of the 
liability for such tax.''
    (b) Clerical Amendment.--The table of sections for such 
part II is amended by adding at the end the following new item:

        ``Sec. 5418. Beer imported in bulk.''

    (c) Effective Date.--The amendments made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

SEC. 1422. TRANSFER TO BONDED WINE CELLARS OF WINE IMPORTED IN BULK 
                    WITHOUT PAYMENT OF TAX.

    (a) In General.--Part II of subchapter F of chapter 51 is 
amended by inserting after section 5363 the following new 
section:

``SEC. 5364. WINE IMPORTED IN BULK.

    ``Wine imported or brought into the United States in bulk 
containers may, under such regulations as the Secretary may 
prescribe, be withdrawn from customs custody and transferred in 
such bulk containers to the premises of a bonded wine cellar 
without payment of the internal revenue tax imposed on such 
wine. The proprietor of a bonded wine cellar to which such wine 
is transferred shall become liable for the tax on the wine 
withdrawn from customs custody under this section upon release 
of the wine from customs custody, and the importer, or the 
person bringing such wine into the United States, shall 
thereupon be relieved of the liability for such tax.''
    (b) Clerical Amendment.--The table of sections for such 
part II is amended by inserting after the item relating to 
section 5363 the following new item:

        ``Sec. 5364. Wine imported in bulk.''

    (c) Effective Date.--The amendments made by this section 
shall take effect on the 1st day of the 1st calendar quarter 
that begins at least 90 days after the date of the enactment of 
this Act.

                 PART III--OTHER EXCISE TAX PROVISIONS

SEC. 1431. AUTHORITY TO GRANT EXEMPTIONS FROM REGISTRATION 
                    REQUIREMENTS.

    (a) In General.--Section 4222(b)(2) (relating to export) is 
amended--
          (1) by striking ``in the case of any sale or resale 
        for export,'', and
          (2) by striking ``Export'' and inserting ``Under 
        regulations''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall take effect on the date of the enactment of this Act.

SEC. 1432. REPEAL OF EXPIRED PROVISIONS.

    (a) Piggy-Back Trailers.--Section 4051 (relating to 
imposition of tax on heavy trucks and trailers sold at retail) 
is amended by striking subsection (d) and by redesignating 
subsection (e) as subsection (d).
    (b) Deep Seabed Mining.--
          (1) In general.--Subchapter F of chapter 36 (relating 
        to tax on removal of hard mineral resources from deep 
        seabed) is hereby repealed.
          (2) Conforming amendment.--The table of subchapters 
        for chapter 36 is amended by striking the item relating 
        to subchapter F.
    (c) Ozone-Depleting Chemicals.--
          (1) Paragraph (1) of section 4681(b) is amended by 
        striking subparagraphs (B) and (C) and inserting the 
        following new subparagraph:
                  ``(B) Base tax amount.--The base tax amount 
                for purposes of subparagraph (A) with respect 
                to any sale or use during any calendar year 
                after 1995 shall be $5.35 increased by 45 cents 
                for each year after 1995.''
          (2) Subsection (g) of section 4682 is amended to read 
        as follows:
    ``(g) Chemicals Used as Propellants in Metered-Dose 
Inhalers.--
          ``(1) Exemption from tax.--
                  ``(A) 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.
                  ``(B) Qualified sale.--For purposes of 
                subparagraph (A), 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.
          ``(2) 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 paragraph.''

                 Subtitle B--Tax-Exempt Bond Provisions

SEC. 1441. REPEAL OF $100,000 LIMITATION ON UNSPENT PROCEEDS UNDER 1-
                    YEAR EXCEPTION FROM REBATE.

    Subclause (I) of section 148(f)(4)(B)(ii) (relating to 
additional period for certain bonds) is amended by striking 
``the lesser of 5 percent of the proceeds of the issue or 
$100,000'' and inserting ``5 percent of the proceeds of the 
issue''.

SEC. 1442. EXCEPTION FROM REBATE FOR EARNINGS ON BONA FIDE DEBT SERVICE 
                    FUND UNDER CONSTRUCTION BOND RULES.

    Subparagraph (C) of section 148(f)(4) is amended by adding 
at the end the following new clause:
                          ``(xvii) Treatment of bona fide debt 
                        service funds.--If the spending 
                        requirements of clause (ii) are met 
                        with respect to the available 
                        construction proceeds of a construction 
                        issue, then paragraph (2) shall not 
                        apply to earnings on a bona fide debt 
                        service fund for such issue.''

SEC. 1443. REPEAL OF DEBT SERVICE-BASED LIMITATION ON INVESTMENT IN 
                    CERTAIN NONPURPOSE INVESTMENTS.

    Subsection (d) of section 148 (relating to special rules 
for reasonably required reserve or replacement fund) is amended 
by striking paragraph (3).

SEC. 1444. REPEAL OF EXPIRED PROVISIONS.

    (a) Paragraph (2) of section 148(c) is amended by striking 
subparagraph (B) and by redesignating subparagraphs (C), (D), 
and (E) as subparagraphs (B), (C), and (D), respectively.
    (b) Paragraph (4) of section 148(f) is amended by striking 
subparagraph (E).

SEC. 1445. EFFECTIVE DATE.

    The amendments made by this subtitle shall apply to bonds 
issued after the date of the enactment of this Act.

                    Subtitle C--Tax Court Procedures

SEC. 1451. OVERPAYMENT DETERMINATIONS OF TAX COURT.

    (a) Appeal of Order.--Paragraph (2) of section 6512(b) 
(relating to jurisdiction to enforce) is amended by adding at 
the end the following new sentence: ``An order of the Tax Court 
disposing of a motion under this paragraph shall be reviewable 
in the same manner as a decision of the Tax Court, but only 
with respect to the matters determined in such order.''
    (b) Denial of Jurisdiction Regarding Certain Credits and 
Reductions.--Subsection (b) of section 6512 (relating to 
overpayment determined by Tax Court) is amended by adding at 
the end the following new paragraph:
          ``(4) Denial of jurisdiction regarding certain 
        credits and reductions.--The Tax Court shall have no 
        jurisdiction under this subsection to restrain or 
        review any credit or reduction made by the Secretary 
        under section 6402.''
    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

SEC. 1452. REDETERMINATION OF INTEREST PURSUANT TO MOTION.

    (a) In General.--Subsection (c) of section 7481 (relating 
to jurisdiction over interest determinations) is amended to 
read as follows:
    ``(c) Jurisdiction Over Interest Determinations.--
          ``(1) In general.--Notwithstanding subsection (a), 
        if, within 1 year after the date the decision of the 
        Tax Court becomes final under subsection (a) in a case 
        to which this subsection applies, the taxpayer files a 
        motion in the Tax Court for a redetermination of the 
        amount of interest involved, then the Tax Court may 
        reopen the case solely to determine whether the 
        taxpayer has made an overpayment of such interest or 
        the Secretary has made an underpayment of such interest 
        and the amount thereof.
          ``(2) Cases to which this subsection applies.--This 
        subsection shall apply where--
                  ``(A)(i) an assessment has been made by the 
                Secretary under section 6215 which includes 
                interest as imposed by this title, and
                  ``(ii) the taxpayer has paid the entire 
                amount of the deficiency plus interest claimed 
                by the Secretary, and
                  ``(B) the Tax Court finds under section 
                6512(b) that the taxpayer has made an 
                overpayment.
          ``(3) Special rules.--If the Tax Court determines 
        under this subsection that the taxpayer has made an 
        overpayment of interest or that the Secretary has made 
        an underpayment of interest, then that determination 
        shall be treated under section 6512(b)(1) as a 
        determination of an overpayment of tax. An order of the 
        Tax Court redetermining interest, when entered upon the 
        records of the court, shall be reviewable in the same 
        manner as a decision of the Tax Court.''
    (b) Effective Date.--The amendment made by this section 
shall take effect on the date of the enactment of this Act.

SEC. 1453. APPLICATION OF NET WORTH REQUIREMENT FOR AWARDS OF 
                    LITIGATION COSTS.

    (a) In General.--Paragraph (4) of section 7430(c) (defining 
prevailing party) is amended by adding at the end thereof the 
following new subparagraph:
                  ``(D) Special rules for applying net worth 
                requirement.--In applying the requirements of 
                section 2412(d)(2)(B) of title 28, United 
                States Code, for purposes of subparagraph 
                (A)(iii) of this paragraph--
                          ``(i) the net worth limitation in 
                        clause (i) of such section shall apply 
                        to--
                                  ``(I) an estate but shall be 
                                determined as of the date of 
                                the decedent's death, and
                                  ``(II) a trust but shall be 
                                determined as of the last day 
                                of the taxable year involved in 
                                the proceeding, and
                          ``(ii) individuals filing a joint 
                        return shall be treated as 1 individual 
                        for purposes of clause (i) of such 
                        section, except in the case of a spouse 
                        relieved of liability under section 
                        6013(e).''
    (b) Effective Date.--The amendment made by this section 
shall apply to proceedings commenced after the date of the 
enactment of this Act.

SEC. 1454. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.

    (a) In General.--Subchapter B of chapter 76 (relating to 
proceedings by taxpayers and third parties) is amended by 
redesignating section 7435 as section 7436 and by inserting 
after section 7434 the following new section:

``SEC. 7435. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.

    ``(a) Creation of Remedy.--If, in connection with an audit 
of any person, there is an actual controversy involving a 
determination by the Secretary as part of an examination that--
          ``(1) one or more individuals performing services for 
        such person are employees of such person for purposes 
        of subtitle C, or
          ``(2) such person is not entitled to the treatment 
        under subsection (a) of section 530 of the Revenue Act 
        of 1978 with respect to such an individual,
upon the filing of an appropriate pleading, the Tax Court may 
determine whether such a determination by the Secretary is 
correct. Any such determination by the Tax Court shall have the 
force and effect of a decision of the Tax Court and shall be 
reviewable as such.
    ``(b) Limitations.--
          ``(1) Petitioner.--A pleading may be filed under this 
        section only by the person for whom the services are 
        performed.
          ``(2) Time for filing action.--If the Secretary sends 
        by certified or registered mail notice to the 
        petitioner of a determination by the Secretary 
        described in subsection (a), no proceeding may be 
        initiated under this section with respect to such 
        determination unless the pleading is filed before the 
        91st day after the date of such mailing.
          ``(3) No adverse inference from treatment while 
        action is pending.--If, during the pendency of any 
        proceeding brought under this section, the petitioner 
        changes his treatment for employment tax purposes of 
        any individual whose employment status as an employee 
        is involved in such proceeding (or of any individual 
        holding a substantially similar position) to treatment 
        as an employee, such change shall not be taken into 
        account in the Tax Court's determination under this 
        section.
    ``(c) Small Case Procedures.--
          ``(1) In general.--At the option of the petitioner, 
        concurred in by the Tax Court or a division thereof 
        before the hearing of the case, proceedings under this 
        section may (notwithstanding the provisions of section 
        7453) be conducted subject to the rules of evidence, 
        practice, and procedure applicable under section 7463 
        if the amount of employment taxes placed in dispute is 
        $10,000 or less for each calendar quarter involved.
          ``(2) Finality of decisions.--A decision entered in 
        any proceeding conducted under this subsection shall 
        not be reviewed in any other court and shall not be 
        treated as a precedent for any other case not involving 
        the same petitioner and the same determinations.
          ``(3) Certain rules to apply.--Rules similar to the 
        rules of the last sentence of subsection (a), and 
        subsections (c), (d), and (e), of section 7463 shall 
        apply to proceedings conducted under this subsection.
    ``(d) Special Rules.--
          ``(1) Restrictions on assessment and collection 
        pending action, etc.--The principles of subsections 
        (a), (b), and (d) of section 6213, section 6214(a), 
        section 6503(a), and section 6512 shall apply to 
        proceedings brought under this section in the same 
        manner as if the Secretary's determination described in 
        subsection (a) were a notice of deficiency.
          ``(2) Awarding of costs and certain fees.--Section 
        7430 shall apply to proceedings brought under this 
        section.
    ``(e) Employment Tax.--The term `employment tax' means any 
tax imposed by subtitle C.''
    (b) Conforming Amendments.--
          (1) Subsection (d) of section 6511 is amended by 
        adding at the end the following new paragraph:
          ``(7) Special period of limitation with respect to 
        self-employment tax in certain cases.--If--
                  ``(A) the claim for credit or refund relates 
                to an overpayment of the tax imposed by chapter 
                2 (relating to the tax on self-employment 
                income) attributable to Tax Court determination 
                in a proceeding under section 7435, and
                  ``(B) the allowance of a credit or refund of 
                such overpayment is otherwise prevented by the 
                operation of any law or rule of law other than 
                section 7122 (relating to compromises),
        such credit or refund may be allowed or made if claim 
        therefor is filed on or before the last day of the 
        second year after the calendar year in which such 
        determination becomes final.''
          (2) Sections 7453 and 7481(b) are each amended by 
        striking ``section 7463'' and inserting ``section 
        7435(c) or 7463''.
          (3) The table of sections for subchapter B of chapter 
        76 is amended by striking the last item and inserting 
        the following:

        ``Sec. 7435. Proceedings for determination of employment status.
        ``Sec. 7436. Cross references.''

    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

                      Subtitle D--Other Provisions

SEC. 1461. EXTENSION OF DUE DATE OF FIRST QUARTER ESTIMATED TAX PAYMENT 
                    BY PRIVATE FOUNDATIONS.

    (a) In General.--Paragraph (3) of section 6655(g) is 
amended by adding at the end the following new sentence: ``In 
the case of a private foundation, subsection (c)(2) shall be 
applied by substituting `May 15' for `April 15'.''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply for purposes of determining underpayments of 
estimated tax for taxable years beginning after the date of the 
enactment of this Act.

SEC. 1462. CLARIFICATION OF AUTHORITY TO WITHHOLD PUERTO RICO INCOME 
                    TAXES FROM SALARIES OF FEDERAL EMPLOYEES.

    (a) In General.--Subsection (c) of section 5517 of title 5, 
United States Code, is amended by striking ``or territory or 
possession'' and inserting ``, territory, possession, or 
commonwealth''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on January 1, 1998.

SEC. 1463. CERTAIN NOTICES DISREGARDED UNDER PROVISION INCREASING 
                    INTEREST RATE ON LARGE CORPORATE UNDERPAYMENTS.

    (a) General Rule.--Subparagraph (B) of section 6621(c)(2) 
(defining applicable date) is amended by adding at the end the 
following new clause:
                          ``(iii) Exception for letters or 
                        notices involving small amounts.--For 
                        purposes of this paragraph, any letter 
                        or notice shall be disregarded if the 
                        amount of the deficiency or proposed 
                        deficiency (or the assessment or 
                        proposed assessment) set forth in such 
                        letter or notice is not greater than 
                        $100,000 (determined by not taking into 
                        account any interest, penalties, or 
                        additions to tax).''
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply for purposes of determining interest for periods 
after December 31, 1997.

TITLE XV--TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION 
                   ACT OF 1996 AND OTHER LEGISLATION

SEC. 1501. AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION ACT OF 
                    1996.

    (a) Amendments Related to Subtitle A.--
          (1) Amendment related to section 1116.--Paragraph (1) 
        of section 6050R(c) is amended by striking ``name and 
        address'' and inserting ``name, address, and phone 
        number of the information contact''.
          (2) Amendment to section 1116.--Paragraphs (1) and 
        (2)(C) of section 1116(b) of the Small Business Job 
        Protection Act of 1996 shall each be applied as if the 
        reference to chapter 68 were a reference to chapter 61.
    (b) Amendment Related to Subtitle B.--Subsection (c) of 
section 52 is amended by striking ``targeted jobs credit'' and 
inserting ``work opportunity credit''.
    (c) Amendments Related to Subtitle C.--
          (1) Amendment related to section 1302.--Subparagraph 
        (B) of section 1361(e)(1) is amended by striking 
        ``and'' at the end of clause (i), striking the period 
        at the end of clause (ii) and inserting ``, and'', and 
        adding at the end the following new clause:
                          ``(iii) any charitable remainder 
                        annuity trust or charitable remainder 
                        unitrust (as defined in section 
                        664(d)).''
          (2) Effective date for section 1307.--
                  (A) Notwithstanding section 1317 of the Small 
                Business Job Protection Act of 1996, the 
                amendments made by subsections (a) and (b) of 
                section 1307 of such Act shall apply to 
                determinations made after December 31, 1996.
                  (B) In no event shall the 120-day period 
                referred to in section 1377(b)(1)(B) of the 
                Internal Revenue Code of 1986 (as added by such 
                section 1307) expire before the end of the 120-
                day period beginning on the date of the 
                enactment of this Act.
          (3) Amendment related to section 1308.--Subparagraph 
        (A) of section 1361(b)(3) is amended by striking ``For 
        purposes of this title'' and inserting ``Except as 
        provided in regulations prescribed by the Secretary, 
        for purposes of this title''.
          (4) Amendments related to section 1316.--
                  (A) Paragraph (2) of section 512(e) is 
                amended by striking ``within the meaning of 
                section 1012'' and inserting ``as defined in 
                section 1361(e)(1)(C)''.
                  (B) Paragraph (7) of section 1361(c) is 
                redesignated as paragraph (6).
                  (C) Subparagraph (B) of section 1361(b)(1) is 
                amended by striking ``subsection (c)(7)'' and 
                inserting ``subsection (c)(6)''.
                  (D) Paragraph (1) of section 512(e) is 
                amended by striking ``section 1361(c)(7)'' and 
                inserting ``section 1361(e)(6)''.
    (d) Amendments Related to Subtitle D.--
          (1) Amendments related to section 1421.--
                  (A) Subsection (i) of section 408 is amended 
                in the last sentence by striking ``30 days'' 
                and inserting ``31 days''.
                  (B) Subparagraph (H) of section 408(k)(6) is 
                amended by striking ``if the terms of such 
                pension'' and inserting ``of an employer if the 
                terms of simplified employee pensions of such 
                employer''.
                  (C)(i) Subparagraph (B) of section 408(l)(2) 
                is amended--
                          (I) by inserting ``and the issuer of 
                        an annuity established under such an 
                        arrangement'' after ``under subsection 
                        (p)'', and
                          (II) in clause (i), by inserting ``or 
                        issuer'' after ``trustee''.
                  (ii) Paragraph (2) of section 6693(c) is 
                amended--
                          (I) by inserting ``or issuer'' after 
                        ``trustee'', and
                          (II) in the heading, by inserting 
                        ``and issuer'' after ``trustee''.
                  (D) Subsection (p) of section 408 is amended 
                by adding at the end the following new 
                paragraph:
          ``(8) Coordination with maximum limitation under 
        subsection (a).--In the case of any simple retirement 
        account, subsections (a)(1) and (b)(2) shall be applied 
        by substituting `the sum of the dollar amount in effect 
        under paragraph (2)(A)(ii) of this subsection and the 
        employer contribution required under subparagraph 
        (A)(iii) or (B)(i) of paragraph (2) of this subsection, 
        whichever is applicable' for `$2,000'.''
                  (E) Clause (i) of section 408(p)(2)(D) is 
                amended by adding at the end the following new 
                sentence: ``If only individuals other than 
                employees described in subparagraph (A) or (B) 
                of section 410(b)(3) are eligible to 
                participate in such arrangement, then the 
                preceding sentence shall be applied without 
                regard to any qualified plan in which only 
                employees so described are eligible to 
                participate.''
                  (F) Subparagraph (D) of section 408(p)(2) is 
                amended by adding at the end the following new 
                clause:
                          ``(iii) Grace period.--In the case of 
                        an employer who establishes and 
                        maintains a plan under this subsection 
                        for 1 or more years and who fails to 
                        meet the requirements of this 
                        subparagraph for any subsequent year 
                        due to any acquisition, disposition, or 
                        similar transaction involving another 
                        such employer, rules similar to the 
                        rules of section 410(b)(6)(C) shall 
                        apply for purposes of this 
                        subparagraph.''
                  (G) Paragraph (5) of section 408(p) is 
                amended in the text preceding subparagraph (A) 
                by striking ``simplified'' and inserting 
                ``simple''.
          (2) Amendments related to section 1422.--
                  (A) Clause (ii) of section 401(k)(11)(D) is 
                amended by striking the period and inserting 
                ``if such plan allows only contributions 
                required under this paragraph.''
                  (B) Paragraph (11) of section 401(k) is 
                amended by adding at the end the following new 
                subparagraph:
                  ``(E) Cost-of-living adjustment.--The 
                Secretary shall adjust the $6,000 amount under 
                subparagraph (B)(i)(I) at the same time and in 
                the same manner as under section 
                408(p)(2)(E).''
                  (C) Subparagraph (A) of section 404(a)(3) is 
                amended--
                          (i) in clause (i), by striking ``not 
                        in excess of'' and all that follows and 
                        inserting the following: ``not in 
                        excess of the greater of--
                                  ``(I) 15 percent of the 
                                compensation otherwise paid or 
                                accrued during the taxable year 
                                to the beneficiaries under the 
                                stock bonus or profit-sharing 
                                plan, or
                                  ``(II) the amount such 
                                employer is required to 
                                contribute to such trust under 
                                section 401(k)(11) for such 
                                year.'', and
                          (ii) in clause (ii), by striking ``15 
                        percent'' and all that follows and 
                        inserting the following ``the amount 
                        described in subclause (I) or (II) of 
                        clause (i), whichever is greater, with 
                        respect to such taxable year.''
                  (D) Subparagraph (B) of section 401(k)(11) is 
                amended by adding at the end the following new 
                clause:
                          ``(iii) Administrative 
                        requirements.--
                                  ``(I) In general.--Rules 
                                similar to the rules of 
                                subparagraphs (B) and (C) of 
                                section 408(p)(5) shall apply 
                                for purposes of this 
                                subparagraph.
                                  ``(II) Notice of election 
                                period.--The requirements of 
                                this subparagraph shall not be 
                                treated as met with respect to 
                                any year unless the employer 
                                notifies each employee eligible 
                                to participate, within a 
                                reasonable period of time 
                                before the 60th day before the 
                                beginning of such year (and, 
                                for the first year the employee 
                                is so eligible, the 60th day 
                                before the first day such 
                                employee is so eligible), of 
                                the rules similar to the rules 
                                of section 408(p)(5)(C) which 
                                apply by reason of subclause 
                                (I).''
          (3) Amendment related to section 1433.--The heading 
        of paragraph (11) of section 401(m) is amended by 
        striking ``Alternative'' and inserting ``Additional 
        alternative''.
          (4) Amendment related to section 1462.--The paragraph 
        (7) of section 414(q) added by section 1462 of the 
        Small Business Job Protection Act of 1996 is 
        redesignated as paragraph (9).
          (5) Clarification of section 1450.--
                  (A) Section 403(b)(11) of the Internal 
                Revenue Code of 1986 shall not apply with 
                respect to a distribution from a contract 
                described in section 1450(b)(1) of such Act to 
                the extent that such distribution is not 
                includible in income by reason of section 
                403(b)(8) of such Code (determined after the 
                application of section 1450(b)(2) of such Act).
                  (B) This paragraph shall apply as if included 
                in section 1450 of the Small Business Job 
                Protection Act of 1996.
    (e) Amendment Related to Subtitle E.--Subparagraph (A) of 
section 956(b)(1) is amended by inserting ``to the extent such 
amount was accumulated in prior taxable years'' after ``section 
316(a)(1)''.
    (f) Amendments Related to Subtitle F.--
          (1) Amendments related to section 1601.--
                  (A) The heading of section 30A is amended to 
                read as follows:

``SEC. 30A. PUERTO RICO ECONOMIC ACTIVITY CREDIT.''

                  (B) The table of sections for subpart B of 
                part IV of subchapter A of chapter 1 is amended 
                in the item relating to section 30A by striking 
                ``Puerto Rican'' and inserting ``Puerto Rico''.
                  (C) Paragraph (1) of section 55(c) is amended 
                by striking ``Puerto Rican'' and inserting 
                ``Puerto Rico''.
          (2) Amendments related to section 1606.--
                  (A) Clause (ii) of section 9503(c)(2)(A) is 
                amended by striking ``(or with respect to 
                qualified diesel-powered highway vehicles 
                purchased before January 1, 1999)''.
                  (B) Subparagraph (A) of section 9503(e)(5) is 
                amended by striking ``; except that'' and all 
                that follows and inserting a period.
          (3) Amendments related to section 1607.--
                  (A) Subsection (f) of section 4001 (relating 
                to phasedown of tax on luxury passenger 
                automobiles) is amended--
                          (i) by inserting ``and section 
                        4003(a)'' after ``subsection (a)'', and
                          (ii) by inserting ``, each place it 
                        appears,'' before ``the percentage''.
                  (B) Subsection (g) of section 4001 (relating 
                to termination) is amended by striking ``tax 
                imposed by this section'' and inserting ``taxes 
                imposed by this section and section 4003'' and 
                by striking ``or use'' and inserting ``, use, 
                or installation''.
          (4) Amendments related to section 1609.--
                  (A) Subsection (l) of section 4041 is 
                amended--
                          (i) by inserting ``or a fixed-wing 
                        aircraft'' after ``helicopter'', and
                          (ii) in the heading, by striking 
                        ``Helicopter''.
                  (B) The last sentence of section 4041(a)(2) 
                is amended by striking ``section 
                4081(a)(2)(A)'' and inserting ``section 
                4081(a)(2)(A)(i)''.
                  (C) Subsection (b) of section 4092 is amended 
                by striking ``section 4041(c)(4)'' and 
                inserting ``section 4041(c)(2)''.
                  (D) Subsection (g) of section 4261 (as 
                redesignated by title X) is amended by 
                inserting ``on that flight'' after 
                ``dedicated''.
                  (E) Paragraph (1) of section 1609(h) of such 
                Act is amended by striking ``paragraph 
                (3)(A)(i)'' and inserting ``paragraph (3)(A)''.
                  (F) Paragraph (4) of section 1609(h) of such 
                Act is amended by inserting before the period 
                ``or exclusively for the use described in 
                section 4092(b) of such Code''.
          (5) Amendments related to section 1616.--
                  (A) Subparagraph (A) of section 593(e)(1) is 
                amended by inserting ``(and, in the case of an 
                S corporation, the accumulated adjustments 
                account, as defined in section 1368(e)(1))'' 
                after ``1951,''.
                  (B) Paragraph (7) of section 1374(d) is 
                amended by adding at the end the following new 
                sentence: ``For purposes of applying this 
                section to any amount includible in income by 
                reason of section 593(e), the preceding 
                sentence shall be applied without regard to the 
                phrase `10-year'.''
          (6) Amendments related to section 1621.--
                  (A) Subparagraph (A) of section 860L(b)(1) is 
                amended in the text preceding clause (i) by 
                striking ``after the startup date'' and 
                inserting ``on or after the startup date''.
                  (B) Paragraph (2) of section 860L(d) is 
                amended by striking ``section 860I(c)(2)'' and 
                inserting ``section 860I(b)(2)''.
                  (C) Subparagraph (B) of section 860L(e)(2) is 
                amended by inserting ``other than foreclosure 
                property'' after ``any permitted asset''.
                  (D) Subparagraph (A) of section 860L(e)(3) is 
                amended by striking ``if the FASIT'' and all 
                that follows and inserting the following new 
                flush text after clause (ii):
                ``if the FASIT were treated as a REMIC and 
                permitted assets (other than cash or cash 
                equivalents) were treated as qualified 
                mortgages.''
                  (E)(i) Paragraph (3) of section 860L(e) is 
                amended by adding at the end the following new 
                subparagraph:
                  ``(D) Income from dispositions of former 
                hedge assets.--Paragraph (2)(A) shall not apply 
                to income derived from the disposition of--
                          ``(i) an asset which was described in 
                        subsection (c)(1)(D) when first 
                        acquired by the FASIT but on the date 
                        of such disposition was no longer 
                        described in subsection (c)(1)(D)(ii), 
                        or
                          ``(ii) a contract right to acquire an 
                        asset described in clause (i).''
                  (ii) Subparagraph (A) of section 860L(e)(2) 
                is amended by inserting ``except as provided in 
                paragraph (3),'' before ``the receipt''.
    (g) Amendments Related to Subtitle G.--
          (1) Extension of period for claiming refunds for 
        alcohol fuels.--Notwithstanding section 6427(i)(3)(C) 
        of the Internal Revenue Code of 1986, a claim filed 
        under section 6427(f) of such Code for any period after 
        September 30, 1995, and before October 1, 1996, shall 
        be treated as timely filed if filed before the 60th day 
        after the date of the enactment of this Act.
          (2) Amendments to sections 1703 and 1704.--Sections 
        1703(n)(8) and 1704(j)(4)(B) of the Small Business Job 
        Protection Act of 1996 shall each be applied as if such 
        sections referred to section 1702 instead of section 
        1602.
    (h) Amendments Related to Subtitle H.--
          (1) Amendments related to section 1806.--
                  (A) Subparagraph (B) of section 529(e)(1) is 
                amended by striking ``subsection (c)(2)(C)'' 
                and inserting ``subsection (c)(3)(C)''.
                  (B) Subparagraph (C) of section 529(e)(1) is 
                amended by inserting ``(or agency or 
                instrumentality thereof)'' after ``local 
                government''.
                  (C) Paragraph (2) of section 1806(c) of the 
                Small Business Job Protection Act of 1996 is 
                amended by striking so much of the first 
                sentence as follows subparagraph (B)(ii) and 
                inserting the following:
        ``then such program (as in effect on August 20, 1996) 
        shall be treated as a qualified State tuition program 
        with respect to contributions (and earnings allocable 
        thereto) pursuant to contracts entered into under such 
        program before the first date on which such program 
        meets such requirements (determined without regard to 
        this paragraph) and the provisions of such program (as 
        so in effect) shall apply in lieu of section 529(b) of 
        the Internal Revenue Code of 1986 with respect to such 
        contributions and earnings.''
          (2) Amendments related to section 1807.--
                  (A) Paragraph (2) of section 23(a) is amended 
                to read as follows:
          ``(2) Year credit allowed.--The credit under 
        paragraph (1) with respect to any expense shall be 
        allowed--
                  ``(A) in the case of any expense paid or 
                incurred before the taxable year in which such 
                adoption becomes final, for the taxable year 
                following the taxable year during which such 
                expense is paid or incurred, and
                  ``(B) in the case of an expense paid or 
                incurred during or after the taxable year in 
                which such adoption becomes final, for the 
                taxable year in which such expense is paid or 
                incurred.''
                  (B) Subparagraph (B) of section 23(b)(2) is 
                amended by striking ``determined--'' and all 
                that follows and inserting the following: 
                ``determined without regard to sections 911, 
                931, and 933.''
                  (C) Paragraph (1) of section 137(b) (relating 
                to adoption assistance programs) is amended by 
                striking ``amount excludable from gross 
                income'' and inserting ``of the amounts paid or 
                expenses incurred which may be taken into 
                account''.
                  (D)(i) Subparagraph (C) of section 414(n)(3) 
                is amended by inserting ``137,'' after 
                ``132,''.
                  (ii) Paragraph (2) of section 414(t) is 
                amended by inserting ``137,'' after ``132,''.
                  (iii) Paragraph (1) of section 6039D(d) is 
                amended by striking ``or 129'' and inserting 
                ``129, or 137''.
    (i) Amendments Related to Subtitle I.--
          (1) Amendment related to section 1901.--Subsection 
        (b) of section 6048 is amended in the heading by 
        striking ``Grantor'' and inserting ``Owner''.
          (2) Amendments related to section 1903.--
                  Clauses (ii) and (iii) of section 
                679(a)(3)(C) are each amended by inserting ``, 
                owner,'' after ``grantor''.
          (3) Amendments related to section 1907.--
                  (A) Clause (ii) of section 7701(a)(30)(E) is 
                amended by striking ``fiduciaries'' and 
                inserting ``persons''.
                  (B) Subsection (b) of section 641 is amended 
                by adding at the end the following new 
                sentence: ``For purposes of this subsection, a 
                foreign trust or foreign estate shall be 
                treated as a nonresident alien individual who 
                is not present in the United States at any 
                time.''
          (4) Effective Date Related to Subtitle I.--The 
        Secretary of the Treasury may by regulations or other 
        administrative guidance provide that the amendments 
        made by section 1907(a) of the Small Business Job 
        Protection Act of 1996 shall not apply to a trust with 
        respect to a reasonable period beginning on the date of 
        the enactment of such Act, if--
                  (A) such trust is in existence on August 20, 
                1996, and is a United States person for 
                purposes of the Internal Revenue Code of 1986 
                on such date (determined without regard to such 
                amendments),
                  (B) no election is in effect under section 
                1907(a)(3)(B) of such Act with respect to such 
                trust,
                  (C) before the expiration of such reasonable 
                period, such trust makes the modifications 
                necessary to be treated as a United States 
                person for purposes of such Code (determined 
                with regard to such amendments), and
                  (D) such trust meets such other conditions as 
                the Secretary may require.
    (j) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), 
        the amendments made by this section shall take effect 
        as if included in the provisions of the Small Business 
        Job Protection Act of 1996 to which they relate.
          (2) Certain administrative requirements with respect 
        to certain pension plans.--The amendment made by 
        subsection (d)(2)(D) shall apply to calendar years 
        beginning after the date of the enactment of this Act.

SEC. 1502. AMENDMENTS RELATED TO HEALTH INSURANCE PORTABILITY AND 
                    ACCOUNTABILITY ACT OF 1996.

    (a) Amendments Related to Section 301.--
          (1) Paragraph (2) of section 26(b) is amended by 
        striking ``and'' at the end of subparagraph (N), by 
        striking the period at the end of subparagraph (O) and 
        inserting ``, and'', and by adding at the end the 
        following new subparagraph:
                  ``(P) section 220(f)(4) (relating to 
                additional tax on medical savings account 
                distributions not used for qualified medical 
                expenses).''
          (2) Paragraph (3) of section 220(c) is amended by 
        striking subparagraph (A) and redesignating 
        subparagraphs (B) through (D) as subparagraphs (A) 
        through (C), respectively.
          (3) Subparagraph (C) of section 220(d)(2) is amended 
        by striking ``an eligible individual'' and inserting 
        ``described in clauses (i) and (ii) of subsection 
        (c)(1)(A)''.
          (4) 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)(X).''
          (5) Paragraph (4) of section 4975(d) is amended by 
        striking ``if, with respect to such transaction'' and 
        all that follows and inserting the following: ``if 
        section 220(e)(2) applies to such transaction.''
    (b) Amendment Related to Section 321.--Subparagraph (B) of 
section 7702B(c)(2) is amended in the last sentence by 
inserting ``described in subparagraph (A)(i)'' after 
``chronically ill individual''.
    (c) Amendment Related to Section 322.--Subparagraph (B) of 
section 162(l)(2) is amended by adding at the end the following 
new sentence: ``The preceding sentence shall be applied 
separately with respect to--
                          ``(i) plans which include coverage 
                        for qualified long-term care services 
                        (as defined in section 7702B(c)) or are 
                        qualified long-term care insurance 
                        contracts (as defined in section 
                        7702B(b)), and
                          ``(ii) plans which do not include 
                        such coverage and are not such 
                        contracts.''
    (d) Amendments Related to Section 323.--
          (1) Paragraph (1) of section 6050Q(b) is amended by 
        inserting ``, address, and phone number of the 
        information contact'' after ``name''.
          (2)(A) Paragraph (2) of section 6724(d) is amended by 
        striking so much as follows subparagraph (Q) and 
        precedes the last sentence, and inserting the following 
        new subparagraphs:
                  ``(R) section 6050R(c) (relating to returns 
                relating to certain purchases of fish),
                  ``(S) section 6051 (relating to receipts for 
                employees),
                  ``(T) section 6052(b) (relating to returns 
                regarding payment of wages in the form of 
                group-term life insurance),
                  ``(U) section 6053(b) or (c) (relating to 
                reports of tips),
                  ``(V) section 6048(b)(1)(B) (relating to 
                foreign trust reporting requirements),
                  ``(W) section 4093(c)(4)(B) (relating to 
                certain purchasers of diesel and aviation 
                fuels),
                  ``(X) 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
                  ``(Y) 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) Subsection (e) of section 6652 is amended in the 
        last sentence by striking ``section 6724(d)(2)(X)'' and 
        inserting ``section 6724(d)(2)(Y)''.
    (e) Amendment Related to Section 325.--Clauses (ii) and 
(iii) of section 7702B(g)(4)(B) are each amended by striking 
``Secretary'' and inserting ``appropriate State regulatory 
agency''.
    (f) Amendments Related to Section 501.--
          (1) Paragraph (4) of section 264(a) is amended by 
        striking subparagraph (A) and all that follows through 
        ``by the taxpayer.'' and inserting the following:
                  ``(A) is or was an officer or employee, or
                  ``(B) is or was financially interested in,
        any trade or business carried on (currently or 
        formerly) by the taxpayer.''
          (2) The last 2 sentences of section 264(d)(2)(B)(ii) 
        are amended to read as follows:
                        ``For purposes of subclause (II), the 
                        term `applicable period' means the 12-
                        month period beginning on the date the 
                        policy is issued (and each successive 
                        12-month period thereafter) unless the 
                        taxpayer elects a number of months (not 
                        greater than 12) other than such 12-
                        month period to be its applicable 
                        period. Such an election shall be made 
                        not later than the 90th day after the 
                        date of the enactment of this sentence 
                        and, if made, shall apply to the 
                        taxpayer's first taxable year ending on 
                        or after October 13, 1995, and all 
                        subsequent taxable years unless revoked 
                        with the consent of the Secretary.''
          (3) Subparagraph (B) of section 264(d)(4) is amended 
        by striking ``the employer'' and inserting ``the 
        taxpayer''.
          (4) Subsection (c) of section 501 of the Health 
        Insurance Portability and Accountability Act of 1996 is 
        amended by striking paragraph (3).
          (5) Paragraph (2) of section 501(d) of such Act is 
        amended by striking ``no additional premiums'' and all 
        that follows and inserting the following: ``a lapse 
        occurring by reason of no additional premiums being 
        received under the contract after October 13, 1995.''
    (g) Amendments Related to Section 511.--
          (1) Subparagraph (B) of section 877(d)(2) is amended 
        by striking ``the 10-year period described in 
        subsection (a)'' and inserting ``the 10-year period 
        beginning on the date the individual loses United 
        States citizenship''.
          (2) Subparagraph (D) of section 877(d)(2) is amended 
        by adding at the end the following new sentence: ``In 
        the case of any exchange occurring during such 5 years, 
        any gain recognized under this subparagraph shall be 
        recognized immediately after such loss of 
        citizenship.''
          (3) Paragraph (3) of section 877(d) is amended by 
        inserting ``and the period applicable under paragraph 
        (2)'' after ``subsection (a)''.
          (4) Subparagraph (A) of section 877(d)(4) is 
        amended--
                  (A) by inserting ``during the 10-year period 
                beginning on the date the individual loses 
                United States citizenship'' after ``contributes 
                property'' in clause (i),
                  (B) by inserting ``immediately before such 
                contribution'' after ``from such property'', 
                and
                  (C) by striking ``during the 10-year period 
                referred to in subsection (a),''.
          (5) Subparagraph (C) of section 2501(a)(3) is amended 
        by striking ``decedent'' and inserting ``donor''.
          (6)(A) Clause (i) of section 2107(c)(2)(A) is amended 
        by striking ``such foreign country in respect of 
        property included in the gross estate'' and inserting 
        ``such foreign country''.
          (B) Subparagraph (C) of section 2107(c)(2) is amended 
        to read as follows:
                  ``(C) Proportionate share.--In the case of 
                property which is included in the gross estate 
                solely by reason of subsection (b), such 
                property's proportionate share is the 
                percentage which the value of such property 
                bears to the total value of all property 
                included in the gross estate solely by reason 
                of subsection (b).''.
    (h) Amendments Related to Section 512.--
          (1) Subpart A of part III of subchapter A of chapter 
        61 is amended by redesignating the section 6039F added 
        by section 512 of the Health Insurance Portability and 
        Accountability Act of 1996 as section 6039G and by 
        moving such section 6039G to immediately after the 
        section 6039F added by section 1905 of the Small 
        Business Job Protection Act of 1996.
          (2) The table of sections for subpart A of part III 
        of subchapter A of chapter 61 is amended by striking 
        the item relating to the section 6039F related to 
        information on individuals losing United States 
        citizenship and inserting after the item relating to 
        the section 6039F related to notice of large gifts 
        received from foreign persons the following new item:

        ``Sec. 6039G. Information on individuals losing United States 
                  citizenship.''

          (3) Paragraph (1) of section 877(e) is amended by 
        striking ``6039F'' and inserting ``6039G''.
    (i) Effective Date.--The amendments made by this section 
shall take effect as if included in the provisions of the 
Health Insurance Portability and Accountability Act of 1996 to 
which such amendments relate.

SEC. 1503. AMENDMENTS RELATED TO TAXPAYER BILL OF RIGHTS 2.

    (a) Amendment Related to Section 1311.--Subsection (b) of 
section 4962 is amended by striking ``subchapter A or C'' and 
inserting ``subchapter A, C, or D''.
    (b) Amendments Related to Section 1312.--
          (1)(A) Paragraph (10) of section 6033(b) is amended 
        by striking all that precedes subparagraph (A) and 
        inserting the following:
          ``(10) the respective amounts (if any) of the taxes 
        imposed on the organization, or any organization 
        manager of the organization, during the taxable year 
        under any of the following provisions (and the 
        respective amounts (if any) of reimbursements paid by 
        the organization during the taxable year with respect 
        to taxes imposed on any such organization manager under 
        any of such provisions):''.
          (B) Subparagraph (C) of section 6033(b)(10) is 
        amended by adding at the end the following: ``except to 
        the extent that, by reason of section 4962, the taxes 
        imposed under such section are not required to be paid 
        or are credited or refunded,''.
          (2) Paragraph (11) of section 6033(b) is amended to 
        read as follows:
          ``(11) the respective amounts (if any) of--
                  ``(A) the taxes imposed with respect to the 
                organization on any organization manager, or 
                any disqualified person, during the taxable 
                year under section 4958 (relating to taxes on 
                private excess benefit from certain charitable 
                organizations), and
                  ``(B) reimbursements paid by the organization 
                during the taxable year with respect to taxes 
                imposed under such section,
        except to the extent that, by reason of section 4962, 
        the taxes imposed under such section are not required 
        to be paid or are credited or refunded,''.
    (c) Effective Date.--The amendments made by this section 
shall take effect as if included in the provisions of the 
Taxpayer Bill of Rights 2 to which such amendments relate.

SEC. 1504. MISCELLANEOUS PROVISIONS.

    (a) Amendments Related to Energy Policy Act of 1992.--
          (1) Paragraph (1) of section 263(a) is amended by 
        striking ``or'' at the end of subparagraph (F), by 
        striking the period at the end of subparagraph (G) and 
        inserting ``; or'', and by adding at the end the 
        following new subparagraph:
                  ``(H) expenditures for which a deduction is 
                allowed under section 179A.''
          (2) Subparagraph (B) of section 312(k)(3) is 
        amended--
                  (A) by striking ``179'' in the heading and 
                the first place it appears in the text and 
                inserting ``179 or 179A'', and
                  (B) by striking ``179'' the last place it 
                appears and inserting ``179 or 179A, as the 
                case may be''.
          (3) Paragraphs (2)(C) and (3)(C) of section 1245(a) 
        are each amended by inserting ``179A,'' after ``179,''.
          (4) The amendments made by this subsection shall take 
        effect as if included in the amendments made by section 
        1913 of the Energy Policy Act of 1992.
    (b) Amendments Related to Uruguay Round Agreements Act.--
          (1) Paragraph (1) of section 6621(a) is amended in 
        the last sentence by striking ``subsection (c)(3))'' 
        and inserting ``subsection (c)(3), applied by 
        substituting `overpayment' for `underpayment')''.
          (2) Subclause (II) of section 412(m)(5)(E)(ii) is 
        amended by striking ``clause (i)'' and inserting 
        ``subclause (I)''.
          (3) Subparagraph (A) of section 767(d)(3) of the 
        Uruguay Round Agreements Act is amended in the last 
        sentence by striking ``(except that'' and all that 
        follows through ``into account)''.
          (4) The amendments made by this subsection shall take 
        effect as if included in the sections of the Uruguay 
        Round Agreements Act to which they relate.
    (c) Amendment Related to Omnibus Budget Reconciliation Act 
of 1993.--
          (1) Paragraph (6) of section 168(j) (defining Indian 
        reservation) is amended by adding at the end the 
        following new flush sentence:
        ``For purposes of the preceding sentence, such section 
        3(d) shall be applied by treating the term `former 
        Indian reservations in Oklahoma' as including only 
        lands which are within the jurisdictional area of an 
        Oklahoma Indian tribe (as determined by the Secretary 
        of the Interior) and are recognized by such Secretary 
        as eligible for trust land status under 25 CFR Part 151 
        (as in effect on the date of the enactment of this 
        sentence).''
          (2) The amendment made by paragraph (1) shall apply 
        as if included in the amendments made by section 13321 
        of the Omnibus Budget Reconciliation Act of 1993, 
        except that such amendment shall not apply--
                  (A) with respect to property (with an 
                applicable recovery period under section 168(j) 
                of the Internal Revenue Code of 1986 of 6 years 
                or less) held by the taxpayer if the taxpayer 
                claimed the benefits of section 168(j) of such 
                Code with respect to such property on a return 
                filed before March 18, 1997, but only if such 
                return is the first return of tax filed for the 
                taxable year in which such property was placed 
                in service, or
                  (B) with respect to wages for which the 
                taxpayer claimed the benefits of section 45A of 
                such Code for a taxable year on a return filed 
                before March 18, 1997, but only if such return 
                was the first return of tax filed for such 
                taxable year.
    (d) Amendment Related to Tax Reform Act of 1986.--Paragraph 
(3) of section 1059(d) is amended by striking ``subsection 
(a)(2)'' and inserting ``subsection (a)''.
    (e) Amendment Related to Tax Reform Act of 1984.--
          (1) Section 267(f) is amended by adding at the end 
        the following new paragraph:
          ``(4) Determination of relationship resulting in 
        disallowance of loss, for purposes of other 
        provisions.--For purposes of any other section of this 
        title which refers to a relationship which would result 
        in a disallowance of losses under this section, 
        deferral under paragraph (2) shall be treated as 
        disallowance.''
          (2) Effective Date.--The amendment made by paragraph 
        (1) shall take effect as if included in section 174(b) 
        of the Tax Reform Act of 1984.
    (f) Clerical Amendments.--
          (1) Clause (iii) of section 163(j)(2)(B) is amended 
        by striking ``clause (i)'' and inserting ``clause 
        (ii)''.
          (2) Paragraph (1) of section 665(d) is amended in the 
        last sentence by striking ``or 669(d) and (e)''.
          (3) Subsection (g) of section 1441 (relating to cross 
        reference) is amended by striking ``one-half'' and 
        inserting ``85 percent''.
          (4) Paragraph (1) of section 2523(g) is amended by 
        striking ``qualified remainder trust'' and inserting 
        ``qualified charitable remainder trust''.
          (5) Subsection (d) of section 9502 is amended by 
        redesignating the paragraph added by section 806 of the 
        Federal Aviation Reauthorization Act of 1996 as 
        paragraph (6).
             Statement of the House Committee on the Budget

               ON THE REVENUE RECONCILIATION ACT OF 1997

                                ------                                


    To serve the American people, balancing the Federal budget 
is only half the job. Congress and the administration must, at 
the same time, let Americans keep more of their own money--to 
save, to invest, and to make their own choices about how best 
to use the resources they have earned.
    That is the principle behind this legislation, the Revenue 
Reconciliation Act of 1997. This bill and its twin measure, the 
Balanced Budget Act of 1997, seek jointly to fulfill the 
reconciliation directives of the Concurrent Resolution on the 
Budget for Fiscal Year 1997. That resolution embraced the 
Bipartisan Budget Agreement, between the Congressional 
leadership and the administration, to balance the Federal 
budget by 2002 and provide much-needed tax relief for America's 
middle-income working families.
    Key components of this tax package include the following:


  - A total of $85 billion in net tax relief over the next 5 
        years and $250 billion over the next 10 years.

  - A tax credit, reaching $500 per child, that will benefit 41 
        million children of America's families.

  - Roughly $35 billion over 5 years in post-secondary 
        education tax incentives.

  - Broad-based relief from capital gains taxes to promote 
        capital formation and, most important, job creation.

  - Expansion of individual retirement accounts [IRA's] to 
        encourage personal saving.

  - Significant reductions in death taxes.

  - Reform of corporate taxes through the repeal of roughly $14 
        billion over 5 years in inappropriate corporate tax 
        benefits.

    This tax package represents a good faith effort to meet the 
terms of the Bipartisan Budget Agreement. Most important, 
though, it meets the needs of American taxpayers. It also 
proceeds from an unalterable truth: the people who know best 
how to spend their money are the people themselves.
                       Committee on Ways and Means,
                                  House of Representatives,
                                     Washington, DC, June 14, 1997.
Hon. John R. Kasich,
Chairman, Committee on the Budget, Washington, DC.
    Dear Mr. Chairman: On June 13, 1997, the Committee on Ways 
and Means, pursuant to H. Con. Res. 84, the Concurrent 
Resolution on the Budget for Fiscal Year 1998, ordered 
favorably reported, as amended, its budget reconciliation 
revenue recommendations, to the Committee on Budget by a 
recorded vote of 22-16. Accordingly, I am now transmitting 
these recommendations to you.
    Enclosed are the legislative language, explanatory report 
language, estimates of the Congressional Budget Office and the 
Joint Committee on Taxation.
    Please feel free to contact me or Pete Singleton if you 
have any questions. With best personal regards,
            Sincerely,
                                               Bill Archer,
                                                          Chairman.
    Enclosures.
                            I. INTRODUCTION

                         A. Purpose and Summary

                                Purpose

    The revenue reconciliation provisions included in the 
Committee's budget reconciliation recommendations provide 
income and estate and gift tax relief to America's families, 
educational tax benefits, savings and investment incentives, 
estate and gift tax relief to closely-held businesses, 
extension of certain expiring tax provisions, District of 
Columbia tax incentives, welfare-to-work tax credit, various 
miscellaneous tax provisions, revenue-offset provisions 
(including a 10-year extension of financing of the Airport and 
Airway Trust Fund and corporate and other tax reforms), 
numerous tax simplification provisions (most of which have been 
previously approved by the Committee and the Congress in the 
Balanced Budget Act of 1995 in the 104th Congress, but not 
enacted), needed technical corrections to recently-passed tax 
legislation, and an increase in the public debt limit as 
projected under the Balanced Budget Agreement and the Fiscal 
Year 1998 Budget Resolution.

                                Summary

    The following is a brief summary of the revenue 
reconciliation provisions of the bill.
Title I--Child and Dependent Care Tax Credits; Health Care for Children
    Child tax credit for children under the age of 17--The bill 
allows taxpayers a maximum nonrefundable tax credit of $500 
($400 for taxable year 1998) for each qualifying child under 
the age of 17. For taxpayers with modified AGI in excess of 
certain thresholds, the sum of the otherwise allowable child 
credit and the otherwise allowable dependent care credit is 
phased out. Beginning after 2001, the otherwise allowable child 
credit is reduced by one-half of the amount of the taxpayer's 
dependent care credit. Generally, the child tax credit is 
effective for taxable years beginning after December 31, 1997.
    Dependent care credit--The present-law credit is indexed 
for inflation. The credit is also phased out in conjunction 
with the child tax credit for high-income taxpayers. The 
provision is effective for taxable years beginning after 
December 31, 1997.
    Expand definition of high-risk individuals with respect to 
tax-exempt State-sponsored organizations providing health 
coverage--The bill expands the definition of high-risk 
individuals to include a child of an individual who meets the 
present-law definition of a high-risk individual, subject to 
certain requirements. The provision is effective for taxable 
years beginning after December 31, 1997.
Title II--Education Tax Incentives
    HOPE credit for higher education tuition expenses--
Individual taxpayers are allowed to claim a nonrefundable HOPE 
credit against Federal income taxes up to $1,500 per student 
for 50 percent of qualified tuition and related expenses (i.e., 
tuition, fees, and books but not room and board) paid for the 
first two years of post-secondary education for the taxpayer, 
the taxpayer's spouse, or a dependent. The credit is phased out 
for taxpayers with modified AGI between $40,000 and $50,000 
($80,000 and $100,000 for joint returns). Eligible students 
must be enrolled on at least a half-time basis at a college, 
university, or certain vocational schools, but need not 
maintain any specific grade point average. The credit is not 
available with respect to a student if a taxpayer elects to 
claim the proposed deduction for qualified higher education 
expenses (described below) with respect to that student for the 
taxable year. The provision is effective for expenses paid 
after December 31, 1997, for education furnished in academic 
periods beginning after such date.
    Deduction for qualified higher education expenses and tax 
treatment of qualified tuition programs and education 
investment accounts--Individual taxpayers are allowed a 
deduction of up to $10,000 per student per year for qualified 
higher education expenses (i.e., tuition, fees, books, 
supplies, and room and board) paid by the taxpayer during the 
taxable year for education furnished to the taxpayer, the 
taxpayer's spouse, or a dependent. The deduction is allowed 
only to the extent that the taxpayer is required to include in 
gross income for the taxable year earnings distributed from a 
qualified tuition program (which is a tax-exempt prepaid 
tuition program maintained by a State or one or more private 
colleges) or an education investment account (which is a tax-
exempt trust established exclusively for the purpose of paying 
qualified higher education expenses of the account holder). The 
deduction is allowed regardless of whether or not the taxpayer 
otherwise itemizes deductions or claims the standard deduction. 
The deduction is not available, however, with respect to a 
student if the proposed HOPE credit (described above) is 
claimed with respect to that student for the taxable year. 
Aggregate deductions allowed for a student for all taxable 
years are limited to $40,000. The deduction is not available 
for graduate-level courses. Contributions to education 
investment accounts and qualified tuition programs not operated 
by a State may not exceed $5,000 per beneficiary per year (with 
an aggregate contribution limit of $50,000 per beneficiary for 
all years). The deduction is available for qualified higher 
education expenses paid after December 31, 1997, for education 
furnished in academic periods beginning after such date.
    Phase out qualified tuition reduction exclusion--The bill 
phases out the special rule in section 117(d) that excludes a 
qualified tuition reduction provided to an employee of an 
educational organization from gross income. The excludable 
percentage is 80 percent in 1998 and is reduced by 20 percent 
each year thereafter; no exclusion is permitted after 2001.
    Penalty free IRA withdrawals for education expenses--The 
bill provides that individuals may make penalty-free 
withdrawals from their IRAs to pay for the undergraduate and 
graduate higher education expenses of themselves, their 
spouses, theirchildren and grandchildren or the children or 
grandchildren of their spouses.
    Tax credit for certain tutoring expenses--The bill provides 
a nonrefundable tax credit equal to the lesser of (1) $150 or 
(2) 50 percent of the costs of supplementary educational 
assistance provided to elementary or secondary school students. 
The credit is phased out for taxpayers with adjusted gross 
income in excess of certain limits The credit is available for 
taxable years beginning after December 31, 1997.
    Exclusion for employer-provided educational assistance--The 
bill extends the exclusion for employer-provided educational 
assistance to courses beginning before January 1, 1998.
    Modification of $150 million limit on qualified 510(c)(3) 
non-hospital bonds--The $150 million limit is increased 
annually in $10 million increments until it reaches $200 
million.
    Enhanced deduction for corporate contributions of computer 
technology and equipment--The bill provides that corporate 
contributions of computer technology and equipment to be used 
for educational purposes in any of grades K-12 qualifies for 
the augmented contribution deduction currently available under 
Code sections 170(e)(3) and 170(e)(4). The provision is 
effective for contributions made in taxable years beginning 
after 1997.
    Treatment of cancellation of certain student loans--The 
bill expands present-law section 108(f) so that an individual's 
gross income does not include forgiveness of loans made by tax-
exempt charitable organizations provided the loan recipient's 
work satisfies a community benefit requirement. Section 108(f) 
also is expanded to cover forgiveness of certain Federal direct 
student loans for which an income-contingent repayment option 
has been selected.

Title III--Savings and Investment Tax Incentives

    American Dream IRAs--The bill replaces present-law 
nondeductible IRAs with new American Dream IRAs (``AD IRAs'') 
to which all individuals may make nondeductible contributions 
of up to $2,000 annually. Contributions to an AD IRA are in 
addition to any contributions that can be made to a deductible 
IRA under the present-law rules. No income limitations apply to 
AD IRAs. Withdrawals from an AD IRA are not includible in 
income if the withdrawal (1) is made after the 5-taxable year 
period beginning with the first taxable year in which the 
individual made a contribution to an AD IRA, and (2) is (a) 
made on or after the date on which the individual attains age 
59\1/2\, (b) made to a beneficiary (or to the individual's 
estate) on or after the death of the individual, (c) 
attributable to the individual's being disabled, or (d) for 
first-time homebuyer expenses.
    Capital gains provisions--The bill reduces the maximum rate 
of capital gains of individuals from 28 percent to 20 percent 
(10 percent for gains otherwise taxed at the 15-percent rate), 
effective May 7, 1997. This maximum rate applies both for the 
regular tax and the alternative minimum tax. A 26-percent 
maximum rate is provided for gain attributable to real estate 
depreciation. The maximum rate for gain attributable to 
collectibles remains at 28 percent. For certain assets acquired 
after December 31, 2000, and held 3 years or more, the cost 
basis may be indexed for inflation. The bill generally provides 
that $250,000 ($500,000 in the case of a married couple) of 
gain from the sale of a principal residence is exempt from tax, 
for sales after May 6, 1997. The bill reduces the corporate 
capital gains tax on assets held more than 8 years to 30 
percent (32 percent in 1998 and 31 percent in 1999). The bill 
modifies the ``110 percent of last year's liability'' safe 
harbor of the individual estimated tax to a ``109 percent of 
last year's liability'' safe harbor for 1997 estimated tax 
payments.

Title IV--Alternative Minimum Tax Provisions

    Modifications to the alternative minimum tax (``AMT'')--The 
bill (1) increases and indexes (after 2007) the AMT exemption 
amounts applicable to individuals, (2) repeals the depreciation 
adjustment for property placed in service after 1998, and (3) 
repeals the corporate AMT for small business for taxable years 
beginning after 1997.
     Minimum tax installment sales of farmers--The bill repeals 
the minimum tax on installment sales of farmers, effective for 
dispositions after 1987.

Title V--Estate and Gift Tax Provisions

    Increase in estate and gift tax unified credit--The bill 
increases the present-law unified credit as follows: the 
effective exemption is $650,000 for decedents dying and gifts 
made in 1998; $750,000 in 1999; $765,000 in 2000; $775,000 in 
2001 through 2004; $800,000 in 2005; $825,000 in 2006; $1 
million in 2007. After 2007, the effective exemption is indexed 
annually for inflation.
    Indexing of certain other estate and gift tax provisions--
The bill provides that, after 1998, the $10,000 annual 
exclusion for gifts, the $750,000 ceiling on special use 
valuation, the $1,000,000 generation-skipping transfer tax 
exemption, and the $1,000,000 ceiling on the value of a 
closely-held business eligible for the special low interest 
rate (as modified below), are indexed annually for inflation.
    Installment payments of estate tax attributable to closely 
held businesses--The bill extends the period for which Federal 
estate tax installments can be made under section 6166 to a 
maximum period of 24 years. In addition, the bill provides that 
no interest is imposed on the amount of deferred estate tax 
attributable to the first $1,000,000 in taxable value of the 
closely held business (i.e., the first $1,000,000 in value in 
excess of the effective exemption provided by the unified 
credit). For businesses with a taxablevalue in excess of 
$1,000,000, the bill also eliminates the deductibility of interest paid 
on estate taxes deferred under section 6166, and reduces the interest 
rate accordingly.
    Estate tax recapture from cash leases of specially-valued 
property--The bill provides that the cash lease of specially-
valued real property by a lineal descendant of the decedent to 
a member of the lineal descendant's family, who continues to 
operate the farm or closely held business, does not cause the 
qualified use of such property to cease for purposes of 
imposing the additional estate tax under section 2032A(c).
    Clarify eligibility for extension of time for payment of 
estate tax--The bill gives taxpayers access to the courts to 
resolve disputes over an estate's eligibility for the section 
6166 election by authorizing the U.S. Tax Court to provide 
declaratory judgments regarding initial or continuing 
eligibility for deferral under section 6166.
    Gifts may not be revalued for estate tax purposes after 
expiration of statute of limitations--The bill provides that a 
gift for which the limitations period has passed cannot be 
revalued for purposes of determining the applicable estate tax 
bracket and available unified credit.
    Repeal of throwback rules applicable to domestic trusts--
The bill exempts from the throwback rules amounts distributed 
by a domestic trust after December 31, 1995. The provision also 
provides that precontribution gain on property sold by a 
domestic trust no longer is subject to section 644.
    Unified credit of decedent increased by unified credit of 
spouse used on split gift included in decedent's gross estate--
With respect to any split-gift property that is subsequently 
includible in both spouses' estates, the bill increases the 
unified credit allowable to the decedent's estate by the amount 
of the unified credit previously allowed to the decedent's 
spouse with respect to the split gift.
    Reformation of defective bequests to spouse of decedent--
The bill allows the marital deduction with respect to a 
defective power of appointment or QTIP trust if a reformation 
(meeting certain criteria) is made to correct the defect.
    Generation-skipping tax provisions--The bill provides that 
if a trust with an inclusion ratio of greater than zero is 
severed into two separate trusts, the bill allows the trustee 
to elect to treat one of the separate trusts as having an 
inclusion ratio of zero and the other separate trust as having 
an inclusion ratio of one. In addition, the bill extends the 
predeceased parent exception to transfers to collateral heirs, 
provided that the decedent has no living lineal descendants at 
the time of the transfer. The predeceased parent exception (as 
modified) also is extended to taxable terminations and taxable 
distributions.

Title VI--Extension of Certain Expiring Tax Provisions

    Research tax credit--The research tax credit is extended 
for the period June 1, 1997, through December 31, 1998 (with a 
special rule providing a similar, 19-month extension for 
taxpayers which elect the alternative incremental research 
credit regime).
    Contributions of stock to private foundations--The bill 
extends the special rule contained in section 170(e)(5) that 
allows a deduction equal to fair market value for contributions 
of qualified appreciated stock made to private foundations 
during the period June 1, 1997, through December 31, 1998.
    Work opportunity tax credit--The bill extends the work 
opportunity tax credit for one year and makes other 
modifications. The provisions generally are effective for wages 
paid or incurred to qualified individuals who begin work for 
the employer after September 30, 1997, and before October 1, 
1998.
    Orphan drug tax credit--The bill permanently extends the 
orphan drug tax credit, effective for qualified clinical 
testing expenses paid or incurred after May 31, 1997.

Title VII--District of Columbia Tax Incentives

    D.C. Enterprise Zone--The bill designates certain 
economically depressed census tracts within the District of 
Columbia as the ``D.C. Enterprise Zone,'' within which business 
and individual residents are eligible for special tax 
incentives. All of the tax incentives take effect only if, 
prior to January 1, 1998, a Federal law is enacted creating a 
District of Columbia economic development corporation. In 
general, tax incentives that are available under present law 
for certain businesses located in empowerment zones are 
available in the D.C. Enterprise Zone. These are: (1) a 20-
percent wage credit for the first $15,000 of wages paid to D.C. 
Enterprise Zone residents who work in the D.C. Enterprise Zone; 
(2) an additional $20,000 of expensing under Code section 179 
for qualified Zone property; and (3) special tax-exempt 
financing for certain Zone facilities. In addition, the bill 
provides $75 million in tax credits to be allocated by the 
newly created economic development corporation to taxpayers 
that make equity investments in, or loans to, businesses 
engaged in an active trade or business anywhere in the District 
of Columbia. The bill also provides a zero percent capital 
gains rate for capital gains from the sale of certain qualified 
D.C. Enterprise Zone business assets held for more than 5 
years. Finally, the bill provides that residents of the D.C. 
Enterprise Zone are entitled to a 10-percent tax rate on all 
taxable income that currently is subject to a 15-percent 
Federal income tax rate.

Title VIII--Welfare-to-Work Tax Credit

    The bill provides employers a credit on the first $20,000 
of eligible wages paid to qualified long-term family assistance 
recipients. Qualified long-term family assistance recipients 
include members of a family receiving family assistance for 
specified periods of time and members of family no longer on 
family assistance because of either Federalor State time 
limits. The maximum credit is $8,500 per employee. The provision is 
effective for wages paid or incurred to qualified individuals who begin 
work for an employer on or after January 1, 1998 and before May 1, 
1999.

Title IX--Miscellaneous Provisions

    Repeal excise tax on diesel fuel used in recreational 
boats--The bill repeals the tax on diesel fuel used in 
recreational boats.
    Modify excise tax on ozone-depleting chemicals--The bill 
repeals the present-law exemption for imported recycled halon-
1211.
    Modify rate structure of vaccine excise tax--The bill 
modifies the excise tax on vaccines to provide a uniform rate 
of tax of $0.84 per dose for all vaccines. In addition, the 
bill adds the HIB (hemophilus influenza type B) vaccine, the 
Hepatitis B vaccine, and the varicella (chickenpox) vaccine to 
the list of taxable vaccines.
    Treat certain ``chain retailers'' as wholesale distributors 
under the gasoline tax refund rules--Chain retailers, defined 
as owner-operators having 10 or more retail outlets, are 
permitted to claim gasoline tax refunds for fuel sold to States 
and local governments and certain others under the provisions 
that currently apply to wholesale distributors.
    Application of luxury excise tax to clean fuel vehicles--
The bill increases the threshold at which the luxury excise tax 
on automobiles applies in the case of clean-burning fuel 
vehicles and electric cars.
    Provisions relating to pensions and other benefits--The 
bill (1) provides that certain irrigation or ditch companies or 
districts may maintain cash or deferred arrangements (``section 
401(k) plans''); (2) provides that the current moratorium on 
the application of certain discrimination rules to State and 
local government plans is permanent; (3) provides that certain 
disability payments made on behalf of full-time employees of a 
police or fire department are excludable from income; (4) 
provides that contributions made by government employees to 
purchase certain permissive service credit under a governmental 
pension plan are not to be taken into account in determining 
annual additions; (5) provides a deduction from the taxable 
estate for the value of certain stock transferred to an 
employee stock ownership plan; (6) increases the maximum 
benefit that can be distributed from a qualified pension plan 
without the participant's consent from $3,500 to $5,000 
(indexed); (7) clarifies certain rules relating to employee 
stock ownership plans of S corporations; and (8) provides that 
the value of certain air transportation on employer-provided 
noncommercial flights is excludable from income.
    Disaster relief provisions--The bill provides the Secretary 
of the Treasury with the authority to extend additional 
taxpayer deadlines for up to 90 days for certain taxpayers 
affected by Presidentially declared disasters. The bill also 
contains a provision relating to the use of certain appraisals 
to establish the amount of a disaster loss. In addition, the 
bill extends the deferral provisions of present law applicable 
to livestock sold on account of drought to livestock sold on 
account of floods and other weather-related conditions. 
Finally, the bill modifies the mortgage revenue bond rules to 
extend them to Presidentially declared disaster areas. 
Specifically, the bill waives the first-time homebuyer 
requirement, the income limits and the purchase price limits 
during the one-year period following the date of the disaster 
declaration. The provision is effective for loans financed with 
bonds issued after December 31, 1996, and before January 1, 
2000.
    Provisions relating to employment taxes--The bill (1) 
provides a safe harbor under which, if certain requirements are 
satisfied, a worker is classified as an independent contractor 
for Federal tax purposes; (2) removes the statutory rule 
treating bakery drivers as employees, so that the generally 
applicable rules for determining worker status apply to bakery 
drivers; (3) provides that certain instructions of a service 
recipient provided pursuant to Federal or State law are not 
taken into account in determining whether a retail securities 
broker is an employee or independent contractor; and (4) 
provides that certain termination payments received by former 
insurance salesmen are not subject to self-employment taxes.
    Provisions relating to small businesses--The bill provides 
for an 18-month delay in the imposition of penalties for 
specified failures to make payments electronically through 
EFPTS. In addition, the bill provides that a home office 
qualifies as the ``principal place of business''--such that 
certain expenses with respect to such office may be deductible 
as a trade or business expense--if (1) the office is used by 
the taxpayer to conduct administrative or management activities 
of a trade or business and (2) there is no other fixed location 
of the trade or business where the taxpayer conducts 
substantial administrative or management activities of the 
trade or business. As under present law, deductions are allowed 
for a home office meeting this two-part test only if the office 
is exclusively used on a regular basis as a place of business 
by the taxpayer and, in the case of an employee, only if such 
exclusive use is for the convenience of the employer. The 
provision applies to taxable years beginning after December 31, 
1997.
            Other provisions--
    Inventory shrinkage--The bill provides that a method of 
keeping inventories will not be considered unsound, or to fail 
to clearly reflect income, solely because it includes an 
adjustment for the shrinkage estimated to occur through year-
end, based on inventories taken other than at year-end.
    Treatment of workmen's compensation liability under rules 
for certain personal injury liability assignments--The 
provision extends the exclusion for qualified assignments under 
section 130 to amounts assigned for assuming a liability to pay 
compensation under any workmen's compensation act, effective 
for workmen's compensation claims filed after the date of 
enactment.
    Treatment of State workmen's compensation funds--The 
provision clarifies the tax-exempt status of any organization 
that is created by State law, and organized and operated 
exclusively to provide workmen's compensation insurance and 
related coverage that is incidental to workmen's compensation 
insurance, and that meets certain additional requirements. The 
provision is effective for taxable years beginning after 
December 31, 1997. No inference is intended as to the status of 
such organizations under present law.
    Treatment of certain publicly traded partnerships--In the 
case of an existing publicly traded partnership that elects 
under the provision to be subject to a tax on gross income from 
the active conduct of a trade or business, the rule of present 
law treating a publicly traded partnership as a corporation 
does not apply. The provision is effective for taxable years 
beginning after December 31, 1997.
    Exclusion from UBIT for certain corporate sponsorship 
payments--The bill provides that ``qualified sponsorship 
payments'' received by tax-exempt organizations are exempt from 
taxation under the unrelated business income tax (``UBIT''). 
``Qualified sponsorship payments'' are defined as any payment 
made by a person engaged in a trade or business with respect to 
which that person receives from the tax-exempt organization no 
substantial return benefit other than the use or acknowledgment 
of the name or logo (or product lines) of the person's trade or 
business in connection with the organization's activities. The 
provision applies to qualified sponsorship payments solicited 
or received after December 31, 1997.
    Timeshare associations--The bill generally extends the 
rules for taxation of homeowners associations to timeshare 
associations. However, the rate of tax applicable to timeshare 
associations is 32 percent, rather than 30 percent. The 
provision is effective for taxable years beginning after 
December 31, 1996.
    Modification of advance refunding rules for certain tax-
exempt bonds issued by the Virgin Islands--One additional 
advance refunding is allowed for governmental bonds issued by 
the Virgin Islands that were advance refunded before June 9, 
1997, if the Virgin Islands debt provisions are changed to 
modify their lien requirement.
    Farm co-ops--The bill provides that gain may be deferred on 
the sale of refiners and processors to a farm cooperative.
    Information reporting on sales of principal residences--
Reports to the IRS are not be required for most sales of 
primary residences with a sales price of $500,000 or less 
($250,000 or less if the seller is not married), provided the 
person settling the sale obtains representations that any gain 
on the sale is eligible to be excluded.
    Increased deduction for certain business meals--The 
deductible percentage of the cost of food and beverages 
consumed while away from home by an individual during, or 
incident to, a period of duty subject to the hours of service 
limitations of the Department of Transportation is increased 
from 50 percent to 80 percent in stages, over an eleven year 
period beginning in 1998.
    Treatment of construction allowances provided to lessees 
with respect to short-term leases--The bill provides an 
exclusion from income for a retail tenant that receives 
construction allowances from a landlord to the extent the 
tenant uses the allowances to construct or improve 
nonresidential real property that reverts to the landlord at 
the end of a short-term lease.
    Mutual savings banks--The provision provides that the 
consolidation of two or more life insurance departments of 
mutual savings banks into a single life insurance company by 
requirement of State law is treated as a recapitalization. Any 
payments required to be made to policyholders in connection 
with the consolidation are treated as policyholder dividends 
deductible by the company under section 808, provided that 
certain requirements are met. The provision takes effect on 
December 31, 1991.
    Allow refunds to be offset for State tax obligations-- 
Subject to certain limitations, an overpayment of Federal tax 
could be offset by the amount of any past-due, legally 
enforceable State tax obligation of a resident of the State 
seeking the offset.,
    Clean fuel vehicles--The bill increases the limitation on 
depreciation permitted to be claimed by the taxpayer on 
automobiles in the case of clean-burning fuel vehicles and 
electric cars.
    Tax benefits for law enforcement officers killed in the 
line of duty--The bill provides that certain death benefits 
received with respect to a police officer killed in the line of 
duty are excludable from income.
    Two-year suspension of oil and gas income net income limit 
for production from marginal wells--The bill suspends the 65-
percent-of-net-income limitation on percentage depletion 
deductions for domestic oil and gas production from marginal 
properties for taxable years beginning in 1998 and 1999.

Extension of duty-free treatment under Generalized System of 
        Preferences; Tariff treatment of certain equipment and repair 
        of vehicles

    Generalized System of Preferences--The bill reauthorizes 
Title V of the Trade Act of 1974, (the Generalized System of 
Preferences), as amended, for two years through May 31, 1999. 
Refunds would be authorized, upon request of the importer, for 
any duty paid between May 31, 1997 and the date of enactment.
    Temporary suspension of vessel repair duty (shipbuilding)--
The bill suspends, for a one-year period beginning on date of 
enactment, the current 50-percent duty, established under 
section 466 of the Tariff Act of 1930, on repairs to U.S. flag 
vessels made in countries that are signatories to the OECD 
Shipbuilding Agreement.

United States-Caribbean Basin Trade Partnership Program

    The bill amends section 213(b) of the Caribbean Basin 
Economic Recovery Act to provide tariff and quota treatment on 
imports from CBI beneficiary countries of currently excluded 
articles (such as textiles, apparel, tuna, petroleum and 
petroleum products, and footwear) that is similar to tariff and 
quota treatment accorded to like articles imported from Mexico 
under the NAFTA, during a temporary period of one year.

Title X--Revenue-Increase Provisions

            Financial Products
    Require recognition of gain on certain appreciated 
positions in financial property--The bill requires a taxpayer 
with an appreciated position in stock, a partnership interest 
or certain trust interests or debt instruments to recognize 
gain as if the taxpayer had sold the position if the taxpayer 
enters into one of several transactions. The transactions 
covered are a ``short sale against the box'', a forward or 
futures contract to deliver the same property, an offsetting 
notional principal contract, and, as provided in Treasury 
regulations, other transactions with substantially the same 
effect. An exception is provided for certain transactions that 
are closed prior to the end of the taxable year in which they 
are entered into, or within 30 days thereafter. The bill also 
extends the present law ``mark-to-market'' regime for 
securities dealers to securities traders and commodities 
traders and dealers on an elective basis.
    Limitation on exception for investment companies under 
section 351--The bill expands the definition of an investment 
company for purposes of the present-law rule that property 
contributed to a partnership or corporation meeting this 
definition does not qualify for non-recognition treatment. 
Under the bill, an investment company generally includes any 
corporation or partnership if more than 80 percent of its 
assets (by value) consist of money, financial instruments, 
foreign currency and certain interests in precious metals and 
entities that hold passive-type assets.
    Disallowance of interest on indebtedness allocable to tax-
exempt obligations--The bill extends to all corporations (other 
than insurance companies) the rule that applies to financial 
institutions that disallows interest deductions of a taxpayer 
(that are not otherwise disallowed as allocable under present 
law to tax-exempt obligations) in the same proportion as the 
average basis of its tax-exempt obligations (other than 
nonsalable tax-exempt debt acquired by a corporation in the 
ordinary course of business in payment for goods or services 
sold to a State or local government) bears to the average basis 
of all of the taxpayer's assets. The bill does not extend the 
small-issuer exception to taxpayers which are not financial 
institutions, but does provide a de minimis exception if the 
average adjusted basis of tax exempt obligation is less than 
the lesser of $1 million or 2 percent of the basis of all of 
the corporation's assets.
    Gains and losses from certain terminations with respect to 
property--The bill extends the rule which treats gain or loss 
from the cancellation, lapse, expiration, or other termination 
of a right or obligation which is (or on acquisition would be) 
a capital asset in the hands of the taxpayer to all types of 
property. The bill also repeals the provision that exempts debt 
obligations issued by natural persons from the rule which 
treats gain realized on retirement of the debt as exchanges.
    Determination of original issue discount where pooled debt 
obligations subject to acceleration--The bill requires credit 
card issuers and other holders of pools of debt instruments to 
accrue interest income on such pools using reasonable 
prepayment assumptions.
    Deny interest deduction on certain debt instruments--The 
bill denies interest deductions on corporate instruments where 
a substantial amount of interest or principal is mandatorily 
payable in stock of the issuer or a related party, or is so 
payable at the option of the issuer or a related party. The 
provision also applies to instruments that are part of an 
arrangement designed to result in such payment. The provision 
is effective for instruments issued after June 8, 1997, unless 
issued pursuant to a binding written agreement in effect on 
that date or described in an IRS ruling request or a public 
announcement or SEC filing on or before such date.
            Corporate Organizations and Reorganizations
    Require gain recognition for certain extraordinary 
dividends--Under the bill, except as provided in regulations, a 
corporate shareholder recognizes gain immediately with respect 
to any redemption treated as a dividend (in whole or in part) 
where the nontaxed portion of the dividend (under the dividends 
received deduction) exceeds the basis of the shares 
surrendered, if the redemption is treated as a dividend due to 
options being counted as stock ownership. In addition, the bill 
requires immediate gain recognition whenever the basis of stock 
with respect to which any extraordinary dividend was received 
is reduced below zero. The bill is effective for distributions 
after May 3, 1995, unless made pursuant to the terms of a 
written binding contract in effect on May 3, 1995 or a tender 
offer outstanding on that date. In applying the new gain rules 
to any distribution that is not a partial liquidation, a non 
pro rata redemption, or a redemption that is treated as a 
dividend by reason of options, September 13, 1995, is 
substituted for May 3, 1995.
    Require gain recognition on certain distributions of 
controlled corporation stock--If, pursuant to a plan or 
arrangement in existence on the date of distribution, either 
the controlled or distributing corporation in a section 355 
distribution is acquired, gain is recognized by the other 
corporation as of the date of the distribution. An acquisition 
occurs if a person or persons acquire 50 percent or more of the 
vote or value of the stock of the controlled or distributing 
corporation pursuant to a plan. Except as provided in 
regulations, in the case of distributions within an affiliated 
group of corporations filing aconsolidated return, section 355 
would not apply to any distribution from one member of the group to 
another. The bill also modifies certain rules for determining control 
immediately after a distribution in the case of certain divisive 
transactions, reducing the present-law test from 80 percent of vote and 
of all other classes of stock to a 50 percent of vote and value test. 
This part of the provision is generally effective for distributions 
after the date of enactment. The rest of the provision generally is 
effective for distributions after April 16, 1997. No part of the bill 
applies to a distribution that is pursuant to a written binding 
contract, IRS ruling request, or an SEC filing or a public announcement 
on or before April 16, 1997, in which the unrelated acquiror is 
identified.
    Reform tax treatment of certain corporate stock transfers--
Purchases of stock between related corporations that are 
treated as dividends under section 304 is treated as if the 
transferor had acquired the stock in exchange for stock of the 
acquiror and that stock deemed issued had then been redeemed. 
Basis reduction rules apply. The bill also limits the earnings 
and profits of an acquiring foreign corporation that would be 
taken into account in applying section 304. The provision is 
effective for distributions or acquisitions after June 8, 1997 
except that it will not apply to any such distribution made 
pursuant to a written agreement that was binding on that date, 
or that was described in an IRS ruling request or SEC filing or 
public announcement on of before that date.
    Modify holding period for dividends-received deduction--A 
corporation will not be eligible for the dividends received 
deduction unless it satisfies a holding period requirement with 
respect to each dividend. The provision is effective for 
dividends paid or accrued after the 30th day after the date of 
enactment.
    Registration of confidential tax shelters and substantial 
understatement penalty--The bill requires the registration with 
the Treasury Department of certain confidential tax shelters 
and modifies the substantial understatement penalty.
    Treat certain preferred stock as ``boot''--Certain 
preferred stock is treated as taxable consideration if received 
in an otherwise tax-free reorganization or contribution to a 
corporation. This is preferred stock that does not participate 
in corporate growth and that includes certain rights to put or 
redeem the stock within 20 years. Also, stock the dividend rate 
on which varies with reference to interest rates or certain 
other indices is within the provision. The provision applies to 
transactions after June 8, 1997, unless pursuant to a binding 
written contract in effect on that date or described in an IRS 
ruling request, SEC filing, or public announcement on or before 
that date.
            Administrative Provisions
    Administrative Provisions--The bill provides for 
information reporting of certain payments made to attorneys, a 
decrease in the threshold for reporting payments to 
corporations performing services for Federal agencies, 
permanently extends the rules relating to disclosure of return 
information for administration of certain veterans programs, 
provides for modifications of the lien and levy rules 
(including the extension of the continuous levy rules to 
additional types of payments).
    Consistency rule for beneficiaries of trusts and estates--
The bill requires a beneficiary of an estate or trust to file 
its return in a manner that is consistent with the information 
received from the estate or trust, unless the beneficiary 
identifies the inconsistency.
            Excise Tax Provisions
    Extension and modification of aviation excise taxes--The 
bill extends the Airport and Airway Trust Fund excise taxes in 
passenger and freight transportation for ten years, through 
September 30, 2007. The bill also modifies the structure of the 
commercial air passenger tax from 10 percent of the amount paid 
to a tax equal to the aggregate of 7.5 percent plus $2 per 
flight segment (phasing up until the pre flight segment reaches 
$3.00 in 2002). The international departure tax is increased to 
$15.50 per passenger, and the tax is extended to 
internationally arriving passengers. The 7.5 percent tax is 
extended to amounts paid by credit card companies and other 
companies under marketing arrangements whereby they offer 
frequent flyer or other reduced airfare provisions to customers 
and others. The 4.3-cents-per-gallon deficit reduction tax 
imposed on aviation fuel is transferred to the Airport and 
Airway Trust Fund, and modifications are made in certain tax 
deposits. The modifications generally apply to transportation 
beginning after September 30, 1997.
    Extend diesel fuel excise tax rules to kerosene--The bill 
extends the current diesel fuel excise tax rules to kerosene, 
subject to limited modifications allowing non-tax-paid sales to 
registered aviation dealers and certain industrial feedstock 
users.
    Modify tax benefits for ethanol and renewable source 
methanol--The bill provides for the phase-out of the current 
tax benefits for ethanol and renewable source methanol through 
the currently scheduled expiration dates. The phase-out is 
accomplished through a restriction on production from new 
facilities, production caps (enforced by an excess production 
penalty equal to the tax benefits), a reduction in the general 
54-cents-per-gallon tax benefit level, and reversal of the 
Treasury Department regulation providing that ETBE and similar 
ethers qualify for the tax benefits.
    Reinstate Leaking Underground Storage Tank Trust Fund 
excise tax--The bill extends the pre-1996 excise tax of 0.1 
cent per gallon on gasoline, diesel fuel, special motor fuels, 
aviation fuels, and inland waterway fuels for five years from 
the date of enactment. Revenues from the reinstated tax will go 
to the Leaking Underground Storage Tank Trust Fund as under 
prior law.
    Application of communications tax to long-distance prepaid 
telephone cards--The bill clarifies that payments from persons 
to communications companies for prepaid telephone cards which 
are subsequently distributed or resold to the ultimate user of 
theprepaid telephone card constitute payments for communication 
services that are subject to the 3-percent communications excise tax.
            Tax-Exempt Organizations
    Extend UBIT rules to second-tier subsidiaries and amend 
control test--The bill modifies the test for determining 
control for purposes of the unrelated business income tax rules 
contained in section 512(b)(13). Generally, ``control'' means 
ownership by vote or value of more than 50 percent of the 
ownership interests. In addition, the bill applies the 
constructive ownership rules of section 318 for purposes of 
section 512(b)(13). The provision generally applies to taxable 
years beginning after the date of enactment.
    Limit increase in basis of property on sale by tax-exempt 
entity to related person--The bill requires a carryover basis 
in property transferred by a tax exempt entity to a related 
party in a sale or exchange, except to the extent of any gain 
recognized to the seller as unrelated business taxable income. 
The provision is effective for sales or exchanges after June 8, 
1997, unless pursuant to a binding written contract in effect 
on that date.
    Reporting and proxy tax requirements for political and 
lobbying expenditures--The bill provides that an exemption from 
the general disclosure requirements and proxy tax of section 
6033(e) is available to a tax-exempt organization if more than 
90 percent of the amount of aggregate annual dues (or similar 
payments) received by the organization are paid by (1) 
individuals or families whose annual dues (or similar amounts) 
are less than $100, or (2) tax-exempt entities. The provision 
is effective for taxable years beginning after December 31, 
1997.
    Repeal grandfather rule with respect to pension business of 
certain insurers--The provision repeals the grandfather rules 
applicable to that portion of the business of the Teachers 
Insurance Annuity Association--College Retirement Equities Fund 
which is attributable to pension business and to that portion 
of the business of Mutual of America which is attributable to 
pension business. The provision is effective for taxable years 
beginning after December 31, 1997.
            Other Provisions
    Phase-out suspense accounts for certain large farm 
corporations--The bill (1) repeals the ability of family farm 
corporations with average gross receipts over $25 million to 
defer income from the required switch from the cash method to 
an accrual method of accounting by establishing suspense 
accounts and (2) requires previously-created suspense accounts 
generally to be restored to income over a period of 20 years.
    Modify net operating loss carryback and carryforward 
rules--The bill reduces the carryback period for net operating 
losses from three to two years and extends the carryforward 
period from 15 to 20 years.
    Expand the limitations on deductibility of interest and 
premiums with respect to life insurance, endowment, and annuity 
contracts--The present-law premium deduction limitation is 
modified to provide that no deduction is permitted for premiums 
paid on any life insurance, annuity or endowment contract 
covering the life of any individual, when the taxpayer is 
directly or indirectly a beneficiary under the contract. Also, 
no deduction is allowed for any amount paid or accrued on debt 
incurred or continued to purchase or carry a life insurance, 
endowment, or annuity contract covering the life of any 
individual. In addition, in the case of a taxpayer other than a 
natural person, no deduction is allowed for the portion of the 
taxpayer's interest expense that is allocable to unborrowed 
policy cash surrender values with respect to any life insurance 
policy or annuity or endowment contract issued after June 8, 
1997. The provisions apply generally with respect to contracts 
issued after June 8, 1997.
    Allocation of basis of properties distributed to a partner 
by a partnership--The provision modifies the basis allocation 
rules for distributee partners, generally requiring allocation 
of basis increases in accordance with the fair market value of 
the distributed properties rather than in accordance with their 
basis to the partnership, effective for partnership 
distributions after the date of enactment.
    Treatment of inventory items of a partnership--The 
provision eliminates the requirement that inventory be 
substantially appreciated in order to give rise to ordinary 
income under the rules relating to sales and exchanges of 
partnership interests and certain partnership distributions. 
The provision is effective for sales, exchanges, and 
distributions after the date of enactment.
    Treatment of appreciated property contributed to a 
partnership--The provision extends the 5-year limit on taxation 
of partners' pre-contribution gain to 10 years, effective for 
property contributed to a partnership after June 8, 1997.
    Earned income credit (``EIC'') compliance provisions--In 
addition to the establishment of IRS continuous levy and the 
modifications of levy exemptions (described elsewhere) which 
also apply to the EIC, the bill provides three compliance 
measures to address the EIC compliance problem. First, 
taxpayers who fraudulently claim the EIC are made EIC 
ineligible for 10 years thereafter. Taxpayers who erroneously 
claim the EIC due to reckless or intentional disregard of rules 
or regulations are ineligible to claim the EIC for two years 
thereafter. Second, taxpayers who are denied the EIC as a 
result of deficiency procedures are ineligible in subsequent 
years to claim the EIC unless they provide evidence of 
eligibility as required by the Secretary of the Treasury. 
Finally, return preparers are subject to a $100 penalty for 
each return claiming an EIC with respect to which certain due 
diligence requirements are notsatisfied. These provisions are 
effective for taxable years beginning after December 31, 1996.
     Restrict eligibility for income forecast method--The bill 
limits the availability of the income forecast method of 
depreciation to movies, sound recordings, videotapes, books, 
patents, copyrights, and other similar items. The bill also 
provides a 3-year recovery period for consumer durable goods 
leased by rent-to-own businesses.
     Require taxpayers to include the rental value of residence 
in income without regard to period of rental--Gross income for 
income tax purposes generally includes all income including 
rents. However, gross income does not include rental income 
where a dwelling unit is used by the taxpayer as a residence 
and is actually rented for less than 15 days during the taxable 
year. Also, no deductions relating to such rental are allowed. 
The bill repeals the 15-day rules.
     Modify the exception to the related party rule of section 
1033 for individuals to only provide an exception for de 
minimis amounts-- The bill provides that in order for the 
nonrecognition rules of section 1033 (relating to involuntary 
conversions) to apply, an individual must acquire replacement 
property from a unrelated party, subject to a $100,000 de 
minimis rule.
     Repeal of exception for certain sales by manufacturers to 
dealer--The bill repeals the exception that permits the use of 
the installment method of accounting for certain sales by 
manufacturers to dealers.

Title XI--Foreign Tax Provisions

            General Provisions
     Eligibility of licenses of computer software for foreign 
sales corporation benefits--The bill provides that computer 
software licensed for reproduction abroad is not excluded from 
the definition of export property for purposes of the foreign 
sales corporation provisions. Accordingly, computer software 
that is exported with a right to reproduce is eligible for the 
benefits of the foreign sales corporation provisions.
     Increase dollar limitation on section 911 exclusion--Under 
the bill, the $70,000 limitation on the exclusion for foreign 
earned income is increased to $80,000, in increments of $2,000 
each year beginning in 1998, and is indexed for inflation 
beginning in 2008.
     Simplify foreign tax credit limitation for individuals--
The bill exempts individuals with no more than $300 ($600 in 
the case of married persons filing jointly) of creditable 
foreign taxes, and no foreign source income other than passive 
income, from the foreign tax credit limitation rules.
     Simplify translation of foreign taxes--The bill generally 
provides for accrual-basis taxpayers to translate foreign taxes 
at the average exchange rate for the taxable year to which such 
taxes relate. The bill also generally provides that, in cases 
where the foreign taxes actually are paid more than two years 
after such accrual, such taxes are to be taken into account for 
the year to which they relate, but are to be translated at the 
exchange rate for the time of payment.
    Election to use simplified foreign tax credit limitation 
for alternative minimum tax purposes--The bill permits 
taxpayers to elect to use as their AMT foreign tax credit 
limitation fraction the ratio of foreign source regular taxable 
income to entire alternative minimum taxable income, rather 
than the ratio of foreign source alternative minimum taxable 
income to entire alternative minimum taxable income.
    Simplify treatment of personal transactions in foreign 
currency--The bill applies nonrecognition treatment to any 
exchange gain that results from an individual's acquisition of 
foreign currency and disposition of it in a personal 
transaction, provided that such gain does not exceed $200.
    Simplify foreign tax credit limitation for dividends from 
10/50 companies--Under the bill, a single foreign tax credit 
limitation generally applies to dividends received by the 
taxpayer from all so-called 10/50 companies (other than any 10/
50 company that qualifies as a passive foreign investment 
company).
            General Provisions Affecting Treatment of Controlled 
                    Foreign Corporations
    The bill makes several modifications to the treatment of 
controlled foreign corporations and lower-tier controlled 
foreign corporations. In addition, the bill extends the 
application of the indirect foreign tax credit to taxes paid or 
accrued by fourth- through sixth-tier controlled foreign 
corporations.
            Modification of Passive Foreign Investment Company 
                    Provisions to Eliminate Overlap with Subpart F and 
                    to Allow Mark-to-Market Election
    Under the bill, a shareholder that is subject to the 
subpart F rules with respect to stock of a passive foreign 
investment company that is also a controlled foreign 
corporation is not subject also to the passive foreign 
investment company provisions with respect to the same stock. 
The bill also allows a shareholder of a passive foreign 
investment company to make a mark-to-market election with 
respect to the stock of the passive foreign investment company, 
provided that such stock is marketable.
            Simplify Formation and Operation of International Joint 
                    Ventures
     The bill repeals the excise tax that applies to transfers 
of appreciated property by U.S. persons to certain foreign 
entities. The bill requires enhanced information reporting by 
U.S. persons with respect to their interests in foreign 
partnerships.
            Modification of Reporting Threshold for Stock Ownership of 
                    a Foreign Corporation
     The bill increases the stock ownership threshold that 
results in an information reporting obligation with respect to 
a foreign corporation from 5 percent to 10 percent.
            Other Foreign Simplification Provisions
     Transition rule for certain trusts--The bill grants 
regulatory authority to allow nongrantor trusts that had been 
treated as U.S. trusts prior to the enactment of the Small 
Business Job Protection Act of 1996 to elect to continue to be 
treated as U.S. trusts.
     Repeal of stock and securities safe harbor requirement 
that principal office be outside the United States--The bill 
modifies the present-law safe harbor that treats foreign 
persons that trade stock or securities for their own accounts 
as not engaged in a U.S. trade or business. For purposes of the 
safe harbor, the bill eliminates the present-law requirement 
that the principal office not be within the United States.
            Other Foreign Provisions
     Inclusion of income from notional principal contracts and 
stock lending transactions under subpart F--The bill adds to 
the definition of foreign personal holding company income for 
subpart F purposes net income from all types of notional 
principal contracts and payments in lieu of dividends derived 
from equity securities lending transactions. The bill provides 
an expanded dealer exception from the definition of foreign 
personal holding company income.
     Restrict like-kind exchange rules for certain property--
The bill provides that for the nonrecognition rules of section 
1031 (relating to like-kind exchanges) to apply, the property 
surrendered in the exchange and the party received in the 
exchange must be both predominantly used either in (or outside) 
the United States.
     Holding period requirement for certain foreign taxes--The 
bill denies a shareholder the foreign tax credits normally 
available with respect to a dividend on stock of a foreign 
corporation or regulated investment company if the shareholder 
has not held the stock for 16 days, in the case of common 
stock, or 46 days in the case of preferred stock. An exception 
is provided for dividends on certain stock held by a foreign 
securities dealer.
     Penalties for failure to file disclosure of exemption for 
income from the international operation of ships or aircraft by 
foreign persons--The bill imposes penalties on foreign persons 
that do not satisfy the filing requirements for claiming 
exemption from U.S. tax for income from the international 
operation of ships or aircraft.
     Limitation on treaty benefits for payments to hybrid 
entities--The bill limits the availability of a reduced rate of 
withholding tax under an income tax treaty in the case of 
income derived through a hybrid entity, in order to prevent tax 
avoidance.
     Clarification of determination of foreign taxes deemed 
paid--The bill clarifies that, for purposes of the indirect 
foreign tax credit, a foreign corporation's foreign tax pool 
does not include any taxes that are attributable to dividends 
distributed by the foreign corporation in prior taxable years.
     Clarification of foreign tax credit limitation for 
financial services income--The bill clarifies that the 
exclusion from passive income for income that is treated as 
high-taxed income does not apply for purposes of the separate 
foreign tax credit limitation applicable to financial services 
income.
     Interest on underpayment reduced by foreign tax credit 
carryback--The bill provides that, if an underpayment for a 
taxable year is reduced or eliminated by a foreign tax credit 
carryback from a subsequent taxable year, such carryback does 
not affect the computation of interest on the underpayment for 
the period ending with the filing date for such subsequent 
taxable year in which the foreign taxes were paid or accrued.
     Determination of period of limitations relating to foreign 
tax credits--The bill provides that, in the case of a claim 
relating to an overpayment attributable to foreign tax credits, 
the limitations period is determined by reference to the year 
in which the foreign taxes were paid or accrued.

Title XII--Simplification Provisions Relating to Individuals and 
        Businesses

            Individual Simplification Provisions
    Modifications to standard deduction of dependents; AMT 
treatment of certain minor children--The bill increases the 
standard deduction for a taxpayer with respect to whom a 
dependency exemption is allowed on another taxpayer's return to 
the lesser of (1) the standard deduction for individual 
taxpayers or (2) the greater of: (a) $500 (indexed for 
inflation as under present law), or (b) the individual's earned 
income plus $250. The bill increases the AMT exemption amount 
for a child under age 14 to the lesser of (1) $33,750 or (2) 
the sum of the child's earned income plus $5,000.
     Increase estimated tax de minimis threshold--The bill 
increases the individual estimated tax de minimis threshold 
from $500 to $1,000.
     Optional methods for computing SECA tax combined--The bill 
simplifies the reporting of self-employment income by combining 
the optional methods for reporting farm and non farm self-
employment income. The provision also ensures that persons 
reporting self-employment income by the optional method have 
enough self-employment income to provide four quarters of 
coverage under the Social Security Act.
     Treatment of certain reimbursed expenses of rural mail 
carriers--The bill simplifies the treatment of certain 
reimbursed expenses of rural mail carriers.
     Travel expenses of Federal criminal investigators--The 
bill provides for special rules relating to the travel expenses 
of certain Federal criminal investigators.
     Payment of taxes by commercially acceptable means--The 
bill generally provides for the payment of taxes by any 
commercially acceptable means.
            Provisions Relating to Businesses Generally
     Simplification to the look-back method applicable to long-
term contracts--The bill simplifies the look-back method 
applicable to long-term contracts by providing that the method 
need not be applied to de minimis changes to estimated income 
and by stream lining the calculation of applicable interest 
rates used in the look-back calculation.
     Minimum tax treatment of certain property and casualty 
insurance companies--The bill provides that a property and 
casualty insurance company that elects for regular tax purposes 
to be taxed only on taxable investment income determines its 
adjusted current earnings under the alternative minimum tax 
without regard to any amount not taken into account in 
determining its gross investment income.
            Partnership Simplification Provisions
     The bill makes simplifying changes to reporting and audit 
rules in the case of electing large partnerships, which are 
generally those that elect to come within the provisions and 
that have 100 or more partners for the partnership's preceding 
taxable year. The bill also provides that electing large 
partnerships must report to partners by March 15 following the 
close of the partnership's taxable year. The bill also provides 
for reporting on magnetic media to the IRS for all 
partnerships, and modifies the filing threshold for an IRA with 
an interest in an electing large partnership. In addition, the 
bill provides modifications and clarifications to the present-
law rules governing partnership proceedings that were enacted 
in 1982 as part of TEFRA.
            Modifications of Rules for Real Estate Investment Trusts
     Clarification of limitation on maximum number of 
shareholders-- The bill replaces the rule that disqualifies a 
REIT for any year in which the REIT failed to comply with 
Treasury regulations to ascertain its ownership, with an 
intermediate penalty of $25,000 ($50,000 for intentional 
violations) for failing to do so. In addition, a REIT that 
complied with the Treasury regulations for ascertaining its 
ownership, and which did not know, or have reason to know, that 
it was so closely held as to be classified as a personal 
holding company, is treated as meeting the requirement that it 
not be a personal holding company.
     De minimis rule for tenant service income--The bill 
permits a REIT to render a de minimis amount (one percent of 
rents) of impermissible services to tenants, or in connection 
with the management of property, and still treat amounts 
received with respect to that property as rent.
     Attribution rules applicable to tenant ownership--The bill 
modifies the application of section 318(a)(3)(A) (attribution 
to partnerships) for purposes of defining rent in section 
856(d)(2), so that attribution occurs only when a partner owns 
a 25 percent or greater interest in the partnership.
     Credit for tax paid by REIT on retained capital gains--The 
bill permits a REIT to elect to retain and pay income tax on 
net long-term capital gains it received during the tax year, 
just as a RIC is permitted under present law.
     Repeal of 30-percent gross income requirement--The bill 
repeals the rule that requires less than 30 percent of a REIT's 
gross income be derived from gain from the sale or other 
disposition of stock or securities held for less than one year, 
certain real property held less than four years, and property 
that is sold or disposed of in a prohibited transaction.
     Modification of earnings and profits for determining 
whether REIT has earnings and profits from non-REIT year--The 
bill changes the ordering rule for purposes of the requirement 
that newly-electing REITs distribute earnings and profits that 
were accumulated in non-REIT years such that distributions of 
accumulated earnings and profits generally are treated as made 
from the entity's earliest accumulated earnings and profits, 
rather than the most recently accumulated earnings and profits.
     Treatment of foreclosure property--The bill lengthens the 
original grace period for foreclosure property until the last 
day of the third full taxable year following the election. 
Under the bill, the grace period could be extended for an 
additional three years by filing a request to the IRS and a 
REIT could revoke an election to treat property as foreclosure 
property for any taxable year.
     Payments under hedging instruments--The bill treats income 
from all hedges (such as an interest rate swap, cap agreement, 
option, futures contract, forward rate agreement or any similar 
financial instrument) that reduce the interest rate risk of 
REIT liabilities, not just from interest rate swaps and caps, 
as qualifying income under the 95-percent test.
    Excess noncash income--The bill (1) expands the class of 
excess noncash items that are not subject to the distribution 
requirement to include income from the cancellation of 
indebtedness and (2) extends the treatment of original issue 
discount and coupon interest as excess noncash items to REITs 
that use an accrual method of taxation.
    Prohibited transaction safe harbor--The bill excludes from 
the prohibited sales rules property that was involuntarily 
converted.
    Shared appreciation mortgages--The bill provides that 
interest received on a shared appreciation mortgage is not 
subject to the tax on prohibited transactions where the 
property subject to the mortgage is sold within 4 years of the 
REIT's acquisition of the mortgage pursuant to a bankruptcy 
plan of the mortgagor unless the REIT acquired the mortgage 
knew or had reason to know that the property subject to the 
mortgage would be sold in a bankruptcy proceeding.
    Wholly-owned REIT subsidiaries--The bill permits any 
corporation wholly-owned by a REIT to be treated as a qualified 
subsidiary, regardless of whether the corporation had always 
been owned by the REIT.
            Repeal of the 30-Percent (Or ``Short-Short'') Test for 
                    Regulated Investment Companies
    The bill repeals the requirement of a regulated investment 
company (RIC) that it derive less than 30 percent of its gross 
income from the sale or other disposition of stock or 
securities held for less than 3 months (the ``30-percent test'' 
or ``short-short rule'').
            Taxpayer Protections
    The bill provides a reasonable cause exception for certain 
additional penalties where one does not now exist, clarifies 
the period for filing claims for refunds, repeals the authority 
to disclose otherwise confidential information regarding 
whether a prospective juror has been audited, clarifies the 
statute of limitations, clarifies the rules regarding the 
awarding of administrative costs, and provides a criminal 
penalty and civil damages for unauthorized inspection of tax 
returns and return information (``browsing'').

Title XIII--Estate, Gift, and Trust Tax Simplification

    The bill contains a number of simplification provisions 
relating to Federal estate, gift and trust taxes that are 
intended to simplify administration of the Internal Revenue 
Code.

Title XIV--Excise Tax and Other Simplification Provisions

    Excise tax simplification--The bill simplifies taxpayer 
compliance with numerous excise tax provisions: accessories 
installed after purchasing heavy trucks and certain 
automobiles, the treatment of tires under the heavy vehicle 
retail tax, and expanded exemptions from IRS registration 
requirements in certain cases. Additionally, the bill includes 
a number of provisions related to the taxes on distilled 
spirits, wine, and beer designed to conform the administration 
of those taxes (1) across beverage types, and (2) to current 
industry and Bureau of Alcohol, Tobacco, and Firearms preferred 
practices.
    Tax-exempt bond provisions--The bill (1) repeals the 
$100,000 limitation on unspent proceeds under the 1-year 
exception from rebate, (2) exempts earnings on bond proceeds 
invested in a bona fide debt service fund from the arbitrage 
rebate requirement and the penalty requirement (under the 
construction bond exception from rebate) if the spending 
requirements are otherwise satisfied, (3) repeals the 150-
percent of debt service yield restriction, and (4) repeals 
certain student loan bond provisions as deadwood.
    Tax Court procedures--The bill provides rules relating to 
overpayment determinations, to the redetermination of interest 
pursuant to a motion, and to the application of net worth 
limitations for awards of litigation costs. The bill also 
generally provides for Tax Court jurisdiction for the 
determination of employment status.
     Other provisions--The bill provides that the due date of a 
private foundation's first-quarter estimated tax payment is the 
same date for filing the foundation's annual return for the 
preceding year. The bill clarifies the authority to withhold 
Puerto Rico (and other Commonwealth) income taxes from the 
salaries of Federal employees. The bill also provides that 
notices of less than $100,000 are disregarded for purposes of 
triggering the increased interest rate on certain large 
corporate underpayments.

Title XV--Technical Corrections

    The bill includes a number of technical corrections to 
previously enacted legislation, including the Small Business 
Job Protection Act of 1996, Health Insurance Portability and 
Accountability Act of 1996, Taxpayer Bill of Rights 2, and 
other recent tax acts.

                 B. Background and Need for Legislation

    Under the Fiscal Year 1998 Budget Resolution (House Con. 
Res. 84), the Committee on Ways and Means was instructed to 
report the revenue reconciliation provisions for a net of $85 
billion of tax cuts for the first 5 fiscal years (fiscal years 
1998-2002) and no more than $250 billion for the 10-year period 
(fiscal years 1998-2007). The budget resolution was the result 
of the Balanced Budget Agreement between the Congressional 
leadership and the President. The revenue reconciliation 
provisions approved by the Committee reflect the need for tax 
reduction for families, capital gains relief, savings and 
investment incentives, estate and gift tax relief to families 
and closely-held businesses, extensions of certain expiring tax 
provisions, District of Columbia tax incentives, welfare-to-
work tax credit, miscellaneous tax provisions, revenue-offset 
provisions, tax simplification provisions, tax technical 
corrections, and an increase in the public debt limit.

                         C. Legislative History

Committee consideration budget conciliation revenue recommendation

    The Committee on Ways and Means (the ``Committee'') 
conducted consideration of budget reconciliation revenue 
recommendations (including tax simplification and technical 
corrections) on June 11-13, 1997. The Committee's statutory 
language (referred to in this report as ``the bill'') for its 
budget reconciliation revenue recommendations was approved, as 
amended, on June 13, 1997, by a roll call vote of 22 yeas and 
16 nays. The statutory provisions and this explanatory material 
are to be submitted to the House Committee on the Budget for 
inclusion in the Budget Committee's report on the Fiscal 1998 
Budget Reconciliation Bill.

Committee hearings

    Committee and Subcommittee hearings related to various 
budget reconciliation revenue recommendations have been held 
during the 105th Congress.
            Full Committee hearings
    Full Committee hearings were held as follows:
          Solvency of the Airport and Airway Trust Fund 
        (February 5, 1997);
          President's Fiscal Year 1998 Budget (February 11-12, 
        1997);
          Education and Training Tax Provisions of the 
        Administration Fiscal Year 1998 Budget Proposal (March 
        5, 1997);
          Revenue Raising Provisions in the Administration's 
        Fiscal Year 1998 Budget Proposal (March 12, 1997);
          Savings and Investment Provisions in the 
        Administration's Fiscal Year 1998 Budget Proposal 
        (March 19, 1997);
          Internal Revenue Service's 1995 Earned Income Tax 
        Credit Compliance Study (May 8, 1997).
            Subcommittee hearings
    The Oversight Subcommittee held the following hearings 
related to Internal Revenue Service oversight:
          Annual Report of the Internal Revenue Service 
        Taxpayer Advocate (February 25, 1997);
          ``High-Risk'' Programs Within the Jurisdiction of the 
        Committee on Ways and Means (March 4, 1997);
          IRS Budget for Fiscal 1998 and the 1997 Tax Return 
        Filing Season (March 18, 1997);
          Electronic Federal Tax Payment System (April 16, 
        1997).

                      II. EXPLANATION OF THE BILL

Title I. Child and Dependent Care Tax Credits; Health Care for Children

A. Child Tax Credit For Children Under Age 17 (sec. 101 of the bill and 
                        new sec. 24 of the Code)

                              Present Law

In general

    Present law does not provide tax credits based solely on 
the taxpayer's number of dependent children. Taxpayers with 
dependent children, however, generally are able to claim a 
personal exemption for each of these dependents. The total 
amount of personal exemptions is subtracted (along with certain 
other items) from adjusted gross income (``AGI'') in arriving 
at taxable income. The amount of each personal exemption is 
$2,650 for 1997, and is adjusted annually for inflation. In 
1997, the amount of the personal exemption is phased out for 
taxpayers with AGI in excess of $121,200 for single taxpayers, 
$151,500 for heads of household, and $181,800 for married 
couples filing joint returns. These phaseout thresholds are 
adjusted annually for inflation.

Dependent care credit

    A nonrefundable credit against income tax liability is 
available for up to 30 percent (phased down to 20 percent for 
individuals with AGI above $28,000) of a limited dollar amount 
of employment-related child and dependent care expenses. 
Eligible employment-related expenses are limited to $2,400 if 
there is one qualifying individual and $4,800 if there are two 
or more qualifying individuals. Employment-related expenses are 
expenses for household services and the care of a qualifying 
individual, if incurred to enable the taxpayer to be gainfully 
employed. Employment-related expenses are reduced to the extent 
the taxpayer has employer-provided dependent care assistance 
that is excludable from gross income.

                           Reasons for Change

    The Committee believes that the individual income tax 
structure does not reduce tax liability by enough to reflect a 
family's reduced ability to pay taxes as family size increases. 
In part, this is because over the last 50 years the value of 
the dependent personal exemption has declined in real terms by 
over one-third. The Committee believes that a tax credit for 
families with dependent children will reduce the individual 
income tax burden of those families, will better recognize the 
financial responsibilities of raising dependent children, and 
will promote family values.

                        Explanation of Provision

    The bill allows taxpayers a maximum nonrefundable tax 
credit of $500 ($400 for taxable year 1998) for each qualifying 
child under the age of 17. A qualifying child is defined as an 
individual for whom the taxpayer can claim a dependency 
exemption and who is a son or daughter of the taxpayer (or a 
descendent of either), a stepson or stepdaughter of the 
taxpayer or an eligible foster child of the taxpayer. The 
credit amount is not indexed for inflation.
    For taxpayers with modified AGI in excess of certain 
thresholds, the sum of the otherwise allowable child credit and 
the otherwise allowable dependent care credit is phased out. 
Specifically, the sum of the otherwise allowable child credit 
and then the otherwise allowable dependent care credit is 
reduced by $25 for each $1,000 of modified AGI (or fraction 
thereof) in excess of the threshold (``the modified AGI phase-
out''). For these purposes modified AGI is computed by 
increasing the taxpayer's AGI by the amount otherwise excluded 
from gross income under Code sections 911, 931, or 933 
(relating to the exclusion of income of U.S. citizens or 
residents living abroad; residents of Guam, American Samoa, and 
the Northern Mariana Islands; and residents of Puerto Rico, 
respectively). The reduction is applied first to the child 
credit and then to the dependent care credit. For married 
taxpayers filing joint returns, the threshold is $110,000. For 
taxpayers filing single or head of household returns, the 
threshold is $75,000. For married taxpayers filing separate 
returns, the threshold is $55,000. These thresholds are not 
indexed for inflation.
    Beginning after 2001, the otherwise allowable child credit 
would be reduced by one-half of the amount of the taxpayer's 
otherwise allowable dependent care credit. This reduction to 
the otherwise allowable child credit would be applied after the 
application of the modified AGI phase-out to the child and 
dependent care credits (if applicable). The maximum amount of 
the child credit for each taxable year (after the reduction, if 
any, for the dependent care credit after 2001) could not exceed 
an amount equal to the excess of: (1) the taxpayer's regular 
income tax liability (net of applicable credits) over (2) the 
sum of the taxpayer's tentative minimum tax liability 
(determined without regard to the alternative minimum foreign 
tax credit) and the earned income credit allowed.

                             Effective Date

    Generally, the child tax credit is effective for taxable 
years beginning after December 31, 1997. The provision to 
reduce the otherwise allowable child credit by one-half of the 
amount of the taxpayer's dependent care credit is effective for 
taxable years beginning after December 31, 2001.

   B. Expand Definition of High-Risk Individuals with Respect to Tax-
 Exempt State-Sponsored Organizations Providing Health Coverage (sec. 
          101(b) of the bill and sec. 501(c)(26) of the Code)

                              Present Law

    Present law provides tax-exempt status to any membership 
organization that is established by a State exclusively to 
provide coverage for medical care on a nonprofit basis to 
certain high-risk individuals, provided certain criteria are 
satisfied.\1\ The organization may provide coverage for medical 
care either by issuing insurance itself or by entering into an 
arrangement with a health maintenance organization (``HMO'').
---------------------------------------------------------------------------
    \1\ No inference is intended as to the tax treatment of other types 
of State-sponsored organizations.
---------------------------------------------------------------------------
    High-risk individuals eligible to receive medical care 
coverage from the organization must be residents of the State 
who, due to a pre-existing medical condition, are unable to 
obtain health coverage for such condition through insurance or 
an HMO, or are able to acquire such coverage only at a rate 
that is substantially higher than the rate charged for such 
coverage by the organization. The State must determine the 
composition of membership in the organization. For example, a 
State could mandate that all organizations that are subject to 
insurance regulation by the State must be members of the 
organization.
    Present law further requires the State or members of the 
organization to fund the liabilities of the organization to the 
extent that premiums charged to eligible individuals are 
insufficient to cover such liabilities. Finally, no part of the 
net earnings of the organization can inure to the benefit of 
any private shareholder or individual.

                           Reasons for Change

    The Committee believes that including certain children of 
high-risk individuals in the group of individuals to whom such 
an organization may provide medical care coverage will assist 
States in providing medical care coverage for uninsured 
children.

                        Explanation of Provision

    The provision expands the definition of high-risk 
individuals to include a child of an individual who meets the 
present-law definition of a high-risk individual, subject to 
certain requirements. The requirements are: (1) the taxpayer is 
allowed a deduction for a personal exemption for the child for 
the taxable year; (2) the child has not attained the age of 17 
as of the close of the calendar year in which the taxable year 
of the taxpayer begins; and (3) the child is a son or daughter 
or the taxpayer (or a dependent of either), a stepson or 
stepdaughter of the taxpayer, or an eligible foster child of 
the taxpayer.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

  C. Indexing of the Dependent Care Credit; Phase Out for High-Income 
    Taxpayers (sec. 102 of the bill and secs. 21 and 26 of the Code)

                              Present Law

    A nonrefundable credit against income tax liability is 
available for up to 30 percent of a limited dollar amount of 
employment-related child and dependent care expenses. The 
credit may be claimed by an individual who maintains a 
household that includes one or more qualifying individuals. A 
qualifying individual is a dependent of the taxpayer who is 
under the age of 13, a physically or mentally incapacitated 
dependent, or a physically or mentally incapacitated spouse. A 
married couple must file a joint return in order to claim the 
credit.
    Employment-related expenses are expenses for household 
services and the care of a qualifying individual, if incurred 
to enable the taxpayer to be gainfully employed. The amount of 
employment-related expenses that may be taken into account in 
computing the credit generally may not exceed an individual's 
earned income or, in the case of married taxpayers, the earned 
income of the spouse with the lesser earnings. Thus, if one 
spouse is not employed, no credit is generally allowed. 
Eligible employment-related expenses are limited to $2,400 if 
there is one qualifying individual, and $4,800 if there are two 
or more qualifying individuals. The amount of employment-
related expenses is reduced by the aggregate amount of 
employer-provided dependent care assistance excluded from the 
taxpayer's income.\2\
---------------------------------------------------------------------------
    \2\ Up to $5,000 annually of employer-provided dependent care 
assistance is excludable from gross income if the assistance is 
provided under a separate written plan of the employer that does not 
discriminate in favor of highly compensated employees and certain other 
requirements are satisfied.
---------------------------------------------------------------------------
    The 30-percent credit rate is reduced by one percentage 
point for each $2,000 (or fraction thereof) of adjusted gross 
income (``AGI'') above $10,000. A married couple's combined AGI 
is used for purposes of this computation. Individuals with more 
than $28,000 of AGI are entitled to a credit equal to 20 
percent of allowable employment-related expenses.

                           Reasons for Change

    The Committee believes that, as the costs of dependent care 
increase as a result of inflation, the size of the credit 
should also be increased. Also, the Committee believes that the 
credit should be targeted to lower- and middle-income 
taxpayers.

                        Explanation of Provision

    The dollar limits on eligible employment-related expenses 
($2,400 if there is one qualifying individual and $4,800 if 
there are two or more qualifying individuals) are indexed for 
inflation.
    The sum of the otherwise allowable dependent care credit 
and the otherwise allowable child credit is phased out for 
taxpayers with modified AGI in excess of certain thresholds. 
Specifically, the sum of the otherwise allowable child credit 
and then the otherwise allowable dependent care credit is 
reduced by $25 for each $1,000 of modified AGI (or fraction 
thereof) in excess of the threshold. For these purposes 
modified AGI is computed by increasing the taxpayer's AGI by 
the amount otherwise excluded from gross income under Code 
sections 911, 931, or 933 (relating to the exclusion of income 
of U.S. citizens or residents living abroad; residents of Guam, 
American Samoa, and the Northern Mariana Islands; and residents 
of Puerto Rico, respectively). The reduction is applied first 
to the child credit and then to the dependent care credit. For 
married taxpayers filing joint returns, the threshold is 
$110,000. For taxpayers filing single or head of household 
returns, the threshold is $75,000. These thresholds are not 
indexed for inflation.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

                   Title II. Education Tax Incentives

             A. Tax Benefits Relating to Education Expenses

 1. HOPE credit for higher education tuition expenses (sec. 201 of the 
                   bill and new sec. 25A of the Code)

                              Present Law

Deductibility of education expenses

    Taxpayers generally may not deduct education and training 
expenses. However, a deduction for education expenses generally 
is allowed under section 162 if the education or training (1) 
maintains or improves a skill required in a trade or business 
currently engaged in by the taxpayer, or (2) meets the express 
requirements of the taxpayer's employer, or requirements of 
applicable law or regulations, imposed as a condition of 
continued employment (Treas. Reg. sec. 1.162-5). However, 
education expenses are not deductible if they relate to certain 
minimum educational requirements or to education or training 
that enables a taxpayer to begin working in a new trade or 
business. In the case of an employee, education expenses (if 
not reimbursed by the employer) may be claimed as an itemized 
deduction only if such expenses meet the above-described 
criteria for deductibility under section 162 and only to the 
extent that the expenses, along with other miscellaneous 
deductions, exceed 2 percent of the taxpayer's adjusted gross 
income (AGI).

Exclusion for employer-provided educational assistance

    A special rule allows an employee to exclude from gross 
income for income tax purposes and from wages for employment 
tax purposes up to $5,250 annually paid by his or her employer 
for educational assistance (sec. 127). In order for the 
exclusion to apply certain requirements must be satisfied, 
including a requirement that not more than 5 percent of the 
amounts paid or incurred by the employer during the year for 
educational assistance under a qualified educational assistance 
program can be provided for the class of individuals consisting 
of more than 5-percent owners of the employer and the spouses 
or dependents of such more than 5-percent owners. This special 
rule for employer-provided educational assistance expires with 
respect to courses beginning after June 30, 1997 (and does not 
apply to graduate level courses beginning after June 30, 1996).
    For purposes of the special exclusion, educational 
assistance means the payment by an employer of expenses 
incurred by or on behalf of the employee for education of the 
employee including, but not limited to, tuition, fees, and 
similar payments, books, supplies, and equipment. Educational 
assistance also includes the provision by the employer of 
courses of instruction for the employee (including books, 
supplies, and equipment). Educational assistance does not 
include tools or supplies which may be retained by the employee 
after completion of a course or meals, lodging, or 
transportation. The exclusion does not apply to any education 
involving sports, games, or hobbies.
    In the absence of the special exclusion, employer-provided 
educational assistance is excludable from gross income and 
wages as a working condition fringe benefit (sec. 132(d)) only 
to the extent the education expenses would be deductible under 
section 162.

Exclusion for interest earned on savings bonds

    Another special rule (sec. 135) provides that interest 
earned on a qualified U.S. Series EE savings bond issued after 
1989 is excludable from gross income if the proceeds of the 
bond upon redemption do not exceed qualified higher education 
expenses paid by the taxpayer during the taxable year.\3\ 
``Qualified higher education expenses'' include tuition and 
fees (but not room and board expenses) required for the 
enrollment or attendance of the taxpayer, the taxpayer's 
spouse, or a dependent of the taxpayer at certain colleges, 
universities, or vocational schools. The exclusion provided by 
section 135 is phased out for certain higher-income taxpayers, 
determined by the taxpayer's modified AGI during the year the 
bond is redeemed. For 1996, the exclusion was phased out for 
taxpayers with modified AGI between $49,450 and $64,450 
($74,200 and $104,200 for joint returns). To prevent taxpayers 
from effectively avoiding the income phaseout limitation 
through issuance of bonds directly in the child's name, section 
135(c)(1)(B) provides that the interest exclusion is available 
only with respect to U.S. Series EE savings bonds issued to 
taxpayers who are at least 24 years old.
---------------------------------------------------------------------------
    \3\ If the aggregate redemption amount (i.e., principal plus 
interest) of all Series EE bonds redeemed by the taxpayer during the 
taxable year exceeds the qualified education expenses incurred, then 
the excludable portion of interest income is based on the ratio that 
the education expenses bears to the aggregate redemption amount (sec. 
135(b)).
---------------------------------------------------------------------------

Qualified scholarships

    Section 117 excludes from gross income amounts received as 
a qualified scholarship by an individual who is a candidate for 
a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. There is, however, no dollar limitation for the 
section 117 exclusion, provided that the scholarship funds are 
used to pay for tuition and required fees. In addition to the 
exclusion for qualified scholarships, section 117 provides an 
exclusion from gross income for qualified tuition reductions 
for education below the graduate level provided to employees of 
certain educational organizations. Section 117(c) specifically 
provides that the exclusion for qualified scholarships does not 
apply to any amount received by a student that represents 
payment for teaching, research, or other services by the 
student required as a condition for receiving the scholarship.

Student loan forgiveness

    In the case of an individual, section 108(f) provides that 
gross income subject to Federal income tax does not include any 
amount from the forgiveness (in whole or in part) of certain 
student loans, provided that the forgiveness is contingent on 
the student's working for a certain period of time in certain 
professions for any of a broad class of employers (e.g., 
providing health care services to a nonprofit organization). 
Student loans eligible for this special rule must be made to an 
individual to assist the individual in attending an education 
institution that normally maintains a regular faculty and 
curriculum and normally has a regularly enrolled body of 
students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses (in contrast to tax-free scholarships under 
section 117, which are limited to tuition and required fees). 
In addition, the loan must be made by (1) the United States (or 
an instrumentality or agency thereof), (2) a State (or any 
political subdivision thereof), (3) certain tax-exempt public 
benefit corporations that control a State, county, or municipal 
hospital and whose employees have been deemed to be public 
employees under State law, or (4) an educational organization 
that originally received the funds from which the loan was made 
from the United States, a State, or a tax-exempt public benefit 
corporation. Thus, loans made with private, nongovernmental 
funds are not qualifying student loans for purposes of the 
section 108(f) exclusion. As with section 117, there is no 
dollar limitation for the section 108(f) exclusion.

Qualified State prepaid tuition programs

    Section 529 (enacted as part of the Small Business Job 
Protection Act of 1996) provides tax-exempt status to 
``qualified State tuition programs,'' meaning certain 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 purpose of meeting qualified higher education expenses of 
the designated beneficiary of the account. ``Qualified higher 
education expenses'' are defined as tuition, fees, books, 
supplies, and equipment required for the enrollment or 
attendance at a college or university (or certain vocational 
schools). Qualified higher education expenses do not include 
room and board expenses. Section 529 also 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 amounts or the value of the educational benefits 
exceed contributions made on behalf of the beneficiary, and (2) 
amounts distributed to a contributor (e.g., when a parent 
receives a refund) will be included in the contributor's gross 
income to the extent such amounts exceed contributions made by 
that person.\4\
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    \4\ Specifically, section 529(c)(3)(A) 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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                           Reasons for Change

    To assist low- and middle-income families and students in 
paying for the costs of post-secondary education, the Committee 
believes that taxpayers should be allowed to claim a credit 
against Federal income taxes for certain tuition and related 
expenses incurred during a student's first two years of 
attendance (on at least a half-time basis) at a college, 
university, or certain vocational schools.

                        Explanation of Provision

In general

    Individual taxpayers are allowed to claim a non-refundable 
HOPE credit against Federal income taxes up to $1,500 per 
student per year for 50 percent of qualified tuition and 
related expenses (but not room and board expenses) paid for the 
first two years of the student's post-secondary education in a 
degree or certificate program. The qualified tuition and 
related expenses must be incurred on behalf of the taxpayer, 
the taxpayer's spouse, or a dependent. The HOPE credit is 
available with respect to an individual student for two taxable 
years, provided that the student has not completed the first 
two years of post-secondary education. Beginning in 1998, the 
maximum credit amount of $1,500 will be indexed for inflation, 
rounded down to the closest multiple of $50.\5\
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    \5\ The HOPE credit may not be used to reduce any alternative 
minimum tax (AMT) liability owed by the taxpayer.
---------------------------------------------------------------------------
    The HOPE credit amount that a taxpayer may otherwise claim 
is phased out ratably for taxpayers with modified AGI between 
$40,000 and $50,000 ($80,000 and $100,000 for joint returns). 
Modified AGI includes amounts otherwise excluded with respect 
to income earned abroad (or income from Puerto Rico or U.S. 
possessions). Beginning in 2001, the income phase-out ranges 
will be indexed for inflation, rounded down to the closest 
multiple of $5,000.
    The HOPE credit is available in the taxable year the 
expenses are paid, subject to the requirement that the 
education commence or continue during that year or during the 
first threemonths of the next year. Qualified tuition expenses 
paid with the proceeds of a loan generally are eligible for the HOPE 
credit (rather than repayment of the loan itself).\6\
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    \6\ The Treasury Department is granted authority to issue 
regulations providing that the HOPE credit will be recaptured in cases 
where the student or taxpayer receives a refund of tuition and related 
expenses with respect to which a credit was claimed in a prior year.
---------------------------------------------------------------------------

Dependent students

    A taxpayer may claim the HOPE credit with respect to an 
eligible student who is not the taxpayer or the taxpayer's 
spouse (e.g., in cases where the student is the taxpayer's 
child) only if the taxpayer claims the student as a dependent 
for the taxable year for which the credit is claimed. If a 
student is claimed as a dependent by the parent or other 
taxpayer, the eligible student him- or herself is not entitled 
to claim a HOPE credit for that taxable year on the student's 
own tax return. If a parent (or other taxpayer) claims a 
student as a dependent, any qualified tuition and related 
expenses paid by the student are treated as paid by the parent 
(or other taxpayer) for purposes of the provision.

Election of HOPE credit or proposed deduction for qualified higher 
        education expenses

    For each taxable year, a taxpayer may elect with respect to 
an eligible student either the HOPE credit or the proposed 
deduction for qualified higher education expenses (described 
below). Thus, for example, if a parent claims a child as a 
dependent for a taxable year, then all qualified tuition 
expenses paid by both the parent and child are deemed paid by 
the parent, and the parent may claim the HOPE credit (assuming 
that the AGI phaseout does not apply) on the parent's return. 
As an alternative, the parent may elect for that taxable year 
the deduction for qualified higher education expenses with 
respect to the dependent child (as described below).\7\ On the 
other hand, if a child is not claimed as a dependent by the 
parent (or by any other taxpayer) for the taxable year, then 
the child him- or herself has the option of electing either the 
HOPE credit or deduction for qualified higher education 
expenses paid during that year.
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    \7\ For any taxable year, a taxpayer may claim the HOPE credit for 
qualified tuition and related expenses paid with respect to one student 
and also claim the proposed deduction (described below) for higher 
education expenses paid with respect to one or more other students. If 
the HOPE credit is claimed with respect to one student for one or two 
taxable years, then the proposed deduction for higher education 
expenses may be available with respect to that student for subsequent 
taxable years.
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Qualified tuition and related expenses

    The HOPE credit is available for ``qualified tuition and 
related expenses,'' meaning tuition, fees, and books required 
for the enrollment or attendance of an eligible student at an 
eligible educational institution. Charges and fees associated 
with meals, lodging, student activities, athletics, insurance, 
transportation, and similar personal, living or family expenses 
are not included. The expenses of education involving sports, 
games, or hobbies are not qualified tuition expenses unless 
this education is part of the student's degree program.
    Qualified tuition and related expenses generally include 
only out-of-pocket expenses. Qualified tuition and related 
expenses do not include expenses covered by educational 
assistance that is not required to be included in the gross 
income of either the student or the taxpayer claiming the 
credit. Thus, total qualified tuition and related expenses are 
reduced by any scholarship or fellowship grants excludable from 
gross income under present-law section 117 and any other tax-
free educational benefits received by the student during the 
taxable year. No reduction of qualified tuition and related 
expenses is required for a gift, bequest, devise, or 
inheritance within the meaning of section 102(a). Under the 
provision, a HOPE credit is not allowed with respect to any 
education expense for which a deduction is claimed under 
section 162 or any other section of the Code.\8\
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    \8\ In addition, the bill amends present-law section 135 to provide 
that the amount of qualified higher education expenses taken into 
account for purposes of that section is reduced by the amount of such 
expenses taken into account in determining the HOPE credit allowed to 
any taxpayer with respect to the student for the taxable year.
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Eligible student

    An eligible student for purposes of the HOPE credit is an 
individual who is enrolled in a degree, certificate, or other 
program (including a program of study abroad approved for 
credit by the institution at which such student is enrolled) 
leading to a recognized educational credential at an eligible 
educational institution. The student must pursue a course of 
study on at least a half-time basis. (In other words, for at 
least one academic period which begins during the taxable year, 
the student must carry at least one-half the normal full-time 
work load for the course of study the student is pursuing.) An 
eligible student may not have been convicted of a Federal or 
State felony consisting of the possession or distribution of a 
controlled substance.

Eligible educational institution

    Eligible educational institutions are defined by reference 
to section 481 of the Higher Education Act of 1965. Such 
institutions generally are accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, or another recognized post-
secondary credential. Certain proprietary institutions and 
post-secondary vocational institutions also are eligible 
educational institutions. The institution must be eligible to 
participate in Department of Education student aid programs.

Regulations

    The Secretary of the Treasury (in consultation with the 
Secretary of Education) is granted authority to issue 
regulations to implement the proposal, including regulations 
providing appropriate rules for recordkeeping and information 
reporting. These regulations may address the information 
reports that eligible educational institutions will be required 
to file to assist students and the IRS in calculating the 
amount of the HOPE credit potentially available. Where certain 
terms are defined by reference to the Higher Education Act of 
1965, the Secretary of Education has authority to issue 
regulations, as well as authority to define other education 
terms as necessary.

                             Effective Date

    The provision is effective for expenses paid after December 
31, 1997, for education furnished in academic periods beginning 
after such date.

2. Deduction for qualified higher education expenses and tax treatment 
of qualified tuition programs and education investment accounts (secs. 
202, 211, and 212 of the bill and sec. 529 and new secs. 222 and 530 of 
                               the Code)

                              Present Law

Deductibility of education expenses

    Taxpayers generally may not deduct education and training 
expenses. However, a deduction for education expenses generally 
is allowed under section 162 if the education or training (1) 
maintains or improves a skill required in a trade or business 
currently engaged in by the taxpayer, or (2) meets the express 
requirements of the taxpayer's employer, or requirements of 
applicable law or regulations, imposed as a condition of 
continued employment (Treas. Reg. sec. 1.162-5). However, 
education expenses are not deductible if they relate to certain 
minimum educational requirements or to education or training 
that enables a taxpayer to begin working in a new trade or 
business. In the case of an employee, education expenses (if 
not reimbursed by the employer) may be claimed as an itemized 
deduction only if such expenses meet the above-described 
criteria for deductibility under section 162 and only to the 
extent that the expenses, along with other miscellaneous 
deductions, exceed 2 percent of the taxpayer's adjusted gross 
income (AGI).

Exclusion for employer-provided educational assistance

    A special rule allows an employee to exclude from gross 
income for income tax purposes and from wages for employment 
tax purposes up to $5,250 annually paid by his or her employer 
for educational assistance (sec. 127). In order for the 
exclusion to apply certain requirements must be satisfied, 
including a requirement that not more than 5 percent of the 
amounts paid or incurred by the employer during the year for 
educational assistance under a qualified educational assistance 
program can be provided for the class of individuals consisting 
of more than 5-percent owners of the employer and the spouses 
or dependents of such more than 5-percent owners. This special 
rule for employer-provided educational assistance expires with 
respect to courses beginning after June 30, 1997 (and does not 
apply to graduate level courses beginning after June 30, 1996).
     For purposes of the special exclusion, educational 
assistance means the payment by an employer of expenses 
incurred by or on behalf of the employee for education of the 
employee including, but not limited to, tuition, fees, and 
similar payments, books, supplies, and equipment. Educational 
assistance also includes the provision by the employer of 
courses of instruction for the employee (including books, 
supplies, and equipment). Educational assistance does not 
include tools or supplies which may be retained by the employee 
after completion of a course or meals, lodging, or 
transportation. The exclusion does not apply to any education 
involving sports, games, or hobbies.
    In the absence of the special exclusion, employer-provided 
educational assistance is excludable from gross income and 
wages as a working condition fringe benefit (sec. 132(d)) only 
to the extent the education expenses would be deductible under 
section 162.

Exclusion for interest earned on savings bonds

    Another special rule (sec. 135) provides that interest 
earned on a qualified U.S. Series EE savings bond issued after 
1989 is excludable from gross income if the proceeds of the 
bond upon redemption do not exceed qualified higher education 
expenses paid by the taxpayer during the taxable year.\9\ 
``Qualified higher education expenses'' include tuition and 
fees (but not room and board expenses) required for the 
enrollment or attendance of the taxpayer, the taxpayer's 
spouse, or a dependent of the taxpayer at certain colleges, 
universities, or vocational schools. The exclusion provided by 
section 135 is phased out for certain higher-income taxpayers, 
determined by the taxpayer's modified AGI during the year the 
bond is redeemed. For 1996, the exclusion was phased out for 
taxpayers with modified AGI between $49,450 and $64,450 
($74,200 and $104,200 for joint returns). To prevent taxpayers 
from effectively avoiding the income phaseout limitation 
through issuance of bonds directly in the child's name, section 
135(c)(1)(B) provides that the interest exclusion is available 
only with respect to U.S. Series EE savings bonds issued to 
taxpayers who are at least 24 years old.
---------------------------------------------------------------------------
    \9\ If the aggregate redemption amount (i.e., principal plus 
interest) of all Series EE bonds redeemed by the taxpayer during the 
taxable year exceeds the qualified education expenses incurred, then 
the excludable portion of interest income is based on the ratio that 
the education expenses bears to the aggregate redemption amount (sec. 
135(b)).
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Qualified scholarships

    Section 117 excludes from gross income amounts received as 
a qualified scholarship by an individual who is a candidate for 
a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses ofinstruction) at a primary, 
secondary, or post-secondary educational institution. The tax-free 
treatment provided by section 117 does not extend to scholarship 
amounts covering regular living expenses, such as room and board. There 
is, however, no dollar limitation for the section 117 exclusion, 
provided that the scholarship funds are used to pay for tuition and 
required fees. In addition to the exclusion for qualified scholarships, 
section 117 provides an exclusion from gross income for qualified 
tuition reductions for education below the graduate level provided to 
employees of certain educational organizations. Section 117(c) 
specifically provides that the exclusion for qualified scholarships 
does not apply to any amount received by a student that represents 
payment for teaching, research, or other services by the student 
required as a condition for receiving the scholarship.

Student loan forgiveness

    In the case of an individual, section 108(f) provides that 
gross income subject to Federal income tax does not include any 
amount from the forgiveness (in whole or in part) of certain 
student loans, provided that the forgiveness is contingent on 
the student's working for a certain period of time in certain 
professions for any of a broad class of employers (e.g., 
providing health care services to a nonprofit organization). 
Student loans eligible for this special rule must be made to an 
individual to assist the individual in attending an education 
institution that normally maintains a regular faculty and 
curriculum and normally has a regularly enrolled body of 
students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses (in contrast to tax-free scholarships under 
section 117, which are limited to tuition and required fees). 
In addition, the loan must be made by (1) the United States (or 
an instrumentality or agency thereof), (2) a State (or any 
political subdivision thereof), (3) certain tax-exempt public 
benefit corporations that control a State, county, or municipal 
hospital and whose employees have been deemed to be public 
employees under State law, or (4) an educational organization 
that originally received the funds from which the loan was made 
from the United States, a State, or a tax-exempt public benefit 
corporation. Thus, loans made with private, nongovernmental 
funds are not qualifying student loans for purposes of the 
section 108(f) exclusion. As with section 117, there is no 
dollar limitation for the section 108(f) exclusion.

Qualified State prepaid tuition programs

    Section 529 (enacted as part of the Small Business Job 
Protection Act of 1996) provides tax-exempt status to 
``qualified State tuition programs,'' meaning certain 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 purpose of meeting qualified higher education expenses of 
the designated beneficiary of the account. ``Qualified higher 
education expenses'' are defined as tuition, fees, books, 
supplies, and equipment required for the enrollment or 
attendance at a college or university (or certain vocational 
schools). Qualified higher education expenses do not include 
room and board expenses. Section 529 also 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 amounts or the value of the educational benefits 
exceed contributions made on behalf of the beneficiary, and (2) 
amounts distributed to a contributor (e.g., when a parent 
receives a refund) will be included in the contributor's gross 
income to the extent such amounts exceed contributions made by 
that person.\10\
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    \10\ Specifically, section 529(c)(3)(A) 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.
---------------------------------------------------------------------------
    Contributions made to a qualified State tuition program are 
treated as incomplete gifts for Federal gift tax purposes (sec. 
529(c)(2)). Thus, any Federal gift tax consequences are 
determined at the time that a distribution is made from an 
account under the program. 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 is treated as a qualified transfer for purposes of 
present-law section 2503(e). Amounts contributed to a qualified 
State tuition program (and earnings thereon) are includible 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 (sec. 529(c)(4)).

Individual retirement arrangements (``IRAs'')

    An individual may make deductible contributions to an 
individual retirement arrangement (``IRA'') for each taxable 
year up to the lesser of $2,000 or the amount of the 
individual's compensation for the year if the individual is not 
an active participant in an employer-sponsored qualified 
retirement plan (and, if married, the individual's spouse also 
is not an active participant). Contributions may be made to an 
IRA for a taxable year up to April 15th of the following year. 
An individual who makes excess contributions to an IRA, i.e., 
contributions in excess of $2,000, is subject to an excise tax 
on such excess contributions unless they are distributed from 
the IRA before the due date for filing the individual's tax 
return for the year (including extensions). If the individual 
(or his or her spouse, if married) is an active participant, 
the $2,000 limit is phased out between $40,000 and $50,000 of 
adjusted gross income (``AGI'') for married couples and between 
$25,000 and $35,000 of AGI for single individuals.
    Present law permits individuals to make nondeductible 
contributions (up to $2,000 per year) to an IRA to the extent 
an individual is not permitted to (or does not) make deductible 
contributions. Earnings on such contributions are includible in 
gross income when withdrawn.
    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. Amounts withdrawn 
from an IRA are includible in gross income (except to the 
extent of nondeductible contributions). In addition, a 10-
percent additional tax generally applies to distributions from 
IRAs made before age 59\1/2\, unless the distribution is made 
(1) on account of death or disability, (2) in the form of 
annuity payments, (3) for medical expenses of the individual 
and his or her spouse and dependents that exceed 7.5 percent of 
AGI, or (4) for medical insurance of the individual and his or 
her spouse and dependents (without regard to the 7.5 percent of 
AGI floor) if the individual has received unemployment 
compensation for at least 12 weeks, and the withdrawal is made 
in the year such unemployment compensation is received or the 
following year.

                           Reasons for Change

    To encourage families and students to save for future 
education expenses, the Committee believes that tax-exempt 
status should be granted to certain prepaid tuition programs 
operated by States or private educational institutions and to 
education investment accounts established by taxpayers on 
behalf of future students. The Committee further believes that 
a deduction should be allowed for Federal income tax purposes 
for earnings withdrawn from such prepaid tuition programs and 
education investment accounts if the earnings are used pay for 
qualified higher education expenses of an undergraduate student 
who is attending a college, university, or certain vocational 
schools on at least a half-time basis.

                        Explanation of Provision

In general

    Individual taxpayers are allowed a deduction of up to 
$10,000 per student per year for qualified higher education 
expenses paid by the taxpayer during the taxable year for 
education furnished to the taxpayer, the taxpayer's spouse, or 
a dependent. The deduction is allowed regardless of whether the 
taxpayer otherwise itemizes deductions or claims the standard 
deduction.\11\ A deduction is not allowed under the bill with 
respect to an otherwise eligible student if the HOPE credit (as 
described previously) is claimed with respect to that student 
for the same taxable year.\12\
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    \11\ The deduction will be claimed after a taxpayer computes 
adjusted gross income (AGI). The deduction is not a preference item for 
alternative minimum tax (AMT) purposes.
    \12\ If a HOPE credit was claimed with respect to a student for an 
earlier taxable year (i.e., the student's first or second year of post-
secondary education), the deduction provided for by the bill may be 
claimed with respect to that student for a subsequent taxable year.
---------------------------------------------------------------------------
    The deduction is allowed only to the extent that the 
taxpayer is required to include in gross income for the taxable 
year amounts distributed from a ``qualified tuition program'' 
or ``education investment account.'' In other words, amounts 
distributed from a qualified tuition program or education 
investment account that are includible in the taxpayer's gross 
income (i.e., earnings) and that are used to pay for qualified 
higher education expenses during the taxable year will be 
deductible under the bill (subject to a $10,000 annual limit 
per student). Amounts distributed from qualified tuition 
programs or education investment accounts generally will 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 under any other section, such as section 117).
    Under the bill, the deduction is limited to $10,000 per 
student for each taxable year. Aggregate deductions under the 
bill with respect to any one student may not exceed $40,000 for 
all taxable years. A deduction is not permitted with respect to 
a student after he or she completes the equivalent of the first 
four years of post-secondary education at an eligible 
educational institution.

Dependent students

    If a parent (or other taxpayer) claims a student as a 
dependent for a taxable year, then only the parent (or other 
taxpayer)--and not the student--may claim the deduction for 
qualified higher education expenses for that taxable year. In 
such a case where the parent claims the proposed deduction for 
qualified higher education expenses, amounts includible in 
gross income by reason of a distribution from a qualified 
tuition program or education investment account will be 
includible in the parent's (or other taxpayer's) gross income 
for that taxable year.\13\ If a parent (or other taxpayer) 
claims a student as a dependent for a taxable year, then all 
qualified higher education expenses paid that year by both the 
parent (or other taxpayer) and the student are deemed to be 
paid by the parent (or other taxpayer). If the student is not 
claimed as a dependent by another taxpayer, then only the 
student him- or herself may claim the deduction provided for by 
the bill (or, as an alternative, the HOPE credit described 
above) on the student's own tax return for the taxable 
year.\14\
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    \13\ Such an income inclusion is required on the parent's return 
only if the parent both claims the student as a dependent and elects 
the deduction provided for by the bill. In contrast, if the parent 
claims the student as a dependent but elects the HOPE credit, then, if 
there is any distribution from a qualified tuition program or education 
investment account during that year, the earnings portion of such 
distributions will be includible in the student's (or other 
distributee's) gross income, as provided for by present-law section 
529(c)(3).
    \14\ For example, assume an education investment account (or 
qualified tuition program account) has a balance of $20,000, of which 
$12,000 represents contributions of principal and $8,000 represents 
accumulated earnings. If the student has expenses of $10,000 consisting 
of $7,000 tuition and related expenses and $3,000 in room and board, a 
distribution of $10,000 from such account to pay these expenses will, 
under present-law section 72, be deemed to consist of the pro-rata 
share of principal and accumulated earnings in the account--in this 
case, $6,000 in principal and $4,000 in accumulated earnings. If the 
parent claims the student as a dependent and elects the proposed 
deduction for qualified higher education expenses, the parent will 
include the $4,000 of accumulated earnings in the parent's gross income 
and then is allowed to claim an offsetting deduction for the same 
$4,000, thus resulting in no tax liability for the $4,000 in earnings. 
Under no circumstances will the principal portion of any distribution 
from the account be includible in gross income, nor will a deduction be 
allowed under the bill for education expenses paid with such principal. 
Alternatively, the parent may elect to claim the HOPE credit (assuming 
that the AGI phaseout does not apply and the student is claimed as a 
dependent and has not yet completed the first two years of post-
secondary education), and the $4,000 in accumulated earnings will be 
includible in the distributee's (i.e., the student's) gross income and 
an offsetting deduction will not be available. Additionally, the 
qualified expenses for purposes of the HOPE credit will not include 
room and board expenses, so only $7,000 in expenses will qualify for 
the HOPE credit. The 50-percent HOPE credit rate will then be applied 
to this amount, which indicates a credit amount of $3,500, but the 
credit that could be claimed will be limited to the statutory maximum 
of $1,500 per student. As a final alternative, if the parent does not 
claim the student as a dependent, then the student may elect to claim 
either the HOPE credit or the deduction as described above.
---------------------------------------------------------------------------

Qualified higher education expenses

    Under the bill, the term ``qualified higher education 
expenses'' means tuition, fees, books, supplies, and equipment 
required for the enrollment or attendance of a student at an 
eligible education institution, as well as room and board 
expenses (meaning the minimum room and board allowance 
applicable to the student as determined by the institution in 
calculating costs of attendance for Federal financial aid 
programs under sec. 472 of the Higher Education Act of 1965). 
Qualified higher education expenses do not include expenses for 
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.
    Qualified higher education expenses generally include only 
out-of-pocket expenses. Qualified higher education expenses do 
not include expenses covered by educational assistance that is 
not required to be included in the gross income of either the 
student or the taxpayer claiming the credit. Thus, total 
qualified higher education expenses are reduced by any 
scholarship or fellowship grants excludable from gross income 
under present-law section 117 and any other tax-free 
educational benefits received by the student during the taxable 
year. In addition, no deduction is allowed under the bill for 
expenses paid with amounts that are excludible under section 
135. No reduction of qualified tuition expenses is required for 
a gift, bequest, devise, or inheritance within the meaning of 
section 102(a). If a student's education expenses for a taxable 
year are deducted under section 162 or any other section of the 
Code, then no deduction is available for such expenses under 
the bill.

Eligible students

    To be eligible for the deduction provided for by the bill, 
a student must be at least a half-time student in a degree or 
certificate program at an eligible educational institution. For 
this purpose, a student is at least a half-time student if, 
during at least one academic period which begins during the 
taxable year, he or she is carrying at least one-half the 
normal full-time work load for the course of study the student 
is pursuing. A student will no longer be an eligible student 
once he or she has completed the equivalent of the first four 
years of post-secondary education at an eligible educational 
institution. An eligible student may not have been convicted of 
a Federal or State felony consisting of the possession or 
distribution of a controlled substance.

Eligible educational institution

    Eligible educational institutions are defined by reference 
to section 481 of the Higher Education Act of 1965. Such 
institutions generally are accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, or another recognized post-
secondary credential. Certain proprietary institutions and 
post-secondary vocational institutions also are eligible 
educational institutions. The institution must be eligible to 
participate in Department of Education student aid programs.

Qualified tuition programs and education investments accounts

    Under the bill, a ``qualified tuition program'' means any 
qualified State tuition program, generally as defined under 
present-law section 529, as well as any program established and 
maintained by one or more eligible educational institutions 
(which may be private institutions that are not State-owned) 
that satisfy the requirements under section 529 (other than 
present-law, State ownership rule). An ``education investment 
account'' means a trust which is created or organized in the 
United States exclusively for the purpose of paying the 
qualified higher education expenses of the account holder and 
which satisfies certain other requirements.
    Contributions to qualified tuition programs or education 
investment accounts may be made only in cash.\15\ Such 
contributions may not be made after the designated beneficiary 
or account holder reaches age 18. Any balance remaining in a 
qualified tuition program or education investment account must 
be distributed within 30 days after the earlier of the date 
that the beneficiary or account holder becomes 30 years old (or 
dies) or the date that the beneficiary or account holder 
completes the equivalent of the first four years of post-
secondary education at one or more eligible institutions. 
Transfers or rollovers of credits or account balances from one 
account benefiting one beneficiary to another account 
benefiting another beneficiary will not be considered a 
distribution from a qualified tuition program or education 
investment account (nor will a change in the designated 
beneficiary or account holder) if the new beneficiary is a 
member of the family of the old beneficiary.\16\ In the case of 
an education investment account or qualified tuition program 
maintained by one or more private educational institutions, 
contributions to an account established on behalf of a 
particular beneficiary (or to a program on behalf of a named 
beneficiary) may not exceed $5,000 per year, with an aggregate 
limit of $50,000 for contributions on behalf of that 
beneficiary for all years. The $50,000 aggregate contribution 
limit per beneficiary is applied by taking into account all 
amounts contributed to all education investment accounts for 
the beneficiary for the current taxable year and all prior 
taxable years, as well as all amounts contributed to all 
qualified tuition programs on behalf of such beneficiary for 
the current taxable year and all prior taxable years.\17\
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    \15\ The bill allows taxpayers to redeem U.S. Savings Bonds and be 
eligible for the exclusion under section 135 (as if the proceeds were 
used to pay qualified higher education expenses) if the proceeds from 
the redemption are contributed to a qualified tuition program or 
education investment account on behalf of the taxpayer, the taxpayer's 
spouse, or a dependent, In such a case, the beneficiary's or account 
holder's basis in the bond proceeds contributed on his or her behalf to 
the qualified tuition program or education investment will be the 
contributor's basis in the bonds (i.e., the original purchase price 
paid by the contributor for such bonds).
    The bill also provides that funds from an education investment 
account are deemed to be distributed to pay qualified higher education 
expenses if the funds are used to purchase tuition credits from, or to 
make contributions to, a qualified tuition program for the benefit of 
the account holder.
    \16\ For this purpose, a ``member of the family'' means persons 
described in paragraphs (1) through (8) of section 152(a), and any 
spouse of such persons.
    \17\ To the extent contributions exceed the $50,000 aggregate 
limit, an excise tax penalty may be imposed on the contributor under 
present-law section 4973, unless the excess contributions (and any 
earnings thereon) are returned to the contributor before the due date 
for the return for the taxable year in which the excess contribution is 
made.
    State-sponsored qualified tuition programs will continue to be 
governed by the rule contained in present-law section 529(b)(7) that 
such programs provide 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. 
State-sponsored qualified tuition programs will not be subject to a 
specific dollar cap under section 529 on annual (or aggregate) 
contributions that can be made under the program on behalf of a named 
beneficiary.
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    Qualified tuition programs and education investment 
accounts (as separate legal entities) will be exempt from 
Federal income tax, other than taxes imposed under the present-
law unrelated business income tax (UBIT) rules.\18\
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    \18\ An interest in a qualified tuition program is not treated as 
debt for purposes of the debt-financed property UBIT rules of section 
514.
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    Under the bill, an additional tax of 10 percent will be 
imposed on distributions from qualified tuition programs or 
education investment account to the extent the distribution 
exceeds qualified higher education expenses paid by the 
taxpayer (and is not made on account of the death, disability, 
or scholarship received by the designated beneficiary or 
account holder).

Estate and gift tax treatment

    For Federal estate and gift tax purposes, any contribution 
to a qualified tuition program or education investment account 
will be treated as a completed gift of a present interest from 
the contributor to the beneficiary at the time of the 
contribution. Thus, annual contributions--which cannot exceed 
$5,000 per year in the case of an education investment account 
or qualified tuition program maintained by one or more private 
education institutions--will be eligible for the present-law 
gift tax exclusion provided by Code section 2503(b) and also 
will be excludable for purposes of the generation-skipping 
transfer tax (provided that the contribution, when combined 
with any other contributions made by the donor to that same 
beneficiary, does not exceed the annual $10,000 gift-tax 
exclusion limit). Similar gift tax and generation-skipping tax 
treatment will apply to contributions of up to $10,000 per 
donor per beneficiary made to a State-sponsored qualified 
tuition program. Contributions to a qualified tuition program 
(either a State-sponsored program or one maintained by a 
private education institution) or to an education investment 
account will not, however, be eligible for the educational 
expense exclusion provided by Code section 2503(e). In no event 
will a distribution from a qualified tuition program or 
education investment account be treated as a taxable gift.
    Transfers or rollovers of credits or account balances from 
an account benefiting one beneficiary to an account benefiting 
another beneficiary (or a change in the designated beneficiary) 
will not be treated as a taxable gift to the extent that the 
new beneficiary is: (1) a member of the family of the old 
beneficiary (as defined above), and (2) assigned to the same 
generation as the old beneficiary (within the meaning of Code 
section 2651). In all other cases, a transfer from one 
beneficiary to another beneficiary (or a change in the 
designated beneficiary) will be treated as a taxable gift from 
the old beneficiary to the new beneficiary to the extent it 
exceeds the $10,000 present-law gift tax exclusion. Thus, a 
transfer of an account from a brother to his sister will not be 
treated as a taxable gift, whereas a transfer from a father to 
his son will be treated as a taxable gift (to the extent it 
exceeds the $10,000 present-law gift tax exclusion).
    For estate tax purposes, the value of any interest in a 
qualified tuition program or education investment account will 
be includible in the estate of the designated beneficiary. In 
no event will such interests be includible in the estate of the 
contributor.

                             Effective Date

    The deduction for qualified higher education expenses, and 
the expansion of the definition of qualified higher education 
expenses under sec. 529 to cover room and board expenses, are 
effective for expenses paid after December 31, 1997, for 
education furnished in academic periods beginning after such 
date. The provisions governing the tax-exempt status of 
qualified tuition plans and education investment accounts 
generally are effective after December 31, 1997. The gift tax 
provisions are effective for contributions (or transfers) made 
after the date of enactment, and the estate tax provisions are 
effective for decedents dying after June 8, 1997.

3. Phase out qualified tuition reduction exclusion (sec. 202(c) of the 
                   bill and sec. 117(d) of the Code)

                              Present Law

    Under present law, a ``qualified tuition reduction'' is 
excluded from gross income (sec. 117(d)). A ``qualified tuition 
reduction'' means any reduction in tuition provided to an 
employee of an educational organization for the education of 
the employee,\19\ the employee's spouse, and dependent children 
at that organization or another such organization. For this 
purpose, qualifying educational organizations are those that 
normally maintain a regular faculty and curriculum and normally 
have a regularly enrolled body of pupils or students in 
attendance at the place where the educational activities are 
regularly carried out. In general, the qualified tuition 
reduction is limited to education below the graduate level; 
however, this limitation does not apply to graduate students 
engaged in teaching or research activities. The exclusion does 
not apply to any amount that represents payment for teaching, 
research, or other services rendered by the student in exchange 
for receiving the tuition reduction.
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    \19\ Eligible beneficiaries also include retired and disabled 
employees, surviving spouses of retired or disabled employees,and 
children of deceased employees if the children are under the age of 25.
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                           Reasons for Change

    The Committee believes that because employees of 
educational organizations, like other taxpayers, will enjoy the 
special education tax benefits relating to education expenses, 
as well as the expanded education savings opportunities 
contained in the bill, the exclusion under 117(d) is no longer 
necessary.

                        Explanation of Provision

    The bill phases out the special rule contained in section 
117(d) that excludes qualified tuition reductions from gross 
income. For 1998, 80 percent of a qualified tuition reduction 
is excludable from gross income. For 1999, the excludable 
percentage is 60 percent; for 2000, the excludable percentage 
is 40 percent; and for 2001, the excludable percentage is 20 
percent. No exclusion for a qualified tuition reduction is 
permitted after 2001.
    Educational benefits provided that are not excludable under 
the bill may be eligible for the proposed HOPE credit, or may 
be eligible for the deduction for qualified higher education 
expenses (described above) to the extent that earnings are 
distributed from an education investment account on behalf of 
the student during the year that the education benefits are 
provided.

                             Effective Date

    The provision is effective for qualified tuition reductions 
with respect to courses of instruction beginning after December 
31, 1997 (subject to the phaseout described above).

  4. Penalty-free withdrawals from IRAs for higher education expenses 
           (sec. 203 of the bill and sec. 72(t) of the Code)

                              Present Law

    An individual may make deductible contributions to an 
individual retirement arrangement (``IRA'') for each taxable 
year up to the lesser of $2,000 or the amount of the 
individual's compensation for the year if the individual is not 
an active participant in an employer-sponsored qualified 
retirement plan (and, if married, the individual's spouse also 
is not an active participant). In the case of a married couple, 
deductible IRA contributions of up to $2,000 can 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.
    If the individual (or the individual's spouse) is an active 
participant in an employer-sponsored retirement plan, the 
$2,000 deduction limit is phased out over certain adjusted 
gross income (``AGI'') levels. The limit is phased out between 
$40,000 and $50,000 of AGI for married taxpayers, and between 
$25,000 and $35,000 of AGI for single taxpayers. An individual 
may make nondeductible IRA contributions to the extent the 
individual is not permitted to make deductible IRA 
contributions. Contributions cannot be made to an IRA after age 
70\1/2\.
    Amounts held in an IRA are includible in income when 
withdrawn (except to the extent the withdrawal is a return of 
nondeductible contributions). Amounts withdrawn prior to 
attainment of age 59\1/2\ are subject to an additional 10-
percent early withdrawal tax, unless the withdrawal is due to 
death or disability, is made in the form of certain periodic 
payments, is used to pay medical expenses in excess of 7.5 
percent of AGI, or is used to purchase health insurance of an 
unemployed individual.

                           Reasons for Change

    The Committee believes that it is appropriate and important 
to allow individuals to withdraw amounts from their IRAs for 
purposes of paying higher education expenses without incurring 
an additional 10-percent early withdrawal tax.

                        Explanation of Provision

    The bill provides that the 10-percent early withdrawal tax 
does not apply to distributions from IRAs (including American 
Dream IRAs added by the bill) if the taxpayer uses the amounts 
to pay qualified higher education expenses (including those 
related to graduate level courses) of the taxpayer, the 
taxpayer's spouse, or any child, or grandchild of the 
individual or the individual's spouse.
    The penalty-free withdrawal is available for ``qualified 
higher education expenses,'' meaning tuition, fees, books, 
supplies, equipment required for enrollment or attendance, and 
room and board at a post-secondary educational institution 
(defined by reference to sec 481 of the Higher Education Act of 
1965). Qualified higher education expenses are reduced by any 
amount excludable from gross income under section 135 relating 
to the redemption of a qualified U.S. savings bond and certain 
scholarships and veterans benefits.

                             Effective Date

    The provision is effective for distributions after December 
31, 1997, with respect to expenses paid after such date for 
education furnished in academic periods beginning after such 
date.

 5. Tax credit for expenses for education which supplements elementary 
 and secondary education (sec. 204 of the bill and new sec. 25B of the 
                                 Code)

                              Present Law

    In general, taxpayers may not deduct education and training 
expenses that relate to basic elementary or secondary 
education. (Treas. reg. sec. 1.162-5). Students who are 
employed may be eligible for the special exclusion for 
employer-provided educational assistance under section 127. In 
addition, qualified scholarships received by such students are 
excluded from gross income under section 117, and such students 
may be eligible for the special rules for student loan 
forgiveness under section 108(f). No tax credit is available 
under present law for expenses incurred with respect to 
elementary or secondary education.

                           Reasons for Change

    The Committee believes that, in addition to making higher 
education accessible and affordable through various tax 
incentives, it is important to ensure that students have the 
necessary academic background to pursue successfully such 
higher education objectives. To this end, the Committee has 
provided assistance to students who may require supplementary 
education with respect to basic elementary and secondary school 
courses of study to assist such students in obtaining a solid 
educational foundation.

                        Explanation of Provision

    The bill provides a nonrefundable tax credit equal to the 
lesser of (1) $150 or (2) 50 percent of qualified educational 
assistance expenses paid with respect to an eligible student.
     Eligible students are children under age 18 enrolled full-
time in elementary or secondary school. Qualified educational 
assistance expenses are costs of supplementary education (e.g., 
tutoring). Such supplementary education must be provided with 
respect to a student's current classes by a supplementary 
education service provider that is accredited by an 
accreditation organization recognized by the Secretary of 
Education. Qualified expenses do not include the cost of 
courses that prepare students for college entrance exams.
    The credit is phased out for taxpayers with adjusted gross 
income between $80,000-$92,000 for joint filers and between 
$50,000-$62,000 for individual filers.

                             Effective Date

    The credit is available for taxable years beginning after 
December 31, 1997.

1. Extension of exclusion for employer-provided educational assistance 
            (sec. 221 of the bill and sec. 127 of the Code)

                              Present Law

    Under present law, an employee's gross income and wages do 
not include amounts paid or incurred by the employer for 
educational assistance provided to the employee if such amounts 
are paid or incurred pursuant to an educational assistance 
program that meets certain requirements. This exclusion is 
limited to $5,250 of educational assistance with respect to an 
individual during a calendar year. The exclusion does not apply 
to graduate level courses beginning after June 30, 1996. The 
exclusion expires with respect to courses beginning after June 
30, 1997. In the absence of the exclusion, educational 
assistance is excludable from income only if it is related to 
the employee's current job.

                        Description of Proposal

    The proposal would extend the exclusion for employer-
provided educational assistance to courses of instruction 
beginning before December 31, 1997. As under present law, the 
exclusion will not apply to graduate-level courses.

                             Effective Date

    The provision would be effective with respect to taxable 
years beginning after December 31, 1996.

  2. Modification of $150 million limit on qualified 501(c)(3) bonds 
  other than hospital bonds (sec. 222 of the bill and sec. 145 of the 
                                 Code)

                              Present Law

    Interest on State and local government bonds generally is 
excluded from income if the bonds are issued to finance 
activities carried out and paid for with revenues of these 
governments. Interest on bonds issued by these governments to 
finance activities of other persons, e.g., private activity 
bonds, is taxable unless a specific exception is included in 
the Code. One such exception is for private activity bonds 
issued to finance activities of private, charitable 
organizations described in Code section 501(c)(3) (``section 
501(c)(3) organizations'') when the activities do not 
constitute an unrelated trade or business.
    Present law treats section 501(c)(3) organizations as 
private persons; thus, bonds for their use may only be issued 
as private activity ``qualified 501(1)(3) bonds,'' subject to 
the restrictions of Code section 145. The most significant of 
these restrictions limits the amount of outstanding bonds from 
which a section 501(c)(3) organization may benefit to $150 
million. In applying this ``$150 million limit,'' all section 
501(c)(3) organizations under common management or control are 
treated as a single organization. The limit does not apply to 
bonds for hospital facilities, defined to include only acute 
care, primarily inpatient, organizations.

                           Reasons for Change

    The committee believes that the present law $150 million 
limitation is inappropriately low.

                        Description of Proposal

    The $150 million limit is increased annually in $10 million 
increments until it is $200 million. Specifically, the 
limitation is $160 million in 1998, $170 million in 1999, $180 
million in 2000, $190 million in 2001, and $200 million in 2002 
and thereafter.

                             Effective Date

    The provision is effective on January 1, 1998.

     3. Enhanced deduction for corporate contributions of computer 
    technology and equipment (sec. 223 of the bill and new section 
                         170(e)(6) of the Code)

                              Present 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.\20\ 
However, in the case of a charitable contribution of inventory 
or other ordinary-income property, short-term capital gain 
property, or certain gifts to private foundations, the amount 
of the deduction is limited to the taxpayer's basis in the 
property. In the case of a charitable contribution of tangible 
personal property, a taxpayer's deduction is limited to the 
adjusted basis in such property if the use by the recipient 
charitable organization is unrelated to the organization's tax-
exempt purpose (sec. 170(e)(1)(B)(i)).
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    \20\ 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)). Corporations are entitled to claim a 
deduction for charitable contributions, generally limited to 10 percent 
of their taxable income (computed without regard to the contributions) 
for the taxable year.
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    Special rules in the Code provide augmented deductions for 
certain corporate \21\ contributions of inventory property for 
the care of the ill, the needy, or infants (sec. 170(e)(3)) and 
certain corporate contributions of scientific equipment 
constructed by the taxpayer, provided the original use of such 
donated equipment is by the donee for research or research 
training in the United States in physical or biological 
sciences (sec. 170(e)(4)).\22\ Under these special rules, the 
amount of the augmented deduction available to a corporation 
making a qualified contribution is equal to its basis in the 
donated property plus one-half of the amount of ordinary income 
that would have been realized if the property had been sold. 
However, the augmented deduction cannot exceed twice the basis 
of the donated property.
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    \21\ S corporations are not eligible donors for purposes of section 
170(e)(3) or section 170(e)(4).
    \22\ Eligible donees under section 170(e)(4) are limited to post-
secondary educational institutions, scientific research organizations, 
and certain other organizations that support scientific research.
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                           Reasons for Change

    The Committee believes that providing an incentive for 
businesses to invest their computer equipment and software for 
the benefit of primary and secondary school students will help 
to provide America's schools with the technological resources 
necessary to prepare both teachers and students for a 
technologically advanced present and future.

                        Explanation of Provision

    The bill expands the list of qualified contributions that 
would qualify for the augmented deduction currently available 
under Code section 170(e)(3) and 170(e)(4). Under the bill, 
qualified contributions mean gifts of computer technology and 
equipment (i.e., computer software, computer or peripheral 
equipment, and fiber optic cable related to computer use) to be 
used within the United States for educational purposes in any 
of grades K-12.
     Eligible donees are (1) any educational organization that 
normally maintains a regular faculty and curriculum and has a 
regularly enrolled body of pupils in attendance at the place 
where its educational activities are regularly carried on; and 
(2) Code section 501(c)(3) entities that are organized 
primarily for purposes of supporting elementary and secondary 
education. A private foundation also is an eligible donee, 
provided that, within 30 days after receipt of the 
contribution, the private foundation contributes the property 
to an eligible donee described above.
    Qualified contributions are limited to gifts made no later 
than two years after the date the taxpayer acquired or 
substantially completed the construction of the donated 
property. Such donated property could be computer technology or 
equipment that is inventory or depreciable trade or business 
property in the hands of the donor. The bill permits payment by 
the donee organization of shipping, transfer, and installation 
costs.\23\ The special treatment applies only to donations made 
by C corporations; as under present law section 170(e)(4), S 
corporations, personal holding companies, and service 
organizations are not eligible donors.
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    \23\ In the case of contributions made through private foundations, 
the bill permits the payment by the private foundation of shipping, 
transfer, and installation costs.
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                             Effective Date

    The provision is effective for contributions made in 
taxable years beginning after 1997.

4. Treatment of cancellation of certain student loans (sec. 224 of the 
                  bill and section 108(f) of the Code)

                              Present Law

    In the case of an individual, gross income subject to 
Federal income tax does not include any amount from the 
forgiveness (in whole or in part) of certain student loans, 
provided that the forgiveness is contingent on the student's 
working for a certain period of time in certain professions for 
any of a broad class of employers (sec. 108(f)).
    Student loans eligible for this special rule must be made 
to an individual to assist the individual in attending an 
educational institution that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses (in contrast to tax free scholarships under 
section 117, which are limited to tuition and required fees). 
In addition, the loan must be made by (1) the United States (or 
an instrumentality or agency thereof), (2) a State (or any 
political subdivision thereof), (3) certain tax-exempt public 
benefit corporations that control a State, county, or municipal 
hospital and whose employees have been deemed to be public 
employees under State law, or (4) an educational organization 
that originally received the funds from which the loan was made 
from the United States, a State, or a tax-exempt public benefit 
corporation. Thus, loans made with private, nongovernmental 
funds are not qualifying student loans for purposes of the 
section 108(f) exclusion.

                           Reasons for Change

    The Committee believes that it is appropriate to expand 
present-law section 108(f), so that certain loan cancellation 
programs of tax-exempt charitable organizations (e.g., private 
educational institutions) receive Federal income tax treatment 
comparable to that provided for similar government-sponsored 
programs. This provision will promote the establishment of 
programs that encourage students to use their education and 
training in valuable community service. In addition, the 
Committee believes it is appropriate to expand section 108(f) 
to cover forgiveness of certain Federal direct student loans.

                        Explanation of Provision

    The bill expands section 108(f) so that an individual's 
gross income does not include forgiveness of loans made by tax-
exempt charitable organizations (e.g., educational 
organizations or private foundations) if the proceeds of such 
loans are used to pay costs of attendance at an educational 
institution or to refinance outstanding student loans and the 
student is not employed by the lender organization. As under 
present law, the section 108(f) exclusion applies only if the 
forgiveness is contingent on the student's working for a 
certain period of time in certain professions for any of a 
broad class of employers. In addition, in the case of loans 
made by tax-exempt charitable organizations, the student's work 
must fulfill a public service requirement. The student must 
work in an occupation or area with unmet needs and such work 
must be performed for or under the direction of a tax-exempt 
charitable organization or a governmental entity.
    The exclusion also is expanded to cover forgiveness of 
direct student loans made through the William D. Ford Federal 
Direct Loan Program where loan repayment and forgiveness are 
contingent on the borrower's income level and any unpaid 
amounts are forgiven in full by the Secretary of Education at 
the end of a 25-year period. Thus, Federal Direct Loan 
borrowers who have elected the income-contingent repayment 
option and who have not repaid their loans in full at the end 
of a 25-year period would not be required to include the 
outstanding loan balance in income as a result of the 
forgiveness of the loan.

                             Effective Date

    The provision applies to discharges of indebtedness after 
the date of enactment.

            Title III. Savings and Investment Tax Incentives

 a. american dream iras (sec. 301 of the bill and new sec. 408A of the 
                                 code)

                              Present Law

    Under present law, an individual may make deductible 
contributions to an individual retirement arrangement (``IRA'') 
up to the lesser of $2,000 or the individual's compensation if 
the individual is not an active participant in an employer-
sponsored retirement plan (and, if married, the individual's 
spouse also is not an active participant in such a plan). In 
the case of a married couple, deductible IRA contributions of 
up to $2,000 can be made for each spouse (including, for 
example, a home maker who does not work outside the home) if 
the combined compensation of both spouses is at least equal to 
the contributed amount.
    If the individual (or the individual's spouse) is an active 
participant in an employer-sponsored retirement plan, the 
$2,000 deduction limit is phased out over certain adjusted 
gross income (``AGI'') levels. The limit is phased out between 
$40,000 and $50,000 of AGI for married taxpayers, and between 
$25,000 and $35,000 of AGI for single taxpayers. An individual 
may make nondeductible IRA contributions to the extent the 
individual is not permitted to make deductible IRA 
contributions. Contributions cannot be made to an IRA after age 
70\1/2\.
    Amounts held in an IRA are includible in income when 
withdrawn (except to the extent the withdrawal is a return of 
nondeductible contributions). Amounts withdrawn prior to 
attainment of age 59\1/2\ are subject to an additional 10-
percent early withdrawal tax, unless the withdrawal is due to 
death or disability, is made in the form of certain periodic 
payments, is used to pay medical expenses in excess of 7.5 
percent of AGI, or is used to purchase health insurance of an 
unemployed individual.
    In general, distributions from an IRA are required to begin 
at age 70\1/2\. An excise tax is imposed if the minimum 
required distributions are not made. Distributions to the 
beneficiary of an IRA are generally required to begin within 5 
years of the death of the IRA owner, unless the beneficiary is 
the surviving spouse.
    A 15-percent excise tax is imposed on excess distributions 
with respect to an individual during any calendar year from 
qualified retirement plans, tax-sheltered annuities, and IRAs. 
In general, excess distributions are defined as the aggregate 
amount of retirement distributions (i.e., payments from 
applicable retirement plans) made with respect to an individual 
during any calendar year to the extent such amounts exceed 
$160,000 (for 1997) or 5 times that amount in the case of a 
lump-sum distribution. The dollar limit is indexed for 
inflation. A similar 15-percent additional estate tax applies 
to excess retirement accumulations upon the death of the 
individual. The 15-percent tax on excess distributions (but not 
the 15-percent additional estate tax) does not apply to 
distributions in 1997, 1998, or 1999.

                           Reasons for Change

    The Committee is concerned about the national savings rate, 
and believes that individuals should be encouraged to save. The 
Committee believes that the ability to make deductible 
contributions to an IRA is a significant savings incentive. 
However, this incentive is not available to all taxpayers under 
present law. Further, the present-law income thresholds for IRA 
deductions are not indexed for inflation so that fewer 
Americans will be eligible to make a deductible IRA 
contribution each year, and the amount of the maximum 
contribution is declining in real terms over time. The 
Committee believes it is appropriate to encourage individual 
saving and that tax-favored savings vehicles should be 
available to more individuals.
    In addition, the Committee believes that some individuals 
would be more likely to save if funds set aside in a tax-
favored account could be withdrawn without tax after a 
reasonable holding period for retirement or certain special 
purposes. Some taxpayers may find such a vehicle more suitable 
for their savings needs.
    The Committee believes that providing an incentive to save 
for certain special purposes is appropriate. The Committee 
believes that many Americans may have difficulty saving enough 
to purchase a home. Home ownership is a fundamental part of the 
American dream.

                        Explanation of Provision

In general

    The bill replaces present-law nondeductible IRAs with new 
American Dream IRAs (``AD IRAs'') to which all individuals may 
make nondeductible contributions of up to $2,000 annually. 
Contributions to an AD IRA are in addition to any contributions 
that can be made to a deductible IRA under the present-law 
rules. No income limitations apply to AD IRAs. An AD IRA is an 
IRA which is designated at the time of establishment as an AD 
IRA in the manner prescribed by the Secretary. Qualified 
distributions from an AD IRA are not includible in income.

Contributions to AD IRAs

    The maximum annual contribution that may be made to an AD 
IRA is the lesser of $2,000 or the individual's compensation 
for the year. As under the present-law rules relating to 
deductible IRAs, a contribution of up to $2,000 for each spouse 
may be made to an AD IRA provided the combined compensation of 
the spouses is at least equal to the contributed amount. The 
$2,000 contribution limit is adjusted annually for inflation 
beginning after 1998 (in $50 increments).
    Contributions to an AD IRA may be made even after the 
individual for whom the account is maintained has attained age 
70\1/2\.

Taxation of distributions

    Qualified distributions from an AD IRA are not includible 
in gross income, nor subject to the additional 10-percent tax 
on early withdrawals. A qualified distribution is a 
distribution that (1) is made after the 5-taxable year period 
beginning with the first taxable year in which the individual 
made a contribution to an AD IRA \24\, and (2) which is (a) 
made on or after the date on which the individual attains age 
59\1/2\, (b) made to a beneficiary (or to the individual's 
estate) on or after the death of the individual, (c) 
attributable to the individual's being disabled, or (d) for 
first-time homebuyer expenses.
---------------------------------------------------------------------------
    \24\ As is the case with IRAs generally, contributions to an AD IRA 
may made for a year by the due date for the individual's tax return for 
the year (determined without regard to extensions). In the case of a 
contribution to an AD IRA made after the end of the taxable year, the 
5-year holding period begins with the taxable year to which the 
contribution relates, rather than the year in which the contribution is 
actually made.
---------------------------------------------------------------------------
    Distributions from an AD IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings, and subject to the 10-percent early 
withdrawal tax (unless an exception applies). The same 
exceptions to the early withdrawal tax that apply to IRAs apply 
to AD IRAs. Thus, the following distributions from an AD IRA 
are not subject to the 10-percent early withdrawal tax: (1) 
distributions after age 59\1/2\; (2) distributions after death 
or disability of the AD IRA owner; (3) certain periodic 
distributions; (4) distributions for medical expenses in excess 
of 7.5 percent of adjusted gross income; (5) distributions for 
medical insurance of unemployed individuals; and (6) 
distributions for higher education expenses.\25\ In addition, 
the 10-percent early withdrawal tax does not apply to amounts 
withdrawn from an AD IRA used to pay first-time homebuyer 
expenses.\26\
---------------------------------------------------------------------------
    \25\ This exception to the early withdrawal tax is added by the 
bill.
    \26\ This exception to the early withdrawal tax does not apply to 
IRAs other than AD IRAs.
---------------------------------------------------------------------------
    Under the bill, qualified first-time homebuyer 
distributions are withdrawals of up to $10,000 during the 
individual's lifetime that are used within 60 days to pay costs 
(including reasonable settlement, financing, or other closing 
costs) of acquiring, constructing, or reconstructing the 
principal residence of a first-time homebuyer who is the 
individual, the individual's spouse, or a child, grandchild, or 
ancestor of the individual or individual's spouse. A first-time 
homebuyer is an individual who has not had an ownership 
interest in a principal residence during the 2-year period 
ending on the date of acquisition of the principal residence to 
which the withdrawal relates. The bill requires that the spouse 
of the individual also meet this requirement as of the date the 
contract is entered into or construction commences. The date of 
acquisition is the date the individual enters into a binding 
contract to purchase a principal residence or begins 
construction or reconstruction of such a residence. Principal 
residence is defined as under the provisions relating to the 
rollover of gain on the sale of a principal residence.
    Under the bill, any amount withdrawn for the purchase of a 
principal residence is required to be used within 60 days of 
the date of withdrawal. The 10-percent additional income tax on 
early withdrawals is imposed with respect to any amount not so 
used. If the 60-day rule cannot be satisfied due to a delay in 
the acquisition of the residence, the taxpayer may recontribute 
all or part of the amount withdrawn to the AD IRA prior to the 
end of the 60-day period without adverse tax consequences.
    An ordering will applies for purposes of determining what 
portion of a distribution that is not a qualified distribution 
is includible in income. Under the ordering rule, distributions 
from an AD IRA are treated as made from contributions first, 
and all an individual's AD IRAs are treated as a single AD IRA. 
Thus, no portion of a distribution from an AD IRA is treated as 
attributable to earnings (and therefore includible in gross 
income) until the total of all distributions from all the 
individual's AD IRAs exceeds the amount of contributions.
    The pre-death minimum distribution rules that apply to IRAs 
do not apply to AD IRAs, and amounts in AD IRAs are not taken 
into account for purposes of the excise tax on excess 
distributions or the additional estate tax on excess 
accumulations.
    Distributions from an AD IRA may be rolled over tax free to 
another AD IRA.

Conversions of IRAs to AD IRAs

    All or any part of amounts in a present-law deductible or 
nondeductible IRA may be converted into an AD IRA after 
December 31, 1997, and before January 1, 1999. The amount that 
would have been includible in gross income if the individual 
had withdrawn the converted amounts are included in gross 
income ratably over the 4-taxable year period beginning with 
the taxable year in which the conversion is made. The early 
withdrawal tax does not apply to such conversions.\27\
---------------------------------------------------------------------------
    \27\ In the case of conversions from an IRA to an AD IRA, the 5-
taxable year holding period begins with the taxable year in which the 
conversion was made.
---------------------------------------------------------------------------
    A conversion of an IRA into an AD IRA may be made in a 
variety of different ways and with or without taking a 
distribution. For example, a conversion could be made by taking 
a distribution from an IRA and rolling it over within 60 days 
to an AD IRA. Or, an individual may make a conversion simply by 
notifying the IRA trustee. An individual also may make the 
conversion in connection with a change in IRA trustees through 
a rollover or a trustee-to-trustee transfer. If a part of an 
IRA balance is converted into an AD IRA, the AD IRA amounts 
have to be held separately.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

                      b. capital gains provisions

1. Maximum rate of tax on net capital gain of individuals (sec. 311 of 
                  the bill and sec. 1(h) of the Code)

                              Present Law

    In general, gain or loss reflected in the value of an asset 
is not recognized for income tax purposes until a taxpayer 
disposes of the asset. On the sale or exchange of capital 
assets, the net capital gain is taxed at the same rate as 
ordinary income, except that individuals are subject to a 
maximum marginal rate of 28 percent of the net capital gain. 
Net capital gain is the excess of the net long-term capital 
gain for the taxable year over the net short-term capital loss 
for the year. Gain or loss is treated as long-term if the asset 
is held for more than one year.
    A capital asset generally means any property except (1) 
inventory, stock in trade, or property held primarily for sale 
to customers in the ordinary course of the taxpayer's trade or 
business, (2) depreciable or real property used in the 
taxpayer's trade or business, (3) specified literary or 
artistic property, (4) business accounts or notes receivable, 
or (5) certain U.S. publications. In addition, the net gain 
from the disposition of certain property used in the taxpayer's 
trade or business is treated as long-term capital gain. Gain 
from the disposition of depreciable personal property is not 
treated as capital gain to the extent of all previous 
depreciation allowances. Gain from the disposition of 
depreciable real property is generally not treated as capital 
gain to the extent of the depreciation allowances in excess of 
the allowances that would have been available under the 
straight-line method of depreciation.

                           Reasons for Change

    The Committee believes it is important that tax policy be 
conducive to economic growth. Economic growth cannot occur 
without saving, investment, and the willingness of individuals 
to take risks and exploit new market opportunities. The greater 
the pool of savings, the greater the monies available for 
business investment in equipment and research. It is through 
such investment in equipment and new products and services that 
the United States economy can increase output and productivity. 
It is through increases in productivity that workers earn 
higher real wages. Hence, greater saving is necessary for all 
Americans to benefit through a higher standard of living.
    The net personal saving rate in the United States has 
averaged less than 5 percent of gross domestic product (GDP) 
for the past 15 years. The Committee believes such saving is 
inadequate to finance the investment that is needed to equip 
the country's businesses with the equipment and research 
dollars necessary to create the higher productivity that 
results in higher real wages for working Americans. A reduction 
in the taxation of capital gains increases the rate of return 
on household saving. Testimony by many economists before the 
Committee generally concluded that increasing the after-tax 
return to saving should increase the saving rate of American 
households.
    American technological leadership has been enhanced by the 
willingness of individuals to take the risk of pursuing new 
businesses exploiting new technologies. Risk taking is stifled 
if the taxation of any resulting gain is high and the ability 
to claim losses is limited. The Committee believes it is 
important to encourage risk taking and believes a reduction in 
the taxation of capital gains will have that effect.
    Reduction in the taxation of capital gains also should 
improve the efficiency of the capital markets. The taxation of 
capital gains upon realization encourages investors who have 
accrued past gains to keep their monies ``locked in'' to such 
investments even when better investment opportunities present 
themselves. All economists that testified before the Committee 
agreed that reducing the rate of taxation of capital gains 
would encourage investors to unlock many of these gains. This 
unlocking will permit more monies to flow to new, highly valued 
uses in the economy. When monies flow freely, the efficiency of 
the capital market is improved.
    The unlocking effect also has the short-term and long-term 
effect of increasing revenues to the Federal Government. The 
current revenue estimating methods employed by the Congress 
account for this long-term behavioral response. Nevertheless, 
current Congressional estimates project that revenue losses to 
the Federal Government will arise from the reduction in the tax 
rate on capital gains. The Committee observes, however, that 
the conservative approach embodied in such estimates does not 
attempt to account for the potential for increased growth in 
GDP that can result from increased saving and risk taking. Many 
macroeconomists have concluded that reductions in the taxation 
of capital gains may increase GDP and wage growth sufficiently 
that future tax revenues from the taxation of wages and 
business profits will offset the losses forecast from the sale 
of capital assets. The potential for future growth and its 
benefits both for all United States citizens and for future 
Federal revenues were important considerations for the 
Committee.
    The Committee rejects the narrow view that reductions in 
the taxation of capital gains benefit primarily higher-income 
Americans. Taking a longer view, the Committee sees a reduction 
in the taxation of capital gains as providing potential 
benefits to all individuals. Most importantly, the Committee 
stresses that economic growth benefits all Americans. Increased 
investment leads to greater productivity and leads to higher 
wages. Traditional attempts to measure the benefit or burden of 
a tax change do not account for this critical outcome.

                        Explanation of Provision

    Under the bill, the maximum rate of tax on the net capital 
gain of an individual is reduced from 28 percent to 20 percent. 
In addition, any net capital gain which otherwise would be 
taxed at a 15 percent rate is taxed at a rate of 10 percent. 
These rates apply for purposes of both the regular tax and the 
minimum tax.
    The tax on the net capital gain attributable to any long-
term capital gain from the sale or exchange of collectibles 
will remain at a maximum rate of 28 percent; any long-term 
capital gain from the sale or exchange of section 1250 property 
(i.e., depreciable real estate) to the extent thegain would 
have been treated as ordinary income if the property had been section 
1245 property will be taxed at a maximum rate of 26 percent; and the 
tax treatment of small business stock (as defined in section 1202(c)) 
will remain unchanged. Gain from the disposition of a collectible which 
is an indexed asset (described below) will not be eligible for the 28-
percent rate unless the taxpayer elects to forego indexing.

                             Effective Date

    The provision applies to taxable years ending after May 6, 
1997.
    For a taxpayer's year that includes May 7, 1997, the lower 
rates will not apply to an amount equal the net capital gain 
determined by including only gain or loss properly taken into 
account for the portion of the taxable year before May 7, 1997. 
Any net capital gain not eligible for the lower rates will be 
subject to the present-law maximum rate of 28 percent. This 
generally has the effect of applying the lower rates to capital 
assets sold or exchanged (or installment payments received) on 
or after May 7, 1997, and subjecting the remaining portion of 
the net capital gain to a maximum rate of 28 percent.
    In the case of gain taken into account by a pass-through 
entity (i.e., a RIC, a REIT, a partnership, an estate or trust, 
or a common trust fund), the date taken into account by the 
entity is the appropriate date for applying the rule in the 
preceding paragraph. Thus, gain taken into account by a pass-
through entity before May 7, 1997 is not eligible for the lower 
rates.
    The provision also changes the 110-percent-of-last-year-
liability estimated tax safe harbor to a 109-percent-of-last-
year-liability safe harbor for 1997.

2. Indexing of basis of certain assets for purposes of determining gain 
          (sec. 312 of the bill and new sec. 1022 of the Code)

                              Present Law

    Under present law, gain or loss from the disposition of any 
asset generally is the sales price of the asset is reduced by 
the taxpayer's adjusted basis in that asset. The taxpayer's 
adjusted basis generally is the taxpayer's cost in the asset 
adjusted for depreciation, depletion, and certain other 
amounts. No adjustment is allowed for inflation.

                           Reasons for Change

    Because a taxpayer's adjusted basis for tax purposes is 
determined by historical cost, a taxpayer can have gains for 
tax purposes even though the real value of the assets (i.e., 
adjusted for inflation) has not increased. Even at modest 
inflation rates of three percent per year for five years, an 
investor's adjusted basis will under-represent his real 
purchasing power by 16 percent over five years. The taxation of 
these inflationary gains discourages new saving and investors 
from selling old investments even when better investment 
opportunities present themselves. This retards economic growth 
and leads to an inefficient allocation of capital by the 
capital markets. For this reason, the Committee believes it is 
appropriate to provide for inflation adjustments to a 
taxpayer's adjusted basis in certain assets (held for more than 
three years) for purposes of determining gain on their 
disposition.

                        Explanation of Provision

In general

    The bill generally provides for an inflation adjustment to 
(i.e., indexing of) the adjusted basis of certain assets 
(called ``indexed assets'') held more than 3 years for purposes 
of determining gain (but not loss) upon a sale or other 
disposition of such assets by a taxpayer other than a C 
corporation. Assets held by trusts, estates, S corporations, 
regulated investment companies (``RICs''), real estate 
investment trusts (``REITs''), and partnerships are eligible 
for indexing, to the extent gain on such assets is taken into 
account by taxpayers other than C corporations.
    The bill applies to assets acquired on or after January 1, 
2001.

Indexed assets

    Assets eligible for the inflation adjustment generally 
include common (but not preferred) stock of C corporations and 
tangible property that are capital assets or property used in a 
trade or business. A personal residence is not eligible for 
indexing. To be eligible for indexing, an asset must be held by 
the taxpayer for more than three years.
    The adjusted basis of debt is not indexed. The proposal 
also excludes from indexing intangible assets, such as options, 
futures, and other derivatives.

Computation of inflation adjustment

    The inflation adjustment under the provision is computed by 
multiplying the taxpayer's adjusted basis in the indexed asset 
by an inflation adjustment percentage. The inflation adjustment 
percentage is the percentage by which the chain-type price 
index for GDP (as reported by the Commerce Department's Bureau 
of Economic Analysis) for the last calendar quarter ending 
before the disposition exceeds the chain-type price index for 
GDP for the last calendar quarter ending before the asset was 
acquired by the taxpayer. The inflation adjustment percentage 
is rounded to the nearest one-tenth of a percent. No adjustment 
is made if the inflation adjustment is one or less.
    Indexing with respect to any asset ends at the time the 
asset is treated as disposed of for tax purposes. Thus, with 
respect to installment sales, the inflation adjustment to the 
seller does not take into account any periods after the sale is 
made. The purchaser generally is entitled toinflation 
adjustments beginning with the date of purchase, even though the 
purchase price is not paid until a later date.
    In computing the inflation ratio, periods of time for which 
an asset is not an indexed asset are not taken into account. 
For example, if convertible debt is converted into common 
stock, the period prior to conversion is disregarded in 
determining the inflation ratio applicable to the disposition 
of the common stock.

Special entities

            RICs and REITs
    In the case of a RIC or a REIT, the indexing adjustments 
generally apply in computing the taxable income and the 
earnings and profits of the RIC or REIT. The indexing 
adjustments, however, are not applicable in determining whether 
a corporation qualifies as a RIC or REIT.
    In order to deny the benefit of indexing to corporate 
shareholders of the RIC or REIT, the bill provides that, under 
regulations, (1) the determination of whether a distribution to 
a corporate shareholder is a dividend is made without regard to 
this provision, (2) the amount treated as a capital gain 
dividend is increased to take into account that the amount 
distributed was reduced by reason of the indexing adjustment, 
and (3) such other adjustments as are necessary shall be made 
to ensure that the benefits of indexing are not allowed to 
corporate shareholders.
    In the case of shares held in a RIC or REIT, partial 
indexing generally is provided by the provision based on the 
ratio of the value of indexed assets held by the entity to the 
value of all its assets. The ratio of indexed assets to total 
assets is determined quarterly (for RICs, the quarterly ratio 
is based on a three-month average). If the ratio of indexed 
assets to total assets exceeds 80 percent in any quarter, full 
indexing of the shares is allowed for that quarter. If less 
than 20 percent of the assets are indexed assets in any 
quarter, no indexing is allowed for that quarter for the 
shares. Partnership interests held by a RIC or REIT are subject 
to a look-through test for purposes of determining whether, and 
to what degree, the shares in the RIC or REIT are indexed.
    A return of capital distribution by a RIC or REIT generally 
is treated by a shareholder as allocable to stock acquired by 
the shareholder in the order in which the stock was acquired.
            Partnership and S corporations, etc.
    Under the provision, stock in an S corporation or an 
interest in a partnership or common trust fund is not an 
indexed asset.\28\ This rule avoids the complexity that would 
result in determining the proper measure of the basis 
adjustment if indexing were to take into account the 
fluctuating basis of the S corporation stock or partnership 
interest attributable to earnings and distributions or to the 
frequently changing mix of assets (i.e., indexed assets and 
other assets) of the entity. Under the provision, the 
individual owner receives the benefit of the indexing 
adjustment when the S corporation, partnership, or common trust 
fund disposes of indexed assets. Under the provision, any 
inflation adjustments at the entity level flows through to the 
holders and result in a corresponding increase in the basis of 
the holder's interest in the entity. Where a partnership has a 
section 754 election in effect, a partner transferring his 
interest in the partnership is entitled to any indexing 
adjustment that has accrued at the partnership level with 
respect to the partner and the transferee partner is entitled 
to the benefits of indexing for inflation occurring after the 
transfer.
---------------------------------------------------------------------------
    \28\ An interest in a real mortgage investment conduit (``REMIC'') 
or a financial asset securitization investment trust (``FASIT'') also 
are not indexed assets, since REMICs and FASITs are not treated as 
corporations for income tax purposes.
---------------------------------------------------------------------------
    The indexing adjustment is disregarded in determining any 
loss on the sale of an interest in a partnership, S corporation 
or common trust fund.
    Example 1.--A, B, and C form an equal partnership, and each 
contributes $50 cash. The partnership purchases common stock in 
corporation X for $150. At a time when the indexed basis to the 
partnership for the stock is $240, the partnership sells the 
stock for $300. Under the bill, the partners collectively 
recognizes $60 gain. Each partner takes into account $20 gain 
and increases his basis in his partnership interest by the $20 
gain (under present law sec. 705). In addition, under the bill 
each partner increases his basis for purposes of determining 
gain on his partnership interest by $30 (his share of the $90 
indexing adjustment made by the partnership). Thus, if any 
partner sells his partnership interest for $100, no gain or 
loss is recognized to the partner.
    Example 2.--Same facts as in Example 1, except that the 
partnership does not sell the stock. Rather, partner A sells 
his partnership interest to D for $100. The partnership does 
not have an election under section 754 in effect. Partner A 
recognizes $50 of gain. Partner D's basis in the partnership is 
the $100 purchase price. Assume that after the sale by A, the 
partnership sells the stock for $300 (at a time when the 
indexed basis is $240). The partnership recognizes $60 of gain 
and each partner takes into account $20 gain and makes the same 
adjustments as in the above example. If partner D then sold his 
partnership interest for $100, he will recognize a loss of $20 
($100 amount realized less adjusted basis for purposes of 
determining loss of $120; the $30 inflation adjustment would be 
disregarded in computing D's adjusted basis in his partnership 
interest.)
    Example 3.--Same facts as in Example 2, except that the 
partnership has an election under section 754 in effect. When A 
sells his partnership interest to D, A recognizes $20 of gain, 
because under the bill, A's share of the partnership indexing 
adjustment is available to A at that time. Upon the sale of the 
stock by the partnership, D recognizes no gain or loss since 
the adjustment under section 743(b) had been made with respect 
to his share of the partnershipproperties. No adjustment is 
made by D to the basis in his partnership interest as a result of the 
sale by the partnership.
            Foreign corporations
    Common stock of a foreign corporation generally is an 
indexed asset if the stock is regularly traded on an 
established securities market. The Committee intends that the 
terms ``regularly traded'' and ``established securities 
market'' have the same meaning under the bill as they have in 
Treas. Reg. 1.884-5(d). Indexed assets, however, do not include 
stock in a foreign investment company, a passive foreign 
investment company (including a qualified electing fund), a 
foreign personal holding company, or, in the hands of a 
shareholder who meets the requirements of section 1248(a)(2) 
(generally pertaining to 10-percent shareholders of controlled 
foreign corporations), any other foreign corporation. An 
American Depository Receipt (ADR) for common stock in a foreign 
corporation is treated as common stock in the foreign 
corporation and, therefore, the basis in an ADR for common 
stock generally is indexed.

Other rules

            Improvements and contributions to capital
    No indexing is provided for improvements or contributions 
to capital if the aggregate amount of the improvements or 
contributions to capital during the taxable year with respect 
to the property or stock is less than $1,000. If the aggregate 
amount of such improvements or contributions to capital is 
$1,000 or more, each addition is treated as a separate asset 
acquired at the close of the taxable year.
            Suspension of holding period
    No indexing adjustment is allowed during any period during 
which there is a substantial diminution of the taxpayer's risk 
of loss from holding the indexed asset by reason of any 
transaction entered into by the taxpayer, or a related party.
            Short sales
    In the case of a short sale of an indexed asset with a 
short sale period in excess of three years, the provision 
requires that the amount realized be indexed for inflation for 
the short sale period.
            Related parties
    The bill does not index the basis of property for sales or 
dispositions between related persons, except to the extent the 
adjusted basis of property in the hands of the transferee is a 
substituted basis (e.g., gifts).
            Collapsible corporations
    Under the bill, indexing does not reduce the amount of 
ordinary gain that would be recognized in cases where a 
corporation is treated as a collapsible corporation (under sec. 
341) with respect to a distribution or sale of stock.

                             Effective Date

    The provision applies to property the holding period of 
which begins after December 31, 2000.
    A taxpayer holding any indexed asset on January 1, 2001, 
may elect to treat the indexed asset as having been sold on 
such date for an amount equal to its fair market value, and as 
having been reacquired for an amount equal to such value. If 
the election is made, the asset would be eligible for indexing 
under the provision. Any gain resulting from the election would 
be treated as received on the date of the deemed sale, and 
would not be treated as gain from the sale or exchange of 
property between related persons under Code section 1239. Any 
loss would not be allowed (and the disallowed loss would not be 
added to the basis of the indexed asset). For readily traded 
securities, fair market value is the closing market price on 
the business day following January 1, 2001. For this purpose, 
``readily traded'' means readily tradable on an established 
securities market or otherwise.
    A taxpayer may make the above election with respect to some 
indexed assets and not with respect to others.

 3. Exclusion of gain on sale of principal residence (sec. 313 of the 
                bill and secs. 121 and 1034 of the Code)

                              Present Law

Rollover of gain

    No gain is recognized on the sale of a principal residence 
if a new residence at least equal in cost to the sales price of 
the old residence is purchased and used by the taxpayer as his 
or her principal residence within a specified period of time 
(sec. 1034). This replacement period generally begins two years 
before and ends two years after the date of sale of the old 
residence. The basis of the replacement residence is reduced by 
the amount of any gain not recognized on the sale of the old 
residence by reason of this gain rollover rule.

One-time exclusion

    In general, an individual, on a one-time basis, may exclude 
from gross income up to $125,000 of gain from the sale or 
exchange of a principal residence if the taxpayer (1) has 
attained age 55 before the sale, and (2) has owned the property 
and used it as a principal residence for three or more of the 
five years preceding the sale (sec. 121).

                           Reasons for Change

    Calculating capital gain from the sale of a principal 
residence is among the most complex tasks faced by a typical 
taxpayer. Many taxpayers buy and sell a number of homes over 
the course of a lifetime, and are generally not certain of how 
much housing appreciation they can expect. Thus, even though 
most homeowners never pay any income tax on the capital gain on 
their principal residences, as a result of the rollover 
provisions and the $125,000 one-time exclusion, detailed 
records of transactions and expenditures on home improvements 
must be kept, in most cases, for many decades. To claim the 
exclusion, many taxpayers must determine the basis of each home 
they have owned, and appropriately adjust the basis of their 
current home to reflect any untaxed gains from previous housing 
transactions. This determination may involve augmenting the 
original cost basis of each home by expenditures on 
improvements. In addition to the record-keeping burden this 
creates, taxpayers face the difficult task of drawing a 
distinction between improvements that add to basis, and repairs 
that do not. The failure to account accurately for all 
improvements leads to errors in the calculation of capital 
gains, and hence to an under- or over-payment of the capital 
gains on principal residences. By excluding from taxation 
capital gains on principal residences below a relatively high 
threshold, few taxpayers would have to refer to records in 
determining income tax consequences of transactions related to 
their house.
    To postpone the entire capital gain from the sale of a 
principal residence, the purchase price of a new home must be 
greater than the sales price of the old home. This provision of 
present law encourages some taxpayers to purchase larger and 
more expensive houses than they otherwise would in order to 
avoid a tax liability, particularly those who move from areas 
where housing costs are high to lower-cost areas. This promotes 
an inefficient use of taxpayer's financial resources.
    Present law also may discourage some older taxpayers from 
selling their homes. Taxpayers who would realize a capital gain 
in excess of $125,000 if they sold their home and taxpayers who 
have already used the exclusion may choose to stay in their 
homes even though the home no longer suits their needs. By 
raising the $125,000 limit and by allowing multiple exclusions, 
this constraint to the mobility of the elderly would be 
removed.
    While most homeowners do not pay capital gains tax when 
selling their homes, current law creates certain tax traps for 
the unwary that can result in significant capital gains taxes 
or loss of the benefits of the current exclusion. For example, 
an individual is not eligible for the one- time capital gains 
exclusion if the exclusion was previously utilized by the 
individual's spouse. This restriction has the unintended effect 
of penalizing individuals who marry someone who has already 
taken the exclusion. Households that move from a high housing-
cost area to a low housing- cost area may incur an unexpected 
capital gains tax liability. Divorcing couples may incur 
substantial capital gains taxes if they do not carefully plan 
their house ownership and sale decisions.

                        Explanation of Provision

    Under the bill a taxpayer generally is able to exclude up 
to $250,000 ($500,000 if married filing a joint return) of gain 
realized on the sale or exchange of a principal residence. The 
exclusion is allowed each time a taxpayer selling or exchanging 
a principal residence meets the eligibility requirements, but 
generally no more frequently than once every two years. The 
bill provides that gain would be recognized to the extent of 
any depreciation allowable with respect to the rental or 
business use of such principal residence for periods after May 
6, 1997.
    To be eligible for the exclusion, a taxpayer must have 
owned the residence and occupied it as a principal residence 
for at least two of the five years prior to the sale or 
exchange. A taxpayer who fails to meet these requirements by 
reason of a change of place of employment, health, or other 
unforseen circumstances is able to exclude the fraction of the 
$250,000 ($500,000 if married filing a joint return) equal to 
the fraction of two years that these requirements are met.
    In the case of joint filers not sharing a principal 
residence, an exclusion of $250,000 is available on a 
qualifying sale or exchange of the principal residence of one 
of the spouses. Similarly, if a single taxpayer who is 
otherwise eligible for an exclusion marries someone who has 
used the exclusion within the two years prior to the marriage, 
the bill would allow the newly married taxpayer a maximum 
exclusion of $250,000. Once both spouses satisfy the 
eligibility rules and two years have passed since the last 
exclusion was allowed to either of them, the taxpayers may 
exclude $500,000 of gain on their joint return.
    Under the proposal, the gain from the sale or exchange of 
the remainder interest in the taxpayer's principal residence 
may qualify for the otherwise allowable exclusion.

                             Effective Date

    The provision is available for all sales or exchanges of a 
principal residence occurring on or after May 7, 1997, and 
replaces the present-law rollover and one-time exclusion 
provisions applicable to principal residences.
    A taxpayer could elect to apply present law (rather than 
the new exclusion) to a sale or exchange (1) made before the 
date of enactment of the Act, (2) made after the date of 
enactment pursuant to a binding contract in effect on the date 
or (3) where the replacement residence was acquired on or 
before the date of enactment (or pursuant to a binding contract 
in effect of the date of enactment) and the rollover provision 
would apply. If a taxpayer acquired his or her current 
residence in a rollover transaction, periods of ownership and 
use of the prior residence would be taken into account in 
determining ownership and use of the current residence.

4. 30-percent corporate alternative tax for certain capital gains (sec. 
               321 of the bill and sec. 1201 of the Code)

                              Present Law

    Under present law, the net capital gain of a corporation is 
taxed at the same rate as ordinary income, and subject to tax 
at graduated rates up to 35 percent.

                           Reasons for Change

    The Committee believes it is important that tax policy be 
conducive to economic growth. Economic growth cannot occur 
without saving, investment, and the willingness of businesses 
to take risks and exploit new market opportunities. The greater 
the pool of savings, the greater the monies available for 
business investment in equipment and research. It is through 
such investment in equipment and new products and services that 
the United States economy can increase output and productivity. 
It is through increases in productivity that workers earn 
higher real wages. Hence, greater saving is necessary for all 
Americans to benefit through a higher standard of living.
    The Committee observes that net business saving has not 
increased significantly from its levels of a decade ago. The 
Committee believes that a lower rate of tax on capital gains 
will encourage investment, saving, and risk-taking, create new 
jobs, and promote economic growth.

                        Explanation of Provision

    The bill provides a maximum rate of tax on the net capital 
gain of a corporation to the extent the gain is attributable to 
the sale or exchange of property held more than 8 years. The 
alternative tax is 32 percent on gain attributable to calendar 
year 1998; 31 percent on gain attributable to calendar year 
1999; and 30 percent on gain attributable to calendar years 
after 1999. The bill also modifies the application of the 
corporate alternative capital gains tax so that the alternative 
capital gains tax applies to the lesser of 8-year gain or 
taxable income. Gain from the disposition of a collectible or 
attributable to the depreciation of section 1250 property is 
not eligible for the lower rate.

                             Effective Date

    The provision applies to taxable years ending after 
December 31, 1997. However, the lower rate does not apply to 
amounts properly taken into account before January 1, 1998. For 
fiscal years beginning in 1998 and 1999, the tax is computed by 
applying the applicable percentage to the 8-year gain for the 
first portion of the year (or, if less, the 8-year gain for the 
entire year), but in an amount not to exceed the taxable income 
for the entire year and then by applying the applicable 
percentage to an amount equal to the 8-year gain for the entire 
year (or, if less, taxable income) reduced by the amount taxed 
at the applicable percentage for the first portion of the year.
    In the case of gain taken into account by a corporation 
from a pass-through entity (i.e., a RIC, a REIT, an S 
corporation, a partnership, an estate or trust, or a common 
trust fund), the date taken into account by the entity is the 
appropriate date for applying the rule in the preceding 
paragraph.

                 IV. Alternative Minimum Tax Provisions

   A. Increase Exemption Amount Applicable to Individual Alternative 
       Minimum Tax (sec. 401 of the bill and sec. 55 of the Code)

                              Present Law

    Present law imposes a minimum tax on an individual to the 
extent the taxpayer's minimum tax liability exceeds his or her 
regular tax liability. This alternative minimum tax is imposed 
upon individuals at rates of (1) 26 percent on the first 
$175,000 of alternative minimum taxable income in excess of a 
phased-out exemption amount and (2) 28 percent on the amount in 
excess of $175,000. The exemption amounts are $45,000 in the 
case of married individuals filing a joint return and surviving 
spouses; $33,750 in the case of other unmarried individuals; 
and $22,500 in the case of married individuals filing a 
separate return. These exemption amounts are phased-out by an 
amount equal to 25 percent of the amount that the individual's 
alternative minimum taxable income exceeds a threshold amount. 
These threshold amounts are $150,000 in the case of married 
individuals filing a joint return and surviving spouses; 
$112,500 in the case of other unmarried individuals; and 
$75,000 in the case of married individuals filing a separate 
return, estates, and trusts. The exemption amounts, the 
threshold phase-out amounts, and the $175,000 break-point 
amount are not indexed for inflation.

                           Reasons for Change

    The Committee is concerned about the projected trend that 
significantly more individuals with few or no tax preferences 
and adjustments will become subject to the alternative minimum 
tax in the near future. This trend is projected, in part, 
because the exemption amounts applicable to the individual 
alternative minimum tax are not indexed for inflation, while 
the standard deduction, personal exemptions, rate brackets and 
other features of the regular tax are indexed for inflation.

                        Explanation of Provision

    For taxable years beginning in 1999, 2001, 2003, 2005 and 
2007, the exemption amounts of the individual alternative 
minimum tax are increased as follows for each such year: (1) by 
$1,000 in the case of married individuals filing a joint return 
and surviving spouses; (2) by $750 in the case of other 
unmarried individuals; and (3) by $500 in the case of married 
individuals filing a separate return. For taxable years 
beginning after 2007, the exemption amounts are indexed for 
inflation.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1998.

 B. Repeal Alternative Minimum Tax for Small Businesses and Repeal the 
Depreciation Adjustment (secs. 402 and 403 of the bill and secs. 55 and 
                            56 of the Code)

                              Present Law

In general

    Present law imposes a minimum tax on an individual or a 
corporation to the extent the taxpayer's minimum tax liability 
exceeds its regular tax liability. The individual minimum tax 
is imposed at rates of 26 and 28 percent on alternative minimum 
taxable income in excess of a phased-out exemption amount; the 
corporate minimum tax is imposed at a rate of 20 percent on 
alternative minimum taxable income in excess of a phased-out 
$40,000 exemption amount. Alternative minimum taxable income 
(``AMTI'') is the taxpayer's taxable income increased by 
certain preference items and adjusted by determining the tax 
treatment of certain items in a manner that negates the 
deferral of income resulting from the regular tax treatment of 
those items. In the case of a corporation, in addition to the 
regular set of adjustments and preferences, there is a second 
set of adjustments known as the ``adjusted current earnings'' 
adjustment.
    The most significant alternative minimum tax adjustment 
relates to depreciation. In computing AMTI, depreciation on 
property placed in service after 1986 must be computed by using 
the class lives prescribed by the alternative depreciation 
system of section 168(g) and either (1) the straight-line 
method in the case of property subject to the straight-line 
method under the regular tax or (2) the 150-percent declining 
balance method in the case of other property. For regular tax 
purposes, depreciation on tangible personal property generally 
is computed using shorter recovery periods and more accelerated 
methods than are allowed for alternative minimum tax purposes.
    If a taxpayer is subject to alternative minimum tax in one 
year, such amount of tax is allowed as a credit in a subsequent 
taxable year to the extent the taxpayer's regular tax liability 
exceeds its tentative minimum tax in such subsequent year. If 
the taxpayer is an individual, this credit is allowed to the 
extent the taxpayer's alternative minimum tax liability is a 
result of adjustments that are timing in nature.

                           Reasons for Change

    The Committee believes that the alternative minimum tax 
inhibits capital formation and business enterprise and is 
administratively complex. Therefore, the bill deletes the 
depreciation adjustment for new investment in depreciable 
property by all businesses and completely repeals the corporate 
alternative minimum tax for small businesses.

                        Explanation of Provision

Repeal of the corporate alternative minimum tax for small businesses

    The corporate alternative minimum tax is repealed for small 
business corporations for taxable years beginning after 
December 31, 1997. A corporation that had average gross 
receipts of less than $5 million for the three-year period 
beginning after December 31, 1994, is a small business 
corporation for any taxable year beginning after December 31, 
1997. A corporation that meets the $5 million gross receipts 
test will continue to be treated as a small business 
corporation exempt from the alternative minimum tax so long as 
its average gross receipts do not exceed $7.5 million. A 
corporation that fails to meet the $7.5 million gross receipts 
test will become subject to corporate alternative minimum tax 
only with respect to preferences and adjustments that relate to 
transactions and investments entered into after the corporation 
loses its status as a small business corporation.
    In addition, the alternative minimum tax credit allowable 
to a small business corporation may not exceed the 
corporation's regular tax liability (reduced by other credits) 
over 25 percent of the corporation's regular tax (reduced by 
foreign tax credits) in excess of $25,000.

Repeal of the depreciation adjustment

    The alternative minimum tax adjustment relating to 
depreciation is repealed for all taxpayers for property placed 
in service after December 31, 1998.

                             Effective Date

    Except as provided above, the provision is effective for 
taxable years beginning after December 31, 1997.

C. Repeal Installment Method Adjustment for Farmers (sec. 404 and sec. 
                            56 of the Code)

                              Present Law

    The installment method allows gain on the sale of property 
to be recognized as payments are received. Under the regular 
tax, dealers in personal property are not allowed to defer the 
recognition of income by use of the installment method on the 
installment sale of such property. For this purpose, dealer 
dispositions do not include sales of any property used or 
produced in the trade or business of farming. For alternative 
minimum tax purposes, the installment method is not available 
with respect to the disposition of any property that is the 
stock in trade of the taxpayer or any other property of a kind 
which would be properly included in the inventory of the 
taxpayer if held at year end, or property held by the taxpayer 
primarily for sale to customers. No explicit exception is 
provided for installment sales of farm property under the 
alternative minimum tax.

                           Reasons for Change

    The Committee understands that the Internal Revenue Service 
(``IRS'') takes the position that the installment method may 
not be used for sales of property produced on a farm for 
alternative minimum tax purposes. The Committee further 
understands that the IRS has announced that it generally will 
not enforce this position for taxable years beginning before 
January 1, 1997, so long as the farmer changes its method of 
accounting for installment sales for taxable years beginning 
after December 31, 1996.\29\ The Committee believes that this 
issue should be clarified in favor of the farmer.
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    \29\ Notice 97-13, January 28, 1997.
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                        Explanation of Provision

    The bill generally provides that for purposes of the 
alternative minimum tax, farmers may use the installment method 
of accounting.

                             Effective Date

    The provision generally is effective for dispositions in 
taxable years beginning after December 31, 1987.

     Title V. Estate, Gift, and Generation-Skipping Tax Provisions

                   A. Estate and Gift Tax Provisions

 1. Increase in estate and gift tax unified credit (sec. 501(a) of the 
                    bill and sec. 2010 of the Code)

                              Present Law

    A gift tax is imposed on lifetime transfers by gift and an 
estate tax is imposed on transfers at death. Since 1976, the 
gift tax and the estate tax have been unified so that a single 
graduated rate schedule applies to cumulative taxable transfers 
made by a taxpayer during his or her lifetime and at death.\30\ 
A unified credit of $192,800 is provided against the estate and 
gift tax, which effectively exempts the first $600,000 in 
cumulative taxable transfers from tax (sec. 2010). For 
transfers in excess of $600,000, estate and gift tax rates 
begin at 37 percent and reach 55 percent on cumulative taxable 
transfers over $3 million (sec. 2001(c)). In addition, a 5-
percent surtax is imposed upon cumulative taxable transfers 
between $10 million and $21,040,000, to phase out the benefits 
of the graduated rates and the unified credit (sec. 
2001(c)(2)).\31\
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    \30\ Prior to 1976, separate tax rate schedules applied to the gift 
tax and the estate tax.
    \31\ Thus, if a taxpayer has made cumulative taxable transfers 
equaling $21,040,000 or more, his or her average transfer tax rate is 
55 percent. The phaseout has the effect of creating a 60-percent 
marginal transfer tax rate on transfers in the phaseout range.
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                           Reasons for Change

    The Committee believes that increasing the amount of the 
estate and gift tax unified credit will encourage saving, 
promote capital formation and entrepreneurial activity, and 
help to preserve existing family-owned farms and businesses. 
The Committee further believes that indexing the unified credit 
exemption equivalent amount for inflation is appropriate to 
reduce the transfer tax consequences that result from increases 
in asset value attributable solely to inflation.

                        Explanation of Provision

    The bill increases the present-law unified credit beginning 
in 1998, from an effective exemption of $600,000 to an 
effective exemption of $1,000,000 in 2007. The increase in the 
effective exemption is phased in according to the following 
schedule: the effective exemption is $650,000 for decedents 
dying and gifts made in 1998; $750,000 in 1999; $765,000 in 
2000; $775,000 in 2001 through 2004; $800,000 in 2005; $825,000 
in 2006; $1 million in 2007. After 2007, the effective 
exemption is indexed annually for inflation. The indexed 
exemption amount is rounded to the next lowest multiple of 
$10,000.
    Conforming amendments to reflect the increased unified 
credit are made (1) to the 5-percent surtax to conform the 
phase out of the increased unified credit and graduated rates, 
(2) to the general filing requirements for an estate tax return 
under section 6018(a), and (3) to the amount of the unified 
credit allowed under section 2102(c)(3) with respect to 
nonresident aliens with U.S. situs property who are residents 
of certain treaty countries.

                             Effective Date

    The provision is effective for decedents dying, and gifts 
made, after December 31, 1997.

   2. Indexing of certain other estate and gift tax provisions (sec. 
 501(b)-(e) of the bill and sec. 2032A, 2503, 2631, and 6601(j) of the 
                                 Code)

                              Present Law

    Annual exclusion for gifts.--A taxpayer may exclude $10,000 
of gifts of present interests in property made by an individual 
($20,000 per married couple) to each donee during a calendar 
year (sec. 2503).
    Special use valuation.--An executor may elect for estate 
tax purposes to value certain qualified real property used in 
farming or a closely-held trade or business at its current use 
value, rather than its ``highest and best use'' value (sec. 
2032A). The maximum reduction in value under such an election 
is $750,000.
    Generation-skipping transfer (``GST'') tax.--An individual 
is allowed an exemption from the GST tax of up to $1,000,000 
for generation-skipping transfers made during life or at death 
(sec. 2631).
    Installment payment of estate tax.--An executor may elect 
to pay the Federal estate tax attributable to an interest in a 
closely held business in installments over, at most, a 14-year 
period (sec. 6166). The tax on the first $1,000,000 in value of 
a closely-held business is eligible for a special 4-percent 
interest rate (sec. 6601(j)).

                           Reasons for Change

    The Committee believes that it is appropriate to index for 
inflation the annual exclusion for gifts, the ceiling on 
special use valuation, the generation-skipping transfer tax 
exemption, and the ceiling on the value of a closely-held 
business eligible for the special low interest rate, to reduce 
the transfer tax consequences that result from increases in 
asset value attributable solely to inflation.

                        Explanation of Provision

    The bill provides that, after 1998, the $10,000 annual 
exclusion for gifts, the $750,000 ceiling on special use 
valuation, the $1,000,000 generation-skipping transfer tax 
exemption, and the $1,000,000 ceiling on the value of a 
closely-held business eligible for the special low interest 
rate (as modified below), are indexed annually for inflation. 
Indexing of the annual exclusion is rounded to the next lowest 
multiple of $1,000 and indexing of the other amounts is rounded 
to the next lowest multiple of $10,000.

                             Effective Date

    The proposal is effective for decedents dying, and gifts 
made, after December 31, 1998.

  3. Installment payments of estate tax attributable to closely held 
businesses (secs. 502 and 503 of the bill and secs. 6601(j) and 6166 of 
                               the Code)

                              Present Law

    In general, the Federal estate tax is due within nine 
months of a decedent's death. Under Code section 6166, an 
executor generally may elect to pay the estate tax attributable 
to an interest in a closely held business in installments over, 
at most, a 14-year period. If the election is made, the estate 
may pay only interest for the first four years, followed by up 
to 10 annual installments of principal and interest. Interest 
generally is imposed at the rate applicable to underpayments of 
tax under section 6621 (i.e., the Federal short-term rate plus 
3 percentage points). Under section 6601(j), however, a special 
4-percent interest rate applies to the amount of deferred 
estate tax attributable to the first $1,000,000 in value of the 
closely-held business.
    To qualify for the installment payment election, the 
business must be an active trade or business and the value of 
the decedent's interest in the closely held business must 
exceed 35 percent of the decedent's adjusted gross estate. An 
interest in a closely held business includes: (1) any interest 
as a proprietor in a business carried on as a proprietorship; 
(2) any interest in a partnership carrying on a trade or 
business if the partnership has 15 or fewer partners, or if at 
least 20 percent of the partnership's assets are included in 
determining the decedent's gross estate; or (3) stock in a 
corporation if the corporation has 15 or fewer shareholders, or 
if at least 20 percent of the value of the voting stock is 
included in determining the decedent's gross estate.

                           Reasons for Change

    The Committee believes that the installment payment 
provisions need to be expanded in order to better address the 
liquidity problems of estates holding farms and closely held 
businesses, to prevent the liquidation of such businesses in 
order to pay estate taxes. The Committee further believes that 
the protection of closely held businesses will preserve jobs 
and strengthen the communities in which such businesses are 
located.
    In addition, by eliminating the deductibility of interest 
paid on estate taxes deferred under section 6166 (and reducing 
the interest rate accordingly), the bill eliminates the need to 
file annual supplemental estate tax returns and make complex 
iterative computations to claim an estate tax deduction for 
interest paid.

                        Explanation of Provision

    The bill extends the period for which Federal estate tax 
installments can be made under section 6166 to a maximum period 
of 24 years. If the election is made, the estate pays only 
interest for the first four years, followed by up to 20 annual 
installments of principal and interest.
    In addition, the bill provides that no interest is imposed 
on the amount of deferred estate tax attributable to the first 
$1,000,000 in taxable value of the closely held business (i.e., 
the first $1,000,000 in value in excess of the effective 
exemption provided by the unified credit). Thus, for example, 
in 1998, when the unified credit is increased to provide an 
effective exemption of $650,000 (as described above), the 
amount of estate tax attributable to the value of the closely 
held business between $650,000 and $1,650,000 is eligible for 
the zero-percent interest rate.
    The interest rate imposed on the amount of deferred estate 
tax attributable to the taxable value of the closely held 
business in excess of $1,000,000 is reduced to an amount equal 
to 45 percent of the rate applicable to underpayments of tax. 
The interest paid on estate taxes deferred under section 6166 
is not deductible for estate or income tax purposes.

                             Effective Date

    The provision is effective for decedents dying after 
December 31, 1997.

 4. Estate tax recapture from cash leases of specially-valued property 
           (sec. 504 of the bill and sec. 2032A of the Code)

                              Present Law

    A Federal estate tax is imposed on the value of property 
passing at death. Generally, such property is included in the 
decedent's estate at its fair market value. Under section 
2032A, the executor may elect to value certain ``qualified real 
property'' used in farming or other qualifying trade or 
business at its current use value rather than its highest and 
best use. If, after the special-use valuation election is made, 
the heir who acquired the real property ceases to use it in its 
qualified use within 10 years (15 years for individuals dying 
before 1982) of the decedent's death, an additional estate tax 
is imposed in order to ``recapture'' the benefit of the 
special-use valuation (sec. 2032A(c)).
    Some courts have held that cash rental of specially-valued 
property after the death of the decedent is not a qualified use 
under section 2032A because the heirs no longer bear the 
financial risk of working the property, and, therefore, results 
in the imposition of the additionalestate tax under section 
2032A(c). See Martin v. Commissioner, 783 F.2d 81 (7th Cir. 1986) (cash 
lease to unrelated party not qualified use); Williamson v. 
Commissioner, 93 T.C. 242 (1989), aff'd, 974 F.2d 1525 (9th Cir. 1992) 
(cash lease to family member not a qualified use); Fisher v. 
Commissioner, 65 T.C.M. 2284 (1993) (cash lease to family member not a 
qualified use); cf. Minter v. U.S., 19 F.3d 426 (8th Cir. 1994) (cash 
lease to family's farming corporation is qualified use); Estate of 
Gavin v. U.S., 1997 U.S. App. Lexis 10383 (8th Cir. 1997) (heir's 
option to pay cash rent or 50 percent crop share is qualified use).
    With respect to a decedent's surviving spouse, a special 
rule provides that the surviving spouse will not be treated as 
failing to use the property in a qualified use solely because 
the spouse rents the property to a member of the spouse's 
family on a net cash basis. (sec. 2032A(b)(5)). Under section 
2032A, members of an individual's family include (1) the 
individual's spouse, (2) the individual's ancestors, (3) lineal 
descendants of the individual, of the individual's spouse, or 
of the individual's parents, and (4) the spouses of any such 
lineal descendants.

                           Reasons for Change

    The Committee believes that cash leasing of farmland among 
family members is consistent with the purposes of the special-
use valuation rules, which are intended to prevent family farms 
(and other qualifying businesses) from being liquidated to pay 
estate taxes in cases where members of the decedent's family 
continue to participate in the business.

                        Explanation of Provision

    The bill provides that the cash lease of specially-valued 
real property by a lineal descendant of the decedent to a 
member of the lineal descendant's family, who continues to 
operate the farm or closely held business, does not cause the 
qualified use of such property to cease for purposes of 
imposing the additional estate tax under section 2032A(c).

                             Effective Date

    The provision is effective for cash rentals occurring after 
December 31, 1976.

5. Clarify eligibility for extension of time for payment of estate tax 
          (sec. 505 of the bill and new sec. 7479 of the Code)

                              Present Law

    In general, the Federal estate tax is due within nine 
months of a decedent's death. Under Code section 6166, an 
executor generally may elect to pay the estate tax attributable 
to an interest in a closely held business in installments over, 
at most, a 14-year period. If the election is made, the estate 
may pay only interest for the first four years, followed by up 
to 10 annual installments of principal and interest. To qualify 
for the installment payment election, the business must meet 
certain requirements. If certain events occur during the 
repayment period (e.g., the closely held business is sold), 
full payment of all deferred estate taxes is required at that 
time.
    Under present law, there is limited access to judicial 
review of disputes regarding initial or continuing eligibility 
for the deferral and installment election under section 6166. 
If the Commissioner determines that an estate was not initially 
eligible for deferral under section 6166, or has lost its 
eligibility for such deferral, the estate is required to pay 
the full amount of estate taxes asserted by the Commissioner as 
being owed in order to obtain judicial review of the 
Commissioner's determination.

                           Reasons for Change

    The bill gives taxpayers access to the courts to resolve 
disputes over an estate's eligibility for the section 6166 
election, without requiring potential liquidation of the assets 
that the installment provisions of section 6166 are designed to 
protect.

                        Explanation of Provision

    The provision authorizes the U.S. Tax Court to provide 
declaratory judgments regarding initial or continuing 
eligibility for deferral under section 6166.

                             Effective Date

    The provision applies to decedents dying after date of 
enactment.

6. Gifts may not be revalued for estate tax purposes after expiration 
        of statute of limitations (sec. 506 of the bill and secs. 2001, 
        6501(c)(9) and 7477 of the Code)

                              Present Law

     The Federal estate and gift taxes are unified so that a 
single progressive rate schedule is applied to an individual's 
cumulative gifts and bequests. The tax on gifts made in a 
particular year is computed by determining the tax on the sum 
of the taxable gifts made that year and all prior years and 
then subtracting the tax on the prior years taxable gifts and 
the unified credit. Similarly, the estate tax is computed by 
determining the tax on the sum of the taxable estate and prior 
taxable gifts and then subtracting the tax on taxable gifts and 
the unified credit. Under a special rule applicable to the 
computation of the gift tax (sec. 2504(c)), the value of gifts 
made in prior years is the value that was used to determine the 
prior year's gift tax. There is no comparable rule in the case 
of the computation of the estate tax.
    Generally, any estate or gift tax must be assessed within 
three years after the filing of the return. No proceeding in a 
court for the collection of an estate or gift tax can be begun 
without an assessment within the three-year period. If no 
return is filed, the tax may be assessed, or asuit commenced to 
collect the tax without assessment, at any time. If an estate or gift 
tax return is filed, and the amount of unreported items exceeds 25 
percent of the amount of the reported items, the tax may be assessed or 
a suit commenced to collect the tax without assessment, within six 
years after the return was filed (sec. 6501).
    Commencement of the statute of limitations generally does 
not require that a particular gift be disclosed. A special 
rule, however, applies to certain gifts that are valued under 
the special valuation rules of Chapter 14. The gift tax statute 
of limitations runs for such a gift only if it is disclosed on 
a gift tax return in a manner adequate to apprise the Secretary 
of the Treasury of the nature of the item.
    Most courts have permitted the Commissioner to redetermine 
the value of a gift for which the statute of limitations period 
for the gift tax has expired in order to determine the 
appropriate tax rate bracket and unified credit for the estate 
tax. See, e.g., Evanson v. United States, 30 F.3d 960 (9th Cir. 
1994); Stalcup v. United States, 946 F. 2d 1125 (5th Cir. 
1991); Estate of Levin, 1991 T.C. Memo 1991-208, aff'd 986 F. 
2d 91 (4th Cir. 1993); Estate of Smith v. Commissioner, 94 T.C. 
872 (1990). But see Boatman's First National Bank v. United 
States, 705 F. Supp. 1407 (W.D. Mo. 1988) (Commissioner not 
permitted to revalue gifts).

                           Reasons for Change

    Revaluation of lifetime gifts at the time of death requires 
the taxpayer to retain records for a potentially lengthy 
period. Rules that encourage a determination within the gift 
tax statute of limitations ease transfer tax administration by 
eliminating reliance on stale evidence and reducing the period 
for which retention of records is required.

                        Explanation of Provision

    The bill provides that a gift for which the limitations 
period has passed cannot be revalued for purposes of 
determining the applicable estate tax bracket and available 
unified credit. For gifts made in calendar years after the date 
of enactment, the bill also extends the special rule governing 
gifts valued under Chapter 14 to all gifts. Thus, the statute 
of limitations will not run on an inadequately disclosed 
transfer in calendar years after the date of enactment, 
regardless of whether a gift tax return was filed for other 
transfers in that same year.
    It is intended that, in order to revalue a gift that has 
been adequately disclosed on a gift tax return, the IRS must 
issue a final notice of redetermination of value (a ``final 
notice'') within the statute of limitations applicable to the 
gift for gift tax purposes (generally, three years). This rule 
is applicable even where the value of the gift as shown on the 
return does not result in any gift tax being owed (e.g., 
through use of the unified credit). It is also anticipated that 
the IRS will develop an administrative appeals process whereby 
a taxpayer can challenge a redetermination of value by the IRS 
prior to issuance of a final notice.
    A taxpayer who is mailed a final notice may challenge the 
redetermined value of the gift (as contained in the final 
notice) by filing a motion for a declaratory judgment with the 
Tax Court. The motion must be filed on or before 90 days from 
the date that the final notice was mailed. The statute of 
limitations is tolled during the pendency of the Tax Court 
proceeding.

                             Effective Date

    The provision generally applies to gifts made after the 
date of enactment. The extension of the special rule under 
chapter 14 to all gifts applies to gifts made in calendar years 
after the date of enactment.

7. Repeal of throwback rules applicable to domestic trusts (sec. 507 of 
             the bill and secs. 644(e) and 665 of the Code)

                              Present Law

    A nongrantor trust is treated as a separate taxpayer for 
Federal income tax purposes. Such a trust generally is treated 
as a conduit with respect to amounts distributed currently \32\ 
and taxed with respect to any income which is accumulated in 
the trust rather than distributed. A separate graduated tax 
rate structure applies to trusts which historically has 
permitted accumulated trust income to be taxed at lower rates 
than the rates applicable to trust beneficiaries. This benefit 
often was compounded through the creation of multiple trusts.
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    \32\ The conduit treatment is achieved by allowing the trust a 
deduction for amounts distributed to beneficiaries during the taxable 
year to the extent of distributable net income and by including such 
distributions in the beneficiaries' income.
---------------------------------------------------------------------------
    The Internal Revenue Code has several rules intended to 
limit the benefit that would otherwise occur from using the 
lower rates applicable to one or more trusts. Under the so-
called ``throwback'' rules, the distribution of previously 
accumulated trust income to a beneficiary will be subject to 
tax (in addition to any tax paid by the trust on that income) 
where the beneficiary's average top marginal rate in the 
previous five years is higher than those of the trust.
    Under section 643(f), two or more trusts are treated as one 
trust if (1) the trusts have substantially the same grantor or 
grantors and substantially the same primary beneficiary or 
beneficiaries, and (2) a principal purpose for the existence of 
the trusts is to avoid Federal income tax. For trusts that were 
irrevocable as of March 1, 1984, section 643(f) applies only to 
contributions to corpus after that date.
    Under section 644, if property is sold within two years of 
its contribution to a trust, the gain that would have been 
recognized had the contributor sold the property is taxed at 
the contributor's marginal tax rates. In effect, section 644 
treats such gains as if the contributor hadrealized the gain 
and then transferred the net after-tax proceeds from the sale to the 
trust as corpus.
    Sections 665 through 668 apply different rules to 
accumulation distributions from a foreign trust than to 
accumulation distributions from domestic trusts. If a foreign 
trust accumulates income, changes its situs so as to become a 
domestic trust, and then makes a distribution that is deemed to 
have been made in a year in which the trust was a foreign 
trust, the distribution is treated as a distribution from a 
foreign trust for purposes of the accumulation distribution 
rules. Rev. Rul. 91-6, 1991-1 C.B. 89.

                           Reasons for Change

    The throwback rules and section 644 are intended to 
eliminate the potential tax reduction arising from taxation at 
the trust level, rather than the beneficiary or contributor 
level. When those provisions were enacted, a taxpayer could 
reduce his or her overall tax liability substantially by 
transferring property to one or more trusts, so that any income 
from the property would be taxed at lower income tax rates. In 
the Tax Reform Act of 1984, Congress curtailed the tax 
avoidance use of multiple trusts. Moreover, in the Tax Reform 
Act of 1986, Congress provided a new rate schedule for estates 
and trusts under which the maximum tax benefit of the graduated 
rate structure applicable to estates or trusts was reduced 
substantially to slightly more than $600 per year for a trust 
or estate. (Because of indexing of the rate brackets, that 
benefit has increased to $845 per year per trust or estate.) 
The Committee has determined that the insignificant potential 
tax reduction available through the transfer of property to 
trust no longer warrants the complexity of the throwback rules 
and section 644.

                        Explanation of Provision

    The bill exempts from the throwback rules amounts 
distributed by a domestic trust after the date of enactment. 
The provision also provides that precontribution gain on 
property sold by a domestic trust no longer is subject to 
section 644 (i.e., taxed at the contributor's marginal tax 
rates).
    The treatment of foreign trusts, including the treatment of 
foreign trusts that become domestic trusts,\33\ remains 
unchanged.
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    \33\ Rev. Rul. 91-6, 1991-1 C.B. 89.
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                             Effective Date

    The provision with respect to the throwback rules is 
effective for distributions made in taxable years beginning 
after the date of enactment. The modification to section 644 
applies to sales or exchanges after the date of enactment.

  8. Unified credit of decedent increased by unified credit of spouse 
used on split gift included in decedent's gross estate (sec. 508 of the 
                    bill and sec. 2010 of the Code)

                              Present Law

    A gift tax is imposed on transfers by gift during life and 
an estate tax is imposed on transfers at death. The gift and 
estate taxes are a unified transfer tax system in that one 
progressive tax is imposed on the cumulative transfers during 
lifetime and at death. The first $10,000 of gifts of present 
interests to each donee during any one calendar year are 
excluded from Federal gift tax. Under section 2513, one spouse 
can elect to treat a gift made by the other spouse to a third 
person as made one-half by each spouse (i.e., ``gift-
splitting'').
    The amount of estate tax payable generally is determined by 
multiplying the applicable tax rate (from the unified rate 
schedule) by the cumulative post-1976 taxable transfers made by 
the taxpayer and then subtracting any transfer taxes payable 
for prior taxable periods. This amount is reduced by any 
remaining available unified credit (and other applicable 
credits) to determine the estate tax liability. The estate tax 
is imposed on all of the assets held by the decedent at his 
death, including the value of certain property previously 
transferred by the decedent in which the decedent had certain 
retained powers or interests. In such circumstances, property 
that has been treated as a gift made one-half by each spouse 
may be includible in both spouses' estates.

                           Reasons for Change

    The ability to gift-split is intended to equalize the 
treatment of spouses in community property States and non-
community property States. Gift-splitting effectively permits 
the transferor taxpayer to benefit from, among other things, 
any unified credit allowable to the non-transferor spouse. The 
benefit of the non-transferor spouse's unified credit is lost, 
however, in circumstances where the split-gift property is 
subsequently included in both spouses' estates. The Committee 
believes that it is inappropriate that the benefit of the non-
transferor spouse's unified credit be lost in such 
circumstances.

                        Explanation of Provision

    With respect to any split-gift property that is 
subsequently includible in both spouses' estates, the bill 
increases the unified credit allowable to the decedent's estate 
by the amount of the unified credit previously allowed to the 
decedent's spouse with respect to the split gift.

                             Effective Date

    The provision applies to gifts made after the date of 
enactment.

9. Reformation of defective bequests to spouse of decedent (sec. 509 of 
            the bill and secs. 2056(b) and 2523 of the Code)

                              Present Law

    A ``marital deduction'' generally is allowed for estate and 
gift tax purposes for the value of property passing to a 
spouse. However, ``terminable interest'' property (i.e., an 
interest in property that will terminate or fail) transferred 
to a spouse generally will only qualify for the marital 
deduction under certain special rules designed to ensure that 
there will be an estate or gift tax to the transferee spouse on 
unspent transferred proceeds. Thus, the effect of a marital 
deduction with the terminable interest rule is to provide only 
a method of deferral of the estate or gift tax, not exemption. 
One of the special terminable interest rules (Code sec. 
2056(b)(5)) provides that the marital deduction is allowed 
where the decedent transfers property to a trust that is 
required to pay income to the surviving spouse and the 
surviving spouse has a general power of appointment at that 
spouse's death (under this so-called ``power of appointment 
trust,'' the power of appointment both provides the surviving 
spouse with power to control the ultimate disposition of the 
trust assets and assures that the trust assets will be subject 
to estate or gift tax). Another special terminable interest 
rule called the ``qualified terminable interest property'' rule 
(``QTIP'') generally permits a marital deduction for transfers 
by the decedent to a trust that is required to distribute all 
of the income to the surviving spouse at least annually and an 
election is made to subject the transferee spouse to transfer 
tax on the trust property. To qualify for the marital 
deduction, a power of appointment trust or QTIP trust must meet 
certain specific requirements. If there is a technical defect 
in meeting those requirements, the marital deduction may be 
lost.

                           Reasons for Change

    The IRS generally has required strict compliance with the 
requirements for a qualified power of appointment trust under 
section 2056(b)(5) or for QTIP under section 2056(b)(7). As a 
result, taxpayers have been unable to qualify for the marital 
deduction due to inadvertent or unavoidable failure to meet 
those requirements. Accordingly, the Committee believes it is 
appropriate to provide a reformation procedure to allow such 
failures to be cured in order that the marital deduction not be 
lost.

                        Explanation of Provision

    The bill allows the marital deduction with respect to a 
defective power of appointment or QTIP trust if there is a 
``qualified reformation'' of the trust that corrects the 
defect. In order to qualify, the reformation must change the 
governing instrument in a manner that cures the defects to 
qualification of the trust for the marital deduction. In 
addition, where a reformation proceeding is commenced after the 
due date for the estate tax return (including extensions), the 
reformation would qualify only if, prior to reformation, the 
governing instrument provides (1) that the surviving spouse is 
entitled to all of the income from the property for life, and 
(2) no person other than the surviving spouse is entitled to 
any distributions during the surviving spouse's life. With 
respect to QTIP, an election to qualify must be made by the 
executor on the estate tax return as required by section 
2056(b)(7)(B)(v).
    The determination of whether a marital deduction should be 
allowed (i.e., the reformation has cured the defects to 
qualification and otherwise qualifies under this provision) is 
made either as of the due date for filing the estate or gift 
tax return (including any extensions) or the time that changes 
are completed pursuant to a reformation proceeding. The statute 
of limitations is extended with respect to the estate or gift 
tax attributable to the trust property until one year after the 
date the Treasury Department is notified that a qualified 
reformation has been completed or that the reformation 
proceeding has otherwise terminated.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

                 B. Generation-Skipping Tax Provisions

  1. Severing of trusts holding property having an inclusion ratio of 
 greater than zero (sec. 511 of the bill and sec. 2642(a) of the Code)

                              Present Law

    A generation-skipping transfer tax (``GST'' tax) generally 
is imposed on transfers, either directly or through a trust or 
similar arrangement, to a skip person (i.e., a beneficiary in 
more than one generation below that of the transferor). 
Transfers subject to the GST tax include direct skips, taxable 
terminations and taxable distributions. An exemption of $1 
million is provided for each person making generation-skipping 
transfers. The exemption may be allocated by a transferor (or 
his or her executor) to transferred property.
    If the value of the transferred property exceeds the amount 
of the GST exemption allocated to that property, the GST tax 
generally is determined by multiplying a flat tax rate equal to 
the highest estate tax rate (i.e., currently 55 percent) by the 
``inclusion percentage'' and the value of the taxable property 
at the time of the taxable event. The ``inclusion percentage'' 
is the number one minus the ``exclusion percentage''. The 
exclusion percentage generally is calculated by dividing the 
amount of the GST exemption allocated to the property by the 
value of the property.
    Under Treasury regulations, trusts that are included in the 
transferor's gross estate or created under the transferor's 
will may be validly severed only if (1) the trust is severed 
according to a direction in the governing instrument; or (2) 
the trust is severed pursuant to the trustee's discretionary 
powers, but only if certain other conditions are satisfied 
(e.g., the severance occurs or a reformation proceeding begins 
before the estate tax return is due). Treas. Reg. 26.2654-1(b).

                           Reasons for Change

    The Committee believes it is appropriate to provide 
flexibility for the severance of trusts to minimize the need 
for complicated governing documents and to remove a potential 
trap for poorly advised taxpayers. The Committee understands 
that a similar result can already be obtained by creating 
separate trusts in the governing document. The flexibility of a 
severance should only be afforded, however, in situations where 
the Treasury Department believes there is no significant 
opportunity for tax avoidance as a result of the severance.

                        Explanation of Provision

    If a trust with an inclusion ratio of greater than zero is 
severed into two separate trusts, the bill allows the trustee 
to elect to treat one of the separate trusts as having an 
inclusion ratio of zero and the other separate trust as having 
an inclusion ratio of one. To qualify for this treatment, the 
separate trust with the inclusion ratio of one must receive an 
interest in each property held by the single trust (prior to 
severance) equal to the single trust's inclusion ratio, except 
to the extent otherwise provided by regulation. The remaining 
interests in each property will be transferred to the separate 
trust with the inclusion ratio of zero. The election must be 
irrevocable, and must be made at a time and in a manner 
prescribed by the Treasury Department.

                             Effective Date

    The provision is effective for severances of trusts 
occurring after the date of enactment.

 2. Modification of generation-skipping transfer tax for transfers to 
 individuals with deceased parents (sec. 512 of the bill and sec. 2651 
                              of the Code)

                              Present Law

    Under the ``predeceased parent exception'', a direct skip 
transfer to a transferor's grandchild is not subject to the 
generation skipping transfer (``GST'') tax if the child of the 
transferor who was the grandchild's parent is deceased at the 
time of the transfer (sec. 2612(c)(2)). This ``predeceased 
parent exception'' to the GST tax is not applicable to (1) 
transfers to collateral heirs, e.g., grandnieces or 
grandnephews, or (2) taxable terminations or taxable 
distributions.

                           Reasons for Change

    The Committee believes that a transfer to a collateral 
relative whose parent is dead should qualify for the 
predeceased parent exception in situations where the transferor 
decedent has no lineal heirs, because no motive or opportunity 
to avoid transfer tax exists. For similar reasons, the 
Committee believes that transfers to trusts should be permitted 
to qualify for the predeceased parent exclusion where the 
parent of the beneficiary is dead at the time that the transfer 
is first subject to estate or gift tax. The Committee also 
understands that this treatment will remove a present law 
impediment to the establishment of charitable lead trusts.

                        Explanation of Provision

    The bill extends the predeceased parent exception to 
transfers to collateral heirs, provided that the decedent has 
no living lineal descendants at the time of the transfer. For 
example, the exception would apply to a transfer made by an 
individual (with no living lineal heirs) to a grandniece where 
the transferor's nephew or niece who is the parent of the 
grandniece is deceased at the time of the transfer.
    In addition, the bill extends the predeceased parent 
exception (as modified by the change in the preceding 
paragraph) to taxable terminations and taxable distributions, 
provided that the parent of the relevant beneficiary was dead 
at the earliest time that the transfer (from which the 
beneficiary's interest in the property was established) was 
subject to estate or gift tax. For example, where a trust was 
established to pay an annuity to a charity for a term for years 
with a remainder interest granted to a grandson, the 
termination of the term for years would not be a taxable 
termination subject to the GST tax if the grandson's parent 
(who is the son or daughter of the transferor) is deceased at 
the time the trust was created and the transfer creating the 
trust was subject to estate or gift tax.

                             Effective Date

    The provision is effective for generation skipping 
transfers occurring after December 31, 1997.

         Title VI. Extension of Certain Expiring Tax Provisions

 A. Research Tax Credit (sec. 601 of the bill and sec. 41 of the Code)

                              Present Law

General rule

    Section 41 provides 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 generally will 
not apply to amounts paid or incurred after May 31, 1997.\34\
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    \34\ When originally enacted, the research tax credit applied to 
qualified expenses incurred after June 30, 1981. The credit was 
modified several times and was extended through June 30, 1995. The 
credit later was extended for the period July 1, 1996, through May 31, 
1997 (with a special 11-month extension for taxpayers that elect to be 
subject to the alternative incremental research credit regime).
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    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 taxpayer's 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.\35\
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    \35\ The Small Business Job Protection Act of 1996 expanded 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.
    A special rule (enacted in 1993) is 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 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 
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 
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)).
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    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 by 
shifting 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)(1)). 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 
of 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)).

Alternative incremental research credit regime

    As part of the Small Business Job Protection Act of 1996, 
taxpayers are allowed 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 fixed-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 before July 1, 1997, and such an election applies to 
that taxable year and all subsequent years (in the event that 
the credit subsequently is extended by Congress) unless revoked 
with the consent ofthe Secretary of the Treasury. If a taxpayer 
elects the alternative incremental research 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 taxpayer's credit.

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'').\36\
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    \68\ Under a special rule enacted as part of the Small Business Job 
Protection Act of 1996, 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 general rule under section 41(b)(3) 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.
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    To be eligible for the credit, the research must not only 
satisfy the requirements of present-law section 174 (described 
below) 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).

Relation to deduction

    Under section 174, taxpayers may elect to deduct currently 
the amount of certain research or experimental expenditures 
incurred in connection with a trade or business, 
notwithstanding the general rule that business expenses to 
develop or create an asset that has a useful life extending 
beyond the current year must be capitalized. However, 
deductions allowed to a taxpayer under section 174 (or any 
other section) are reduced by an amount equal to 100 percent of 
the taxpayer's research tax credit determined for the taxable 
year. Taxpayers may alternatively elect to claim a reduced 
research tax credit amount under section 41 in lieu of reducing 
deductions otherwise allowed (sec. 280C(c)(3)).

                           Reasons for Change

    Businesses may not find it profitable to invest in some 
research activities because of the difficulty in capturing the 
full benefits from the research. Costly technological advances 
made by one firm are often cheaply copied by its competitors. A 
research tax credit can help promote investment in research, so 
that research activities undertaken approach the optimal level 
for the overall economy. Therefore, the Committee believes 
that, in order to encourage research activities, it is 
appropriate to reinstate the research tax credit.

                        Explanation of Provision

    The research tax credit is extended for 19 months--i.e., 
generally for the period June 1, 1997, through December 31, 
1998.
    Under the provision, taxpayers are permitted to elect the 
alternative incremental research credit regime under section 
41(c)(4) for any taxable year beginning after June 30, 1996, 
and such election will apply to that taxable year and all 
subsequent taxable years unless revoked with the consent of the 
Secretary of the Treasury.

                             Effective Date

    The provision generally is effective for qualified research 
expenditures paid or incurred during the period June 1, 1997, 
through December 31, 1998.
    A special rule provides that, notwithstanding the general 
termination date for the research credit of December 31, 1998, 
if a taxpayer elects to be subject to the alternative 
incremental research credit regime for its first taxable year 
beginning after June 30, 1996, and before July 1, 1997, the 
alternative incremental research credit will be available 
during the entire 30-month period beginning with the first 
month of such taxable year--i.e., the equivalent of the 11-
month extension provided for by the Small Business Job 
Protection Act of 1996 plus an additional 19-month extension 
provided for by this bill. However, to prevent taxpayers from 
effectively obtaining more than 30-months of research credits 
from the Small Business Job Protection Act of 1996 and this 
bill, the 30-month period for taxpayers electing the 
alternative incremental research credit regime is reduced by 
the number of months (if any) after June 1996 with respect to 
which the taxpayer claimed research credit amounts under the 
regular, 20-percent research credit rules.

B. Contributions of Stock to Private Foundations (sec. 602 of the bill 
                    and sec. 170(e)(5) of the Code)

                              Present 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.\37\ 
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.\38\
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    \37\ 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)).
    \38\ 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 are allowed a deduction equal to the fair 
market value of ``qualified appreciated stock'' contributed to 
a private foundation prior to May 31, 1997.\39\ Qualified 
appreciated stock is defined as publicly traded stock which is 
capital gain property. The fair-market-value deduction for 
qualified appreciated stock donations applies 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 is treated as making all 
contributions that were made by any member of the individual's 
family.
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    \39\ The special rule contained in section 170(e)(5), which was 
originally enacted in 1984, expired January 1, 1995. The Small Business 
Job Protection Act of 1996 reinstated the rule for 11 months--for 
contributions of qualified appreciated stock made to private 
foundations during the period July 1, 1996, through May 31, 1997.
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                           Reasons for Change

    The Committee believes that, to encourage donations to 
charitable private foundations, it is appropriate to extend the 
rule that allows a fair market value deduction for certain 
gifts of appreciated stock to private foundations.

                        Explanation of Provision

    The bill extends the special rule contained in section 
170(e)(5) for contributions of qualified appreciated stock made 
to private foundations during the period June 1, 1997, through 
December 31, 1998.

                             Effective Date

    The provision is effective for contributions of qualified 
appreciated stock to private foundations made during the period 
June 1, 1997, through December 31, 1998.

C. Work Opportunity Tax Credit (sec. 603 of the bill and sec. 51 of the 
                                 Code)

                              Present Law

In general

    The work opportunity tax 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 wages. Qualified wages consist of wages 
attributable to service rendered by a member of a targeted 
group during the one-year period beginning with the day the 
individual begins work for the employer. For a vocational 
rehabilitation referral, however, the period will begin on the 
day the individual begins work for the employer on or after the 
beginning of the individual's vocational rehabilitation plan as 
under prior law.
    Generally, no more than $6,000 of wages during the first 
year of employment is permitted to be taken into account with 
respect to any individual. Thus, the maximum credit per 
individual is $2,100. With respect to qualified summer youth 
employees, the maximum credit is 35 percent of up to $3,000 of 
qualified first-year wages, for a maximum credit of $1,050.
    The deduction for wages is reduced by the amount of the 
credit. Also, the credit does not reduce alternative minimum 
tax (AMT) liability.

Targeted groups eligible for the credit

            (1) Families receiving AFDC
    An eligible recipient is an individual certified by the 
designated local employment agency as being a member of a 
family eligible to receive benefits under AFDC or its successor 
program for a period of at least nine months part of which is 
during the 9-month period ending on the hiring date. For these 
purposes, members of the family are defined to include only 
those individuals taken into account for purposes of 
determining eligibility for the AFDC or its successor program.
            (2) Qualified ex-felon
    A qualified ex-felon is an individual certified as: (1) 
having been convicted of a felony under any State or Federal 
law, (2) being a member of a family that had an income during 
the six months before the earlier of the date of determination 
or the hiring date which on an annual basis is 70 percent or 
less of the Bureau of Labor Statistics lower living standard, 
and (3) having a hiring date within one year of release from 
prison or date of conviction.
            (3) High-risk-youth
    A high-risk youth is an individual certified as being at 
least 18 but not 25 on the hiring date and as having a 
principal place of abode within an empowerment zone or 
enterprise community (as defined under Subchapter U of the 
Internal Revenue Code). Qualified wages will not include wages 
paid or incurred for services performed after the individual 
moves outside an empowerment zone or enterprise community.
            (4) Vocational rehabilitation referral
    Vocational rehabilitation referrals are those individuals 
who have a physical or mental disability that constitutes a 
substantial handicap to employment and who have been referred 
to the employer while receiving, or after completing, 
vocational rehabilitation services under an individualized, 
written rehabilitation plan under a State plan approved under 
the Rehabilitation Act of 1973 or under a rehabilitation plan 
for veterans carried out under Chapter 31 of Title 38, U.S. 
Code. Certification will be provided by the designated local 
employment agency upon assurances from the vocational 
rehabilitation agency that the employee has met the above 
conditions.
            (5) Qualified summer youth employee
    Qualified summer youth employees are individuals: (1) who 
perform services during any 90-day period between May 1 and 
September 15, (2) who are certified by the designated local 
agency as being 16 or 17 years of age on the hiring date, (3) 
who have not been an employee of that employer before, and (4) 
who are certified by the designated local agency as having a 
principal place of abode within an empowerment zone or 
enterprise community (as defined under Subchapter U of the 
Internal Revenue Code). As with high-risk youths, no credit is 
available on wages paid or incurred for service performed after 
the qualified summer youth moves outside of an empowerment zone 
or enterprise community. If, after the end of the 90-day 
period, the employer continues to employ a youth who was 
certified during the 90-day period as a member of another 
targeted group, the limit on qualified first-year wages will 
take into account wages paid to the youth while a qualified 
summer youth employee.
            (6) Qualified Veteran
    A qualified veteran is a veteran who is a member of a 
family certified as receiving assistance under: (1) AFDC for a 
period of at least nine months part of which is during the 12-
month period ending on the hiring date, or (2) a food stamp 
program under the Food Stamp Act of 1977 for a period of at 
least three months part of which is during the 12-month period 
ending on the hiring date. For these purposes, members of a 
family are defined to include only those individuals taken into 
account for purposes of determining eligibility for: (i) the 
AFDC or its successor program, and (ii) a food stamp program 
under the Food Stamp Act of 1977, respectively.
    Further, a qualified veteran is an individual who has 
served on active duty (other than for training) in the Armed 
Forces for more than 180 days or who has been discharged or 
releasedfrom active duty in the Armed Forces for a service-
connected disability. However, any individual who has served for a 
period of more than 90 days during which the individual was on active 
duty (other than for training) is not an eligible employee if any of 
this active duty occurred during the 60-day period ending on the date 
the individual was hired by the employer. This latter rule is intended 
to prevent employers who hire current members of the armed services (or 
those departed from service within the last 60 days) from receiving the 
credit.
            (7) Families receiving Food Stamps
    An eligible recipient is an individual aged 18 but not 25 
certified by a designated local employment agency as being a 
member of a family receiving assistance under a food stamp 
program under the Food Stamp Act of 1977 for a period of at 
least six months ending on the hiring date. 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. For these purposes, members 
of the family are defined to include only those individuals 
taken into account for purposes of determining eligibility for 
a food stamp program under the Food Stamp Act of 1977.

Minimum employment period

    No credit is allowed for wages paid unless the eligible 
individual is employed by the employer for at least 180 days 
(20 days in the case of a qualified summer youth employee) or 
400 hours (120 hours in the case of a qualified summer youth 
employee).

Expiration date

    The credit is effective for wages paid or incurred to a 
qualified individual who begins work for an employer after 
September 30, 1996, and before October 1, 1997.

                           Reasons for Change

    The Committee believes that this short-term program with 
modifications will provide the Congress and the Treasury and 
Labor Departments an opportunity to assess fully the operation 
and effectiveness of the credit as a hiring incentive.

                        Explanation of Provision

    The bill extends for one year the work opportunity tax 
credit and makes four modifications: (1) the minimum employment 
period is reduced to 120 hours, (2) the credit percentage is 
modified so that the percentage is 25% for the first 400 hours 
and 40% thereafter (assuming the minimum employment period is 
satisfied with respect to that employee), (3) an otherwise 
eligible member of a family receiving AFDC benefits satisfies 
the credit requirements if the family has received AFDC 
benefits for any 9-month period during the 18-month period 
ending on the hiring date (this expansion applies whether or 
not the individual is a qualified veteran), and (4) the credit 
is allowed against the AMT.

                             Effective Date

    Generally the provisions that extend the work opportunity 
tax credit and make other modifications to the credit are 
effective for wages paid or incurred to qualified individuals 
who begin work for the employer after September 30, 1997, and 
before October 1, 1998. The provision allowing the credit 
against the AMT is effective for taxable years beginning after 
December 31, 1997.

  d. orphan drug tax credit (sec. 604 of the bill and sec. 45c of the 
                                 code)

                              Present Law

    A 50-percent nonrefundable tax credit is 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).
    As with other general business credits (sec. 38), taxpayers 
are allowed to carry back unused credits to three years 
preceding the year the credit is earned (but not to a taxable 
year ending before July 1, 1996) and to carry forward unused 
credits to 15 years following the year the credit is earned. 
The credit cannot be used to offset a taxpayer's alternative 
minimum tax liability.
    The orphan drug tax credit expired and does not apply to 
expenses paid or incurred after May 31, 1997.\40\
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    \40\ The orphan drug tax credit originally was enacted in 1983 and 
was extended on several occasions. The credit expired on December 31, 
1994, and later was reinstated for the period July 1, 1996, through May 
31, 1997.
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                           Reasons for Change

    In order to encourage the socially optimal level of 
research to develop drugs to treat rare diseases and 
conditions--and because the research and clinical testing of 
such drugs often must be conducted over several years--the 
Committee believes that the orphan drug tax credit should be 
permanently extended.

                        Explanation of Provision

    The orphan drug tax credit provided for by section 45C is 
permanently extended.

                             Effective Date

    The provision is effective for qualified clinical testing 
expenses paid or incurred after May 31, 1997.

             Title VII. District of Columbia Tax Incentives

    (secs. 701-702 of the bill and new secs. 1400-1400D of the code)

                              Present Law

Empowerment zones and enterprise communities

            In general
    Pursuant to the Omnibus Budget Reconciliation Act of 1993 
(OBRA 1993), the Secretaries of the Department of Housing and 
Urban Development (HUD) and the Department of Agriculture 
designated a total of nine empowerment zones and 95 enterprise 
communities on December 21, 1994. As required by law, six 
empowerment zones are located in urban areas (with aggregate 
population for the six designated urban empowerment zones 
limited to 750,000) and three empowerment zones are located in 
rural areas.\41\ Of the enterprise communities, 65 are located 
in urban areas and 30 are located in rural areas (sec. 1391). 
Designated empowerment zones and enterprise communities were 
required to satisfy certain eligibility criteria, including 
specified poverty rates and population and geographic size 
limitations (sec. 1392). Portions of the District of Columbia 
were designated as an enterprise community.
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    \41\ The six designated urban empowerment zones are located in New 
York City, Chicago, Atlanta, Detroit, Baltimore, and Philadelphia-
Camden (New Jersey). The three designated rural empowerment zones are 
located in Kentucky Highlands (Clinton, Jackson, and Wayne counties, 
Kentucky), Mid-Delta Mississippi (Bolivar, Holmes, Humphreys, Leflore 
counties, Mississippi), an Rio Grande Valley Texas (Cameron, Hidalgo, 
Starr, and Willacy counties, Texas).
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    The following tax incentives are available for certain 
businesses located in empowerment zones: (1) an annual 20-
percent wage credit for the first $15,000 of wages paid to a 
zone resident who works in the zone; (2) an additional $20,000 
of expensing under Code section 179 for ``qualified zone 
property'' placed in service by an ``enterprise zone business'' 
(accordingly, certain businesses operating in empowerment zones 
are allowed up to $38,000 of expensing for 1997; the allowable 
amount will increase to $38,500 for 1998); and (3) special tax-
exempt financing for certain zone facilities (described in more 
detail below).
    The 95 enterprise communities are eligible for the special 
tax-exempt financing benefits but not the other tax incentives 
available in the nine empowerment zones. In addition to these 
tax incentives, OBRA 1993 provided that Federal grants would be 
made to designated empowerment zones and enterprise 
communities.
    The tax incentives for empowerment zones and enterprise 
communities generally will be available during the period that 
the designation remains in effect, i.e., a 10-year period.
            Definition of ``qualified zone property''
    Present-law section 1397C defines ``qualified zone 
property'' as depreciable tangible property (including 
buildings), provided that: (1) the property is acquired by the 
taxpayer (from an unrelated party) after the zone or community 
designation took effect; (2) the original use of the property 
in the zone or community commences with the taxpayer; and (3) 
substantially all of the use of the property is in the zone or 
community in the active conduct of a trade or business by the 
taxpayer in the zone or community. In the case of property 
which is substantially renovated by the taxpayer, however, the 
property need not be acquired by the taxpayer after zone or 
community designation or originally used by the taxpayer within 
the zone or community if, during any 24-month period after zone 
or community designation, the additions to the taxpayer's basis 
in the property exceed the greater of 100 percent of the 
taxpayer's basis in the property at the beginning of the 
period, or $5,000.
            Definition of ``enterprise zone business''
    Present-law section 1397B defines the term ``enterprise 
zone business'' as a corporation or partnership (or 
proprietorship) if for the taxable year: (1) the sole trade or 
business of the corporation or partnership is the active 
conduct of a qualified business within an empowerment zone or 
enterprise community; (2) at least 80 percent of the total 
gross income is derived from the active conduct of a 
``qualified business'' within a zone or community; (3) 
substantially all of the business' tangible property is used 
within a zone or community; (4) substantially all of the 
business' intangible property is used in, and exclusively 
related to, the active conduct of such business; (5) 
substantially all of the services performed by employees are 
performed within a zone or community; (6) at least 35 percent 
of the employees are residents of the zone or community; and 
(7) no more than five percent of the average of the aggregate 
unadjusted bases of the property owned by the business is 
attributable to (a) certain financial property, or (b) 
collectibles not held primarily for sale to customers in the 
ordinary course of an active trade or business.
    A ``qualified business'' is defined as any trade or 
business other than a trade or business that consists 
predominantly of the development or holding of intangibles for 
sale or license.\42\ In addition, the leasing of real property 
that is located within the empowerment zone or community to 
others is treated as a qualified business only if (1) the 
leased property is not residential property, and (2) at least 
50 percent of the gross rental income from the real property is 
from enterprise zone businesses. The rental of tangible 
personal property to others is not a qualified business unless 
substantially all of the rental of such property is by 
enterprise zone businesses or by residents of an empowerment 
zone or enterprise community.
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    \42\ Also, a qualified business does not include certain facilities 
described in section 144(c)(6)(B) (e.g., massage parlor, hot tub 
facility, or liquor store) or certain large farms.
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            Tax-exempt financing rules
    Tax-exempt private activity bonds may be issued to finance 
certain facilities in empowerment zones and enterprise 
communities. These bonds, along with most private activity 
bonds, are subject to an annual private activity bond State 
volume cap equal to $50 per resident of each State, or (if 
greater) $150 million per State.
    Qualified enterprise zone facility bonds are bonds 95 
percent or more of the net proceeds of which are used to 
finance (1) ``qualified zone property'' (as defined above) the 
principal user of which is an ``enterprise zone business'' 
(also defined above \43\), or (2) functionally related and 
subordinate land located in the empowerment zone or enterprise 
community. These bonds may only be issued while an empowerment 
zone or enterprise community designation is in effect.
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    \43\ For purpose of the tax-exempt financing rules, and 
``enterprise zones Business'' also includes a business located in a 
zone or community which would qualify as an enterprise zone business if 
it were separately incorporated.
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    The aggregate face amount of all qualified enterprise zone 
bonds for each qualified enterprise zone business may not 
exceed $3 million per zone or community. In addition, total 
qualified enterprise zone bond financing for each principal 
user of these bonds may not exceed $20 million for all zones 
and communities.

Taxation of capital gains

    In general, gain or loss reflected in the value of an asset 
is not recognized for income tax purposes until a taxpayer 
disposes of the asset. On the sale or exchange of capital 
assets, the net capital gain generally is taxed at the same 
rate as ordinary income, except that the maximum rate of tax is 
limited to 28 percent of the net capital gain.\44\ Net capital 
gain is the excess of the net long-term capital gain for the 
taxable year over the net short-term capital loss for the year. 
Gain or loss is treated as long-term if the asset is held for 
more than one year.
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    \44\ The Revenue Reconciliation Act of 1993 added Code section 
12002, which provides a 50-percent exclusion for gain from the sale of 
certain small business stock acquired at original issue and held for at 
least five years.
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    Capital losses generally are deductible in full against 
capital gains. In addition, individual taxpayers may deduct 
capital losses against up to $3,000 of ordinary income in each 
year. Any remaining unused capital losses may be carried 
forward indefinitely to another taxable year.
    A capital asset generally means any property except (1) 
inventory, stock in trade, or property held primarily for sale 
to customers in the ordinary course of the taxpayer's trade or 
business, (2) depreciable or real property used in the 
taxpayer's trade or business, (3) specified literary or 
artistic property, (4) business accounts or notes receivable, 
and (5) certain publications of the Federal Government.
    In addition, the net gain from the disposition of certain 
property used in the taxpayer's trade or business is treated as 
long-term capital gain. Gain from the disposition of 
depreciable personal property is not treated as capital gain to 
the extent of all previous depreciation allowances. Gain from 
the disposition of depreciable real property generally is not 
treated as capital gain to the extent of the depreciation 
allowances in excess of the allowances that would have been 
available under the straight-line method.

Individual tax rates

    To determine tax liability, an individual taxpayer 
generally must apply the tax rate schedules (or the tax tables) 
to his or her taxable income. The rate schedules are broken 
into several ranges of income, known as income brackets, and 
the marginal tax rate increases as a taxpayer's income 
increases. Separate rate schedules apply based on an 
individual's filing status. For 1997, the individual income tax 
rate schedules are as follows:

------------------------------------------------------------------------
          If taxable income is                Then income tax equals    
------------------------------------------------------------------------
                           Single individuals                           
                                                                        
$0-$24,650..............................  15 percent of taxable income. 
$24,651-$59,750.........................  $3,698, plus 28% of the amount
                                           over $24,650.                
$59,751-$124,650........................  $13,526, plus 31% of the      
                                           amount over $59,750.         
$124,651-$271,050.......................  $33,645, plus 36% of the      
                                           amount over $124,650.        
Over $271,050...........................  $86,349, plus 39.6% of the    
                                           amount over $271,050.        
                                                                        
                           Heads of households                          
                                                                        
$0-$33,050..............................  15 percent of taxable income. 
$33,051-$85,350.........................  $4,958, plus 28% of the amount
                                           over $33,050.                
$85,351-$138,200........................  $19,602 plus 31% of the amount
                                           over $85,350.                
$138,201-$271,050.......................  $35,985, plus 36% of the      
                                           amount over $138,200.        
Over $271,050...........................  $83,811, plus 39.6% of the    
                                           amount over $271,050.        
                                                                        
                Married individuals filing joint returns                
                                                                        
$0-$41,200..............................  15 percent of taxable income. 
$41,201-$99,600.........................  $6,180, plus 28% of the amount
                                           over $41,200.                
$99,601-$151,750........................  $22,532, plus 31% of the      
                                           amount over $99,600.         
$151,751-$271,050.......................  $38,698, plus 36% of the      
                                           amount over $151,750.        
Over $271,050...........................  $81,646, plus 39.6% of the    
                                           amount over $271,050.        
                                                                        
               Married individuals filing separate returns              
                                                                        
$0-$20,600..............................  15 percent of taxable income. 
$20,601-$49,800.........................  $3,090, plus 28% of the amount
                                           over $20,600.                
$49,801-$75,875.........................  $11,266, plus 31% of the      
                                           amount over $49,800.         
$75,876-$135,525........................  $19,349, plus 36% of the      
                                           amount over $75,875.         
Over $135,525...........................  $40,823 plus 39.6% of the     
                                           amount over $135,525.        
------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that the District of Columbia faces 
two key problems--residents migrating from the District and 
insufficient economic activity. To this end, the Committee has 
provided certain tax incentives to reduce the Federal tax 
burden on certain District residents, and to encourage economic 
development in those areas of the District where development 
has been inadequate. However, the Committee is aware that the 
efficacy of tax incentives to address one or both problems is 
severely limited absent fundamental structural reform of the 
District's government and economy. Thus, the availability of 
the tax incentives is contingent on the passage of other 
Federal legislation that will implement such critical 
structural reforms.

                        Explanation of Provision

Designation of D.C. Enterprise Zone

    Certain economically depressed census tracts within the 
District of Columbia are designated as the ``D.C. Enterprise 
Zone,'' within which businesses and individual residents are 
eligible for special tax incentives. The census tracts that 
compose the D.C. Enterprise Zone are (1) all census tracts that 
presently are part of the D.C. enterprise community designated 
under section 1391 (i.e., portions of Anacostia, Mt. Pleasant, 
Chinatown, and the easternmost part of the District) and (2) 
all additional census tracts within the District of Columbia 
where the poverty rate is at least 35 percent. The D.C. 
Enterprise Zone designation generally will remain in effect for 
five years for the period from January 1, 1998, through 
December 31, 2002.\45\
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    \45\ The status of certain census tracts within the District as an 
enterprise community designated under section 1391 also terminates on 
December 31, 2002.
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    The following tax incentives will take effect only if, 
prior to January 1, 1998, a Federal law is enacted creating a 
District of Columbia economic development corporation that is 
an instrumentality of the District of Columbia government.\46\
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    \46\ In addition, the bill assumes the enactment of certain 
modifications to Federal law (other than Federal tax laws contained in 
the Internal Revenue Code) similar to those proposed by the 
Administration that would clarify and expand the District's authority 
to issue revenue bonds.
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Business development incentives

            Empowerment zone wage credit, expensing, and tax-exempt 
                    financing
    The following tax incentives that are available under 
present law in empowerment zones would be available in the D.C. 
Enterprise Zone (modified as described below): (1) a 20-percent 
wage credit for the first $15,000 of wages paid to D.C. 
Enterprise Zone residents who work in the D.C. Enterprise Zone; 
(2) an additional $20,000 of expensing under Code section 179 
for qualified zone property; and (3) special tax-exempt 
financing for certain zone facilities.
    In general, the wage credit for certain D.C. Enterprise 
Zone residents who work in the D.C. Enterprise Zone is the same 
as is available in empowerment zones under present law. 
However, the wage credit rate remains at 20 percent for the 
D.C. Enterprise Zone for the period 1998 through 2002 (and does 
not phase down to 15 percent in the year 2002 as under present-
law section 1396). The wage credit is effective for wages paid 
(or incurred) to a qualified individual after December 31, 
1997, and before January 1, 2003.
    The increased expensing under Code section 179 is effective 
for property placed in service in taxable years beginning after 
December 31, 1997, and before January 1, 2003. Thus, qualified 
D.C. Zone property placed in service in taxable years beginning 
in 1998 is eligible for up to $38,500 of expensing.
    A qualified D.C. Zone business (defined as under present 
law section 1394(b)(3)) is permitted to borrow proceeds from 
the issuance of qualified enterprise zone facility bonds. Such 
bonds can be issued only by a newly created economic 
development corporation and are subject to the requirements 
applicable under present law to enterprise zone facility bonds, 
except that the amount of outstanding bond proceeds that can be 
borrowed by any qualified District business cannot exceed $15 
million (rather than $3 million). The special tax-exempt bond 
provisions apply to bonds issued after December 31, 1997, and 
prior to January 1, 2003.
            Tax credits for equity investments in and loans to 
                    businesses located in the District of Columbia
    A newly created economic development corporation is 
authorized to allocate $75 million in tax credits to taxpayers 
that make certain equity investments in, or loans to, 
businesses (either corporations or partnerships) engaged in an 
active trade or business in the District of Columbia. The 
business need not be located in the D.C. Enterprise Zone, 
although factors to be considered in the allocation of credits 
include whether the project would provide job opportunities for 
low and moderate income residents of the D.C. Enterprise Zone 
and whether the business is located in the D.C. Enterprise 
Zone. Eligible businesses are not be required to satisfy the 
criteria of a qualified D.C. Zone business, described above. 
Such credits are nonrefundable and can be used to offset a 
taxpayer's alternative minimum tax (AMT) liability.
    Under the bill, the amount of credit cannot exceed 25 
percent of the amount invested (or loaned) by the taxpayer. 
Thus, the economic development corporation may allocate the 
full $75million in tax credits to no less than $300 million in 
equity investments in, or loans, to eligible businesses.
    Under the bill, credits may be allocated to loans made to 
an eligible business only if the business uses the loan 
proceeds to purchase depreciable tangible property and any 
functionally related and subordinate land. Credits may be 
allocated to equity investments only if the equity interest was 
acquired for cash. Any credits allocated to a taxpayer making 
an equity investment are subject to recapture if the equity 
interest is disposed of by the taxpayer within five years. A 
taxpayer's basis in an equity investment is reduced by the 
amount of the credit.
    The bill applies to credit amounts allocated for taxable 
years beginning after December 31, 1997, and before January 1, 
2003.\47\
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    \47\ As a general business credit, the credit can be carried back 
three years (but not before January 1, 1998) and forward for fifteen 
years.
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            Zero percent capital gains rate
    The bill provides a zero percent capital gains rate for 
capital gains from the sale of certain qualified D.C Zone 
assets held for more than five years. In general, D.C. Zone 
assets mean stock or partnership interests held in or tangible 
property held by a D.C. Zone business. For this purpose, a D.C. 
Zone business is defined as an enterprise zone business under 
present-law section 1397B.
    ``D.C. Zone business stock'' is stock in a domestic 
corporation originally issued after December 31, 1997, that, at 
the time of issuance \48\ and during substantially all of the 
taxpayer's holding period, was a D.C. Zone business, provided 
that such stock was acquired by the taxpayer on original issue 
from the corporation solely in exchange for cash\49\. A ``D.C. 
Zone partnership interest'' is a domestic partnership interest 
originally issued after December 31, 1997, that is acquired by 
the taxpayer from the partnership solely in exchange for cash 
before January 1, 2003, provided that, at the time such 
interest was acquired \50\ and during substantially all of the 
taxpayer's holding period, the partnership was a D.C. Zone 
business. Finally, ``D.C. Zone business property'' is tangible 
property acquired by the taxpayer by purchase (within the 
meaning of present law section 179(d)(2)) after December 31, 
1997, and before January 1, 2003, provided that the original 
use of such property in the D.C. Enterprise Zone commences with 
the taxpayer and substantially all of the use of such property 
during substantially all of the taxpayer's holding period was 
in a D.C. Zone business of the taxpayer.
---------------------------------------------------------------------------
    \48\ In the case of a new corporation, it is sufficient if the 
corporation is being organized for purposes of being a D.C. Zone 
business.
    \49\ Qualified D.C. Zone business stock does not include any stock 
acquired from a corporation which made a substantial stock redemption 
or distribution (without a bona fide business purpose therefore) in an 
attempt to avoid the purposes of the provision. A similar rule applies 
with respect to qualified D.C. Zone partnership interests.
    \50\ In the case of a new partnership, it is sufficient if the 
partnership is being formed for purposes of being a D.C. Zone business.
---------------------------------------------------------------------------
    A special rule provides that, in the case of business 
property that is ``substantially renovated,'' such property 
need not be acquired by the taxpayer after December 31, 1997, 
nor need the original use of such property in the D.C. 
Enterprise Zone commence with the taxpayer. For these purposes, 
property is treated as ``substantially renovated'' if, prior to 
January 1, 2003, additions to basis with respect to such 
property in the hands of the taxpayer during any 24-month 
period beginning after December 31, 1997, exceed the greater of 
(1) an amount equal to the adjusted basis at the beginning of 
such 24-month period in the hands of the taxpayer, or (2) 
$5,000. Thus, substantially renovated real estate located in 
the D.C. Enterprise Zone may constitute D.C. Zone business 
property. However, the bill specifically excludes land that is 
not an integral part of a D.C. Zone business from the 
definition of D.C. Zone business property.
    In addition, qualified D.C. Zone assets include property 
that was a qualified D.C. Zone asset in the hands of a prior 
owner, provided that at the time of acquisition, and during 
substantially all of the subsequent purchaser's holding period, 
either (1) substantially all of the use of the property is in a 
D.C. Zone business, or (2) the property is an ownership 
interest in a D.C. Zone business.\51\
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    \51\ The termination of the D.C. Zone designation will not, by 
itself, result in property failing to be treated as a qualified D.C. 
Zone asset. However, capital gain eligible for the zero percent capital 
gains rate does not include any gain attributable to periods after 
December 31, 2007.
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    In general, gain eligible for the zero percent tax rate 
means gain from the sale or exchange of a qualified D.C. Zone 
asset that is (1) a capital asset or (2) property used in the 
trade or business as defined in section 1231(b). Gain 
attributable to periods before December 31, 1997, and after 
December 31, 2007, is not qualified capital gain. No gain 
attributable to real property, or an intangible asset, which is 
not an integral part of a D.C. Zone business qualifies for the 
zero percent rate.
    The bill provides that property that ceases to be a 
qualified D.C. Zone asset because the property is no longer 
used in (or no longer represents an ownership interest in) a 
D.C. Zone business after the five-year period beginning on the 
date the taxpayer acquired such property would continue to be 
treated as a D.C. Zone asset. Under this rule, the amount of 
gain eligible for the zero percent capital gains rate cannot 
exceed the amount which would be qualified capital gain had the 
property been sold on the date of such cessation.
    Special rules are provided for pass-through entities (i.e., 
partnerships, S corporations, regulated investment companies, 
and common trust funds). In the case of a sale or exchange of 
an interest in a pass-through entity that was not a D.C. Zone 
business during substantially all ofthe period that the 
taxpayer held the interest, the zero percent capital gains rate applies 
to the extent that the gain is attributable to amounts that would have 
been qualified capital gain had the assets been sold for their fair 
market value on the date of the sale or exchange of the interest in the 
pass-through entity. This rule applies only if the interest in the 
pass-through entity were held by the taxpayer for more than five years. 
In addition, the rule applies only to qualified D.C. Zone assets that 
were held by the pass-through entity for more than five years, and 
throughout the period that the taxpayer held the interest in the pass-
through entity.
    The bill also provides that in the case of a transfer of a 
qualified D.C. Zone asset by gift, at death, or from a 
partnership to a partner that held an interest in the 
partnership at the time that the qualified D.C. Zone asset was 
acquired, (1) the transferee is to be treated as having 
acquired the asset in the same manner as the transferor, and 
(2) the transferee's holding period includes that of the 
transferor. In addition, rules similar to those contained in 
section 1202(i)(2) regarding treatment of contributions to 
capital after the original issuance date and section 1202(j) 
regarding treatment of certain short positions apply.

Individual resident tax rate reduction

    Individuals who have their principal place of abode in any 
census tract that is part of the D.C. Enterprise Zone are 
entitled to a 10-percent tax rate on all taxable income that 
currently is subject to a 15-percent Federal income tax rate. 
Thus, using the 1997 tax rate schedule, a single taxpayer who 
resides in the D.C. Enterprise Zone with $24,650 or more of 
taxable income will receive a Federal income tax reduction of 
$1,233 under the bill. Married taxpayers who reside in the D.C. 
Enterprise Zone and file a joint return with taxable income of 
$41,200 or more of taxable income will receive a Federal income 
tax reduction of $2,060 under the bill.
    The special 10-percent rate provision is in effect for the 
period 1998-2007.

                             Effective Date

    The D.C. tax incentives generally are effective January 1, 
1998, and remain in effect for five years until the termination 
of the D.C. Enterprise Zone designation on December 31, 2002. 
However, the zero percent tax rate for capital gains and the 
special 10-percent rate bracket are effective for the period 
1998-2007.

                 Title VIII. Welfare-to-Work Tax Credit

          (sec. 801 of the bill and new sec. 51A of the Code)

                              Present Law

    The work opportunity tax 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 wages. Qualified wages consist of wages 
attributable to service rendered by a member of a targeted 
group during the one-year period beginning with the day the 
individual begins work for the employer. For a vocational 
rehabilitation referral, however, the period will begin on the 
day the individual begins work for the employer on or after the 
beginning of the individual's vocational rehabilitation plan as 
under prior law.
    For purposes of the work opportunity tax credit, the 
targeted groups for which the credit is available include (1) 
families receiving Aid to Families with Dependent Children 
(AFDC), (2) qualified ex-felons, (3) high-risk youth, (4) 
vocational rehabilitation referrals, (5) qualified summer youth 
employees, (6) qualified veterans, and (7) families receiving 
food stamps.
    Generally, no more than $6,000 of wages during the first 
year of employment is permitted to be taken into account with 
respect to any individual. Thus, the maximum credit per 
individual is $2,100. With respect to qualified summer youth 
employees, the maximum credit is 35 percent of up to $3,000 of 
qualified first-year wages, for a maximum credit of $1,050.
    The deduction for wages is reduced by the amount of the 
credit.
    The work opportunity tax credit is effective for wages paid 
or incurred to a qualified individual who begins work for an 
employer after September 30, 1996, and before October 1, 1997.

                           Reasons for Change

    One goal of the Personal Responsibility and Work 
Opportunity Reform Act of 1996 (Public Law 104-193) was to move 
individuals from welfare to work. The Committee believes that 
the welfare-to-work credit will provide to employers an 
additional incentive to hire these categories of individuals. 
This incentive is intended to ease the transition from welfare 
to work for the targeted categories of individuals by 
increasing access to employment. It is also intended to provide 
certain employee benefits to these individuals to encourage 
training, health coverage, dependent care and ultimately better 
job attachment.

                        Explanation of Provision

    The bill provides to employers a credit on the first 
$20,000 of eligible wages paid to qualified long-term family 
assistance (AFDC or its successor program) recipients during 
the first two years of employment. The credit is 35% of the 
first $10,000 of eligible wages in the first year of employment 
and 50% of the first $10,000 of eligible wages in the second 
year of employment. The maximum credit is $8,500 per qualified 
employee.
    Qualified long-term family assistance recipients are: (1) 
members of a family that has received family assistance for at 
least 18 consecutive months ending on the hiring date; (2) 
members of a family that has received family assistance for a 
total of at least 18 months (whether or not consecutive) after 
the date of enactment of this credit if they are hired within 2 
years after the date that the 18-month total is reached; and 
(3) members of a family who are no longer eligible for family 
assistance because of either Federal or State time limits, if 
they are hired within 2 years after the Federal or State time 
limits made the family ineligible for family assistance.
    Eligible wages are amounts paid by the employer for the 
following: (1) educational assistance excludable under a 
section 127 program (or that would be excludable but for the 
expiration of section 127); (2) health plan coverage for the 
employee, but not more than the applicable premium defined 
under section 4980B(f)(4); and (3) dependent care assistance 
excludable under section 129.

                             Effective Date

    The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after January 1, 1998 and before May 1, 1999.

                   Title IX. Miscellaneous Provisions

                        A. Excise Tax Provisions

  1. Repeal excise tax on diesel fuel used in recreational motorboats 
       (sec. 901 of the bill and secs. 4041 and 6427 of the Code)

                              Present Law

    Before a temporary suspension through December 31, 1997 was 
enacted in 1996, diesel fuel used in recreational motorboats 
was subject to the 24.3-cents-per-gallon diesel fuel excise 
tax. Revenues from this tax were retained in the General Fund. 
The 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.

                           Reasons for Change

    Many marinas have found it uneconomical to carry both 
undyed (taxed) and dyed (untaxed) diesel fuel because the 
majority of their market is for uses not subject to tax. As a 
result, some recreational boaters have experienced difficulty 
finding fuels. In 1996, Congress suspended imposition of the 
tax on recreational boating while alternative collection 
methods were evaluated. No satisfactory alternative has been 
found; therefore, the Committee determined that competing needs 
for boat fuel availability and preservation of the integrity of 
the diesel fuel tax compliance structure are best served by 
repealing the diesel fuel tax on recreational motorboat use.

                        Explanation of Provision

    The provision repeals the application of the diesel fuel 
tax to fuel used in recreational motorboats.

                             Effective Date

    The provision is effective for fuel sold after December 31, 
1997.

 2. Continued application of tax on imported recycled Halon-1211 (sec. 
               902 of the bill and sec. 4682 of the Code)

                              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 $6.25 per pound in 1997 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. In addition, exemption 
is provided for imported recycled halon-1301 and halon-2402 if 
such chemicals are imported from countries that are signatories 
to the Montreal Protocol on Substances that Deplete the Ozone 
Layer. Present law further provides that exemption is to be 
provided for imported recycled halon-1211, for such chemicals 
imported from countries that are signatories to the Montreal 
Protocol on Substances that Deplete the Ozone Layer after 
December 31, 1997.

                           Reasons for Change

    The Committee understands that in response to the profit 
incentive created by the higher price for ozone-depleting 
chemicals that has resulted from the tax on these chemicals, 
entrepreneurs have developed and are marketing a substitute for 
halon-1211 that is not ozone depleting. The Committee believes 
permitting imported recycled halon-1211 to compete in the 
market tax free may destroy this entrepreneurial and 
environmental success story.

                        Explanation of Provision

    The bill repeals the present-law exemption for imported 
recycled halon-1211.

                             Effective Date

    The provision is effective on the date of enactment.

  3. Uniform rate of excise tax on vaccines (sec. 903 of the bill and 
                    secs. 4131 and 4132 of the Code)

                              Present Law

    Under section 4131, a manufacturer's excise tax is imposed 
on the following vaccines routinely recommended for 
administration to children: DPT (diphtheria, pertussis, 
tetanus,), $4.56 per dose; DT (diphtheria, tetanus), $0.06 per 
dose; MMR (measles, mumps, or rubella), $4.44 per dose; and 
polio, $0.29 per dose. In general, if any vaccine is 
administered by combining more than one of the listed taxable 
vaccines, the amount of tax imposed is the sum of the amounts 
of tax imposed for each taxable vaccine. However, in the case 
of MMR and its components, any component vaccine of MMR is 
taxed at the same rate as the MMR-combined vaccine.
    Amounts equal to net revenues from this excise tax are 
deposited in the Vaccine Injury Compensation Trust Fund to 
finance compensation awards under the Federal Vaccine Injury 
Compensation Program for individuals who suffer certain 
injuries following administration ofthe taxable vaccines. This 
program provides a substitute Federal, ``no fault'' insurance system 
for the State-law tort and private liability insurance systems 
otherwise applicable to vaccine manufacturers. All persons immunized 
after September 30, 1998, with covered vaccines must pursue 
compensation under this Federal program before bringing civil tort 
actions under State law.

                           Reasons for Change

    The Committee understands that the present-law tax rates 
applicable to taxable vaccines were chosen to reflect estimated 
probabilities of adverse reactions and the severity of the 
injury that might result from such reactions. The Committee 
understands that medical researchers believe that there is 
insufficient data to support fine gradations of estimates of 
potential harm from the various different childhood vaccines. 
In the light of this scientific assessment, the Committee 
believes some simplicity can be achieved by taxing such 
vaccines at the same rate per dose.
    The Committee further believes it is appropriate to review 
the list of taxable vaccines from time to time as medical 
science advances. The Center for Disease Control has 
recommended that the vaccines for HIB (hemophilus influenza 
type B), Hepatitis B, and varicella (chickenpox) be widely 
administered among the nation's children. In light of the 
growing number of immunizations using these vaccines, the 
Committee adds these vaccines to the list of taxable vaccines.

                        Explanation of Provision

    The bill replaces the present-law excise tax rates, that 
differ by vaccine, with a single rate tax of $0.84 per dose on 
any listed vaccine component. Thus, the bill provides that the 
tax applied to any vaccine that is a combination of vaccine 
components is 84 cents times the number of components in the 
combined vaccine. For example, the MMR vaccine is to be taxed 
at a rate of $2.52 per dose and the DT vaccine is to be taxed 
at rate of $1.68 per dose.
    In addition, the provision adds three new taxable vaccines 
to the present-law taxable vaccines: (1) HIB (hemophilus 
influenza type B); (2) Hepatitis B; and (3) varicella 
(chickenpox). The three newly listed vaccines also are subject 
to the 84-cents per dose excise tax.

                             Effective Date

    The provision is effective for vaccine purchases after 
September 30, 1997. No tax is to be collected or refunds 
permitted for amounts held for sale on October 1, 1997.

4. Treat certain gasoline ``chain retailers'' as wholesale distributors 
 under the gasoline excise tax refund rules (sec. 904 of the bill and 
                         sec. 6416 of the Code)

                              Present Law

    Gasoline is taxed at 18.3 cents per gallon upon removal 
from a registered pipeline or barge terminal facility. The 
position holder in the terminal at the time of removal is 
liable for payment of the tax. Certain uses of gasoline, 
including use by States and local governments, are exempt from 
tax. In general, these exemptions are realized by refunds to 
the exempt users of tax paid by the party that removed the 
gasoline from a terminal facility. Present law includes an 
exception to the general rule that refunds are made to 
consumers in the case of gasoline sold to States and local 
governments and certain other exempt users. In those cases, 
wholesale distributors sell the gasoline net of tax previously 
paid and receive the refunds. The term wholesale distributor 
includes only persons that sell gasoline to producers, 
retailers, or to users in bulk quantities. Retailers do not 
qualify as wholesale distributors, regardless of their size.

                           Reasons for Change

    During recent years, States and local governments 
increasingly have purchased gasoline for their fleets by credit 
card purchases from retail outlets. Previously, these purchases 
were through bulk deliveries to tanks supplying private pumps 
at government installations. Currently, wholesale distributors 
are eligible to claim gasoline tax refunds on behalf of these 
customers. The Committee determined that allowing retail 
businesses of comparable size would adapt the gasoline tax 
rules to current market conditions without creating new 
opportunities for tax evasion.

                        Explanation of Provision

    The definition of wholesale distributor is expanded to 
include certain ``chain retailers''--retailers who own and make 
retail sales from 10 or more retail gasoline outlets. This 
modification conforms the definition of wholesale distributor 
to that which existed before 1987 when the point of collection 
of the gasoline tax was moved from the wholesale distribution 
level to removal from a terminal facility.

                             Effective Date

    The provision is effective after September 30, 1997.

   5. Exemption of electric and other clean-fuel motor vehicles from 
 luxury automobile classification (sec. 905 of the bill and secs. 4001 
                         and 4003 of the Code)

                              Present Law

    Present law imposes an excise tax on the sale of 
automobiles whose price exceeds a designated threshold, 
currently $34,000. The excise tax is imposed at a rate of 8-
percent for 1997 on the excess of the sales price above the 
designated threshold. The 8-percent rate declines by one 
percentage point per year until reaching 3 percent in 2002, and 
no tax thereafter. The$34,000 threshold is indexed for 
inflation. The present-law index of $34,000 is the result of adjusting 
a $30,000 threshold specified in the Code for inflation occurring after 
1990 (sec. 4001(e)).
    The tax generally applies only to the first retail sale 
after manufacture, production, or importation of an automobile. 
It does not apply to subsequent sales of taxable automobiles. A 
10-percent tax is imposed on the separate purchase of vehicle 
and parts and accessories therefor when the sum of the separate 
purchases exceeds the luxury tax threshold (sec. 4003).\52\
---------------------------------------------------------------------------
    \52\ The rate of tax under section 4003 is not determined by 
reference to section 4001. However, a technical correction under the 
bill (Title XV) conforms the tax rate applicable under section 4003 to 
that applicable under section 4001.
---------------------------------------------------------------------------
    The tax under section 4001 applies to sales before January 
1, 2003. The tax under section 4003 has no termination 
date.\53\
---------------------------------------------------------------------------
    \53\ A technical correction under the bill (Title XV) conforms the 
expiration date of the tax under section 4003 to the expiration date 
under section 4001.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that the price of a clean-burning 
fuel vehicle or an electric vehicle does not necessarily 
represent the consumer's purchase of a luxury good in the sense 
intended with the enactment of the luxury excise tax on 
automobiles in the Omnibus Budget Reconciliation Act of 1990. 
Rather, the higher price of such vehicles often represents the 
cost of the technology required to produce an automobile 
designed to provide certain environmental benefits. The 
Committee believes the cost of this technology should not be 
considered a luxury for the purpose of the luxury excise tax on 
automobiles. Therefore, the Committee believes it is 
appropriate to modify the threshold above which the luxury 
automobile excise tax applies in the case of certain clean-
burning fuel vehicles and electric vehicles.

                        Explanation of Provision

    The bill modifies the threshold above which the luxury 
excise tax on automobiles will apply for each of two identified 
classes of automobiles both in the case of a purchase of a 
vehicle and in the case of the separate purchase of a vehicle 
and parts and accessories therefor. First, for an automobile 
that is not a clean-burning fuel vehicle to which retrofit 
parts and components are installed to make the vehicle a clean-
burning vehicle (as defined under sec. 179A(c)(1)(A)), the 
threshold would be $30,000, as adjusted for inflation under 
present law, plus an amount equal to the increment to the 
retail value of the automobile attributable to the retrofit 
parts and components installed. For example, assume that in 
1997, after the date of enactment, an individual purchases a 
clean-burning fuel vehicle for $43,000. Further assume that had 
the individual purchased the identical vehicle, without having 
had certain components replaced to qualify it as clean burning, 
the price paid would have been $39,000. The incremental 
increase in the price of the vehicle due to the installation of 
the qualified property is $4,000, and the luxury tax would be 
applied for the amount paid above a threshold of $38,000 (the 
$34,000 base threshold applicable for 1997 plus $4,000 for the 
value of the incremental components). The tax would apply to 
$5,000 of the sales price ($43,000 less the $38,000 threshold).
    In the case of a passenger vehicle designed to be propelled 
primarily by electricity and built by an original equipment 
manufacturer, the threshold applicable for any year is modified 
to equal 150 percent of $30,000 with the result increased for 
inflation occurring after 1990 and rounded to next lowest 
multiple of $2,000.
    For all other vehicles, the threshold remains equal to that 
provided under present law.

                             Effective Date

    The provision is effective for sales and installations 
occurring on or after the date of enactment.

         B. provisions relating to pensions and other benefits

 1. Cash or deferred arrangements for irrigation and drainage entities 
           (sec. 911 of the bill and sec. 401(k) of the Code)

                              Present Law

    Under present law, taxable and tax-exempt employers may 
maintain qualified cash or deferred arrangements. State and 
local government organizations generally are prohibited from 
establishing qualified cash or deferred arrangements (``section 
401(k) plans''). This prohibition does not apply to qualified 
cash or deferred arrangements adopted by a State or local 
government before May 6, 1986.
    Mutual irrigation or ditch companies are exempt from tax if 
at least 85 percent of the income of the company consists of 
amounts collected from members for the sole purpose of meeting 
losses and expenses.

                           Reasons for Change

    The Committee believes that all mutual irrigation and ditch 
companies and water districts should be permitted to maintain a 
qualified cash or deferred arrangement, regardless of whether 
the company or district is a tax-exempt or taxable entity or 
part of a State or local government.

                        Explanation of Provision

    Under the bill, mutual irrigation or ditch companies and 
districts organized under the laws of a State as a municipal 
corporation for the purpose of irrigation, water conservation 
or drainage (or a national association of such organizations) 
are permitted to maintain qualified cash or deferred 
arrangements, even if the company or district is a State or 
local government organization.

                             Effective Date

    The provision is effective with respect to years beginning 
after December 31, 1997.

 2. Permanent moratorium on application of nondiscrimination rules to 
               governmental plans (sec. 912 of the bill)

                              Present Law

    Under present law, the rules applicable to governmental 
plans require that such plans satisfy certain nondiscrimination 
and minimum participation rules. In general, the rules require 
that a plan not discriminate in favor of highly compensated 
employees with regard to the contribution and benefits provided 
under the plan, participation in the plan, coverage under the 
plan, and compensation taken into account under the plan. The 
nondiscrimination rules apply to all governmental plans; 
qualified retirement plans (including cash or deferred 
arrangements (sec. 401(k) plans) in effect before May 6, 1986) 
and annuity plans (sec. 403(b) plans).
     For purposes of satisfying the nondiscrimination rules, 
the Internal Revenue Service has issued several Notices which 
extended the effective date for compliance for governmental 
plans. Governmental plans will be required to comply with the 
nondiscrimination rules beginning with plan years beginning on 
or after the later of January 1, 1999, or 90 days after the 
opening of the first legislative session beginning on or after 
January 1, 1999, of the governing body with authority to amend 
the plan, if that body does not meet continuously. For plan 
years beginning before the extended effective date, 
governmental plans are deemed to satisfy the nondiscrimination 
requirements.

                           Reasons for Change

    The Committee believes that, because of the unique 
circumstances applicable to governmental plans and the 
complexity of compliance, the moratorium on compliance with the 
nondiscrimination rules should be made permanent.

                        Explanation of Provision

    The bill provides that governmental plans will be exempt 
from the nondiscrimination and minimum participation rules.

                             Effective Date

    The provision is effective for taxable years beginning on 
and after the date of enactment.

3. Treatment of certain disability payments to public safety employees 
            (sec. 913 of the bill and sec. 104 of the Code)

                              Present Law

    Under present law, amounts received under a workmen's 
compensation act as compensation for personal injuries or 
sickness incurred in the course of employment are excluded from 
gross income. Compensation received under a workmen's 
compensation act by the survivors of a deceased employee also 
are excluded from gross income. Nonoccupational death and 
disability benefits are not excludable from income as workmen's 
compensation benefits.

                           Reasons for Change

    The Committee is aware that some State plans were 
structured so that the exclusion for workers' compensation 
benefits was not applicable, and that some benefit recipients 
mistakenly thought the exclusion applied. The Committee 
believes it appropriate to provide relief in such cases.

                        Explanation of Provision

    Under the bill, certain payments made on behalf of full-
time employees of any police or fire department organized and 
operated by a State (or any political subdivision, agency, or 
instrumentality thereof) are excludable from income. The bill 
applies to payments made on account of heart disease or 
hypertension of the employee and that were received in 1989, 
1990, 1991 pursuant to a State law as amended on May 19, 1992, 
which irrebuttably presumed that heart disease and hypertension 
are work-related illnesses, but only for employees separating 
from service before July 1, 1992.
    The bill provides that claims for refund or credit for 
overpayment of tax resulting from the provision could be filed 
up to 1 year after the date of enactment, without regard to the 
otherwise applicable statute of limitations.

                             Effective Date

    The provision is effective on the date of enactment.

1. Portability of permissive service credit under governmental pension 
         plans (sec. 914 of the bill and sec. 415 of the Code)

                              Present Law

    Under present law, limits are imposed on the contributions 
and benefits under qualified pension plans. Certain special 
rules apply in the case of State and local governmental plans.
     In the case of a defined contribution plan, the limit on 
annual additions is the lesser of $30,000 or 25 percent of 
compensation. Annual additions include employer contributions, 
as well as after-tax employee contributions. In the case of a 
defined benefit pension plan, the limit on the annual 
retirement benefit is the lesser of (1) 100 percent of 
compensation or (2) $120,000 (indexed for inflation). The 100 
percent of compensation limitation does not apply in the case 
of State and local governmental pension plans.
    Amounts contributed by employees to a State or local 
governmental plan are treated as made by the employer if the 
employer ``picks up'' the contribution.

                           Reasons for Change

    Many State and local government plans facilitate 
portability of pension benefits by permitting employees to 
purchase credit for service with another governmental employer 
and for certain other service as provided in the plan. The 
Committee believes it appropriate to modify the limits on 
contributions and benefits to encourage portability of benefits 
between governmental plans.

                        Explanation of Provision

    Under the bill, in applying the defined benefit pension 
plan limit, the annual benefit under a State or local 
governmental plan includes the accrued benefit derived from 
contributions to purchase permissive service credit. Such 
contributions are not taken into account in determining annual 
additions.
    Permissive service credit means credit for a period of 
service recognized by the governmental plan if the employee 
contributes to the plan an amount (as determined by the plan) 
which does not exceed the amount necessary to fund the accrued 
benefit attributable to such period of service.
    The bill does not affect the treatment of ``pick up'' 
contributions.

                             Effective Date

    The provision is effective with respect to years beginning 
after December 31, 1997.

 5. Gratuitous transfers for the benefit of employees (sec. 915 of the 
                     bill and sec. 664 of the Code)

                              Present Law

Employee stock ownership plans

    An employee stock ownership plan (``ESOP'') is a qualified 
stock bonus plan or a combination stock bonus and money 
purchase pension plan under which employer securities are held 
for the benefit of employees. The securities, which are held by 
one or more tax-exempt trusts under the plan, may be acquired 
through direct employer contributions or with the proceeds of a 
loan to the trust (or trusts).

Charitable remainder trusts

    A deduction is allowed for Federal estate tax purposes for 
transfers by a decedent to charitable, religious, scientific, 
etc. organizations (Code sec. 2055(a)). In the case of a 
transfer of a remainder interest to a charity, the remainder 
interest must be in a charitable remainder trust (Code sec. 
2055(e)). A charitable remainder trust generally is a trust 
that is required to pay, no less often than annually, a fixed 
dollar amount (charitable remainder annuity trust) or a 
fixedpercentage of the fair market value of the trust's assets 
determined at least annually (charitable remainder unitrust) to 
noncharitable beneficiaries, and the remainder of the trust (i.e., 
after termination of the annuity or unitrust amounts) to a charitable, 
religious, scientific, etc. organization (Code sec. 664).

                           Reasons for Change

    The Committee believes it appropriate to encourage certain 
transfers of stock to an ESOP.

                        Explanation of Provision

In general

    The bill permits certain limited transfers of qualified 
employer securities by charitable remainder trusts to ESOPs 
without adversely affecting the status of the charitable 
remainder trusts under Code section 664. As a result, the bill 
provides that a qualified gratuitous transfer of employer 
securities to an ESOP is deductible from the gross estate of a 
decedent under Code section 2055 to the extent of the present 
value of the remainder interest. In addition, an ESOP will not 
fail to be a qualified plan because it complies with the 
requirements with respect to a qualified gratuitous transfer.

Qualified gratuitous transfer

    In order for a transfer of securities to be a ``qualified 
gratuitous transfer,'' the following requirements must be 
satisfied: (1) the securities transferred must previously have 
passed from the decedent to a charitable remainder trust; (2) 
at the time of the transfer to the ESOP, family members of the 
decedent own (directly or indirectly) no more than 10 percent 
of the value of the outstanding stock of the company; (3) 
immediately after the transfer to the ESOP, the ESOP owns at 
least 60 percent \54\ of the value of outstanding stock of the 
company; and (4) the plan meets certain requirements. In order 
to prevent erosion of the 60-percent ownership requirements, an 
excise tax is imposed on the employer maintaining the ESOP with 
respect to certain dispositions of the transferred stock within 
3 years of the transfer.
---------------------------------------------------------------------------
    \54\ The 60-percent requirement is determined assuming that 
outstanding options have been exercised.
---------------------------------------------------------------------------
    The provision applies in cases in which the ESOP was in 
existence on August 1, 1996, and the decedent dies on or before 
December 31, 1998. The provision does not fail to apply merely 
because the ESOP is amended after August 1, 1996, for example, 
in order to conform to the requirements of the provision.

Plan requirements

    In order for a transfer to qualify as a gratuitous 
transfer, the ESOP must contain certain provisions. First, the 
plan must provide that plan participants are entitled to direct 
the manner in which stock transferred are to be voted (with 
respect to all matters). Transferred securities that have not 
yet been allocated to participants must be voted by a trustee 
that is not a 5-percent owner of the company or a family member 
of the decedent.
    Second, the plan must provide that participants have the 
right to receive distributions in the form of stock and that 
the participant can require the employer to repurchase any 
shares distributed under a fair valuation formula. For this 
purpose, a valuation formula is not considered fair if it takes 
into account a discount for minority interests.
    Finally, the plan must provide that, if the plan is 
terminated before all the transferred stock has been allocated, 
the remaining stock is to be transferred to one or more 
charitable organizations. The employer is subject to an excise 
tax designed to recapture the estate taxes that would have been 
due had the transfer to the ESOP not occurred if the plan is 
terminated and any unallocated shares are not transferred to 
charitable organizations.

Treatment of transferred stock and allocation rules

    No deduction is permitted under section 404 of the Code 
with respect to securities transferred from the charitable 
remainder trust. The nondiscrimination requirements (sec. 
401(a)(4)) normally applicable to qualified plans must be 
satisfied with respect to the securities transferred. The ESOP 
is required to treat the securities transferred as employer 
securities, except for purposes of determining the amount of 
deductible contributions to the plan otherwise permitted by the 
employer. The ESOP is required to allocate the transferred 
securities up to the limit on contributions and benefits (sec. 
415) after allocating any other employer contributions for the 
year; any transferred securities that can not be allocated 
because of the section 415 limits would be held in a suspense 
account and allocated in the same manner in subsequent years. 
Transferred securities are not taken into account in 
determining whether any other contributions satisfy the section 
415 limit. Further, securities transferred to an ESOP by a 
charitable remainder trust cannot be allocated to the account 
of (1) any family member of the decedent, or (2) any employee 
owning more than 5 percent of any class of outstanding stock of 
the corporation issuing the securities (or a member of a 
controlled group of corporations) or the total value of any 
class of outstanding stock of any such corporation. The 
employer is subject to an excise tax if impermissible 
allocations are made.

Definition of qualified employer securities

    Qualified employer securities include only employer 
securities (within the meaning of sec. 409(l) of the Code), 
which are issued by a domestic corporation that has no 
outstanding stock that is readily tradable on an established 
securities market and that has only one class of stock.

                             Effective Date

    The bill applies to transfers made to trusts to, or for the 
use of, an ESOP after the date of enactment.

  6. Treatment of certain transportation on noncommercially operated 
aircraft as a fringe benefit (sec. 916 of the bill and sec. 132 of the 
                                 Code)

                              Present Law

    Under present law, the value of an employer-provided flight 
taken for personal purposes is generally includible in income. 
However, under a special rule in regulations, the value of a 
personal flight is deemed to be zero (and, therefore, there is 
no income inclusion) if at least 50 percent of the regular 
passenger seating capacity of the aircraft is occupied by 
individuals whose flights are primarily for the employer's 
business (and therefore, excludable from income).

                           Reasons for Change

    The Committee believes that the present-law rule for 
valuing flights on employer aircraft unfairly results in 
taxable income in certain cases.

                        Explanation of Provision

    Under the provision, the value of air transportation for 
personal purposes is excludable from income if the flight is 
made in the ordinary course of the trade or business of an 
employer and the flight would have been made whether or not the 
employee was transported on the flight, and the employer incurs 
no substantial additional cost (including foregone revenue) in 
providing the flight to the employee.

                             Effective Date

    The provision is effective for transportation services 
provided after December 31, 1998.

7. Cash out of certain accrued benefits (sec. 917 of the bill and secs. 
                        411 and 417 of the Code)

                              Present Law

    Under present law, in the case of an employee whose plan 
participation terminates, a qualified plan may involuntarily 
``cash out'' the benefit (i.e., pay out the balance to the 
credit of a plan participant without the participant's consent, 
and, if applicable, the consent of the participant's spouse) if 
the present value of the benefit does not exceed $3,500. If a 
benefit is cashed out under this rule and the participant 
subsequently returns to employment covered by the plan, then 
service taken into account in computing benefits payable under 
the plan after the return need not include service with respect 
to which benefits were cashed out unless the employee ``buys 
back'' the benefit.
    Generally, a cash-out distribution from a qualified plan to 
a plan participant can be rolled over, tax free, to an IRA or 
to another qualified plan.

                           Reasons for Change

    The Committee believes that the limit on involuntary cash-
outs should be raised to $5,000 in recognition of the effects 
of inflation and the value of small benefits payable under a 
qualified pension plan.

                        Explanation of Provision

    The bill increases the limit on involuntary cash-outs to 
$5,000 from $3,500. The $5,000 amount is adjusted annually for 
inflation beginning after 1997 (in $50 increments).

                             Effective Date

    The provision is effective for plan years beginning on and 
after the date of enactment.

 8. ESOPS maintained by S corporations (sec. 918 of the bill and secs. 
                       409 and 4975 of the Code)

                              Present Law

    Under present law, an S corporation can have no more than 
75 shareholders. Certain tax-exempt organizations, including 
employee stock ownership plans (``ESOPs'') can be a shareholder 
of an S corporation.
    ESOPs are generally required to make distributions in the 
form of employer securities.
    ESOPs are subject to certain prohibited transaction rules 
designed to prohibit certain transactions between the plan and 
certain persons close to the plan. A number of statutory 
exceptions are provided to the prohibited transaction rules, 
including exceptions for loans between the plan and plan 
participants and certain sales of stock to the ESOP. These 
statutory exceptions do not apply to shareholder-employees of S 
corporations. However, such individuals can obtain an 
administrative exception from such rules from the Department of 
Labor.

                           Reasons for Change

    It is possible that an S corporation may lose its status as 
such if the ESOP is required to give stock to plan 
participants, rather than cash equal to the value of the stock. 
Changes to the prohibited transactions rules are appropriate to 
facilitate the maintenance of an ESOP by an S corporation.

                        Explanation of Provision

    The bill provides that ESOPs of S corporations may 
distribute cash to plan participants. In addition, the bill 
extends the exception to certain prohibited transactions rules 
to S corporations.

                             Effective Date

    The provisions are effective for taxable years beginning 
after December 31, 1997.

                     C. Disaster Relief Provisions

  1. Authority to postpone certain tax-related deadlines by reason of 
  presidentially declared disaster (sec. 921 of the bill and new sec. 
                           7508A of the Code)

                              Present Law

    In the case of a Presidentially declared disaster, the 
Secretary of the Treasury has the authority to postpone some 
(but not all) tax-related deadlines.

                           Reasons for Change

    The Committee believes that the Secretary should have the 
authority to postpone additional tax-related deadlines.

                        Explanation of Provision

    The bill provides that, in the case of a taxpayer 
determined to be affected by a Presidentially declared 
disaster, the Secretary may specify that, for a period of up to 
90 days, certain taxpayer deadlines are postponed. The 
deadlines that may be postponed are the same as are postponed 
by reason of service in a combat zone. The provision does not 
apply for purposes of determining interest on any overpayment 
or underpayment.

                             Effective Date

    The provision is effective for any period for performing an 
act that has not expired before the date of enactment.

2. Use of certain appraisals to establish amount of disaster loss (sec. 
               922 of the bill and sec. 165 of the Code)

                              Present Law

    In order to claim a disaster loss, a taxpayer must 
establish the amount of the loss. This may, for example, be 
done through the use of an appraisal.

                           Reasons for Change

    The Committee believes that no impediment should exist to 
utilizing alternate types of acceptable appraisals.

                        Explanation of Provision

    The bill provides that nothing in the Code should be 
construed to prohibit Treasury from issuing guidance providing 
that an appraisal for the purpose of obtaining a Federal loan 
or Federal loan guarantee as the result of a Presidentially 
declared disaster may be used to establish the amount of a 
disaster loss.

                             Effective Date

    The provision is effective on the date of enactment.

3. Treatment of livestock sold on account of weather-related conditions 
       (sec. 923 of the bill and secs. 451 and 1033 of the Code)

                              Present Law

    In general, cash-method taxpayers report income in the year 
it is actually or constructively received. However, present law 
contains two special rules applicable to livestock sold on 
account of drought conditions. Code section 451(e) provides 
that a cash-method taxpayer whose principal trade or business 
is farming who is forced to sell livestock due to drought 
conditions may elect to include income from the sale of the 
livestock in the taxable year following the taxable year of the 
sale. This elective deferral of income is available only if the 
taxpayer establishes that, under the taxpayer's usual business 
practices, the sale would not have occurred but for drought 
conditions that resulted in the area being designated as 
eligible for Federal assistance. This exception is generally 
intended to put taxpayers who receive an unusually high amount 
of income in one year in the position they would have been in 
absent the drought.
    In addition, the sale of livestock (other than poultry) 
that is held for draft, breeding, or dairy purposes in excess 
of the number of livestock that would have been sold but for 
drought conditions is treated as an involuntary conversion 
under section 1033(e). Consequently, gain from the sale of such 
livestock could be deferred by reinvesting the proceeds of the 
sale in similar property within a two-year period.

                           Reasons for Change

    The Committee believes that the present-law exceptions to 
gain recognition for livestock sold on account of drought 
should apply to livestock sold on account of floods and other 
weather-related conditions as well.

                        Explanation of Provision

    The bill amends Code section 451(e) to provide that a cash-
method taxpayer whose principal trade or business is farming 
and who is forced to sell livestock due not only to drought (as 
under present law), but also to floods or other weather-related 
conditions, may elect to include income from the sale of the 
livestock in the taxable year following the taxable year of 
thesale. This elective deferral of income is available only if the 
taxpayer establishes that, under the taxpayer's usual business 
practices, the sale would not have occurred but for the drought, flood 
or other weather-related conditions that resulted in the area being 
designated as eligible for Federal assistance.
    In addition, the bill amends Code section 1033(e) to 
provide that the sale of livestock (other than poultry) that 
are held for draft, breeding, or dairy purposes in excess of 
the number of livestock that would have been sold but for 
drought (as under present law), flood or other weather-related 
conditions is treated as an involuntary conversion.

                             Effective Date

    The provision applies to sales and exchanges after December 
31, 1996.

  4. Mortgage bond financing for residences located in Presidentially 
declared disaster areas (sec. 924 of the bill and sec. 143 of the Code)

                              Present Law

    Qualified mortgage bonds are private activity tax-exempt 
bonds issued by States and local governments acting as conduits 
to provide mortgage loans to first-time home buyers who satisfy 
specified income limits and who purchase homes that cost less 
than statutory maximums.
    Present law waives the three buyer targeting requirements 
for a portion of the loans made with proceeds of a qualified 
mortgage bond issue if the loans are made to finance homes in 
statutorily prescribed economically distressed areas.

                           Reasons for Change

    The Committee believes that availability of mortgage 
subsidy financing may help survivors of Presidentially declared 
disasters rebuild their homes.

                        Explanation of Provision

    The bill waives the first time homebuyer requirement, the 
income limits, and the purchase price limits for loans to 
finance homes in certain Presidentially declared disaster 
areas. The waiver applies only during the one-year period 
following the date of the disaster declaration.

                             Effective Date

    The provision applies to loans financed with bonds issued 
after December 31, 1996, and before January 1, 2000.

               D. Provisions Relating to Employment Taxes

 1. Employment tax status of distributors of bakery products (sec. 931 
                 of the bill and sec. 3121 of the Code)

                              Present Law

    Under present law, the determination of whether a worker is 
an employee or an independent contractor is generally 
determined under a common-law facts and circumstances test. An 
employer-employee relationship generally exists if the person 
contracting for the services has the right to control not only 
the result of the services, but also the means by which that 
result is accomplished.
    Under a special statutory rule, bakery distributors are 
treated as employees for Social Security payroll tax purposes 
(even if they are independent contractors for income tax 
purposes) if: (1) their services are part of a continuing 
relationship with the person for whom they are performed; (2) 
the distributor's service contract contemplates that he or she 
will perform substantially all of the services personally; and 
(3) the distributor does not have a substantial investment in 
facilities used in the performance of services, excluding 
facilities used for transportation. This provision also applies 
to distributors of meat, vegetable, fruit, and beverage (other 
than milk) products, as well as to distributors of laundry and 
dry cleaning services.
    Bakery drivers generally take the position that they are 
not employees under the statutory rule because they have a 
substantial investment in facilities and their contract of 
service does not contemplate that substantially all services 
are to be performed personally by them.

                           Reasons for Change

    The Committee believes that the special rule for 
determining employment status of bakery drivers is not 
consistent with the current practice of the industry and no 
longer necessary.

                        Explanation of Provision

    The bill deletes distributors of bakery products from the 
list of product and service distributors treated as statutory 
employees for Social Security payroll tax purposes. Thus, the 
status of such workers is determined under the generally 
applicable rules.

                             Effective Date

    The provision is effective for services performed after 
December 31, 1997.

 2. Clarification of standard to be used in determining tax status of 
            retail securities brokers (sec. 932 of the bill)

                              Present Law

    Under present law, whether a worker is an employee or 
independent contractor is generally determined under a common-
law facts and circumstances test. An employer-employee 
relationship is generally found to exist if the service 
recipient has not only the right to control the result to be 
accomplished by the work, but also the means by which the 
result is to be accomplished. The Internal Revenue Service 
(``IRS'') generally takes the position that the presence and 
extent of instructions is important in reaching a conclusion as 
to whether a business retains the right to direct and control 
the methods by which a worker performs a job, but that it is 
also important to consider the weight to be given those 
instructions if they are imposed by the business only in 
compliance with governmental or governing body regulations. The 
IRS training manual provides that if a business requires its 
workers to comply with rules established by a third party 
(e.g., municipal building codes related to construction), the 
fact that such rules are imposed should be given little weight 
in determining the worker's status.

                           Reasons for Change

    Brokerage houses are required to monitor compliance with 
certain investor protection laws. The Committee believes that 
such monitoring should not be taken into account in determining 
the status of a broker for Federal tax purposes.

                        Explanation of Provision

    Under the bill, in determining the status of a registered 
representative of a broker-dealer for Federal tax purposes, no 
weight may be given to instructions from the service recipient 
which are imposed only in compliance with governmental investor 
protection standards or investor protection standards imposed 
by a governing body pursuant to a delegation by a Federal or 
State agency.

                             Effective Date

    The provision is effective with respect to services 
performed after December 31, 1997. No inference is intended 
that the treatment under the proposal is not present law.

  3. Clarification of exemption from self-employment tax for certain 
termination payments received by former insurance salesmen (sec. 933 of 
                  the bill and sec. 1402 of the Code)

                              Present Law

    As part of the Federal Insurance Contributions Act 
(``FICA'') a tax is imposed on employees and employers. The tax 
consists of two parts: old-age, survivor, and disability 
insurance (``OASDI'') and Medicare Hospital Insurance (``HI''). 
For wages paid in 1997, the OASDI tax rate is 6.2 percent of 
wages up to $65,400 (indexed for inflation) on both the 
employer and employee. The HI tax rate on both the employer and 
the employee is 1.45 percent of wages (with no wage cap).
    Similarly, under the self-employment contributions act 
(``SECA''), taxes are imposed on an individual's net earnings 
from self employment. In general, net earnings from self 
employment means the gross income derived by an individual from 
any trade or business carried on by such individual, less the 
deductions allowed which are attributable to such trade or 
business. The SECA tax rate is the same as the combined 
employer and employee FICA rates (i.e., 12.4 percent for OASDI 
and 2.9 percent for HI) and the maximum amount of earnings 
subject to the OASDI portion of SECA taxes is coordinated with 
and is set at the same level as the maximum level of wages and 
salaries subject to the OASDI portion of FICA taxes. There is 
no limit on the amount of self-employment income subject to the 
HI portion of the tax.
    Certain insurance salesmen are independent contractors and 
therefore subject to tax under SECA.
    Under case law, certain payments received by a former 
insurance salesmen who had sold insurance as an independent 
contractor are not net earnings from self employment and 
therefore are not subject to SECA. See, e.g., Jackson v. 
Comm'r, 108 TC____No. 10 (1997); Gump v. U.S., 86 F. 3d 1126 
(CA FC 1996); Milligan v. Comm'r, 38 F. 3d 1094 (9th Cir. 
1994).

                           Reasons for Change

    Clarifying the SECA tax treatment of certain payments would 
provide greater certainty to taxpayers and would reduce the 
need for further litigation.

                        Explanation of Provision

    The bill codifies case law by providing that net earnings 
from self employment do not include any amount received during 
the taxable year from an insurance company on account of 
services performed by such individual as an insurance salesman 
for such company if (1) such amount is received after 
termination of the individual's agreement to perform services 
for the company, (2) the individual performs no services for 
the company after such termination and before the close of the 
taxable year, (3) the amount of the payment depends solely on 
policies sold by the individual during the last year of the 
agreement and the extent to which such policies remain in force 
for some period after such termination, and does not depend on 
the length of service or overall earnings from services 
performed for the company, and (4) the payments are conditioned 
upon the salesman agreeing not to compete with the company for 
at least one year following such termination.
    The bill will also amend the Social Security Act to provide 
that such termination payments are not treated as earnings for 
purposes of determining social security benefits.
    No inference is intended with respect to the SECA tax 
treatment of payments that are not described in the proposal.

                             Effective Date

    The provision is effective with respect to payments after 
December 31, 1997. No inference is intended that the proposal 
is not present law.

 4. Safe harbor for independent contractors (sec. 934 of the bill and 
                       new sec. 3511 of the Code)

                              Present Law

    Under present law, whether a worker is an employee or 
independent contractor is generally determined under a common-
law facts and circumstances test. An employer-employee 
relationship is generally found to exist if the service 
recipient has not only the right to control the result to be 
accomplished by the work, but also the means by which the 
result is to be accomplished. The Internal Revenue Service 
(``IRS'') has developed a set of 20 factors for use in applying 
the common-law test.
    Under a special safe harbor rule (section 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 in fact an employee if the service 
recipient has a reasonable basis for treating the worker as an 
independent contractor and certain other requirements are met. 
Section 530 does not apply to the worker and does not apply for 
income tax purposes. Section 530 does not apply to technical 
services personnel.

                           Reasons for Change

    The present-law rules for determining worker status 
continue to generate controversies between taxpayers and the 
IRS. Because the determination of proper classification of a 
worker is often factual, reasonable people may differ as to the 
correct result given a certain set of facts. Thus, even though 
a taxpayer in good faith determines that a worker is an 
independent contractor, an IRS agent may reach a different 
conclusion by, for example, weighing some of the 20 factors 
differently than the taxpayer. The consequences of 
misclassification can be severe, particularly if the 
misclassification was inadvertent. The Committee believes that 
providing more specific rules for determining worker 
classification will provide greater clarity for taxpayers and 
reduce disputes with the IRS.

                        Explanation of Provision

In general

    The bill provides a statutory safe harbor for determining 
worker classification for Federal tax purposes. If the 
standards set forth in the bill are met, the worker is not 
treated as an employee and the service recipient (or payor) is 
not treated as an employer. If the safe harbor is not 
satisfied, the determination of the worker's status is made 
under the present-law rules.

Standards for determining whether individuals are not employees

    Under the bill, the following three sets of requirements 
have to be satisfied in order for a worker not to be treated as 
an employee: (1) worker requirements regarding the service 
recipient; (2) worker requirements regarding others; and (3) 
documentation requirements. The requirements regarding the 
worker are satisfied if, in connection with performing the 
services, the worker: (1) has a significant investment in 
assets and/or training; (2) incurs significant unreimbursed 
expenses; (3) agrees to perform the services for a particular 
amount of time or to complete a specific result and is liable 
for damages for early termination without cause; (4) is paid 
primarily on a commissioned basis; or (5) purchases products 
for resale.
    The requirements regarding others are satisfied if one of 
the following two requirements is met: (1) a place of business 
requirement; or (2) a services available to the public 
requirement. The place of business requirement is satisfied if 
the worker: (1) has a principal place of business; (2) does not 
primarily perform services in the service recipient's place of 
business; or (3) pays a fair market rent for use of the service 
recipient's place of business. The services available to the 
public requirement is satisfied if the worker is not required 
to perform services exclusively for the service recipient, and 
during the year (or the preceding or subsequent year) the 
worker (1) has performed a significant amount of services for 
other persons; (2) has offered to perform services for other 
persons through advertising, individual written or oral 
solicitations, listings with agencies, brokers, or other 
organizations that provide referrals, or other similar 
activities; or (3) provides service under a business name that 
is registered with (or licensed by) a State or a political 
subdivision (or an agency or instrumentality of a State or 
political subdivision).
    The documentation requirements are satisfied if the 
services performed by the worker are performed pursuant to a 
written contract between the worker and the service recipient 
(or payor) and the contract provides that the worker will not 
be treated as an employee.
    If the service recipient (or payor) fails to file the 
appropriate Federal tax returns (including information returns) 
with respect to a worker for a taxable year, the safe harbor is 
not available for such year. Thus, the classification of the 
worker for the year is determined under the present-law rules.
    If the worker performs services through an entity owned in 
whole or in part by the worker, then the standards under the 
bill may be applied to include the entity as the worker. The 
term service recipient (and payor) does not include any entity 
which is owned in whole or in part by the worker. Thus, the new 
standards do not apply to the relationship between the worker 
and an entity if the worker has any ownership interest in the 
service recipient (or payor) (e.g., if the worker provides 
services through a personal service corporation, the bill does 
not apply with respect to the relationship between the worker 
and the personal service corporation).

                             Effective Date

    The provision is effective with respect to services 
performed after December 31, 1997.

                E. Provisions Relating to Small Business

     1. Delay imposition of penalties for failure to make payments 
electronically through EFTPS until after December 31, 1998 (sec. 941 of 
                  the bill and sec. 6302 of the Code)

                              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) 
\55\). The Electronic Federal Tax Payment System (``EFTPS'') 
was developed by Treasury in response to this requirement.\56\ 
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.
---------------------------------------------------------------------------
    \55\ This requirement was enacted in 1993 (sec. 523 of P.L. 103-
182).
    \56\ Treasury had earlier developed TAXLINK as the prototype for 
EFTPS. TAXLINK has been operational for several years; EFTPS is 
currently operational. Employers currently using TAXLINK will 
ultimately be required to participate in EFTPS.
---------------------------------------------------------------------------
    The new system is phased in over a period of years by 
increasing each year the percentage of total taxes subject to 
the new EFTPS system. For fiscal year 1994, 3 percent of the 
total taxes are required to be made by electronic fund 
transfer. These percentages increased gradually for fiscal 
years 1995 and 1996. For fiscal year 1996, the percentage was 
20.1 percent (30 percent for excise taxes and corporate 
estimated tax payments). For fiscal year 1997, these 
percentages increased significantly, to 58.3 percent (60 
percent for excise taxes and corporate estimated tax payments). 
The specific implementation method required to achieve the 
target percentages is set forth in Treasury regulations. 
Implementation began with the largest depositors.
    Treasury had originally 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. The Small 
Business Job Protection Act of 1996 provided that the increase 
in the required percentages for fiscal year 1997 (which, 
pursuant to Treasury regulations, was to take effect on January 
1, 1997) will not take effect until July 1, 1997.\57\ This was 
done to provide additional time prior to implementation of the 
1997 requirements so that employers could be better informed 
about their responsibilities.
---------------------------------------------------------------------------
    \57\ Sec. 1809 of P.L. 104-188.
---------------------------------------------------------------------------
    On June 2, 1997, the IRS announced \58\ that it will not 
impose penalties through December 31, 1997, on businesses that 
make timely deposits using paper federal tax deposit coupons 
while converting to the EFTPS system.
---------------------------------------------------------------------------
    \58\ IR-97-32.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that it is necessary to provide 
small businesses with additional time prior to implementation 
of the requirements so that these employers may be better 
informed about their responsibilities.

                        Explanation of Provision

    The bill provides that no penalty shall be imposed solely 
by reason of a failure to use EFTPS prior to January 1, 1999, 
if the taxpayer was first required to use the EFTPS system on 
or after July 1, 1997.

                             Effective Date

    The provision is effective on the date of enactment.

  2. Home office deduction: clarification of definition of principal 
   place of business (sec. 942 of the bill and sec. 280A of the Code)

                              Present Law

    A taxpayer's business use of his or her home may give rise 
to a deduction for the business portion of expenses related to 
operating the home (e.g., a portion of rent or depreciation and 
repairs). Code section 280A(c)(1) provides, however, that 
business deductions generally are allowed only with respect to 
a portion of a home that is used exclusively and regularly in 
one of the following ways: (1) as the principal place of 
business for a trade or business; (2) as a place of business 
used to meet with patients, clients, or customers in the normal 
course of the taxpayer's trade or business; or (3) in 
connection with the taxpayer's trade or business, if the 
portion so used constitutes a separate structure not attached 
to the dwelling unit. In the case of an employee, the Code 
further requires that the business use of the home must be for 
the convenience of the employer (sec. 280A(c)(1)).\59\ These 
rules apply to houses, apartments, condominiums, mobile homes, 
boats, and other similar property used as the taxpayer's home 
(sec. 280A(f)(1)). Under Internal Revenue Service (IRS) 
rulings, the deductibility of expenses incurred for local 
transportation between a taxpayer's home and a work location 
sometimes depends on whether the taxpayer's home office 
qualifies under section 280A(c)(1) as a principal place of 
business (see Rev. Rul. 94-47, 1994-29 I.R.B. 6).
---------------------------------------------------------------------------
    \59\ If an employer provides access to suitable space on the 
employer's premises for the conduct by an employee of particular 
duties, then, if the employee opts to conduct such duties at home as a 
matter of personal preference, the employee's use of the home office is 
not ``for the convenience of the employer.'' See e.g., W. Michael 
Mathes, (1990) T.C. Memo 1990-483.
---------------------------------------------------------------------------
    Prior to 1976, expenses attributable to the business use of 
a residence were deductible whenever they were ``appropriate 
and helpful'' to the taxpayer's business. In 1976, Congress 
adopted section 280A, in order to provide a narrower scope for 
the home office deduction, but did not define the term 
``principal place of business.'' In Commissioner v. Soliman, 
113 S.Ct. 701 (1993), the Supreme Court reversed lower court 
rulings and upheld an IRS interpretation of section 280A that 
disallowed a home office deduction for a self-employed 
anesthesiologist who practiced at several hospitals but was not 
provided office space at the hospitals. Although the 
anesthesiologist used a room in his home exclusively to perform 
administrative and management activities for his profession 
(i.e., he spent two or three hours a day in his home office on 
bookkeeping, correspondence, reading medical journals, and 
communicating with surgeons, patients, and insurance 
companies), the Supreme Court upheld the IRS position that the 
``principal place of business'' for the taxpayer was not the 
home office, because the taxpayer performed the ``essence of 
the professional service'' at the hospitals.\60\ Because the 
taxpayer did not meet with patients at his home office and the 
room was not a separate structure, a deduction was not 
available under the second or third exception under section 
280A(c)(1) (described above).
---------------------------------------------------------------------------
    \60\ In response to the Supreme Court's decision in Soliman, the 
IRS revised its Publication 587, Business Use of Your Home, to more 
closely follow the comparative analysis used in Soliman by focusing on 
the following two primary factors in determining whether a home office 
is a taxpayer's principal place of business: (1) the relative 
importance of the activities performed at each business location; and 
(2) the amount of time spent at each location.
---------------------------------------------------------------------------
    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 or product samples of 
the taxpayer's trade or business of selling products at retail 
or wholesale, but only if the home is the sole fixed location 
of such trade or business.
     Home office deductions may not be claimed if they create 
(or increase) a net loss from a business activity, although 
such deductions may be carried over to subsequent taxable years 
(sec. 280A(c)(5)).

                           Reasons for Change

    The Committee believes that the Supreme Court's decision in 
Soliman unfairly denies a home office deduction to a growing 
number of taxpayers who manage their business activities from 
their homes. Thus, the statutory modification adopted by the 
Committee will reduce the present-law bias in favor of 
taxpayers who manage their business activities from outside 
their home, thereby enabling more taxpayers to work efficiently 
at home, save commuting time and expenses, and spend additional 
time with their families. Moreover, the statutory modification 
is an appropriate response to the computer and information 
revolution, which has made it more practical for taxpayers to 
manage trade or business activities from a home office.

                        Explanation of Provision

    Section 280A is amended to specifically provide that a home 
office qualifies as the ``principal place of business'' if (1) 
the office is used by the taxpayer to conduct administrative or 
management activities of a trade or business and (2) there is 
no other fixed location of the trade or business where the 
taxpayer conducts substantial administrative or management 
activities of the trade or business. As under present law, 
deductions will be allowed for a home office meeting the above 
two-part test only if the office is exclusively used on a 
regular basis as a place of business by the taxpayer and, in 
the case of an employee, only if such exclusive use is for the 
convenience of the employer.
    Thus, under the bill, a home office deduction is allowed 
(subject to the present-law ``convenience of the employer'' 
rule governing employees) if a portion of a taxpayer's home is 
exclusively and regularly used to conduct administrative or 
management activities for a trade or business of the taxpayer, 
who does not conduct substantial administrative or management 
activities at any other fixed location of the trade or 
business, regardless of whether administrative or management 
activities connected with his trade or business (e.g., billing 
activities) are performed by others at other locations. The 
fact that a taxpayer also carries out administrative or 
management activities at sites that are not fixed locations of 
the business, such as a car or hotel room, will not affect the 
taxpayer's ability to claim a home office deduction under the 
bill. Moreover, if a taxpayer conducts some administrative or 
management activities at a fixed location of the business 
outside the home, the taxpayer still will be eligible to claim 
a deduction so long as the administrative or management 
activities conducted at any fixed location of the business 
outside the home are not substantial (e.g., the taxpayer 
occasionally does minimal paperwork at another fixed location 
of the business). In addition, a taxpayer's eligibility to 
claim a home office deduction under the bill will not be 
affected by the fact that the taxpayer conducts substantial 
non-administrative or non-management business activities at a 
fixed location of the business outside the home (e.g., meeting 
with, or providing services to, customers, clients, or patients 
at a fixed location of the business away from home).
    If a taxpayer in fact does not perform substantial 
administrative or management activities at any fixed location 
of the business away from home, then the second part of the 
test will be satisfied, regardless of whether or not the 
taxpayer opted not to use an office away from home that was 
available for the conduct of such activities. However, in the 
case of an employee, the question whether an employee chose not 
to use suitable space made available by the employer for 
administrative activities is relevant to determining whether 
the present-law ``convenience of the employer'' test is 
satisfied. In cases where a taxpayer's use of a home office 
does not satisfy the provision's two-part test, the taxpayer 
nonetheless may be able to claim a home officededuction under 
the present-law ``principal place of business'' exception or any other 
provision of section 280A.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1997.

                          f. other provisions

 1. Shrinkage for inventory accounting (sec. 951 of the bill and sec. 
                            471 of the Code)

                              Present Law

    Section 471(a) provides that ``(w)henever in the opinion of 
the Secretary the use of inventories is necessary in order 
clearly to determine the income of any taxpayer, inventories 
shall be taken by such taxpayer on such basis as the Secretary 
may prescribe as conforming as nearly as may be to the best 
accounting practice in the trade or business and as most 
clearly reflecting income.'' Where a taxpayer maintains book 
inventories in accordance with a sound accounting system, the 
net value of the inventory will be deemed to be the cost basis 
of the inventory, provided that such book inventories are 
verified by physical inventories at reasonable intervals and 
adjusted to conform therewith.\61\ The physical count is used 
to determine and adjust for certain items, such as undetected 
theft, breakage, and bookkeeping errors, collectively referred 
to as ``shrinkage.''
---------------------------------------------------------------------------
    \61\ Treas. reg. sec. 1:471-2(d).
---------------------------------------------------------------------------
    Some taxpayers verify and adjust their book inventories by 
a physical count taken on the last day of the taxable year. 
Other taxpayers may verify and adjust their inventories by 
physical counts taken at other times during the year. Still 
other taxpayers take physical counts at different locations at 
different times during the taxable year (cycle counting).
    If a physical inventory is taken at year-end, the amount of 
shrinkage for the year is known. If a physical inventory is not 
taken at year-end, shrinkage through year-end will have to be 
based on an estimate, or not taken into account until the 
following year. In the first decision in Dayton Hudson v. 
Commissioner,\62\ the U.S. Tax Court held that a taxpayer's 
method of accounting may include the use of an estimate of 
shrinkage occurring through year-end, provided the method is 
sound and clearly reflects income. In the second decision in 
Dayton Hudson v. Commissioner,\63\ the U.S. Tax Court adhered 
to this holding. However, the U.S. Tax Court in the second 
decision determined that this taxpayer had not established that 
its method of accounting clearly reflected income. Other cases 
decided by the U.S. Tax Court \64\ have held that taxpayers' 
methods of accounting that included shrinkage estimates do 
clearly reflect income.
---------------------------------------------------------------------------
    \62\ 101 T.C. 462 (1993).
    \63\ T.C. Memo (filed June 11, 1997).
    \64\ Wal-Mart v. Commissioner, T.C. Memo 1997-1 and Kroger v. 
Commissioner, T.C. Memo 1997-2.
---------------------------------------------------------------------------
    The U.S. Tax Court in the second Dayton Hudson opinion 
noted that ``(i)n most cases, generally accepted accounting 
principles (GAAP), consistently applied, will pass muster for 
taxpurposes. The Supreme Court has made clear, however, that 
GAAP does not enjoy a presumption of accuracy that must be rebutted by 
the Commissioner.''

                           Reasons for Change

    The Committee believes that inventories should be kept in a 
manner that clearly reflects income. The Committee also 
believes that it is inappropriate to require a physical count 
of a taxpayer's entire inventory to be taken exactly at year-
end, provided that physical counts are taken on a regular and 
consistent basis. Where physical inventories are not taken at 
year-end, the Committee believes that income will be more 
clearly reflected if the taxpayer makes a reasonable estimate 
of the shrinkage occurring through year-end, rather than simply 
ignoring it.
    The Committee believes that a taxpayer should have the 
opportunity to change its method of accounting to a method that 
keeps inventories using shrinkage estimates, so long as such 
method is sound and clearly reflects income. The Committee does 
not believe that it is appropriate to deny a taxpayer access to 
such a method solely because its current, acceptable method of 
accounting does not utilize shrinkage estimates.

                        Explanation of Provision

    The bill provides that a method of keeping inventories will 
not be considered unsound, or to fail to clearly reflect 
income, solely because it includes an adjustment for the 
shrinkage estimated to occur through year-end, based on 
inventories taken other than at year-end. Such an estimate must 
be based on actual physical counts. Where such an estimate is 
used in determining ending inventory balances, the taxpayer is 
required to take a physical count of inventories at each 
location on a regular and consistent basis. A taxpayer is 
required to adjust its ending inventory to take into account 
all physical counts performed through the end of its taxable 
year.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment.
    A taxpayer is permitted to change its method of accounting 
by this section if the taxpayer is currently using a method 
that does not utilize estimates of inventory shrinkage and 
wishes to change to a method for inventories that includes 
shrinkage estimates based on physical inventories taken other 
than at year-end. Such a change is treated as a voluntary 
change in method of accounting, initiated by the taxpayer with 
the consent of the Secretary of the Treasury, provided the 
taxpayer changes to a permissible method of accounting. The 
period for taking into account any adjustment required under 
section 481 as a result of such a change in method is 4 years.
    No inference is intended by the Committee by the adoption 
of this provision with regard to the validity of any method of 
accounting for inventories under present law.

   2. Treatment of workmen's compensation liability under rules for 
certain personal injury liability assignments (sec. 952 of the bill and 
                         sec. 130 of the Code)

                              Present Law

    Under present law, an exclusion from gross income is 
provided for amounts received for agreeing to a qualified 
assignment to the extent that the amount received does not 
exceed the aggregate cost of any qualified funding asset (sec. 
130). A qualified assignment means any assignment of a 
liability to make periodic payments as damages (whether by suit 
or agreement) on account of a personal injury or sickness (in a 
case involving physical injury or physical sickness), provided 
the liability is assumed from a person who is a party to the 
suit or agreement, and the terms of the assignment satisfy 
certain requirements. Generally, these requirements are that 
(1) the periodic payments are fixed as to amount and time; (2) 
the payments cannot be accelerated, deferred, increased, or 
decreased by the recipient; (3) the assignee's obligation is no 
greater than that of the assignor; and (4) the payments are 
excludable by the recipient under section 104(a)(2) as damages 
on account of personal injuries or sickness. Present law 
provides a separate exclusion under section 104(a)(1) for the 
recipient of amounts received under workmen's compensation acts 
as compensation for personal injuries or sickness, but a 
qualified assignment under section 130 does not include the 
assignment of a liability to make such payments.

                           Reasons for Change

    Structured settlement arrangements are essentially conduit 
arrangements in which the assignor of a liability, the assignee 
(the structured settlement company) and the claimant (recipient 
of benefits) share the economic benefit of the exclusion from 
income provided under present law. The Committee understands 
that some workmen's compensation payments involve periodic 
payments (rather than lump sum payments). The Committee was 
persuaded that additional economic security would be provided 
to workmen's compensation claimants who receive periodic 
payments if the payments are made through a structured 
settlement arrangement, where the payor is generally is subject 
to State insurance company regulation that is aimed at 
maintaining solvency of the company, in lieu of being made 
directly by self-insuring employers that may not be subject to 
comparable solvency-related regulation.

                        Explanation of Provision

    The provision extends the exclusion for qualified 
assignments under Code section 130 to amounts assigned for 
assuming a liability to pay compensation under any workmen's 
compensation act. The provision requires that the assignee 
assume the liability from a person who is a party to the 
workmen's compensation claim, and requires that the periodic 
payment be excludable from the recipient's gross income under 
section 104(a)(1), in addition to the requirements of present 
law.

                             Effective Date

    The provision is effective for workmen's compensation 
claims filed after the date of enactment.

   3. Tax-exempt status for certain State workmen's compensation act 
    companies (sec. 953 of the bill and sec. 501(c)(27) of the Code)

                              Present Law

    In general, the Internal Revenue Service (``IRS'') takes 
the position that organizations that provide insurance for 
their members or other individuals are not considered to be 
engaged in a tax-exempt activity. The IRS maintains that such 
insurance activity is either (1) a regular business of a kind 
ordinarily carried on for profit, or (2) an economy or 
convenience in the conduct of members' businesses because it 
relieves the members from obtaining insurance on an individual 
basis.
    Certain insurance risk pools have qualified for tax 
exemption under Code section 501(c)(6). In general, these 
organizations (1) assign any insurance policies and 
administrative functions to their member organizations 
(although they may reimburse their members for amounts paid and 
expenses); (2) serve an important common business interest of 
their members; and (3) must be membership organizations 
financed, at least in part, by membership dues.
    State insurance risk pools may also qualify for tax exempt 
status under section 501(c)(4) as social welfare organizations 
or under section 115 as serving an essential governmental 
function of a State. In seeking qualification under section 
501(c)(4), insurance organizations generally are constrained by 
the restrictions on the provision of ``commercial-type 
insurance'' contained in section 501(m). Section 115 generally 
provides that gross income does not include income derived from 
the exercise of any essential governmental function and 
accruing to a State or any political subdivision thereof. 
However, the IRS may be reluctant to rule that particular State 
risk-pooling entities satisfy the section 501(c)(4) or 115 
requirements for tax-exempt status.

                           Reasons for Change

    The Committee believes that eliminating uncertainty 
concerning the eligibility of certain State workmen's 
compensation act companies for tax-exempt status will assist 
States in ensuring workmen's compensation coverage for 
uninsured employers with respect to employees in the State.

                        Explanation of Provision

    The provision clarifies the tax-exempt status of any 
organization that is created by State law, and organized and 
operated exclusively to provide workmen's compensation 
insurance and related coverage that is incidental to workmen's 
compensation insurance,\65\ and that meets certain additional 
requirements. The workmen's compensation insurance must be 
required by State law, or be insurance with respect to which 
State law provides significant disincentives if it is not 
purchased by an employer (such as loss of exclusive remedy or 
forfeiture of affirmative defenses such as contributory 
negligence). The organization must provide workmen's 
compensation to any employer in the State (for employees in the 
State or temporarily assigned out-of-State) seeking such 
insurance and meeting other reasonable requirements. The State 
must either extend its full faith and credit to debt of the 
organization or provide the initial operating capital of such 
organization. For this purpose, the initial operating capital 
can be provided by providing the proceeds of bonds issued by a 
State authority; the bonds may be repaid through exercise of 
the State's taxing authority, for example. For periods after 
the date of enactment, the assets of the organization must 
revert to the State upon dissolution. Finally, the majority of 
the board of directors (or comparable oversight body) of the 
organization must be appointed by an official of the executive 
branch of the State or by the State legislature, or by both.
---------------------------------------------------------------------------
    \65\ Related coverage that is incidental to workmen's compensation 
insurance includes liability under Federal workmen's compensation laws, 
for example.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997. No inference is intended as to the 
status of such organizations under present law.

 4. Treatment of certain publicly traded partnerships (sec. 954 of the 
                    bill and sec. 7704 of the Code)

    A publicly traded partnership generally is treated as a 
corporation for Federal tax purposes (sec. 7704). An exception 
to the rule treating the partnership as a corporation applies 
if 90 percent of the partnership's gross income consists of 
``passive-type income,'' which includes (1) interest (other 
than interest derived in a financial or insurance business, or 
certain amounts determined on the basis of income or profits), 
(2) dividends, (3) real property rents (as defined for purposes 
of the provision), (4) gain from the sale or other disposition 
of real property, (5) income and gains relating to minerals and 
natural resources (as defined for purposes of the provision), 
and (6) gain from the sale or disposition of a capital asset 
(or certain trade or business property) held for the production 
of income of the foregoing types (subject to an exception for 
certain commodities income).
    The exception for publicly traded partnerships with 
``passive-type income'' does not apply to any partnership that 
would be described in section 851(a) of the Code (relating to 
regulated investment companies, or ``RICs''), if that 
partnership were a domestic corporation. Thus, a publicly 
traded partnership that is registered under the Investment 
Company Act of 1940 generally is treated as a corporation under 
the provision. Nevertheless, if a principal activity of the 
partnership consists of buying and selling of commodities 
(other than inventory or propertyheld primarily for sale to 
customers) or futures, forwards and options with respect to 
commodities, and 90 percent of the partnership's income is such income, 
then the partnership is not treated as a corporation.
    A publicly traded partnership is a partnership whose 
interests are (1) traded on an established securities market, 
or (2) readily tradable on a secondary market (or the 
substantial equivalent thereof).
    Treasury regulations provide detailed guidance as to when 
an interest is treated as readily tradable on a secondary 
market or the substantial equivalent. Generally, an interest is 
so treated ``if, taking into account all of the facts and 
circumstances, the partners are readily able to buy, sell, or 
exchange their partnership interests in a manner that is 
comparable, economically, to trading on an established 
securities market'' (Treas. Reg. sec. 1.7704-1(c)(1)).
    When the publicly traded partnership rules were enacted in 
1987, a 10-year grandfather rule provided that the provisions 
apply to certain existing partnerships only for taxable years 
beginning after December 31, 1997.\66\ An existing publicly 
traded partnership is any partnership, if (1) it was a publicly 
traded partnership on December 17, 1987, (2) a registration 
statement indicating that the partnership was to be a publicly 
traded partnership was filed with the Securities and Exchange 
Commission with respect to the partnership on or before 
December 17, 1987, or (3) with respect to the partnership, an 
application was filed with a State regulatory commission on or 
before December 31, 1987, seeking permission to restructure a 
portion of a corporation as a publicly traded partnership. A 
partnership that otherwise would be treated as an existing 
publicly traded partnership ceases to be so treated as of the 
first day after December 17, 1987, on which there has been an 
addition of a substantial new line of business with respect to 
such partnership. A rule is provided to coordinate this 
grandfather rule with the exception to the rule treating the 
partnership as a corporation applies if 90 percent of the 
partnership's gross income consists of passive-type income. The 
coordination rule provides that passive-type income exception 
applies only after the grandfather rule ceases to apply 
(whether by passage of time or because the partnership ceases 
to qualify for the grandfather rule).
---------------------------------------------------------------------------
    \66\ Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203), sec. 
10211(c).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that, in important respects, 
publicly traded partnerships generally resemble corporations 
and should be subject to tax as corporations, so long as the 
current corporate income tax applies to corporate entities. 
Nevertheless, in the case of certain publicly traded 
partnerships that were existing on December 17, 1987, and that 
are treated as partnerships under the grandfather rule until 
December 31, 1997, it is appropriate to permit the continuation 
of their status as partnerships, so long as they elect to be 
subject to a tax that is intended to approximate the corporate 
tax they would pay if they were treated as corporations for 
Federal tax purposes.

                        Explanation of Provision

    In the case of an existing publicly traded partnership that 
elects under the provision to be subject to a tax on gross 
income from the active conduct of a trade or business, the rule 
of present law treating a publicly traded partnership as a 
corporation does not apply. An existing publicly traded 
partnership is any publicly traded partnership that is not 
treated as a corporation, so long as such treatment is not 
determined under the passive-type income exception of Code 
section 7704(c)(1). The election to be subject to the tax on 
gross trade or business income, once made, remains in effect 
until revoked by the partnership, and cannot be reinstated.
    The tax is 15 percent of the partnership's gross income 
from the active conduct of a trade or business. The 
partnership's gross trade or business income includes its share 
of gross trade or business income of any lower-tier 
partnership. The tax imposed under the provision may not be 
offset by tax credits.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

5. Exclusion from UBIT for certain corporate sponsorship payments (sec. 
               955 of the bill and sec. 513 of the Code)

                              Present Law

    Although generally exempt from Federal income tax, tax-
exempt organizations 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). Contributions or gifts received by tax-exempt 
organizations generally are not subject to the UBIT. However, 
present-law section 513(c) provides that an activity (such as 
advertising) does not lose its identity as a separate trade or 
business merely because it is carried on within a larger 
complex of other endeavors.\67\ If a tax-exempt organization 
receives sponsorship payments in connection with an event or 
other activity, the solicitation and receipt of such 
sponsorship payments may be treated as a separate activity. The 
Internal Revenue Service (IRS) has taken the position that, 
under some circumstances, such sponsorship payments are subject 
to the UBIT.\68\
---------------------------------------------------------------------------
    \67\ See United States v. American College of Physicians, 475 U.S. 
834 (1986) (holding that activity of selling advertising in medical 
journal was not substantially related to the organization's exempt 
purposes and, as a separate business under section 513(c), was subject 
to tax).
    \68\ See Prop. Treas. Reg. sec. 1.513-4 (issued January 19, 1993, 
EE-74-92, IRB 1993-7, 71). These proposed regulations generally exclude 
from the UBIT financial arrangements under which the tax-exempt 
organization provides so-called ``institutional'' or ``good will'' 
advertising to a sponsor (i.e., arrangements under which a sponsor's 
name, logo, or product line is acknowledged by the tax-exempt 
organization). However, specific product advertising (e.g., 
``comparative or qualitative descriptions of the sponsor's products'') 
provided by a tax-exempt organization on behalf of a sponsor is not 
shielded from the UBIT under the proposed regulations.
---------------------------------------------------------------------------

                           Reasons for Change

    In order to reduce the uncertainty regarding the treatment 
for UBIT purposes of corporate sponsorship payments received by 
tax-exempt organizations, the Committee believes that it is 
appropriate to distinguish sponsorship payments for which the 
donor receives no substantial return benefit other than the use 
or acknowledgment of the donor's name or logo as part of a 
sponsored event (which should not be subject to the UBIT) from 
payments made in exchange for advertising provided by the 
recipient organization (which should be subject to the UBIT).

                        Explanation of Provision

    Under the bill, qualified sponsorship payments received by 
a tax-exempt organization (or State college or university 
described in section 511(a)(2)(B)) are exempt from the UBIT.
    ``Qualified sponsorship payments'' are defined as any 
payment made by a person engaged in a trade or business with 
respect to which the person will receive no substantial return 
benefit other than the use or acknowledgment of the name or 
logo (or product lines) of the person's trade or business in 
connection with the organization's activities.\69\ Such a use 
or acknowledgment does not include advertising of such person's 
products or services--meaning qualitative or comparative 
language, price information or other indications of savings or 
value, or an endorsement or other inducement to purchase, sell, 
or use such products or services. Thus, for example, if, in 
return for receiving a sponsorship payment, an organization 
promises to use the sponsor's name or logo in acknowledging the 
sponsor's support for an educational or fundraising event 
conducted by the organization, such payment will not be subject 
to the UBIT. In contrast, if the organization provides 
advertising of a sponsor's products, the payment made to the 
organization by the sponsor in order to receive such 
advertising will be subject to the UBIT (provided that the 
other, present-law requirements for UBIT liability are 
satisfied).
---------------------------------------------------------------------------
    \69\ In determining whether a payment is a qualified sponsorship 
payment, it is irrelevant whether the sponsored activity is related or 
unrelated to the organization's exempt purpose.
---------------------------------------------------------------------------
    The bill specifically provides that a qualified sponsorship 
payment does not include any payment where the amount of such 
payment is contingent, by contract or otherwise, upon the level 
of attendance at an event, broadcast ratings, or other factors 
indicating the degree of public exposure to an activity. 
However, the fact that a sponsorship payment is contingent upon 
an event actually taking place or being broadcast, in and of 
itself, will not cause the payment to fail to be a qualified 
sponsorship payment. Moreover, mere distribution or display of 
a sponsor's products by the sponsor or the tax-exempt 
organization to the general public at a sponsored event, 
whether for free or for remuneration, will be considered to be 
``use or acknowledgment'' of the sponsor's product lines (as 
opposed to advertising), and thus will not affect the 
determination of whether a payment made by the sponsor is a 
qualified sponsorship payment.
    The provision does not apply to the sale of advertising or 
acknowledgments in tax-exempt organization periodicals. For 
this purpose, the term ``periodical'' means regularly scheduled 
and printed material published by (or on behalf of) the payee 
organization that is not related to and primarily distributed 
in connection with a specific event conducted by the payee 
organization. For example, the provision will not apply to 
payments that lead to acknowledgments in a monthly journal, but 
will apply if a sponsor receives an acknowledgment in a program 
or brochure distributed at a sponsored event.
    The provision specifically provides that, to the extent 
that a portion of a payment would (if made as a separate 
payment) be a qualified sponsorship payment, such portion of 
the payment will be treated as a separate payment. Thus, if a 
sponsorship payment made to a tax-exempt organization entitles 
the sponsor to both product advertising and use or 
acknowledgment of the sponsor's name or logo by the 
organization, then the UBIT will not apply to the amount of 
such payment that exceeds the fair market value of the product 
advertising provided to the sponsor. Moreover, the provision of 
facilities, services or other privileges by an exempt 
organization to a sponsor or the sponsor's designees (e.g., 
complimentary tickets, pro-am playing spots in golf 
tournaments, or receptions for major donors) in connection with 
a sponsorship payment will not affect the determination of 
whether the payment is a qualified sponsorship payment. Rather, 
the provision of such goods or services will be evaluated as a 
separate transaction in determining whether the organization 
has unrelated business taxable income from the event. In 
general, if such services or facilities do not constitute a 
substantial return benefit or if the provision of such services 
or facilities is a related business activity, then the payments 
attributable to such services or facilities will not be subject 
to the UBIT. Moreover, just as the provision of facilities, 
services or other privileges by a tax-exempt organization to a 
sponsor or the sponsor's designees (complimentary tickets, pro-
am playing spots in golf tournaments, or receptions for major 
donors) will be treated as a separate transaction that does not 
affect the determination of whether a sponsorship payment is a 
qualified sponsorship payment, a sponsor's receipt of a license 
to use an intangible asset (e.g., trademark, logo, or 
designation) of the tax-exempt organization likewise will be 
treated as separate from the qualified sponsorship transaction 
in determining whether the organization has unrelated business 
taxable income.
    The exemption provided by the provision will be in addition 
to other present-law exceptions from the UBIT (e.g., the 
exceptions for activities substantially all the work for which 
is performed by volunteers and for activities not regularly 
carried on). No inference is intended as to whether any 
sponsorship payment received prior to 1998 was subject to the 
UBIT.

                             Effective Date

    The provision applies to qualified sponsorship payments 
solicited or received after December 31, 1997.

  6. Timeshare associations (sec. 956 of the bill and sec. 528 of the 
                                 Code)

                              Present Law

    Taxation of homeowners associations making the section 528 
election.--Under present law (sec. 528), condominium management 
associations and residential real estate management 
associations may elect to be taxable at a 30 percent rate on 
their ``homeowners association income'' if they meet certain 
income, expenditure, and organizational requirements.
    ``Homeowners association income'' is the excess of the 
association's gross income, excluding ``exempt function 
income,'' over allowable deductions directly connected with 
non-exempt function gross income. ``Exempt function income'' 
includes membership dues, fees, and assessments for a common 
activity undertaken by association members or owners of 
residential units in the condominium or subdivision. Homeowners 
association income includes passive income (e.g., interest and 
dividends) earned on reserves and fees for use of association 
property (e.g., swimming pools, meeting rooms, etc.).
    For an association to qualify for this treatment, (1) at 
least 60 percent of the association's gross income must consist 
of membership dues, fees, or assessments on owners, (2) at 
least 90 percent of its expenditures must be for the 
acquisition, management, maintenance, or care of ``association 
property,'' and (3) no part of its net earnings can inure to 
the benefit of any private shareholder. ``Association 
property'' means: (1) property held by the association; (2) 
property commonly held by association members; (3) property 
within the association privately held by association members; 
and (4) property held by a governmental unit for the benefit of 
association members. In addition to these statutory 
requirements, Treasury regulations require that the units of 
the association be used for residential purposes. Use is not a 
residential use if the unit is occupied by a person or series 
of persons less than 30 days for more than half of the 
association's taxable year. Treas. reg. sec. 1.528-4(d).
    Taxation of homeowners associations not making the section 
528 election.--Homeowners associations that do not (or cannot) 
make the section 528 election are taxed either as a tax-exempt 
social welfare organization under section 501(c)(4) or as a 
regular C corporation. In order for an organization to qualify 
as a tax-exempt social welfare organization, the organization 
must meet the following three requirements: (1) the association 
must serve a ``community'' which bears a reasonable, 
recognizable relationship to an area ordinarily identified as a 
governmental subdivision or unit; (2) the association may not 
conduct activities directed to exterior maintenance of any 
private residence, and (3) common areas of association 
facilities must be for the use and enjoyment of the general 
public (Rev. Rul. 74-99, 1974-1 C.B. 131).
    Non-exempt homeowners associations are taxed as C 
corporations, except that (1) the association may exclude 
excess assessments that it refunds to its members or applies to 
the subsequent year's assessments (Rev. Rul. 70-604, 1970-2 
C.B. 9); (2) gross income does not include special assessments 
held in a special bank account (Rev. Rul. 75-370, 75-2 C.B. 
25), and (3) assessments for capital improvements are treated 
as non-taxable contributions to capital (Rev. Rul. 75-370, 
1975-2 C.B. 25).
    Taxation of timeshare associations.--Under present law, 
timeshare associations are taxed as regular C corporations 
because (1) they cannot meet the requirement of the Treasury 
regulations for the section 528 election that the units be used 
for residential purposes (i.e., the 30-day rule) and they have 
relatively large amount of services performed for its owners 
(e.g., maid and janitorial services) and (2) they cannot meet 
any of requirements of Rev. Rul. 74-99 for tax-exempt status 
under section 501(c)(4).

                           Reasons for Change

    The Committee understands that the IRS recently has 
challenged the exclusions from gross income of timeshare 
associations of refunds of excess assessments, special 
assessments held in a segregated account, and capital 
assessments as contributions to capital. See P.L.R. 9539001 
(June 8, 1995). The Committee believes that the activities of 
timeshare associations are sufficiently similar to those of 
homeowners associations that they should be similarly taxed. 
Accordingly, the Committee bill would extend the rules for the 
taxation of homeowners associations to timeshare associations, 
except that the rate of tax on timeshare associations is 32 
percent, instead of the 30-percent rate that applies to 
homeowner's associations.

                        Explanation of Provision

    The bill amends section 528 to permit timeshare 
associations to qualify for taxation under that section. 
Timeshare associations would have to meet the requirements of 
section 528 (e.g., the 60 percent gross income, 90 percent 
expenditure, and the non-profit organizational and operational 
requirements). Thus, a qualified timeshare association must 
receive at least 60 percent of its income from membership dues, 
fees and assessments from owners of either (a) timeshare rights 
to use of, or (b) timeshare ownership in, property the 
timeshare association. In addition, at least 90 percent of the 
expenditures of the timeshare association must be for 
activities provided by the association to, or on behalf of, 
members of the timeshare association. No part of the net 
earnings of the timeshare association can inure to the benefit 
(other than by acquiring, constructing, or providing 
management, maintenance, and care of property of the timeshare 
association or rebate of excess membership dues, fees, or 
assessments) of any private shareholder or individual. A member 
of a qualified timeshare association must hold a timeshare 
right to use (or timeshare ownership in) real property of the 
association. A qualified timeshare association cannot be a 
condominium management association. Lastly, in order to 
qualify, the timeshare association must elect to be taxed under 
section 528. Timeshare associations electing to be taxed under 
section 528 are subject to a tax on their ``timeshare 
association income'' at a rate of 32 percent.

                             Effective Date

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

7. Modification of advance refunding rules for certain tax-exempt bonds 
issued by the Virgin Islands (sec. 957 of the bill and sec. 149 of the 
                                 Code)

                              Present Law

Advance refundings

    Generally a governmental bond originally issued after 
December 31, 1985, may be advance refunded one time. An advance 
refunding is any refunding where all of the refunded bonds are 
not redeemed within 90 days after the refunding bonds are 
issued.

Virgin Island bonds

    Under present law, the Virgin Islands is required to secure 
its bonds with a priority first lien claim on specified revenue 
streams rather than being permitted to issue multiple bond 
issues secured on a parity basis by a common pool of revenues. 
Under a proposed non-tax law change, the priority lien 
requirement would be repealed.

                           Reasons for Change

    The Committee believes that an additional advance refunding 
is appropriate in light of changed circumstances with respect 
to these bonds.

                        Explanation of Provision

    One additional advance refunding would be allowed for 
governmental bonds issued by the Virgin Islands that were 
advance refunded before June 9, 1997, if the Virgin Islands 
debt provisions are changed to repeal the current priority 
first lien requirement.

                             Effective Date

    The provision is effective on the date of enactment.

   8. Deferral of gain on certain sales of farm product refiners and 
      processors (sec. 958 of the bill and sec. 1042 of the Code)

                              Present Law

    Under present law, if certain requirements are satisfied, a 
taxpayer may defer recognition of gain on the sale of qualified 
securities to an employee stock ownership plan (``ESOP'') or a 
eligible worker-owed cooperative to the extent that the 
taxpayer reinvests the proceeds in qualified replacement 
property (sec. 1042). Gain is recognized when the taxpayer 
disposes of the qualified replacement property. One of the 
requirements that must be satisfied for deferral to apply is 
that, immediately after the sale, the ESOP must own at least 30 
percent of the stock of the corporation issuing the qualified 
securities. In general, qualified securities are securities 
issued by a domestic C corporation that has no stock 
outstanding that is readily tradeable on an established 
securities market. Deferral treatment does not apply to gain on 
the sale of qualified securities by a C corporation.

                           Reasons for Change

    The Committee believes it appropriate to facilitate the 
transfer of refiners and processors to farmers' cooperatives.

                        Explanation of Provision

    The bill extends the deferral provided under section 1042 
to the sale of stock of a qualified refiner or processor to an 
eligible farmer's cooperative. A qualified refiner or processor 
is a domestic corporation substantially all of the activities 
of which consist of the active conduct of the trade or business 
of refining or processing agricultural or horticultural 
products and which purchases more than one-half of such 
products to be refined or processed from farmers who make up 
the cooperative which is purchasing the stock or the 
cooperative. An eligible farmers' cooperative is an 
organization which is treated as a cooperative for Federal 
income tax purposes and which is engaged in the marketing of 
agricultural or horticultural products.
    The deferral of gain is available only if, immediately 
after the sale, the eligible farmers' cooperative owns 100 
percent of the qualified refiner or processor. The provision 
applies even if the stock of the qualified refiner or processor 
is publicly traded. In addition, the bill applies to gain on 
the sale of stock by a C corporation.

                             Effective Date

    The provision applies to sales after December 31, 1997.

  9. Information returns on real estate transactions (sec. 959 of the 
                   bill and sec. 6045(e) of the Code)

                              Present Law

    Persons who close real estate transactions are required to 
file informational returns with the IRS. There returns, filed 
on Form 1099S, are required to show the name and address of the 
buyer and seller of the real estate, details with regard to the 
gross proceeds of the sale, the portion of any real property 
tax which is treated as a tax imposed on the purchaser, and 
whether or not any financing of the seller was federally-
subsidized indebtedness.

                           Reasons for Change

    The Committee believes that informational returns should 
not generally be required on sales of personal residences where 
the sales price does not exceed the amount eligible to be 
excluded from income.

                        Explanation of Provision

    The bill excludes sales of personal residences with a gross 
sales price of $500,000 or less ($250,000 or less in the case 
of a seller who is not married) from the real estate 
transaction reporting requirement. In order to be eligible for 
this exclusion, the person who would otherwise be required to 
file the informational return must obtain written assurances 
from the seller of the real estate, in a form acceptable to the 
Secretary of the Treasury, that any gain will be exempt from 
Federal income tax under section 121(a) and that no financing 
of the seller was federally-subsidized indebtedness.

                             Effective Date

    The provision is effective for informational returns 
otherwise required to be filed with regard to real estate sales 
occurring after the date of enactment.

   10. Increased deduction for business meals while operating under 
Department of Transportation hours of service limitations (sec. 960 of 
                 the bill and sec. 274(n) of the Code)

                              Present Law

    Ordinary and necessary business expenses, as well as 
expenses incurred for the production of income, are generally 
deductible, subject to a number of restrictions and 
limitations. Generally, the amount allowable as a deduction for 
food and beverage is limited to 50 percent of the otherwise 
deductible amount. Exceptions to this 50 percent rule are 
provided for food and beverages provided to crew members of 
certain vessels and offshore oil or gas platforms or drilling 
rigs.

                           Reasons for Change

    Individuals subject to the hours of service limitations of 
the Department of Transportation are frequently forced to eat 
meals away from home in circumstances where their choice is 
limited, prices comparatively high and the opportunity for 
lavish meals remote. The Committee believes that it is 
appropriate to allow a higher percentage of the cost of food 
and beverages consumed while away from home by these 
individuals to be deducted than is allowed under the general 
rule.

                        Explanation of Provision

    The bill increases to 80 percent the deductible percentage 
of the cost of food and beverages consumed while away from home 
by an individual during, or incident to, a period of duty 
subject to the hours of service limitations of the Department 
of Transportation. The increase in the deductible percentage is 
phased in according to the following schedule:

                                                                        
                                                              Deductible
                 Taxable years beginning in                   percentage
                                                                        
                                                                        
1998, 1999.................................................           55
2000, 2001.................................................           60
2002, 2003.................................................           65
2004, 2005.................................................           70
2006, 2007.................................................           75
2008 and thereafter........................................           80
                                                                        

                             Effective Date

    The provision is effective for taxable years beginning 
after 1997.

11. Treatment of construction allowances provided to lessees (sec. 961 
               of the bill and new sec. 110 of the Code)

                              Present Law

    Depreciation allowances for property used in a trade or 
business generally are determined under the modified 
Accelerated Cost Recovery System (``MACRS'') of section 168. 
Depreciation allowances for improvements made on leased 
property are determined under MACRS, even if the MACRS recovery 
period assigned to the property is longer than the term of the 
lease (sec. 168(i)(8)).\70\ This rule applies regardless 
whether the lessor or lessee places the leasehold improvements 
in service.\71\ If a leasehold improvement constitutes an 
addition or improvement to nonresidential real property already 
placed in service, the improvement is depreciated using the 
straight-line method over a 39-year recovery period, beginning 
in the month the addition or improvement was placed in service 
(secs. 168 (b)(3), (c)(1), (d)(2), and (I)(6)). A lessor of 
leased property that disposes of a leasehold improvement that 
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 lessor at the termination of 
the lease (sec. 168(i)(8)).
---------------------------------------------------------------------------
    \70\ The Tax Reform Act of 1986 modified the Accelerated cost 
Recovery System (``ACRS'') to institute MACRS. Prior to the adoption of 
ACRS by the Economic Recovery Act of 1981, taxpayers were allowed to 
depreciate the various components of a building a separate assets with 
separate useful lives. The use of component depreciation was repealed 
upon the adoption of ACRS. The denial of component depreciation also 
applies under MACRS, as provided by the Tax Reform Act of 1986.
    \71\ Former Code sections 168(f)(6) and 178 provided that in 
certain circumstances, a lessee could recover the cost of leasehold 
improvements made over the remaining term of the lease. These 
provisions were repealed by the Tax Reform Act of 1986.
---------------------------------------------------------------------------
    The gross income of a lessor of real property does not 
include any amount attributable to the value of buildings 
erected, or other improvements made by, a lessee that revert to 
the lessor at the termination of a lease (sec. 109).
    Issues have arisen as to the proper treatment of amounts 
provided to a lessee by a lessor for property to be constructed 
and used by the lessee pursuant to the lease (``construction 
allowances''). Incentive payments have been includible in 
income as accessions to wealth.\72\ However, a coordinated 
issue paper issued by the Internal Revenue Service on October 
8, 1996, provides that amounts received by a lessee from a 
lessor and expended by the lessee on assets owned by the lessor 
were not includible in the lessee's income. The issue paper 
provides that tax ownership is determined by applying a 
``benefits and burdens of ownership'' test and includes an 
examination of the following factors: (1) whether legal title 
passes; (2) how the parties treat the transaction; (3) whether 
an equity interest was acquired in the property; (4) whether 
the contract creates present obligations on the seller to 
execute and deliver a deed and on the buyer to make payments; 
(5) whether the right of possession is vested; (6) who pays 
property taxes; (7) who bears the risk of loss or damage to the 
property; (8) who receives the profits from the operation and 
sale of the property; (9) who carries insurance with respect to 
the property; (10) who is responsible for replacing the 
property; and (11) who has the benefits of any remainder 
interests in the property.
---------------------------------------------------------------------------
    \72\ John B. White, Inc. v. Comm., 55 T.C. 729 (1971), aff'd per 
curiam 458 F. 2d 989 (3d Cir.), cert. denied, 409 U.S. 876 (1972).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee understands that it is common practice for a 
lessor to custom improve retail space for the use by a lessee 
pursuant to a lease. Such leasehold improvements generally may 
be provided by the lessor constructing the improvements to the 
lessee's specifications. Alternatively, the lessee may receive 
a construction allowance from the lessor pursuant to the lease 
in order to build or improve the property. The Committee 
believes that the tax treatment of either case should be the 
same. The Committee understands that the IRS paper on this 
issue reaches a similar conclusion in cases where the lessor is 
treated as the tax owner of the constructed or improved 
property. However, the Committee is concerned that the 
traditional factors cited by the IRS in making the 
determination of who is the tax owner of the property may be 
applied differently by the lessor and the lessee and may lead 
to controversies between the IRS and taxpayers. Thus, the bill 
provides a safe harbor such that it will be assumed that a 
construction allowance is used to construct or improve lessor 
property (and is properly excludible by the lessee) when long-
lived property is constructed and used pursuant to a short-term 
lease. In addition, the bill provides safeguards to ensure that 
lessors and lessees consistently treat the property subject to 
the construction allowance as nonresidential real property.

                        Explanation of Provision

    The bill provides that the gross income of a lessee does 
not include amounts received in cash (or treated as a rent 
reduction) from a lessor under a short-term lease of retail 
space for the purpose of the lessee's construction or 
improvement of qualified long-term real property for use in the 
lessee's trade or business at such retail space. The exclusion 
only applies to the extent the allowance does not exceed the 
amount expended by the lessee on the construction or 
improvement of qualified long-term real property. For this 
purpose, ``qualified long-term real property'' means 
nonresidential real property that is part of, or otherwise 
present at, retail space used by the lessee and that reverts to 
the lessor at the termination of the lease. A ``short-term 
lease'' means a lease or other agreement for the occupancy or 
use of retail space for a term of 15 years or less (as 
determined pursuant to sec. 168(i)(3)). ``Retail space'' means 
real property leased, occupied, or otherwise used by the lessee 
in its trade or business of selling tangible personal property 
or services to the general public.
    The bill provides that lessor will treat the amounts 
expended on the construction allowance as nonresidential real 
property. However, the lessee's exclusion is not dependent upon 
the lessor's treatment of the property as nonresidential real 
property.
    The bill contains reporting requirements to ensure that 
both the lessor and lessee treat such amounts as nonresidential 
real property. Under regulations the lessor and the lessee, 
shall, at such times and in such manner as provided by the 
regulations, furnish to the Secretary of the Treasury 
information concerning the amounts received (or treated as a 
rent reduction), the amounts expended on qualified long-term 
real property, and such other information as the Secretary 
deems necessary to carry out the provisions of the bill. It is 
expected that the Secretary, in promulgating such regulations, 
will attempt to minimize the administrative burdens of 
taxpayers while ensuring compliance with the bill.

                             Effective Date

    The provision applies to leases entered into after the date 
of enactment. No inference is intended as to the treatment of 
amounts that are not subject to the provision.

  12. Treatment of consolidation of certain mutual savings bank life 
 insurance departments (sec. 962 of the bill and sec. 594 of the Code)

                              Present Law

Special rules for mutual savings banks with life insurance business

    Present law provides for special treatment of a mutual 
savings bank conducting a life insurance business in a separate 
life insurance department (Code sec. 594). Under the special 
rule, the insurance and noninsurance businesses of such banks 
are bifurcated, and the tax imposed is the sum of the partial 
taxes computed on (a) the taxable income of the mutual savings 
bank determined without regard to items properly allocable to 
the life insurance business, and (b) the income of the life 
insurance department, calculated in accordance with the rules 
applicable to life insurance companies (subchapter L of the 
Code). This special treatment applies so long as the mutual 
savings bank is authorized under State law to engage in the 
business of issuing life insurance contracts, the life 
insurance business is conducted in a separate department the 
accounts of which are maintained separately from the other 
accounts of the mutual savings bank, and the life insurance 
department would qualify as a life insurance company under Code 
section 816 if it were treated as a separate corporation.

Rules for corporate reorganizations

    Present law provides that certain corporate reorganization 
transactions, including recapitalizations, generally are 
treated as tax-free transactions (sec. 368(a)(1)(E)). No gain 
or loss is recognized if stock or securities in a corporation 
that is a party to a reorganization are (in pursuance of the 
plan of reorganization) exchanged solely for stock or 
securities in that corporation or in another corporation that 
is a party to the reorganization, except that gain (if any) to 
the recipient is recognized to the extent the principal amount 
of securities received exceeds the principal amount of the 
securities surrendered (secs. 354, 356(a)(1)). If such an 
exchange has the effect of distribution of a dividend, then the 
portion of the distributee's gain that does not exceed his 
ratable share of the corporation's earnings and profits is 
treated as a dividend (sec. 356(a)(2)).

Rules for life insurance companies

    A life insurance company generally is permitted to deduct 
the amount of policyholder dividends paid or accrued during the 
taxable year (sec. 808). In the case of a mutual life insurance 
company, the amount of the deduction for policyholder dividends 
is reduced (but not below zero) by the differential earnings 
amount (sec. 809). The term policyholder dividend includes (1) 
any amount paid or credited (including as an increase in 
benefits) if the amount is not fixed in the contract but 
depends on the experience of the company or the discretion of 
the management; (2) excess interest; (3) premium adjustments; 
and (4) experience-rated refunds.

                           Reasons for Change

    The Committee believes that the consolidation of life 
insurance departments of mutual savings banks should not fail 
to be treated as a tax-free consolidation transaction because 
it meets the requirements of State law governing the 
consolidation transaction. Similarly, where the related 
distribution to of cash to policyholders whose policies have 
not lapsed occurs as a requirement of State law, and the 
policyholders have no divisible right to surplus, no right to 
vote or to approve the consolidation transaction, the 
distribution to participating policyholders whose policies were 
in effect immediately before the consolidation should not fail 
to be treated as a policyholder dividend.

                        Explanation of Provision

    The provision provides that the consolidation of two or 
more life insurance departments of mutual savings banks into a 
single life insurance company by requirement of State law is 
treated as a tax-free reorganization described in section 
368(a)(1)(E) (i.e., a recapitalization). Any payments required 
to be made to policyholders in connection with the 
consolidation are treated as policyholder dividends deductible 
by the company under section 808, provided that certain 
requirements are met. The requirements are: (a) the payments 
are only with respect to policies in effect immediately before 
the consolidation; (b) the payments are only with respect to 
policies that are participating (i.e., on which policyholder 
dividends are paid) before and after the consolidation; (c) the 
payments cease with respect to any policy if the policy lapses 
after the consolidation; (d) the policyholders before the 
consolidation had no divisible right to the surplus of any life 
insurance department and had no right to vote; and (e) the 
approval of the policyholders was not required for the 
consolidation. No inference is intended as to the tax treatment 
of (1) consolidation, demutualization or other transactions 
involving, or (2) payments to policyholders of, any insurer or 
financial institution other than the life insurance departments 
of mutual savings banks.

                             Effective Date

    The provision takes effect on December 31, 1991.

   13. Offset of past-due, legally enforceable State tax obligations 
against Federal overpayments (sec. 963 of the bill and sec. 6402 of the 
                                 Code)

                              Present Law

    Overpayments of Federal tax may be credited against any 
liability in respect of an internal revenue tax on the part of 
the person who made the overpayment. Any overpayment not so 
credited may be offset against any past-due support payments 
and past-due legally enforceable debts owed to Federal agencies 
of the person making the overpayment. Any remaining overpayment 
is required to be refunded.

                           Reasons for Change

    The Committee believes that the collection of legally 
enforceable state tax obligations, owed to a State by its 
residents, should be facilitated. However, the Committee also 
believes that the Federal government should not be made a party 
to disputes between a State and residents of another State. 
Consequently, Federal tax overpayments may be offset for this 
purpose only if the return establishing the overpayment shows 
an address within the State seeking the offset.

                        Explanation of Provision

     An overpayment of Federal tax could be offset by the 
amount of any past-due, legally enforceable State tax 
obligation, provided the person making the overpayment has 
shown on the return establishing the overpayment an address 
that is within the State seeking the offset. For this purpose, 
a past-due, legally enforceable State tax obligation is a debt 
which resulted from a judgement rendered by a court of 
competent jurisdiction, or a determination after an 
administrative hearing, which determined an amount of State tax 
to be due and which is no longer subject to judicial review, as 
well as from an assessment the time for which redetermination 
has expired that has not been delinquent for more than 10 
years. A State tax obligation includes any local tax 
administered by the chief tax administration agency of the 
State.
    The Secretary of the Treasury will establish regulations 
prescribing the time and manner in which States may submit 
notices of past-due, legally enforceable State tax obligations 
and may require States to pay a fee to reimburse the Secretary 
for the cost of applying the offset procedure.
    The offset for a past-due, legally enforceable state tax 
obligation of a state resident will apply after the offsets 
provided in present law for internal revenue tax liabilities, 
past-due support, and past-due, legally enforceable obligations 
owed a Federal agency. The Secretary of the Treasury is 
authorized to issue regulations establishing procedures for the 
implementation of this proposal.

                             Effective Date

    The provision is effective for refunds payable after 
December 31, 1998.

14. Exemption of the incremental cost of a clean fuel vehicle from the 
limits on depreciation for vehicles (sec. 964 of the bill and sec. 280F 
                              of the Code)

                              Present Law

    The amount the taxpayer may claim as a depreciation 
deduction for any passenger automobile is limited to: $2,560 
for the first taxable year in the recovery period; $4,100 for 
the second taxable year in the recovery period; $2,450 for the 
third taxable year in the recovery period; and $1,475 for each 
succeeding taxable year in the recovery period. Each of the 
dollar limitations is indexed for inflation after October 1987 
by automobile component of the Consumer Price Index. 
Consequently, the limitations applicable for 1997 are $3,160, 
$5,000, $3,050, and $1,775.

                           Reasons for Change

    The Committee believes that the price of a clean-burning 
fuel vehicle or an electric vehicle does not necessarily 
represent the consumer's purchase of a luxury. Rather, the 
higher price of such vehicles often represents the cost of the 
technology required to produce an automobile designed to 
provide certain environmental benefits. The Committee believes 
the cost of this technology should not be considered a luxury 
for the purpose of the limitation on depreciation that may be 
claimed on passenger automobiles. Therefore, the Committee 
believes it is appropriate to modify the limitation on 
depreciation that may be claimed on passenger automobiles in 
the case of certain clean-burning fuel vehicles and electric 
vehicles.

                        Explanation of Provision

    The bill modifies the section 280F limitation on 
depreciation in the case of qualified clean- burning fuel 
vehicles and certain electric vehicles. With respect to 
qualified clean-burning fuel vehicles, those that are modified 
to permit such vehicle to be propelled by a clean burning fuel, 
the bill generally modifies present-law by applying the current 
limitation to that portion of the vehicles cost not represented 
by the installed qualified clean-burning fuel property. The 
taxpayer may claim an amount otherwise allowable as a 
depreciation deduction on the installed qualified clean- 
burning fuel, without regard to the 280F limitation. Generally, 
this has the same effect as only subjecting the cost of the 
vehicle before modification to the sec. 280F limitations.
    For example, assume that in 1997, after the date of 
enactment, a taxpayer purchases a clean-burning fuel vehicle 
for $43,000. Further assume that had the taxpayer purchased the 
identical vehicle, without having had certain components 
replaced to qualify it as clean burning, the price paid would 
have been $39,000. The cost of the qualified retrofit parts and 
components is $4,000. The depreciation that the taxpayer may 
claim for this vehicle in any year is the depreciation that 
could be claimed under present law section 280F for that 
portion of the vehicle worth $39,000, plus the depreciation 
that can be claimed under section 168 for the $4,000 worth of 
qualified retrofit parts and components.
    In the case of a passenger vehicle designed to be propelled 
primarily by electricity and built by an original equipment 
manufacturer, the base-year limitation amounts of $2,560 for 
the first taxable year in the recovery period, $4,100 for the 
second taxable year in the recovery period, $2,450 for the 
third taxable year in the recovery period, and $1,475 for each 
succeeding taxable year in the recovery period are tripled to 
$7,680, $12,300, $7,350, and $4,425, respectively, and then 
adjusted for inflation after October 1987 by the automobile 
component of the Consumer Price Index.

                             Effective Date

    The provision is effective for property placed in service 
on or after the date of enactment and before January 1, 2005.

 15. Exemption from tax upon death of a policy officer in the line of 
        duty (sec. 965 of the bill and new sec. 138 of the Code)

                              Present Law

    Survivors of military service personnel (such as those 
killed in combat) are generally entitled to survivor benefits 
(38 U.S.C. sec. 1310). These survivor benefits are generally 
exempt from taxation (38 U.S.C. sec. 5301). Survivor means the 
surviving spouse or surviving dependent child of the military 
service personnel.
    Survivor annuity benefits paid under a governmental 
retirement plan to a survivor of a law enforcement officer 
killed in the line of duty are generally includible in income. 
Amounts contributed to the plan by the officer and previously 
included in the officer's income would not be includible in the 
survivor's income.

                           Reasons for Change

    The Committee believes that it is appropriate to apply to 
the survivors of law enforcement officers who are killed in the 
line of duty the rules regarding the taxation of certain 
survivor benefits provided to survivors of military personnel.

                        Explanation of Provision

    The bill generally provides that an amount paid as a 
survivor annuity on account of the death of a law enforcement 
officer who is killed in the line of duty will be excludable 
from income to the extent the survivor annuity is attributable 
to the officer's service as a law enforcement officer. The 
survivor annuity must be provided under a governmental plan to 
the surviving spouse (or former spouse) of the law enforcement 
officer or to a child of the officer.

                             Effective Date

    The provision applies to amounts received in taxable years 
beginning after December 31, 1996, with respect to individuals 
dying after that date.

    16. Temporary suspension of taxable income limit on percentage 
 depletion for marginal production (sec. 966 of the bill and sec. 613A 
                              of the Code)

                              Present Law

    The Code permits taxpayers to recover their investments in 
oil and gas wells through depletion deductions (sec. 613A). In 
the case of certain properties, the deductions may be 
determined using the percentage depletion method. Among the 
limitations that apply in calculating percentage depletion 
deductions is a restriction that these deductions may not 
exceed 65 percent of the taxpayer's taxable income (excluding, 
for this purpose, percentage depletion net operating loss 
carrybacks, and capital loss carrybacks). If a portion of 
percentage depletion deductions are disallowed by this 
limitation, the disallowed amount may be deducted in the 
following year.
    Specific percentage depletion rules apply to oil and gas 
production from ``marginal'' properties. Marginal production is 
defined as domestic crude oil and natural gas production from 
stripper well property or from property substantially all of 
the production from which during the calendar year is heavy 
oil. Stripper well property is property from which the average 
daily production is 15 barrel equivalents or less, determined 
by dividing the average daily production of domestic crude oil 
and domestic natural gas from producing wells on the property 
for the calendar year by the number of wells.

                           Reasons for Change

    The Committee determined that a limited modification of the 
net income limit for marginal oil and gas production is an 
appropriate part of overall national energy security policy.

                        Explanation of Provision

    The 65-percent-of-net-income limitation is suspended for 
domestic oil and gas production from marginal properties during 
taxable years beginning after December 31, 1997, and before 
January 1, 2000.

                             Effective Date

    The provision is effective on the date of enactment.

    g. extension of duty-free treatment under generalized system of 
   preferences; tariff treatment of certain equipment and repair of 
                                vehicles

      1. Generalized System of Preferences (sec. 971 of the bill)

    Section 971 of the bill reauthorizes Title V of the Trade 
Act of 1974, as amended (Generalized System of Preferences, 
``GSP'') for two years to expire on May 31, 1999.

                               Prior Law

    Title V of the Trade Act of 1974, as amended, (Generalized 
System of Preferences), grants authority to the President to 
provide duty-free treatment on imports of eligible articles 
from designated beneficiary developing countries, subject to 
specific conditions and limitations. To qualify for GSP 
privileges each beneficiary country is subject to various 
mandatory and discretionary eligibility criteria. Import 
sensitive products are ineligible for GSP. The President's 
authority to grant GSP benefits expired on May 31, 1997.

                        Explanation of Provision

    The bill reauthorizes the GSP program for two years, to 
expire on May 31, 1999. The bill provides for refunds, upon 
request of the importer, of any duty paid between May 31, 1997, 
and the date of enactment.

                             Effective Date

    The provision is effective upon date of enactment.

2. Temporary suspension of vessel repair duty (shipbuilding) (sec. 972 
          of the bill and sec. 466 of the Tariff Act of 1930)

Present Law

    Section 466 of the Tariff Act of 1930 establishes a 50-
percent duty of repairs made outside the United States to U.S. 
flag vessels.

                           Reasons for Change

    A permanent repeal of the vessel repair statute was 
included in H.R. 2754 during the 104th Congress, the bill to 
implement the Shipbuilding Agreement negotiated under the 
auspices of the Organization for Economic Cooperation and 
Development (``OECD''), in order to meet U.S. obligations under 
that Agreement. H.R. 2754 was never enacted into law.
    The Committee intends that this provision be considered a 
temporary, one-time measure to aid ship operators while the 
Congress continues to try to implement the Shipbuilding 
Agreement. The Committee strongly supports the Shipbuilding 
Agreement and hopes that it can be implemented so that it may 
take effect as soon as possible, with the inclusion at that 
time of a permanent repeal of the vessel repair duty.

                        Explanation of Provision

    The bill suspends for a one-year period beginning on date 
of enactment the current 50-percent duty on repairs to U.S. 
flag vessels made in countries that are signatories to the OECD 
Shipbuilding Agreement.

                             Effective Date

    The provision is effective for repair activities occurring 
for a one-year period beginning on the date of enactment.

 H. United States-Caribbean Basin Trade Partnership Act (secs. 981-988 
                              of the bill)

    Subtitle H of Title IX provides additional trade benefits 
to Caribbean Basin Initiative (CBI) countries comparable to 
tariff and quota treatment under the North American Free Trade 
Agreement (NAFTA) on products not already eligible for CBI 
treatment subject to certain conditions and limitations.

             1. Findings and Policy (sec. 982 of the bill)

                              Present Law

    The CBI program was established by the Caribbean Basin 
Economic Recovery Act (CBERA), which was enacted on August 5, 
1983. This legislation authorized the President to grant duty-
free treatment to the imports of eligible articles from 
designated Caribbean countries. The basic purpose of the CBI 
program, as originally proposed by President Ronald Reagan, was 
to respond to an economic crisis in the Caribbean by 
encouraging industrial development primarily through 
preferential access to the U.S. market. The goal was to promote 
political and social stability in the strategically important 
region. CBI trade benefits were made permanent in 1990.

                        Explanation of Provision

    Section 982 contains findings of the Congress that:
          (1) The United States apparel industry is a major 
        component of the United States manufacturing sector of 
        the United States, employing more than 650,000 people.
          (2) In 1973 the United States apparel industry 
        supplied 88 percent of the garments consumed by 
        Americans, and in 1995 that share fell to less than 50 
        percent.
          (3) Countries in the Western Hemisphere offer the 
        greatest opportunities for increased exports of United 
        States textile and apparel industry.
          (4) Given the greater propensity of countries located 
        in the Western Hemisphere to use United States 
        components and to purchase United States products 
        compared to other countries, increased trade and 
        economic activity between the United States and 
        countries in the Western Hemisphere will create new 
        jobs in the United States as a result of expanding 
        opportunities.
          (5) The Caribbean Basin Initiative represents a 
        permanent commitment by the United States to encourage 
        the development of strong democratic governments and 
        revitalized economies in neighboring countries in the 
        Caribbean Basin region.
          (6) The economic security of the countries in the 
        Caribbean Basin is potentially threatened by the 
        diversion of investment to Mexico as a result of the 
        North America Free Trade Agreement (NAFTA).
          (7) To preserve the U.S. commitment to Caribbean 
        Basin beneficiary countries, and to help further their 
        economic development, it is necessary to offer 
        temporary benefits equivalent to the trade treatment 
        accorded to products of NAFTA members.
          (8) Offering NAFTA equivalent benefits to Caribbean 
        Basin Initiative countries, pending their eventual 
        accession to the NAFTA, will promote the growth of free 
        enterprise and economic opportunity in the region and 
        thereby enhance the national security interests of the 
        United States.
    Section 982 states that it is, therefore, the policy of the 
United States to: (1) assure that the domestic textile and 
apparel industry remains competitive in the global marketplace 
by encouraging the formation and expansion of ``partnerships'' 
between the textile and apparel industry of the United States 
and the textile and apparel industry of various countries 
located in the Western Hemisphere; and, (2) offer Caribbean 
Basin partnership countries tariff and quota treatment 
equivalent to that accorded to products of NAFTA countries, and 
to seek the accession of these partnership countries to the 
NAFTA or a free trade agreement comparable to the NAFTA at the 
earliest possible date, with the goal of achieving full NAFTA 
participation by all Caribbean countries by January 1, 2005. 
This date is consistent with the goals of completing 
negotiations of the ``Free Trade Area of the Americas'' which 
was announced by the hemisphere's leaders at the Summit of the 
Americas in December 1994.

2. Temporary duty and quota treatment provided to partnership countries 
                         (sec. 984 of the bill)

                              Present Law

    Under the CBERA, imports from CBI, except for certain 
products that are statutorily excluded, are granted duty-free 
treatment, subject to specific eligibility requirements. 
Statutorily excluded articles are ineligible for duty-free 
treatment under the CBI. These excluded products are: textile 
and apparel articles that are subject to textile agreements, 
canned tuna, petroleum and petroleum products, footwear, 
handbags, luggage, flat goods, work gloves, and leather-wearing 
apparel. Also excluded are certain watches and watch products.
    Under NAFTA, imports of these products from Mexico 
(excluded from CBI and listed above) receive either declining 
tariff or duty-free and quota-free treatment.

                        Explanation of Provision

    Section 984 of the bill amends section 213(b) of the CBERA 
to provide tariff and quota treatment on imports from CBI 
beneficiary countries of excluded articles that is identical 
totariff and quota treatment accorded like articles imported from 
Mexico under the NAFTA during a temporary period of up to one year.

a. Rules of origin

                              Present Law

    Chapter Four of the NAFTA establishes rules of origin for 
identifying goods that are to be treated as ``originating in 
the territories of the NAFTA parties'' and are therefore 
eligible for preferential treatment accorded to originating 
goods under the NAFTA, including reduced duties and duty-free 
and quota-free treatment.

                        Explanation of Provision

    The bill provides that NAFTA tariff and quota treatment 
would apply to CBI articles which meet NAFTA rules of origin 
(treating the United States and CBI beneficiary countries as 
``parties'' under the agreement for this purpose). Customs 
procedures applicable to exporters under the NAFTA also must be 
met for partnership countries to qualify for parity treatment. 
Imports of articles currently excluded under CBI, which do not 
meet the conditions of NAFTA parity, would continue to be 
excluded from the CBI program.

b. Effective date and termination of temporary treatment

                              Present Law

    CBI trade benefits were made permanent in 1990.

                        Explanation of Provision

    Under section 984 a temporary transitional period would 
begin January 1, 1998, and end on the date that either NAFTA 
accession or a reciprocal free trade agreement enters into 
force with the beneficiary country, or on December 31, 1998, 
whichever is earlier.

c. General review of beneficiary countries

                              Present Law

    Section 212(f) of the CBERA requires the President, every 
three years, to submit to the Congress a complete report 
regarding the operation of the CBI program, including the 
results of a general review of beneficiary countries.

                        Explanation of Provision

    Section 984 of the bill amends section 212(f) of the CBERA 
to provide that the next review takes place one year after the 
effective date of the bill and subsequent reviews occur at 
three year intervals thereafter. The bill requires the 
President to conduct and report to Congress on triennial 
reviews of the benefits accorded under the bill. The review 
will be based on the 17 eligibility criteria listed in section 
212 of the CBERA, as further interpreted by the bill. These 
criteria include intellectual property protection, investment 
protection, market access, worker rights, cooperation in 
administering the program, and the degree to which the country 
follows accepted rules of international trade provided for 
under the World Trade Organization. The President may 
determine, based on the review, whether to withdraw, suspend, 
or limit new parity benefits. Existing authority in the CBERA 
would continue to withdraw, suspend, or limit current benefits 
at any time based on present criteria.
    The Subcommittee is aware that questions periodically arise 
regarding beneficiary countries' adherence to the eligibility 
criteria under section 212 of the CBERA, as amended. As part of 
the implementation of this legislation, the Subcommittee 
expects the President to offer adequate opportunities for 
interested parties to present information concerning CBERA 
beneficiaries' adherence to the eligibility criteria.

d. Safeguards

                              Present Law

    The import relief procedures and authorities under section 
201-204 of the Trade Act of 1974 apply to imports from CBI 
partnership countries, as they do to imports from other 
countries. If CBI imports cause or threaten to cause serious 
injury to the domestic industry producing a like or directly 
competitive article, section 213(e) of the CBERA authorizes the 
President to suspend CBI duty-free treatment and proclaim a 
rate of duty or other relief measures.
    Under NAFTA, the U.S. may invoke a special safeguard 
provision at any time during the tariff phase-out period if a 
NAFTA-origin textile or apparel good is being imported in such 
increased quantities and under such conditions as to cause 
``serious damage, or actual threat thereof,'' to a domestic 
industry producing a like or directly competitive good. The 
President is authorized to either suspend further duty 
reductions or increase the rate of duty to the most-favored-
nation rate for up to three years. The NAFTA also provides for 
a ``quantitative restriction'' safeguard, which the United 
States or Mexico may invoke against ``non-originating'' textile 
or apparel goods, using the standard of ``serious damage, or 
actual threat thereof.''

                        Explanation of Provision

    Normal safeguard authorities under CBERA would apply to 
imports of all products except textiles and apparel. NAFTA 
equivalent safeguard authorities would apply to imports of 
textile and apparel products from CBI countries, except that, 
under the bill, the President would not be obligated to provide 
equivalent trade liberalizing compensation to the exporting 
country.Nothing in this provision is intended to limit the 
rights of the United States or of the Caribbean nations under the 
Uruguay Round Agreement on Textiles and Clothing, especially in light 
of the fact that the binational panel review system established under 
NAFTA does not apply to the Caribbean.

e. Treatment of textile and apparel imports from Caribbean countries 
        and Mexico

            1. GAL Program

                              Present Law

    The ``Special Access Program for Textiles,'' established by 
regulation in February 1986, provides flexible Guaranteed 
Access Levels (GALs) to the U.S. market for textile or apparel 
and ``made up'' textile product categories (not fabric, yarn, 
or other textile products) assembled in CBI countries from 
fabrics wholly formed and cut in the United States, under 
bilateral agreements negotiated at the request of each 
Caribbean government. GALs are separate limits from (and 
usually significantly higher than) standard quota levels, and 
are generally increased upon request of the exporting country.

                        Explanation of Provision

    Section 984 eliminates import restraint and consultation 
levels and duties on textile and apparel articles originating 
in a partnership country. Under the bill, duty-free and quota 
free treatment applies to apparel that is: (1) subject to the 
``GAL'' program, and which meets the NAFTA yarn-forward rule of 
origin; (2) cut and sewn in a partnership country from fabrics 
wholly formed in the United States, from yarns wholly formed in 
the United States; (3) is knit-to-shape from yarns wholly 
formed in the United States; and (4) is made from fabric knit 
in a partnership country from yarn wholly formed in the United 
States. Hand-made, hand-loomed and folklore articles of the 
region also qualify for duty-free and quota-free treatment.
            2. Originating textile and apparel goods

                              Present Law

    Certain textile and apparel articles from major supplying 
CBI countries are subject to import quotas under bilateral 
agreements negotiated on a product-category basis under 
authority of Section 204 of the Agricultural Act of 1956 and in 
accordance with the Uruguay Round Agreement on Textiles and 
Clothing. Articles under quota may be assembled from U.S. and/
or foreign components.

                        Explanation of Provision

    Under section 984, imports of textile and apparel products 
meeting NAFTA rules of origin would receive NAFTA equivalent 
tariff treatment and enter quota-free. There would be no change 
in the treatment of non-originating textile products currently 
subject to import quotas under bilateral and multilateral 
textile agreements.
            3. Trade Preference Levels (TPLs)

                              Present Law

    Appendix 6(B) of the NAFTA provides a limited exception to 
the NAFTA rules of origin for textile and apparel goods. The 
exception takes the form of Tariff Preference Levels (TPLs) 
under which specific quantities of goods from each NAFTA 
country that do not meet NAFTA ``yarn-forward'' rules of origin 
will nonetheless be accorded NAFTA preferential tariff rates. 
Imports of such goods that exceed these quantities will be 
subject to MFN duty rates. Under NAFTA, TPLs are available for 
three broad categories of products: (1) cotton or man-made 
apparel; (2) wool apparel; and (3) goods entered under 
subheading 9802.00.80 of the HTS.

                        Explanation of Provision

    Section 984 authorizes the USTR to establish TPLs for 
Caribbean textile and apparel products which are similar to 
those established for Mexico in the NAFTA. After consulting 
with the domestic industry and other interested parties, USTR 
is authorized to establish TPLs in the following categories at 
specified levels: not more than 45,000,000 square meter 
equivalents of cotton or man-made fiber apparel; not more 
1,500,000 square meter equivalents of wool apparel; and, not 
more than 25,000,000 square meter equivalents of goods entered 
under subheading 9802.00.80 of the HTS.
    The bill requires that these amounts be allocated among the 
seven partnership countries which have the largest volume of 
textile and apparel exports to the United States, based on a 
pro rata share of the volume of their textile and apparel 
exports.

f. Customs procedures and penalties for transshipment

                              Present Law

    Under NAFTA, Parties to the Agreement must observe Customs 
procedures and documentation requirements which are established 
in Chapter 5 of the NAFTA. Requirements regarding Certificates 
of Origin for imports receiving preferential tariffs are 
detailed in Article 502.1 of the NAFTA.

                        Explanation of Provision

    The bill directs the Secretary of the Treasury to prescribe 
regulations that require, as a condition of entry, that any 
importer of record that claims preferential tariff treatment 
for textile and apparel products under the bill must comply 
with requirements similar in all materialrespects to the 
requirements regarding Certificates of Origin contained in 502.1 of the 
NAFTA, for a similar importation from Mexico. In addition, if an 
exporter is determined under the laws of the United States to have 
engaged in illegal transshipment of textile or apparel products from a 
partnership country, then the President shall deny all benefits under 
the bill to such exporter, and to any successors of such exporter, for 
a period of 2 years.

          5. Treatment of sugar imports (sec. 985 of the bill)

                              Present Law

    Under the tariff-rate quota system for sugar, which was 
proclaimed by the President on December 23, 1994, the Secretary 
of Agriculture establishes the quota quantity that can be 
entered at the lower tier import duty-rate. The USTR allocates 
quantities to CBI countries that receive duty-free treatment. 
Imports above the in-quota amount from CBI countries are 
tariffed at the higher over-quota rates.
    The quantity of sugar which may be imported duty-free from 
Mexico is governed by Section A of Annex 703.2 of the NAFTA. 
Under NAFTA, access grows over time to unlimited duty-free 
access for exports of sugar from Mexico beginning in the year 
2009.

                        Explanation of Provision

    Section 985 responds to concerns raised by CBI beneficiary 
governments that additional access to the U.S. sugar market 
could potentially result in a decrease in access for exports of 
sugar from the Caribbean and thereby reduce employment in the 
region. Section 102 requires the President to monitor the 
effects, if any, of the NAFTA on access to the U.S. sugar 
market by CBI beneficiary countries. If the President considers 
that NAFTA implementation is affecting or likely will affect 
market access adversely, the President shall: (1) take action 
by Executive authority after consulting with interested parties 
and appropriate committees, or (2) propose legislation 
necessary or appropriate to ameliorate such effects.

                 6. Rum imports (sec. 986 of the bill)

                              Present Law

    Rum and beverages made with rum are eligible for duty-free 
entry into the United States both under the CBI program and 
NAFTA, provided they meet the CBI or NAFTA rules of origin and 
other requirements. When Caribbean rum is processed in Canada 
into a rum beverage and the beverage is exported from Canada 
into the United States, it is not eligible for duty-free 
treatment under either the CBI or the NAFTA. The beverage is 
ineligible for duty-free treatment under CBI because it is not 
shipped directly from a beneficiary country to the United 
States as the CBI rules require. The beverage does not qualify 
for NAFTA duty-free treatment because the processing in Canada 
is not sufficient to qualify it as a NAFTA ``originating 
good.''

                        Explanation of Provision

    To address this situation Section 986 amends the CBERA to 
accord duty-free treatment to certain beverages imported from 
Canada if: (1) the rum is the growth, product, or manufacture 
of a beneficiary country or the U.S. Virgin Islands; (2) the 
rum is imported directly into Canada, and the beverages made 
from it are imported directly from Canada into the United 
States; and, (3) the rum accounts for at least 90 percent by 
volume of the alcoholic content of the beverages.

7. Meeting of Caribbean Trade Ministers and USTR (sec. 987 of the bill)

                              Present Law

    No provision.

                        Explanation of Provision

    Section 987 directs the President to convene a meeting with 
the trade ministers of CBI beneficiary countries in order to 
establish a schedule of regular meetings, to commence as soon 
as practicable, of the trade ministers and the USTR. The 
purpose of the meetings shall be to further consultations 
between the U.S. and partnership countries concerning the 
likely timing and procedures for initiating negotiations for 
partnership countries to: (1) accede to NAFTA; or (2) enter 
into comprehensive, mutually advantageous trade agreements with 
the United States that contain comparable provisions to the 
NAFTA, and would make substantial progress in achieving the 
negotiation objectives listed in Section 108(b)(5) of Public 
Law 103-182. (These are general trade negotiating objectives 
for future free trade agreements which were included in the 
NAFTA implementing bill.)

                  Title X. Revenue-Increase Provisions

                         A. Financial Products

  1. Require recognition of gain on certain appreciated positions in 
 personal property (sec. 1001(a) of the bill and new sec. 1259 of the 
                                 Code)

                              Present Law

    In general, gain or loss is taken into account for tax 
purposes when realized. Gain or loss generally is realized with 
respect to a capital asset at the time the asset is sold, 
exchanged, or otherwise disposed of. Gain or loss is determined 
by comparing the amount realized with the adjusted basis of the 
particular property sold. In the case of corporate stock, the 
basis of shares purchased at different dates or different 
prices generally is determined by reference to the actual lot 
sold if it can be identified. Special rules under the Code can 
defer or accelerate recognition in certain situations.
    The recognition of gain or loss is postponed for open 
transactions. For example, in the case of a ``short sale'' 
(i.e., when a taxpayer sells borrowed property such as stock 
and closes the sale by returning identical property to the 
lender), no gain or loss on the transaction is recognized until 
the closing of the borrowing.
    Transactions designed to reduce or eliminate risk of loss 
on financial assets generally do not cause realization. For 
example, a taxpayer may lock in gain on securities by entering 
into a ``short sale against the box,'' i.e., when the taxpayer 
owns securities that are the same as, or substantially 
identical to, the securities borrowed and sold short. The form 
of the transaction is respected for income tax purposes and 
gain on the substantially identical property is not recognized 
at the time of the short sale. Pursuant to rules that allow 
specific identification of securities delivered on a sale, the 
taxpayer can obtain open transaction treatment by identifying 
the borrowed securities as the securities delivered. When it is 
time to close out the borrowing, the taxpayer can choose to 
deliver either the securities held or newly-purchased 
securities. The Code provides rules only to prevent taxpayers 
from using short sales against the box to accelerate loss or to 
convert short-term capital gain into long-term capital gain or 
long-term capital loss into short-term capital loss (sec. 
1233(b)).
    Taxpayers also can lock in gain on certain property by 
entering into offsetting positions in the same or similar 
property. Under the straddle rules, when a taxpayer realizes a 
loss on one offsetting position in actively-traded personal 
property, the taxpayer generally can deduct this loss only to 
the extent the loss exceeds the unrecognized gain in the other 
positions in the straddle. In addition, rules similar to the 
short sale rules prevent taxpayers from changing the tax 
character of gains and losses recognized on the offsetting 
positions in a straddle (sec. 1092).
    Taxpayers may engage in other arrangements, such as 
``futures contracts,'' ``forward contracts,'' ``equity swaps'' 
and other ``notional principal contracts'' where the risk of 
loss and opportunity for gain with respect to property are 
shifted to another party (the ``counterparty''). These 
arrangements do not result in the recognition of gain by the 
taxpayer.
    The Code accelerates the recognition of gains and losses in 
certain cases. For example, taxpayers are required each year to 
mark to market certain regulated futures contracts, foreign 
currency contracts, non-equity options, and dealer equity 
options, and to take any capital gain or loss thereon into 
account as 40 percent short-term gain and 60 percent long-term 
gain (sec. 1256).

                           Reasons for Change

    In general, a taxpayer cannot completely eliminate risk of 
loss (and opportunity for gain) with respect to property 
without disposing of the property in a taxable transaction. In 
recent years, however, several financial transactions have been 
developed or popularized which allow taxpayers to substantially 
reduce or eliminate their risk of loss (and opportunity for 
gain) without a taxable disposition. Like most taxable 
dispositions, many of these transactions also provide the 
taxpayer with cash or other property in return for the interest 
that the taxpayer has given up.
     One of these transactions is the ``short sale against the 
box.'' In such a transaction, a taxpayer borrows and sells 
shares identical to the shares the taxpayer holds. By holding 
two precisely offsetting positions, the taxpayer is insulated 
from economic fluctuations in the value of the stock. While the 
short against the box is in place, the taxpayer generally can 
borrow a substantial portion of the value of the appreciated 
long stock so that, economically, the transaction strongly 
resembles a sale of the stock held.
     Other transactions that have been used by taxpayers to 
transfer risk of loss (and opportunity for gain) involve 
entering into notional principal contracts or futures or 
forward contracts to deliver the same stock. For example, a 
taxpayer holding appreciated stock may enter into an ``equity 
swap'' which requires the taxpayer to make payments equal to 
the dividends and any increase in the stock's value for a 
specified period, and entitles the taxpayer to receive payments 
equal to any depreciation in value. The terms of such swaps 
also frequently entitle the shareholder to receive payments 
during the swap period of a market rate of return (e.g., the 
Treasury-bill rate) on a notional principal amount equal to the 
value of the shareholder's appreciated stock, making the 
transaction strongly resemble a taxable exchange of the 
appreciated stock for an interest-bearing asset.

                        Explanation of Provision

General rule

    The bill requires a taxpayer to recognize gain (but not 
loss) upon entering into a constructive sale of any appreciated 
position in stock, a partnership interest or certain debt 
instruments as if such position were sold, assigned or 
otherwise terminated at its fair market value on the date of 
the constructive sale.
    If the requirements for a constructive sale are met, the 
taxpayer would recognize gain in a constructive sale as if the 
position were sold at its fair market value on the date of the 
sale and immediately repurchased. Except as provided in 
Treasury regulations, a constructive sale would generally not 
be treated as a sale for other Code purposes. An appropriate 
adjustment in the basis of the appreciated financial position 
would be made in the amount of any gain realized on 
aconstructive sale, and a new holding period of such position would 
begin as if the taxpayer had acquired the position on the date of the 
constructive sale.
    A taxpayer is treated as making a constructive sale of an 
appreciated position when the taxpayer (or, in certain 
circumstances, a person related to the taxpayer) does one of 
the following: (1) enters into a short sale of the same 
property, (2) enters into an offsetting notional principal 
contract with respect to the same property, or (3) enters into 
a futures or forward contact to deliver the same property. A 
constructive sale under any part of the definition occurs if 
the two positions are in property that, although not the same, 
is substantially identical. In addition, for a taxpayer that 
has entered into a short sale, a notional principal contract or 
a futures or forward contract, the taxpayer is treated as 
making a constructive sale when it acquires the same property 
as the underlying property for the position. Finally, to the 
extent provided in Treasury regulations, a taxpayer is treated 
as making a constructive sale when it enters into one or more 
other transactions, or acquires one or more other positions, 
that have substantially the same effect as any of the 
transactions described.
     The positions of two related persons are treated as 
together resulting in a constructive sale if the relationship 
is one described in section 267 or section 707(b) and the 
transaction is entered into with a view toward avoiding the 
purposes of the provision.
    Whether any part of the constructive sale definition is met 
by one or more appreciated financial positions and offsetting 
transactions generally will be determined as of the date the 
last of such positions or transactions is entered into. More 
than one appreciated financial position or more than one 
offsetting transaction can be aggregated to determine whether a 
constructive sale has occurred. For example, it is possible 
that no constructive sale would result if one appreciated 
financial position and one offsetting transaction were 
considered in isolation, but that a constructive sale would 
result if the appreciated financial position were considered in 
combination with two transactions. Where the standard for a 
constructive sale is met with respect to only a pro rata 
portion of a taxpayer's appreciated financial position (e.g., 
some, but not all, shares of stock), that portion would be 
treated as constructively sold under the provision. If there is 
a constructive sale of less than all of any type of property 
held by the taxpayer, the specific property deemed sold would 
be determined under the rules governing actual sales, after 
adjusting for previous constructive sales under the bill. Under 
the regulations to be issued by the Treasury, either a 
taxpayer's appreciated financial position or its offsetting 
transaction might in some circumstances be disaggregated on a 
non-pro rata basis for purposes of the constructive sale 
determination.
    The bill provides an exception from constructive sale 
treatment for any transaction that is closed before the end of 
the 30th day after the close of the taxable year in which it 
was entered into. This exception does not apply, however, where 
a transaction is closed during the last 60 days of the taxable 
year or within 30 days thereafter unless (1) the taxpayer holds 
the appreciated financial position to which the transaction 
relates (e.g., the stock where the offsetting transaction is a 
short sale) throughout the 60-day period beginning on the date 
the transaction is closed and (2) at no time during such 60-day 
period is the taxpayer's risk of loss reduced (under the 
principles of section 246(c)(4)) by holding positions with 
respect to substantially similar or related property.
    A transaction that has resulted in a constructive sale of 
an appreciated financial position (e.g., a short sale) is not 
to be treated as resulting in a constructive sale of another 
appreciated financial position so long as the taxpayer holds 
the position which was treated as constructively sold. However, 
when that position is assigned, terminated or disposed of by 
the taxpayer, the taxpayer immediately thereafter is treated as 
entering into the transaction that resulted in the constructive 
sale (e.g., the short sale) if it remains open at that time. 
Thus, the transaction can cause a constructive sale of another 
appreciated financial position at any time thereafter. For 
example, assume a taxpayer holds two stock positions and one 
offsetting short sale, and the taxpayer identifies the short 
sale as offsetting one of the stock positions. If the taxpayer 
then sells the stock position that was identified, the 
identified short position would cause a constructive sale of 
the taxpayer's other stock position at that time.

Definitions

    An appreciated financial position is defined as any 
position with respect to any stock, debt instrument, or 
partnership interest, if there would be gain upon a taxable 
disposition of the position for its fair market value. A 
``position'' is defined as an interest, including a futures or 
forward contract, short sale, or option. An exception is 
provided for debt instruments the interest on which is not 
contingent on profits, the borrower's discretion, or similar 
factors and which are not convertible, directly or indirectly, 
into stock. Other debt instruments, including those identified 
as part of a hedging or straddle transaction, are appreciated 
financial positions.
    A notional principal contract is treated as an offsetting 
notional principal contract, and thus, results in a 
constructive sale of an appreciated financial position, if it 
requires the holder of the appreciated financial position to 
pay (or provide a contractual credit for) all or substantially 
all of the investment yield and appreciation on the position 
for a specified period and also gives the holder a right to be 
reimbursed for (or receive credit for) all or substantially all 
of any decline in value of the position.
    A forward contract results in a constructive sale of an 
appreciated financial position only if the forward contract 
provides for delivery of a substantially fixed amount of 
property and a substantially fixed price. Thus, a forward 
contract providing for delivery of an amount of property, such 
as shares of stock, that is subject to significant variation 
under the contract terms does not result in a constructive 
sale.
    A constructive sale does not include a transaction 
involving an appreciated financial position that is marked to 
market, including positions governed by section 475 (mark to 
market for securities dealers) or section 1256 (mark to market 
for futures contracts, options and currency contracts). Nor 
does a constructive sale include any contract for sale of an 
appreciated financial position which is not a ``marketable 
security'' (as defined in section 453(f)) if the contract 
settles within one year after the date it is entered into.

Treasury guidance

    The provision provides regulatory authority to the Treasury 
to treat as constructive salescertain transactions that have 
substantially the same effect as those specified (i.e., short sales, 
offsetting notional principal contracts and futures or forward 
contracts to deliver the same or substantially similar property). Under 
section 7805(b)(2), the Treasury generally is prohibited from issuing 
regulations that are retroactive, unless such regulations are issued 
within 18 months of the date of enactment of the provision.
     It is anticipated that the Treasury will use the 
provision's authority to treat as constructive sales other 
financial transactions that, like those specified in the 
provision, have the effect of eliminating substantially all of 
the taxpayer's risk of loss and opportunity for income or gain 
with respect to the appreciated financial position. Because 
this standard requires reduction of both risk of loss and 
opportunity for gain, it is intended that transactions that 
reduce only risk of loss or only opportunity for gain will not 
be covered. Thus, for example, it is not intended that a 
taxpayer who holds an appreciated financial position in stock 
will be treated as having made a constructive sale when the 
taxpayer enters into a put option with an exercise price equal 
to the current market price (an ``at the money'' option). 
Because such an option reduces only the taxpayer's risk of 
loss, and not its opportunity for gain, the above standard 
would not be met.
    For purposes of the provision, it is not intended that risk 
of loss and opportunity for gain be considered separately. 
Thus, if a transaction has the effect of eliminating a portion 
of the taxpayer's risk of loss and a portion of the taxpayer's 
opportunity for gain with respect to an appreciated financial 
position which, taken together, are substantially all of the 
taxpayer's risk of loss and opportunity for gain, it is 
intended that Treasury regulations will treat this transaction 
as a constructive sale of the position.
    It is anticipated that the Treasury regulations, when 
issued, will provide specific standards for determining whether 
several common transactions will be treated as constructive 
sales. One such transaction is a ``collar''. In a collar, a 
taxpayer commits to an option requiring him to sell a financial 
position at a fixed price (the ``call strike price'') and has 
the right to have his position purchased at a lower fixed price 
(the ``put strike price''). For example, a shareholder may 
enter into a collar for a stock currently trading at $100 with 
a put strike price of $95 and a call strike price of $110. The 
effect of the transaction is that the seller has transferred 
the rights to all gain above the $110 call strike price and all 
loss below the $95 put strike price; the seller has retained 
all risk of loss and opportunity for gain in the range price 
between $95 and $110. A collar can be a single contract or can 
be effected by using a combination of put and call options.
    In order to determine whether collars have substantially 
the same effect as the transactions specified in the provision, 
it is anticipated that Treasury regulations will provide 
specific standards that take into account various factors with 
respect to the appreciated financial position, including its 
volatility. Similarly, it is expected that several aspects of 
the collar transaction will be relevant, including the spread 
between the put and call prices, the period of the transaction, 
and the extent to which the taxpayer retains the right to 
periodic payments on the appreciated financial position (e.g., 
the dividends on collared stock).
    Another common transaction for which a specific regulatory 
standard may be appropriate is a so-called ``in-the-money'' 
option, i.e., a put option where the strike price is 
significantly above the current market price or a call option 
where the strike price is significantly below the current 
market price. For example, if a shareholder purchases a put 
option exercisable at a future date (a so-called ``European'' 
option) with a strike price of $120 with respect to stock 
currently trading at $100, the shareholder has eliminated all 
risk of loss on the position for the option period and assured 
himself of all yield and gain on the stock for any appreciation 
up to $120. In determining whether such a transaction will be 
treated as a constructive sale, it is anticipated that Treasury 
regulations will provide a specific standard that takes into 
account many of the factors described above with respect to 
collars, including the yield and volatility of the stock and 
the period and other terms of the option.
    For collars, options and some other transactions, one 
approach that Treasury might take in issuing regulations is to 
rely on option prices and option pricing models. The price of 
an option represents the payment the market requires to 
eliminate risk of loss (for a put option) and to purchase the 
right to receive yield and gain (for a call option). Thus, 
option pricing offers one model for quantifying both the total 
risk of loss and opportunity for gain with respect to an 
appreciated financial position, as well as the proportions of 
these total amounts that the taxpayer has retained.
    In addition to setting specific standards for treatment of 
these and other transactions, it may be appropriate for 
Treasury regulations to establish ``safe harbor'' rules for 
common financial transactions that do not result in 
constructive sale treatment. An example might be a collar with 
a sufficient spread between the put and call prices, a 
sufficiently limited period and other relevant terms such that, 
regardless of the particular characteristics of the stock, the 
collar probably would not transfer substantially all risk of 
loss and opportunity for gain.

                             Effective Date

    The provision is effective for constructive sales entered 
into after June 8, 1997. A special rule is provided for 
transactions before this date which would have been 
constructive sales under the provision. The positions in such a 
transaction will not be taken into account in determining 
whether a constructive sale after June 8, 1997, has occurred, 
provided that the taxpayer identifies the offsetting positions 
of the earlier transaction within 30 days after the date of 
enactment. The special rule will cease to apply to on the date 
the taxpayer ceases to hold any of the positions so identified.
    In the case of a decedent dying after June 8, 1997, if (1) 
a constructive sale of an appreciated financial position (as 
defined in the proposal) occurred before such date, (2) the 
transaction remains open for not less than two years, and (3) 
the transaction is not closed in a taxable transaction within 
30 days after the date of enactment, such position (and any 
property related to it, under principles of the provision) will 
be treated as property constituting rights to receive income in 
respect of a decedent under section 691.

 2. Election of mark to market for securities traders and for traders 
   and dealers in commodities (sec. 1001(b) of the bill and new sec. 
                          475(d) of the Code)

                              Present Law

    A dealer in securities must compute its income pursuant to 
a mark-to-market method of accounting (sec. 475). Any security 
that is inventory must be included in inventory at its fair 
market value, and any security that is not inventory and that 
is held at year end is treated as sold for its fair market 
value. There is an exception to mark-to-market treatment for 
any security identified as held for investment or not held for 
sale to customers (or a hedge of such a security). For this 
purpose, a ``dealer in securities'' is a person who (1) 
regularly purchases securities from or sells securities to 
customers in the ordinary course of a trade or business, or (2) 
regularly offers to enter into, assume, offset, assign or 
otherwise terminate positions in securities with customers in 
the ordinary course of a trade or business. For this purpose, 
``security'' means any stock in a corporation; any partnership 
or beneficial ownership interest in a widely-held or publicly-
traded partnership or trust; any note, bond, debenture, or 
other evidence of indebtedness; an interest rate, currency or 
equity notional principal contract; any evidence of an interest 
in, or a derivative financial instrument of any security 
described above; and certain positions identified as hedges of 
any of the above. Any gain or loss taken into account under 
these provisions generally is treated as ordinary gain or loss.
    Traders in securities generally are taxpayers who engage in 
a trade or business involving active sales or exchanges of 
securities on the market, rather than to customers. The mark-
to-market treatment applicable to securities dealers does not 
apply to traders in securities or to dealers in other property.

                           Reasons for Change

    Mark-to-market accounting generally provides a clear 
reflection of income with respect to assets that are traded in 
established markets. For market-valued assets, mark-to-market 
accounting imposes few burdens and offers few opportunities for 
manipulation. Securities and exchange-traded commodities have 
determinable market values, and securities traders and 
commodities traders and dealers regularly calculate year-end 
values of their assets in determining their income for 
financial statement purposes. Many commodities dealers also 
utilize year-end values in adjusting their inventory using the 
lower-of-cost-or-market method for Federal income tax purposes.

                        Explanation of Provision

    The bill allows securities traders and commodities traders 
and dealers to elect application of the mark-to-market 
accounting rules, which apply only to securities dealers under 
present law. All securities held by an electing taxpayer in 
connection with a trade or business as a securities trader, and 
all commodities held by an electing taxpayer in connection with 
a trade or business as a commodities dealer or trader, are 
subject to mark-to-market treatment. The taxpayer is allowed to 
identify property not held in connection with its trade or 
business as not subject to the election. As for securities 
dealers under present law, gain or loss recognized by an 
electing taxpayer under the provision is ordinary gain or loss.
    With respect to a commodities dealer, all of the provisions 
of present law section 475 apply as if commodities were 
securities. Commodities for purposes of the provision would 
include only commodities of a kind customarily dealt in on an 
organized commodities exchange. It is anticipated that Treasury 
regulations will provide that section 475(c)(4), which prevents 
a dealer from treating certain notional principal contracts and 
other derivative financial instruments as held for investment, 
will apply only to contacts and instruments referenced to 
commodities in the case of a commodities dealer.
    For securities traders, some of the provisions of present 
law section 475 apply, but others that are specific to dealers 
do not. For example, because a securities trader does not hold 
inventory, the mark-to-market rules for inventory are not 
applicable to traders. In addition, securities that are not 
held in connection with the trade or business of a securities 
trader are excluded from mark-to-market treatment if the trader 
identifies the securities in the trader's records before the 
close of the day on which they are acquired under rules similar 
to those of section 475(b)(2) for dealers. The provisions 
applicable to securities traders apply to commodities traders 
as if commodities were securities.
    The election is to be made separately with respect to the 
taxpayer's entire business as (1) a securities trader, (2) a 
commodities trader, or (3) a commodities dealer. Thus, a 
taxpayer that is both a commodities dealer and a securities 
trader may make the election with respect to one business, but 
not the other. The election will be made in the time and manner 
prescribed by the Secretary of the Treasury and will be 
effective for the taxable year for which it is made and all 
subsequent taxable years, unless revoked with the consent of 
the Secretary.

                             Effective Date

    The provision would apply to taxable years of securities 
traders ending after the date of enactment. For a taxpayer 
making the election, the adjustments required under section 481 
as a result of the change in accounting method are required to 
be taken into account ratably over a four-year period.
    For elections made for the first taxable year ending after 
the date of enactment, the taxpayer must identify the 
securities or commodities to which the election will apply 
within 30 days of the date of enactment.

 3. Limitation on exception for investment companies under section 351 
          (sec. 1002 of the bill and sec. 351(e) of the Code)

                              Present Law

    A contribution of property to a corporation does not result 
in gain or loss to the contributing shareholder if the 
contributor is part of a group of contributors who own 80 
percent of the voting stock of each class of stock entitled to 
vote. A contribution of property to a partnership generally 
does not result in recognition of gain or loss to the 
contributing partner.
    Certain Code sections provide exceptions to the general 
rule for deferral of pre-contribution gain and loss. Gain or 
loss is recognized upon a contribution by a shareholder to a 
corporation that is an investment company (sec. 351(e)(1)). 
Gain, but not loss, is recognized upon a contribution by a 
partner to a partnership that would be treated as an investment 
companyif the partnership were a corporation (sec. 721(b)). 
Under Treasury regulations, a contribution of property by a shareholder 
to a corporation, or by a partner to a partnership, is treated as a 
transfer to an investment company only if (1) the contribution results, 
directly or indirectly, in a diversification of the transferor's 
interests, and (2) the transferee is (a) a regulated investment company 
(``RIC''), (b) a real estate investment trust (``REIT''), or (c) a 
corporation more than 80 percent of the assets of which by value 
(excluding cash and non-convertible debt instruments) are readily 
marketable stocks or securities or interests in RICs or REITs that are 
held for investment (Treas. reg. sec. 1.351-1(c)(1)).

                           Reasons for Change

    Under present law and regulations, a partnership or a 
corporation is not treated as an investment company even though 
more than 80 percent of its assets are a combination of readily 
marketable stock and securities and other high-quality 
investment assets of determinable values, such as non-
convertible debt instruments, notional principal contracts, 
foreign currency and interests in metals. Thus, under present 
law, a partner may contribute stock, securities or other assets 
to an investment partnership, and a shareholder may contribute 
such assets to a corporation (e.g., a RIC) and, without current 
taxation, receive an interest in an entity that is essentially 
a pool of high-quality investment assets. Where, as a result of 
such a transaction, the partner or shareholder has diversified 
or otherwise changed the nature of the financial assets in 
which it has an interest, the transaction has the effect of a 
taxable exchange. Of particular concern to the Committee is the 
reappearance of so-called ``swap funds,'' which are 
partnerships or RICs that are structured to fall outside the 
definition of an investment company, and thereby allow 
contributors to make tax-free contributions of stock and 
securities in exchange for an interest in an entity that holds 
similar assets.

                        Explanation of Provision

    The bill modifies the definition of an investment company 
for purposes of determining whether a transfer of property to a 
partnership or corporation results in gain recognition (secs. 
351(e) and 721(b)) by requiring that certain assets be taken 
into account for purposes of the definition, in addition to 
marketable stock and securities as under present law.
    Under the bill, an investment company includes a RIC or 
REIT as under present law. In addition, under the bill, an 
investment company includes any corporation or partnership if 
more than 80 percent of its assets by value consist of money, 
financial instruments, foreign currency, interests in REITs, 
RICs, common trust funds and publicly-traded partnerships, and 
certain interests in precious metals and entities that hold the 
above-listed items.\1\ In addition, the bill grants regulatory 
authority to the Treasury to add other assets to the list set 
out in the provision.
---------------------------------------------------------------------------
    \1\ Where assets are defined by reference to provisions of section 
731(c)(2), it is intended that the Treasury regulations promulgated 
under those provisions will also be applicable.
---------------------------------------------------------------------------
    The bill is intended to change only the types of assets 
considered in the definition of an investment company in the 
present Treasury regulations (Treas. reg. sec. 1.351-
1(c)(1)(ii)) and not to override the other provisions of those 
regulations. For example, the bill does not override (1) the 
requirement that only assets held for investment are considered 
for purposes of the definition (Treas. reg. sec. 1.351-
1(c)(3)), (2) the rule treating the assets of a subsidiary as 
owned proportionally by a parent owning 50 percent or more of 
its stock (Treas. reg. sec. 1.351-1(c)(4)), (3) the requirement 
that the investment company determination consider any plan 
with regard to an entity's assets in existence at the time of 
transfer (Treas. reg. sec. 1.351-1(c)(2)), and (4) the 
requirement that a contribution of property to an investment 
company result in diversification in order for gain to be 
recognized (Treas. reg. sec. 1.351-1(c)(1)(i)).

                             Effective Date

    The provision applies to all transfers after June 8, 1997, 
in taxable years ending after such date. An exception is 
provided for transfers of a fixed amount of securities made 
pursuant to a binding written contract in effect on June 8, 
1997, and at all times thereafter until the transfer.

  4. Disallowance of interest on indebtedness allocable to tax-exempt 
      obligations (sec. 1003 of the bill and sec. 265 of the Code)

                              Present Law

In general

    Present law disallows a deduction for interest on 
indebtedness incurred or continued to purchase or carry 
obligations the interest on which is not subject to tax (tax-
exempt obligations) (sec. 265). This rule applies to tax-exempt 
obligations held by individual and corporate taxpayers. The 
rule also applies to certain cases in which a taxpayer incurs 
or continues indebtedness and a related person acquires or 
holds tax-exempt obligations.\2\
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    \2\ Code section 7701(f) (as enacted in the Deficit Reduction Act 
of 1984 (sec. 53(c) of P.L. 98-369)) provides that the Treasury 
Secretary shall prescribe such regulations as may be necessary or 
appropriate to prevent the avoidance of any income tax rules which deal 
with linking of borrowing to investment or diminish risk through the 
use of related persons, pass-through entities, or other intermediaries.
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Application to non-financial corporations

    General guidelines.--In Rev. Proc. 72-18, 1972-1 C.B. 740, 
the IRS provided guidelines for application of the disallowance 
provision to individuals, dealers in tax-exempt obligations, 
other business enterprises, and banks in certain situations. 
Under Rev. Proc. 72-18, a deduction is disallowed only when 
indebtedness is incurred or continued for the purpose of 
purchasing or carrying tax-exempt obligations.
    This purpose may be established either by direct or 
circumstantial evidence. Direct evidence of a purpose to 
purchase tax-exempt obligations exists when the proceeds 
ofindebtedness are directly traceable to the purchase of tax-exempt 
obligations or when such obligations are used as collateral for 
indebtedness. In the absence of direct evidence, a deduction is 
disallowed only if the totality of facts and circumstances establishes 
a sufficiently direct relationship between the borrowing and the 
investment in tax-exempt obligations.
    Two-percent de minimis exception.--In the case of an 
individual, interest on indebtedness generally is not 
disallowed if during the taxable year the average adjusted 
basis of the tax-exempt obligations does not exceed 2 percent 
of the average adjusted basis of the individual's portfolio 
investments and trade or business assets. In the case of a 
corporation other than a financial institution or a dealer in 
tax-exempt obligations, interest on indebtedness generally is 
not disallowed if during the taxable year the average adjusted 
basis of the tax-exempt obligations does not exceed 2 percent 
of the average adjusted basis of all assets held in the active 
conduct of the trade or business. These safe harbors are 
inapplicable to financial institutions and dealers in tax-
exempt obligations.
    Interest on installment sales to State and local 
governments.--If a taxpayer sells property to a State or local 
government in exchange for an installment obligation, interest 
on the obligation may be exempt from tax. Present law has been 
interpreted to not disallow interest on a taxpayer's 
indebtedness if the taxpayer acquires nonsalable tax-exempt 
obligations in the ordinary course of business in payment for 
services performed for, or goods supplied to, State or local 
governments.\3\
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    \3\ R.B. George Machinery Co., 26 B.T.A. 594 (1932) acq. C.B.XI-2, 
4; Rev. Proc. 72-18, as modified by Rev. Proc. 87-53, 1987-2 C.B. 669.
---------------------------------------------------------------------------

Application to financial corporations and dealers in tax-exempt 
        obligations

    In the case of a financial institution, the allocation of 
the interest expense of the financial institution (which is not 
otherwise allocable to tax-exempt obligations) is based on the 
ratio of the average adjusted basis of the tax-exempt 
obligations acquired after August 7, 1987, to the average 
adjusted basis of all assets of the taxpayer (sec. 265). In the 
case of an obligation of an issuer which reasonably anticipates 
to issue not more than $10 million of tax-exempt obligations 
(other than certain private activity bonds) within a calendar 
year (the ``small issuer exception''), only 20 percent of the 
interest allocable to such tax-exempt obligations is disallowed 
(sec. 291(a)(3)). A similar pro rata rule applies to dealers in 
tax-exempt obligations, but there is no small issuer exception, 
and the 20-percent disallowance rule does not apply (Rev. Proc. 
72-18).

Treatment of insurance companies

    Present law provides that a life insurance company's 
deduction for additions to reserves is reduced by a portion of 
the company's income that is not subject to tax (generally, 
tax-exempt interest and deductible intercorporate dividends) 
(secs. 807 and 812). The portion by which the life insurance 
company's reserve deduction is reduced is related to its 
earnings rate. Similarly, in the case of property and casualty 
insurance companies, the deduction for losses incurred is 
reduced by a percentage (15 percent) of (1) the insurer's tax-
exempt interest and (2) the deductible portion of dividends 
received (with special rules for dividends from affiliates) 
(sec. 832(b)(5)(B)). If the amount of this reduction exceeds 
the amount otherwise deductible as losses incurred, the excess 
is includible in the property and casualty insurer's income.

                           Reasons for Change

    The Committee believes that the rules adopted by the 
Internal Revenue Service to administer the interest 
disallowance rule as they apply to corporations needs 
modifications. The Committee believes that the Internal Revenue 
Service is correct that the interest disallowance rule should 
not apply to tax-exempt holdings by corporations that acquired 
those tax-exempt obligations in the ordinary course of business 
as payment for goods and services provided to State and local 
governments. On the other hand, the Committee believes that the 
present law 2 percent safe harbor is inappropriately large to 
be considered as de minimis in the case of large corporations. 
Instead, the Committee believes that more appropriate de 
minimis exception is where holdings of tax-exempt obligations 
are less than $1 million (or 2 percent of the corporation's 
assets, if less). The Committee believes that more objective 
rules need to be adopted to enforce the interest disallowance 
rule. Specifically, the Committee believes that a pro rata 
allocation of debt to tax-exempt obligations assets is 
appropriate in determining the amount of interest to be 
disallowed because a pro rata rule (1) is consistent with its 
view that money generally is fungible and, consequently, that 
all borrowings of a corporation finance (or carry) all of the 
corporation's assets, including tax-exempt obligations, and (2) 
avoids the difficult and often subjective inquiry relating to 
when indebtedness is incurred or continued to purchase or carry 
tax-exempt obligations. In addition, the Committee believes 
that rules need to be adopted to enforce the interest 
disallowance rule in the case of consolidated and affiliated 
groups of corporations and partnerships with corporate 
partners. The Committee believes that the pro rata disallowance 
rule should not apply to insurance companies since present law 
contains rules that address holdings of tax-exempt obligations 
by insurance companies.

                        Explanation of Provision

General rule

    The bill extends to all corporations (other than insurance 
companies) the rule that applies to financial institutions that 
disallows interest deductions of a taxpayer (that are not 
otherwise disallowed as allocable under present law to tax-
exempt obligations) in the same proportion as the average basis 
of its tax-exempt obligations bears to the average basis of all 
of the taxpayer's assets. However, the bill does not extend the 
small-issuer exception to taxpayers which are not financial 
institutions.

Exceptions

    The provision does not apply to nonsalable tax-exempt debt 
acquired by a corporation in the ordinary course of business in 
payment for goods or services sold to a State or local 
government. In addition, the bill provides a de minimis 
exception under which the disallowance rule does not apply to 
corporations, other than financial institutions and dealers in 
tax-exempt obligations, if the average adjusted basis of tax 
exempt obligations acquired after August 7,1986, is less than 
the lesser of $1 million or 2 percent of the basis of all of the 
corporation's assets. Under the bill, insurance companies are not 
subject to the pro rata rule but would continue to be subject to 
present law.

Holdings by related persons

    The provision applies the interest disallowance provision 
to all related persons that are members of the same 
consolidated group as if all the members of the group were a 
single taxpayer. The consolidated group rule is to be applied 
without regard to any member that is an insurance company. In 
the case of affiliated corporations that are not members of the 
same consolidated group, tracing rules apply as if all of the 
related persons are a single entity.
    In the case of a corporation (other than a financial 
institution) that is a partner in a partnership, the corporate 
partners are treated as holding their allocable shares of all 
of the assets of the partnership.
    The provision is not intended to affect the application of 
section 265 to related parties under current law.

                             Effective Date

    The proposal is effective for taxable years beginning after 
the date of enactment with respect to obligations acquired 
after June 8, 1997.

5. Gains and losses from certain terminations with respect to property 
           (sec. 1004 of the bill and sec. 1234A of the Code)

                              Present Law

    Treatment of gains and losses.--Gain from the ``sale or 
other disposition'' is the excess of the amount realized 
therefrom over its adjusted basis; loss is the excess of 
adjusted basis over the amount realized. The definition of 
capital gains and losses in section 1222 requires that there be 
a ``sale or exchange'' of a capital asset.\4\ The U.S. Supreme 
Court has held that the term ``sale or exchange'' is a narrower 
term than ``sale or other disposition.'' \5\ Thus, it is 
possible from there to be a taxable income from the sale or 
other disposition of an asset without that gain being treated 
as a capital gain.
---------------------------------------------------------------------------
    \4\ Code section 1221 defines a capital asset to mean property held 
by the taxpayer other than (1) property properly includible in 
inventory of the taxpayer or primarily held for sale to customers in 
the ordinary course of the taxpayer's trade or business, (2) 
depreciable and real property used in the taxpayer's trade or business, 
(3) a copyright, a literary musical; or artistic composition, letter or 
memorandum, or similar property that was created by the taxpayer (or 
whose basis is determined, in whole or in part, the basis of the 
creator, (4) accounts or notes receivable acquired in the ordinary 
course of the taxpayer's trade or business, and (5) a publication of 
the United States Government which was received from the Government 
other than by sale.
    \5\ Helvering v. William Flaccus Oak Leather Co., 313 U.S. 247 
(1941).
---------------------------------------------------------------------------
    Treatment of capital gains and losses.--Long-term capital 
gains of individuals are subject to a maximum rate of tax of 28 
percent.\6\ Capital losses of individuals are allowed to the 
extent of capital gains or the lower of those gains or $3,000.
---------------------------------------------------------------------------
    \6\ See bill section 311, which provides an alternative tax rates 
on long-term capital gains of 10 percent or 20 percent for taxpayers 
otherwise marginal bracket is 15 percent or greater than 15 percent, 
respectively.
---------------------------------------------------------------------------
    Long-term capital gains of corporations are subject to the 
same rate of tax as ordinary income.\7\ Capital losses of 
corporations are allowed only to the extent of the 
corporation's capital gains; excess capital losses may be 
carried back to the 3 preceding years and carried forward for 
the succeeding years.
---------------------------------------------------------------------------
    \7\ See bill section 321, which provides an alternative tax rate of 
30 percent on corporate capital gains on assets held lower than 5 
years.
---------------------------------------------------------------------------
    In the case of gains and losses from the sale or exchange 
of property used in a trade or business, net gains generally 
are treated as capital gain while net losses are treated as 
ordinary losses (sec. 1231).
    Court decisions interpreting the ``sale or exchange'' 
requirement.--There has been a considerable amount of 
litigation dealing with whether modifications of legal 
relationships between taxpayers is be treated as a ``sale or 
exchange.'' For example, in Douglass Fairbanks v. U.S., 306 
U.S. 436 (1939), the U.S. Supreme Court held that gain realized 
on the redemption of bonds before their maturity is not 
entitled to capital gain treatment because the redemption was 
not a ``sale or exchange''.\8\ Several court decisions 
interpreted the ``sale or exchange'' requirement to mean that a 
disposition, that occurs as a result of a lapse, cancellation, 
or abandonment, is not a sale or exchange of a capital asset, 
but produces ordinary income or loss. For example, in 
Commissioner v. Pittston Co., 252 F. 2d 344 (2d Cir), cert. 
denied, 357 U.S. 919 (1958), the taxpayer was treated as 
receiving ordinary income from amounts received for acquisition 
from the mine owner of a contract that the taxpayer had made 
with mine owner to buy all of the coal mined at a particular 
mine for a period of 10 years on the grounds that the payments 
were in lieu of subsequent profits that would have been taxed 
as ordinary income. Similarly, Commissioner v. Starr Brothers, 
205 F. 2d 673 (1953), the Second Circuit held that a payment 
that a retail distributor received from a manufacturer in 
exchange for waiving a contract provision prohibiting the 
manufacturer from selling to the distributor's competition was 
not a sale or exchange. Likewise, in General Artists Corp. v. 
Commissioner, 205 F. 2d 360 , cert. denied 346 U.S. 866 (1953), 
the Second Circuit held that amounts received by a booking 
agent for cancellation of a contract to be the exclusive agent 
of a singer was not a sale or exchange. In National-Standard 
Company v. Commissioner, 749 F. 2d 369, the Sixth Circuit held 
that a loss incurred the transfer of foreign currency to 
discharge the taxpayer's liability was an ordinary loss, since 
transfer was not a ``sale or exchange'' of that currency. More 
recently, in Stoller v. Commissioner, 994 F. 2d 855, 93-1 
U.S.T.C. par. 50349 (1993), the Court of Appeals for the 
District of Columbia held, in a transaction that preceded the 
effective date of section 1234A, that losses incurred on the 
cancellation of forward contracts to buy and sell short-term 
Government securities that formed a straddle were ordinary 
because the cancellation of the contracts was not a ``sale or 
exchange.''
---------------------------------------------------------------------------
    \8\ (The result in this case was overturned by enactment in 1934 of 
the predecessor of present law sec. 1271(a), see below). See section 
117 of the Revenue Act of 1934, 28 Stat. 680, 714-715.
---------------------------------------------------------------------------
    Extinguishment treated as sale or exchange--The Internal 
Revenue Code contains provisions that deem certain transactions 
to be a sale or exchange and, therefore, any resulting gain or 
loss is to be treated as a capital gain or loss. These rules 
generally provide for ``sale or exchange'' treatment as a way 
of extending capital gain or loss treatment of those 
transactions. Under one special provision, gains and losses 
attributable to the cancellation, lapse, expiration, or other 
termination of a right or obligation with respect to certain 
personal property are treated as gains or losses from the sale 
of a capital asset (sec. 1234A). Personal property subject to 
this rule is (1) personal property of a type which is actively 
traded \9\ and which is, or would be on acquisition, a capital 
asset in the hands of the taxpayer (other than stock that is 
not part of straddle or of a corporation that is not formed or 
availed of to take positions which offset positions in personal 
property of its shareholders) and (2) a ``section 1256 
contract'' \10\ which is capital asset in the hands of the 
taxpayer.\11\ Section 1234A does not apply to the retirement of 
a debt instrument.
---------------------------------------------------------------------------
    \9\ Treasury Regulations generally define ``actively traded'' as 
any personal property for which there are an established financial 
market. In addition, those regulations provided that ``notional 
principal contract constitutes personal property of a type that is 
actively traded if contracts based on the same or substantially similar 
specified indices are purchased, sold, or entered into on an 
established financial market'' and that ``rights and obligations of a 
party to a notional principal contract are rights and obligations with 
respect to personal property and constitute an interest is personal 
property.'' Treas. Reg. sec. 1.092(c)-1(c).
    \10\ A ``section 1256 contract'' means (1) any regulated futures 
contract, (2) foreign currency contract, (3) nonequity option, or (4) 
dealer equity option.
    \11\ The present law provision (sec. 1234A) which treats 
cancellation, lapse, expiration, or other termination of a right or 
obligation with respect to personal property as a sale of a capital 
asset was added by Congress in 1981 when Congress adopted a number of 
provisions dealing with tax straddles. There are two components or 
``legs'' to a straddle, where the value of one leg changes inversely 
with the value of the other leg. Without a special rule, taxpayers were 
able to ``leg-out'' of the loss leg of the straddle, while retaining 
the gain leg, resulting the creation of an ordinary loss. In 1981, 
Congress believed that the effective ability of taxpayer to elect the 
character of a gain or loss leg of a straddle was unwarranted and 
provided the present law rule that a cancellation, lapse, expiration or 
other termination of a right is a sale or exchange. However, since 
straddles were the focus of the 1981 legislation, that legislation was 
limited to types of property which were the subject of straddles, i.e., 
personal property (other than stock) of a type which is actively traded 
which is, or would be on acquisition, a capital asset in the hands of 
the taxpayer. The provision subsequently was extended to section 1256 
contracts.
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    Retirement of debt obligations treated as sale or 
exchange.--Amounts received on the retirement of any debt 
instrument are treated as amounts received in exchange 
therefore (sec. 1271(a)(1)). In addition, gain on the sale or 
exchange of a debt instrument with OID \12\ generally is 
treated as ordinary income to the extent of its OID if there 
was an intention at the time of its issuance to call the debt 
instrument before maturity (sec. 1271(a)(2)). These rules do 
not apply to (1) debt issued by a natural person or (2) debt 
issued before July 2, 1982, by a noncorporate or nongovernment 
issuer. As a result of this exemption, the character of gain or 
loss realized on retirement of an obligation issued by a 
natural person under present law is governed by case law.
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    \12\ The issuer of a debt instrument with OID generally accrues and 
deducts the discount, as interest, over the life of the obligation even 
though the amount of such interest is not paid until the debt matures. 
The holder of such a debt instrument also generally includes the OID in 
income as it accrues as interest on an accrual basis. The mandatory 
inclusion of OID in income does not apply, among other exceptions, to 
debt obligations issued by natural persons before March 2, 1984, and 
loans of less than $10,000 between natural persons if such loan is not 
made in the ordinary course of business of the lender (secs. 1272(a)(2) 
(D) and (E)).
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                           Reasons for Change

    Extinguishment treated as sale or exchange.--In general, 
the Committee believes that present law is deficient since it 
(1) taxes similar economic transactions differently, (2) 
effectively provides some, but not all, taxpayers with an 
election, and (3) its lack of certainty makes the tax laws 
unnecessarily difficult to administer.
    The Committee believes that some transactions, such as 
settlements of contracts to deliver a capital asset, are 
economically equivalent to a sale or exchange of such contracts 
since the value of any asset is the present value of the future 
income that such asset will produce. In addition, to the extent 
that present law treats modifications of property rights as not 
being a sale or exchange, present law effectively provides, in 
many cases, taxpayers with an election to treat the transaction 
as giving rise to capital gain, subject to more favorable rates 
than ordinary income, or an ordinary loss that can offset 
higher-taxed ordinary income and not be subject to limitations 
on use of capital losses. The effect of an election can be 
achieved by selling the property right if the resulting 
transaction results in a gain or providing for the 
extinguishment of the property right if the resulting 
transaction results in a loss.
    Courts have given different answers as to whether 
transactions which terminate contractual interests are treated 
as a ``sale or exchange.'' This lack of uniformity has caused 
uncertainty to both taxpayers and the Internal Revenue Service 
in the administration of the tax laws.
    Accordingly, the Committee bill treats the cancellation, 
lapse, expiration, or other termination of a right or 
obligation with respect to property which is (or on acquisition 
would be) a capital asset in the hands of the taxpayer to all 
types of property as a ``sale or exchange.'' A major effect of 
the Committee bill would be to remove the effective ability of 
a taxpayer to elect the character of gains and losses from 
certain transactions. Another significant effect of the 
Committee bill would be to reduce the uncertainty concerning 
the tax treatment of modifications of property rights.
    Character of gain on retirement of debt obligations issued 
by natural persons.--Similar objections can be raised about the 
rule which exempts debt of natural persons from the deemed sale 
or exchange rule applicable to debt of other taxpayers. The 
Committee believes that the debt of natural persons and other 
taxpayers is sufficiently economically similar to be similarly 
taxed upon their retirement. Accordingly, the Committee 
believes that the exception to the deemed sale or exchange rule 
on retirement of debt of a natural person should be repealed.

                        Explanation of Provision

    Extension of relinquishment rule to all types of 
property.--The bill extends to all types of property the rule 
which treats gain or loss from the cancellation, lapse, 
expiration, or other termination of a right or obligation with 
respect to property which is (or on acquisition would be) a 
capital asset in the hands of the taxpayer.
    By definition, the extension of the ``sale or exchange 
rule'' of present law section 1234A to all property will only 
affect property that is not personal property which is actively 
traded on an established exchange. Thus, the Committee bill 
will apply to (1) interests in real property and (2) non-
actively traded personal property. An example of the first type 
of property interest that will be affected by the Committee 
bill is the tax treatment of amounts received to release a 
lessee from a requirement that the premise be restored on 
termination of the lease.\13\ An example of the second type of 
property interest that is affected by the Committee bill is the 
forfeiture of a down payment under a contract to purchase 
stock.\14\ The Committee bill does not affect whether a right 
is ``property'' or whether property is a ``capital asset.''
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    \13\ See Billy Rose Diamond Horseshoe, Inc. v. Commissioner, 448 
F.2d 549 (1971), where the Second Circuit held that payments were not 
entitled to capital gain treatment because there was no sale or 
exchange. See also, Sirbo Holdings, Inc. v. Commissioner, 509 F.2d 1220 
(2d Cir. 1975).
    \14\ See U.S. Freight Co. v. U.S. 422 F.2d 887 (Ct. Cl. 1970), 
holding that forfeiture was an ordinary loss.
---------------------------------------------------------------------------
    Character of gain or loss on retirement of debt obligations 
issued by natural persons.--The Committee bill repeals the 
provision that exempts debt obligations issued by natural 
persons from the rule which treats gain or loss realized on 
retirement of the debt as gain or loss realized on an exchange. 
Thus, under the bill, gain or loss on the retirement of such debt will 
be capital gain or loss. The provision retains the present-law 
exceptions for debt issued before July 2, 1982, by noncorporations or 
nongovernments.

                             Effective Date

    Extension of relinquishment rule to all types of 
property.--The extension of the extinguishment rule applies to 
property acquired or positions established 30 day after the 
date of enactment of the provision.
    Character of gain or loss on retirement of debt obligations 
issued by natural persons.--The repeal of the exception to the 
character of gain on retirement of debt instruments issued by 
natural persons or obligations issued before July 2, 1982, 
applies to purchases and debt issued 30 days after date of 
enactment of the provision.

     6. Determination of original issue discount where pooled debt 
  obligations subject to acceleration (sec. 1005 of the bill and sec. 
                           1272 of the Code)

                              Present Law

Inclusion of interest income, in general

    A taxpayer generally must include in gross income the 
amount of interest received or accrued within the taxable year 
on indebtedness held by the taxpayer. If the principal amount 
of an indebtedness may be paid without interest by a specified 
date (as is the case with certain credit card balances), under 
present law, the holder of the indebtedness is not required to 
accrue interest until after the specified date has passed.

Original issue discount

    The holder of a debt instrument with original issue 
discount (``OID'') generally accrues and incudes in gross 
income, as interest, the OID over the life of the obligation, 
even though the amount of the interest may not be received 
until the maturity of the instrument.
    The amount of OID with respect to a debt instrument is the 
excess of the stated redemption price at maturity over the 
issue price of the debt instrument. The stated redemption price 
at maturity includes all amounts payable at maturity. The 
amount of OID in a debt instrument is allocated over the life 
of the instrument through a series of adjustments to the issue 
price for each accrual period. The adjustment to the issue 
price is determined by multiplying the adjusted issue price 
(i.e., the issue price increased by adjustments prior to the 
accrual period) by the instrument's yield to maturity, and then 
subtracting the interest payable during the accrual period. 
Thus, in order to compute the amount of OID and the portion of 
OID allocable to a period, the stated redemption price at 
maturity and the time of maturity must be known. Issuers of OID 
instruments accrue and deduct the amount of OID as interest 
expense in the same manner as the holder.
    Special rules for determining the amount of OID allocated 
to a period apply to certain instruments that may be subject to 
prepayment. First, if a borrower can reduce the yield on a debt 
by exercising a prepayment option, the OID rules assume that 
the borrower will prepay the debt. In addition, in the case of 
(1) any regular interest in a REMIC, (2) qualified mortgages 
held by a REMIC, or (3) any other debt instrument if payments 
under the instrument may be accelerated by reason of 
prepayments of other obligations securing the instrument, the 
daily portions of the OID on such debt instruments are 
determined by taking into account an assumption regarding the 
prepayment of principal for such instruments.

                           Reasons for Change

    Interest income generally accrues over the period an amount 
is borrowed and repaid. Certain debt instruments, such as 
credit card receivables, do not require the debtors to pay 
interest if they pay their accounts by a specified date. The 
operation of the OID and interest accrual rules of present law 
provide that, in such instances, the holder of the debt may 
assume that the debtors will remit their balances in a timely 
manner and thus avoid the interest charges. In a the case of a 
large pool of such debt instruments, this prepayment 
assumption, as applied to all debtors in the pool, is 
unrealistic and may result in the mismeasurement of income with 
respect to the interest charged to those debtors that do not 
prepay their account balances.

                        Explanation of Provision

    The bill applies the special OID rule applicable to any 
regular interest in a REMIC, qualified mortgages held by a 
REMIC, or certain other debt instruments to any pool of debt 
instruments the payments on which may be accelerated by reason 
of prepayments. Thus, under the bill, if a taxpayer holds a 
pool of credit card receivables that require interest to be 
paid if the borrowers do not pay their accounts by a specified 
date, the taxpayer would be required to accrue interest or OID 
on such pool based upon a reasonable assumption regarding the 
timing of the payments of the accounts in the pool. In cases 
where the payments in the pool occur soon after year end and 
before the taxpayer files its tax return for such year end, the 
taxpayer may accrue interest based on its actual experience 
rather than based upon reasonable assumptions.
    The bill operates as follows. Assume that a calendar year 
taxpayer issues credit cards, the terms of which provide that 
if charges for a calendar month are paid within 30 days after 
the close of the month, no interest will accrue with respect to 
such charges. However, if the balances are not paid within this 
30-day grace period, interest will accrue from the date of the 
charge until the balance is paid. Further assume that the 
taxpayer issues a significant number of such credit cards and 
the card holders incur charges of $10 million in December 1997. 
Under present law (depending upon the taxpayer's accounting 
method), the taxpayer is not required to include any interest 
income in 1997 with respect to the December charges because it 
is possible that all the credit card holders will pay off the 
$10 million cumulative December balance by January 30, 1998, 
and therefore will not be subject to interest with respect to 
such charges. If some of the credit card holders do not pay 
their December charges by January 30, 1998, the balances of 
those holders will be subject to interest charges under the 
terms of the credit cards and the taxpayer would accrue such 
interest in income in 1998. Under the bill, the taxpayer, in 
computing its 1997 taxable income, would be required to make a 
reasonable assumption as to what portion of the $10 million 
balances will not be paid off within the 30-day grace period and would 
be required to accrue interest income through December 31, 1997, with 
respect to such portion. The taxpayer would then adjust such accrual in 
1998 to reflect the extent to which such prepayment assumption 
reflected the actual payments received in January.
    In addition, the Secretary of the Treasury is authorized to 
provide appropriate exemptions from the provision, including 
exemptions for taxpayers that hold a limited amount of debt 
instruments, such as small retailers.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment. If a taxpayer is required to 
change its method of accounting under the bill, such change 
would be treated as initiated by the taxpayer with the consent 
of the Secretary of the Treasury and any section 481 adjustment 
would be included in income ratably over a four-year period. It 
is understood that some taxpayers presently use a method of 
accounting similar to the method required to be used under the 
bill and have asked the Secretary of the Treasury for 
permission to change to a different method for pre-effective 
date years. So as not to require taxpayers to change methods of 
accounting multiple times, it is expected that the Secretary 
would not grant these pending requests.

 7. Deny interest deduction on certain debt instruments (sec. 1006 of 
                   the bill and sec. 163 of the Code)

                              Present Law

    Whether an instrument qualifies for tax purposes as debt or 
equity is determined under all the facts and circumstances 
based on principles developed in case law. If an instrument 
qualifies as equity, the issuer generally does not receive a 
deduction for dividends paid and the holder generally includes 
such dividends in income (although corporate holders generally 
may obtain a dividends-received deduction of at least 70 
percent of the amount of the dividend). If an instrument 
qualifies as debt, the issuer may receive a deduction for 
accrued interest and the holder generally includes interest in 
income, subject to certain limitations.
    Original issue discount (``OID'') on a debt instrument is 
the excess of the stated redemption price at maturity over the 
issue price of the instrument. An issuer of a debt instrument 
with OID generally accrues and deducts the discount as interest 
over the life of the instrument even though interest may not be 
paid until the instrument matures. The holder of such a debt 
instrument also generally includes the OID in income on an 
accrual basis.

                           Reasons for Change

    The Committee is concerned that corporate taxpayers may 
issue instruments denominated as debt but that more closely 
resemble equity transactions for which an interest deduction is 
not appropriate.

                        Explanation of Provision

    Under the bill, no deduction is allowed for interest or OID 
on an instrument issued by a corporation (or issued by a 
partnership to the extent of its corporate partners) that is 
payable in stock of the issuer or a related party (within the 
meaning of sections 267(b) and 707(b)), including an instrument 
a substantial portion of which is mandatorily convertible or 
convertible at the issuer's option into stock of the issuer or 
a related party. In addition, an instrument is be treated as 
payable in stock if a substantial portion of the principal or 
interest is required to be determined, or may be determined at 
the option of the issuer or related party, by reference to the 
value of stock of the issuer or related party. An instrument 
also is treated as payable in stock if it is part of an 
arrangement designed to result in such payment of the 
instrument with or by reference to such stock, such as in the 
case of certain issuances of a forward contract in connection 
with the issuance of debt, nonrecourse debt that is secured 
principally by such stock, or certain debt instruments that are 
convertible at the holder's option when it is substantially 
certain that the right will be exercised. For example, it is 
not expected that the provision will affect debt with a 
conversion feature where the conversion price is significantly 
higher than the market price of the stock on the issue date of 
the debt. The bill does not affect the treatment of a holder of 
an instrument.
    The bill is not intended to affect the characterization of 
instruments as debt or equity under present law; and no 
inference is intended as to the treatment of any instrument 
under present law.

                             Effective Date

    The provision is effective for instruments issued after 
June 8, 1997, but will not apply to such instruments (1) issued 
pursuant to a written agreement which was binding on such date 
and at all times thereafter, (2) described in a ruling request 
submitted to the Internal Revenue Service on or before such 
date, or (3) described in a public announcement or filing with 
the Securities and Exchange Commission on or before such date.

             B. Corporate Organizations and Reorganizations

 1. Require gain recognition for certain extraordinary dividends (sec. 
              1011 of the bill and sec. 1059 of the Code)

                              Present Law

    A corporate shareholder generally can deduct at least 70 
percent of a dividend received from another corporation. This 
dividends received deduction is 80 percent if the corporate 
shareholder owns at least 20 percent of the distributing 
corporation and generally 100 percent if the shareholder owns 
at least 80 percent of the distributing corporation.
    Section 1059 of the Code requires a corporate shareholder 
that receives an ``extraordinary dividend'' to reduce the basis 
of the stock with respect to which the dividend was received by 
the nontaxed portion of the dividend. Whether a dividend is 
``extraordinary'' is determined, among other things, by 
reference to the size of the dividend in relation to the 
adjusted basis of the shareholder's stock. Also, a dividend 
resulting from a non pro rata redemption or a partial 
liquidation is an extraordinary dividend. If the reduction in 
basis of stock exceeds the basis in the stock with respect to 
which an extraordinary dividend is received, the excess is 
taxed as gain on the sale or disposition of such stock, but not 
until that time (sec. 1059(a)(2)). The reduction in basis for 
this purpose occurs immediately before any sale or disposition 
of the stock (sec. 1059(d)(1)(A)). The Treasury Department has 
general regulatory authority to carry out the purposes of the 
section.
    Except as provided in regulations, the extraordinary 
dividend provisions do not apply to result in a double 
reduction in basis in the case of distributions between members 
of an affiliated group filing consolidated returns, where the 
dividend is eliminated or excluded under the consolidated 
return regulations. Double inclusion of earnings and profits 
(i.e., from both the dividend and from gain on the disposition 
of stock with a reduced basis) also should generally be 
prevented.\15\ Treasury regulations provide for application of 
the provision when a corporation is a partner in a partnership 
that receives a distribution.\16\
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    \15\ See H Rept. 99-841, II-166, 99th Cong. 2d Sess. (September 18, 
1986).
    \16\ See Treas. reg. sec. 1.701-2(f), Example (2).
---------------------------------------------------------------------------
    In general, a distribution in redemption of stock is 
treated as a dividend, rather than as a sale of the stock, if 
it is essentially equivalent to a dividend (sec. 302). A 
redemption of the stock of a shareholder generally is 
essentially equivalent to a dividend if it does not result in a 
meaningful reduction in the shareholder's proportionate 
interest in the distributing corporation. Section 302(b) also 
contains several specific tests (e.g., a substantial reduction 
computation and a termination test) to identify redemptions 
that are not essentially equivalent to dividends. The 
determination whether a redemption is essentially equivalent to 
a dividend includes reference to the constructive ownership 
rules of section 318, including the option attribution rules of 
section 318(a)(4). The rules relating to treatment of cash or 
other property received in a reorganization contain a similar 
reference (sec. 356(a)(2)).

                           Reasons for Change

    Corporate taxpayers have attempted to dispose of stock of 
other corporations in transactions structured as redemptions, 
where the redeemed corporate shareholder apparently expects to 
take the position that the transactions are dividends that 
qualify for the dividends received deduction. Thus, the 
redeemed corporate shareholder attempts to exclude from income 
a substantial portion of the amount received. In some cases, it 
appears that the taxpayers' interpretations of the option 
attribution rules of section 318(a)(4) are important to the 
taxpayers' contentions that their interests in the distributing 
corporation are not meaningfully reduced, and are, therefore, 
dividends.\17\ Some taxpayers may argue that certain options 
have sufficient economic reality that they should be recognized 
as stock ownership for purposes of determining whether a 
taxpayer has substantially reduced its ownership.
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    \17\ For example, it has been reported that Seagram Corporation 
intends to take the position that the corporate dividends-received 
deduction will eliminate tax on significant distributions received from 
DuPont Corporation in a redemption of almost all the DuPont stock held 
by Seagram, coupled with the issuance of certain rights to reacquire 
DuPont stock. (See, e.g., Landro and Shapiro, ``Hollywood Shuffle,'' 
Wall Street Journal, pp. Al and All (April 7, 1995); Sloan, ``For 
Seagram and DuPont, a Tax Deal that No One Wants to Brandy About,'' 
Washington Post, p. D3 (April 11, 1995); Sheppard, ``Can Seagram Bail 
Out of DuPont without Capital Gain Tax,'' Tax Notes Today, (April 10, 
1995, 95 TNT 75-4).
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    Even in the absence of options, the present law rules 
dealing with extraordinary dividends may permit inappropriate 
deferral of gain recognition when the portion of the 
distribution that is excluded due to the dividends received 
deduction exceeds the basis of the stock with respect to which 
the extraordinary dividend is received.

                        Explanation of Provision

    Under the bill, except as provided in regulations, a 
corporate shareholder recognizes gain immediately with respect 
to any redemption treated as a dividend (in whole or in part) 
when the nontaxed portion of the dividend exceeds the basis of 
the shares surrendered, if the redemption is treated as a 
dividend due to options being counted as stock ownership.\18\
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    \18\ Thus, for example, where a portion of such a distribution 
would not have been treated as a dividend due to insufficient earnings 
and profits, the rule applies to the portion treated as a dividend.
---------------------------------------------------------------------------
    In addition, the bill requires immediate gain recognition 
whenever the basis of stock with respect to which any 
extraordinary dividend was received is reduced below zero. The 
reduction in basis of stock would be treated as occurring at 
the beginning of the ex-dividend date of the extraordinary 
dividend to which the reduction relates.
    Reorganizations or other exchanges involving amounts that 
are treated as dividends under section 356 of the Code are 
treated as redemptions for purposes of applying the rules 
relating to redemptions under section 1059(e). For example, if 
a recapitalization or other transaction that involves a 
dividend under section 356 has the effect of a non pro rata 
redemption or is treated as a dividend due to options being 
counted as stock, the rules of section 1059 apply. Redemptions 
of shares, or other extraordinary dividends on shares, held by 
a partnership will be subject to section 1059 to the extent 
there are corporate partners (e.g., appropriate adjustments to 
the basis of the shares held by the partnership and to the 
basis of the corporate partner's partnership interest will be 
required).
    Under continuing section 1059(g) of present law, the 
Treasury Department is authorized to issue regulations where 
necessary to carry out the purposes and prevent the avoidance 
of the provision.

                             Effective Date

    The provision generally is effective for distributions 
after May 3, 1995, unless made pursuant to the terms of a 
written binding contract in effect on May 3, 1995 and at all 
times thereafter before such distribution, or a tender offer 
outstanding on May 3, 1995.\19\ However, in applying the new 
gain recognition rules to any distribution that is not a 
partial liquidation, a non pro rata redemption, or a redemption 
that is treated as a dividend by reason of options, September 
13, 1995 is substituted for May 3, 1995 in applying the 
transition rules.
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    \19\ Thus, for example, in the case of a distribution prior to the 
effective date, the provisions of present law would continue to apply, 
including the provisions of present-law sections 1059(a) and 
1059(d)(1), requiring reduction in basis immediately before any sale or 
disposition of the stock, and requiring of gain at the time of such 
sale or disposition.
---------------------------------------------------------------------------
    No inference is intended regarding the tax treatment under 
present law of any transaction within the scope of the 
provision, including transactions utilizing options.
    In addition, no inference is intended regarding the rules 
under present law (or in any case where the treatment is not 
specified in the provision) for determining the shares of stock 
with respect to which a dividend is received or that experience 
a basis reduction.

  2. Require gain recognition on certain distributions of controlled 
  corporation stock (sec. 1012 of the bill and secs. 355, 351(c), and 
                       368(a)(2)(H) of the Code)

                              Present Law

    A corporation generally is required to recognize gain on 
the distribution of property (including stock of a subsidiary) 
as if such property had been sold for its fair market value. 
The shareholders generally treat the receipt of property as a 
taxable event as well. Section 355 of the Internal Revenue Code 
provides an exception to this rule for certain ``spin-off'' 
type distributions of stock of a controlled corporation, 
provided that various requirements are met, including certain 
restrictions relating to acquisitions and dispositions of stock 
of the distributing corporation (``distributing'') or the 
controlled corporation (``controlled'') prior and subsequent to 
a distribution.
    In cases where the form of the transaction involves a 
contribution of assets to the particular controlled corporation 
that is distributed in connection with the distribution, there 
are specific Code requirements that distributing corporation's 
shareholders own ``control'' of the distributed corporation 
immediately after the distribution. Control is defined for this 
purpose as 80 percent of the voting power of all classes of 
stock entitled to vote and 80 percent of each other class of 
stock. (Sections 368(a)(1)(D), 368(c), and 351(a) and (c)). In 
addition, it is a requirement for qualification of any section 
355 distribution that the distributing corporation distribute 
control of the controlled corporation (defined by reference to 
the same 80-percent test).\20\ Present law has the effect of 
imposing more restrictive requirements on certain types of 
acquisitions or other transfers following a distribution if the 
company involved is the controlled corporation rather than the 
distributing corporation.
---------------------------------------------------------------------------
    \20\ If a controlled corporation is acquired after a distribution, 
an issue may arise whether under step-transaction concepts, the 
acquisition can be viewed as having occurred before the distribution, 
with the result that the distributing corporation would not be viewed 
as having distributed the necessary 80 percent control. The Internal 
Revenue Service has indicated that it will not rule on requests for 
section 355 treatment in cases in which there have been negotiations, 
agreements, or arrangements with respect to transactions or events 
which, if consummated before the distribution, would result in the 
distribution of stock or securities of a corporation which is not 
``controlled'' by the distributing corporation. Rev. Proc. 96-39, 1996-
33 I.R.B. 11; see also Rev. Rul. 96-30, 1996-1 C.B. 36; Rev. Rul. 70-
225, 1970-1 C.B. 80.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that section 355 was intended to 
permit the tax-free division of existing business arrangements 
among existing shareholders. In cases in which it is intended 
that new shareholders will acquire ownership of a business in 
connection with a spin off, the transaction more closely 
resembles a corporate level disposition of the portion of the 
business that is acquired.
    The Committee is also concerned that spin-off transactions 
within a single corporate group can have the effect of avoiding 
other present law rules that create or recapture excess loss 
accounts in affiliated groups filing consolidated returns.\21\ 
Such intra-group distributions can also generally have the 
effect of permitting possibly inappropriate basis increases (or 
preventing basis decreases) following a distribution, due to 
the differences between the basis allocation rules that govern 
spin-offs and those that apply to other distributions.
---------------------------------------------------------------------------
    \21\ Excess loss accounts in consolidation generally are created 
when a parent corporation derives a benefit in the form of a 
distribution, or the use of otherwise unavailable losses, that exceed 
the basis of the parent in the stock of the subsidiary providing the 
benefit. In general, such excess benefits in consolidation are 
permitted to be deferred rather than causing immediate taxable gain. 
Nevertheless, they are recaptured when a subsidiary leaves the group or 
in certain other situations. However, such excess loss accounts are not 
recaptured in certain cases where there is an internal spin-up prior to 
a subsidiary leaving the group. See. Treas. Reg. Sec. 1.1502-19(g). In 
addition, an excess loss account may not be created at all in certain 
cases that are similar economically to a distribution that would reduce 
the stock basis of the distributing subsidiary corporation, if the 
distributing from the subsidiary is structured to meet the form of a 
section 355 distribution.
---------------------------------------------------------------------------
    However, the Committee believes that the difference in 
treatment of certain transactions following a spin-off, 
depending upon whether the distributing or controlled 
corporation engages in the transaction, should be minimized.

                        Explanation of Provision

    The bill adopts additional restrictions under section 355 
on acquisitions and dispositions of the stock of the 
distributing or controlled corporation.
    Under the bill, if, pursuant to a plan or arrangement in 
existence on the date of distribution, either the controlled or 
distributing corporation is acquired, gain is recognized by the 
other corporation as of the date of the distribution.
    In the case of an acquisition of a controlled corporation, 
the amount of gain recognized by the distributing corporation 
is the amount of gain that the distributing corporation would 
have recognized had stock of the controlled corporation been 
sold for fair market value on the date of distribution. In the 
case of an acquisition of the distributing corporation, the 
amount of gain recognized by the controlled corporation is the 
amount of net gain that the distributing corporation would have 
recognized had it sold its assets for fair market value 
immediately after the distribution. This gain is treated as 
long-term capital gain. No adjustment to the basis of the stock 
or assets of either corporation is allowed by reason of the 
recognition of the gain.
    Whether a corporation is acquired is determined under rules 
similar to those of present law section 355(d), except that 
acquisitions would not be restricted to ``purchase'' 
transactions. Thus, an acquisition occurs if one or more 
persons acquire 50 percent or more of the vote or value of the 
stock of the controlled or distributing corporation pursuant to 
a plan or arrangement. For example, assume a corporation 
(``P'') distributes the stock of its wholly owned subsidiary 
(``S'') to its shareholders. If, pursuant to a plan or 
arrangement, 50 percent or more of the vote or value of either 
P or S is acquired by one or more persons, the bill proposal 
requires gain recognition by the corporation not acquired. 
Except as provided in Treasury regulations, if the assets of 
the distributing or controlled corporation are acquired by a 
successor in a merger or other transaction under section 
368(a)(1) (A), (C) or (D) of the Code, the shareholders 
(immediately before the acquisition) of the corporation 
acquiring such assets are treated as acquiring stock in the 
corporation from which the assets were acquired. Under Treasury 
regulations, other asset transfers also could be subject to 
this rule. However, in any transaction, stock received directly 
or indirectly by former shareholders of distributing or 
controlled, in a successor or new controlling corporation of 
either, is not treated as acquired stock if it is attributable 
to such shareholders' stock in distributing or controlled that 
was not acquired as part of a plan or arrangement to acquire 50 
percent or more of such successor or other corporation.
    Acquisitions occurring within the four-year period 
beginning two years before the date of distribution are 
presumed to have occurred pursuant to a plan or arrangement. 
Taxpayers can avoid gain recognition by showing that an 
acquisition occurring during this four-year period was 
unrelated to the distribution.
    The bill does not apply to distributions that would 
otherwise be subject to section 355(d) of present law, which 
imposes corporate level tax on certain disqualified 
distributions.
    The bill does not apply to a distribution pursuant to a 
title 11 or similar case.
    The Treasury Department is authorized to prescribe 
regulations as necessary to carry out the purposes of the 
proposal, including regulations to provide for the application 
of the proposal in the case of multiple transactions.
    Except as provided in regulations, in the case of 
distributions of stock within an affiliated group of 
corporations filing a consolidated return, section 355 does not 
apply to any distribution of the stock of one member of the 
group to another member. In the case of such a distribution of 
stock, the Secretary of the Treasury is to provide appropriate 
rules for the treatment of the distribution, including rules 
governing adjustments to the adjusted basis of the stock and 
the earnings and profits of the members of the group.
    The bill also modifies certain rules for determining 
control immediately after a distribution in the case of certain 
divisive transactions in which a controlled corporation is 
distributed and the transaction meets the requirements of 
section 355. In such cases, under section 351 and modified 
section 368(a)(2)(H) with respect to certain reorganizations 
under section 368(a)(1)(D), those shareholders receiving stock 
in the distributed corporation are treated as in control of the 
distributed corporation immediately after the distribution if 
they hold stock representing a 50 percent or greater interest 
in the vote and value of stock of the distributed corporation.
    The bill does not change the present-law requirement under 
section 355 that the distributing corporation must distribute 
80 percent of the voting power and 80 percent of each other 
class of stock of the controlled corporation. It is expected 
that this requirement will be applied by the Internal Revenue 
Service taking account of the provisions of the proposal 
regarding plans that permit certain types of planned 
restructuring of the distributing corporation following the 
distribution, and to treat similar restructurings of the 
controlled corporation in a similar manner. Thus, the 80-
percent control requirement is expected to be administered in a 
manner that would prevent the tax-free spin-off of a less-than-
80-percent controlled subsidiary, but would not generally 
impose additional restrictions on post-distribution 
restructurings of the controlled corporation if such 
restrictions would not apply to the distributing corporation.

                             Effective Date

    The bill is generally effective for distributions after 
April 16, 1997. However, the part of the bill providing a 50-
percent control requirement immediately after certain section 
351 and 368(a)(1)(D) distributions will be effective for 
transfers after the date of enactment.
    No part of the bill will apply to a distribution (or 
transfer, as the case may be) after April 16, 1997, if such 
distribution or transfer is (1) made pursuant to a written 
agreement which was binding on such date and at all times 
thereafter; (2) described in a ruling request submitted to the 
Internal Revenue Service on or before such date; or (3) 
described on or before such date in a public announcement or in 
a filing with the Securities and Exchange Commission required 
solely by reason of the distribution. Any written agreement, 
ruling request, or public announcement is not within the scope 
of these transition provisions unless it identifies the 
unrelated acquiror of the distributing corporation or of any 
controlled corporation, whichever is applicable.

3. Reform tax treatment of certain corporate stock transfers (sec. 1013 
            of the bill and secs. 304 and 1059 of the Code)

                              Present Law

    Under section 304, if one corporation purchases stock of a 
related corporation, the transaction generally is 
recharacterized as a redemption. In determining whether a 
transaction so recharacterized is treated as a sale or a 
dividend, reference is made to the changes in the selling 
corporation's ownership of stock in the issuing corporation 
(applying the constructive ownership rules of section 318(a) 
with modifications under section 304(c)). Sales proceeds 
received by a corporate transferor that are characterized as a 
dividend may qualify for the dividends received deduction under 
section 243, and such dividend may bring with it foreign tax 
credits under section 902. Section 304 does not apply to 
transfers of stock between members of a consolidated group.
    Section 1059 applies to ``extraordinary dividends,'' 
including certain redemption transactions treated as dividends 
qualifying for the dividends received deduction. If a 
redemption results in an extraordinary dividend, section 1059 
generally requires the shareholder to reduce its basis in the 
stock of the redeeming corporation by the nontaxed portion of 
such dividend.

                           Reasons for Change

    Section 304 is directed primarily at preventing a 
controlling shareholder from claiming basis recovery and 
capital gain treatment on transactions that result in a 
withdrawal of earnings from corporate solution. There concerns 
are most relevant where the shareholder is an individual. 
Different concerns may be present if the shareholder is a 
corporation, due in part to the presence of the dividends 
received deduction. A corporation often may prefer a 
transaction to be characterized as a dividend, as opposed to a 
sale or exchange. Accordingly, a corporation may intentionally 
seek to apply section 304 to a transaction which is in 
substance a sale or exchange. Corporations that are related for 
purposes of section 304 need not be 80-percent controlled by a 
common parent. The separate rules for corporations filing a 
consolidated return, that would generally reduce basis for 
untaxed dividends received, do not apply. Furthermore, in some 
situations where the selling corporation does not in fact own 
any stock of the acquiring corporation before or after the 
transaction (except by attribution), it is possible that 
current law may lead to inappropriate results.
    As one example, in certain related-party sales the selling 
corporation may take the position that its basis in any shares 
of stock it may have retained (or possibly in any shares of the 
acquiring corporation that it may own) need not be reduced by 
the amount of its dividends received deduction. This could 
result in an inappropriate shifting of basis. The result can be 
artificial reduction of gain or creation of loss on disposition 
of any such retained shares.
    As one example, assume that domestic corporation X owns 70 
percent of the shares of domestic corporation S and all the 
shares of domestic corporation B. S owns all the shares of 
domestic corporation T with a basis of $100. Assume that 
corporation B has sufficient earnings and profits so that any 
distribution of property would be treated as a dividend. Assume 
that S sells all but one of its shares in T to B for $99, their 
fair market value. Under present law, the transfer is treated 
as a redemption of shares of B, which redemption is treated as 
dividend to S because, even though S in fact owns no shares of 
B, it is deemed to own all the shares of B before and after the 
transaction through attribution from X. Taxpayers may contend 
that the one share of T retained (worth $1) retains the entire 
original basis of $100. Although S has received $99 from B for 
its other shares of T, and has not paid full tax on that 
receipt due to the dividends received deduction, S may now 
attempt to claim a $99 loss on disposing of the remaining share 
of T.
    In international cases, a U.S. corporation owned by a 
foreign corporation may inappropriately claim foreign tax 
credits from a section 304 transaction. For example, if a 
foreign-controlled domestic corporation sells the stock of a 
subsidiary to a foreign sister corporation, the domestic 
corporation may take the position that it is entitled to credit 
foreign taxes that were paid by the foreign sister corporation. 
See Rev. Rul. 92-86, 1992-2 C.B. 199; Rev. Rul. 91-5, 1991-1 
C.B. 114. However, if the foreign sister corporation had 
actually distributed its earnings and profits to the common 
foreign parent, no foreign tax credits would have been 
available to the domestic corporation.

                        Explanation of Provision

    Under the bill, to the extent that a section 304 
transaction is treated as a distribution under section 301, the 
transferor and the acquiring corporation are treated as if (1) 
the transferor had transferred the stock involved in the 
transaction to the acquiring corporation in exchange for stock 
of the acquiring corporation in a transaction to which section 
351(a) applies, and (2) the acquiring corporation had then 
redeemed the stock it is treated as having issued. Thus, the 
acquiring corporation is treated for all purposes as having 
redeemed the stock it is treated as having issued to the 
transferor. In addition, the bill amends section 1059 so that, 
if the section 304 transaction is treated as a dividend to 
which the dividends received deduction applies, the dividend is 
treated as an extraordinary dividend in which only the basis of 
the transferred shares would be taken into account under 
section 1059.
    Under the bill, a special rule applies to section 304 
transactions involving acquisitions by foreign corporations. 
The bill limits the earnings and profits of the acquiring 
foreign corporationthat are taken into account in applying 
section 304. The earnings and profits of the acquiring foreign 
corporation to be taken into account will not exceed the portion of 
such earnings and profits that (1) is attributable to stock of such 
acquiring corporation held by a corporation or individual who is the 
transferor (or a person related thereto) and who is a U.S. shareholder 
(within the meaning of sec, 951(b)) of such corporation, and (2) was 
accumulated during periods in which such stock was owned by such person 
while such acquiring corporation was a controlled foreign corporation. 
For purposes of this rule, except as otherwise provided by the 
Secretary of the Treasury, the rules of section 1248(d) (relating to 
certain exclusions from earnings and profits) would apply. The 
Secretary of the Treasury is to prescribe regulations as appropriate, 
including regulations determining the earnings and profits that are 
attributable to particular stock of the acquiring corporation.
    No inference is intended as to the treatment of any 
transaction under present law.

                             Effective Date

    The provision is effective for distributions or 
acquisitions after June 8, 1997 except that the provision will 
not apply to any such distribution or acquisition (1) made 
pursuant to a written agreement which was binding on such date 
and at all times thereafter, (2) described in a ruling request 
submitted to the Internal Revenue Service on or before such 
date, or (3) described in a public announcement or filing with 
the Securities and Exchange Commission on or before such date.

4. Modify holding period for dividends-received deduction (sec. 1014 of 
                 the bill and sec. 246(c) of the Code)

                              Present Law

    If an instrument issued by a U.S. corporation is classified 
for tax purposes as stock, a corporate holder of the instrument 
generally is entitled to a dividends received deduction for 
dividends received on that instrument. This deduction is 70 
percent of dividends received if the recipient owns less than 
20 percent (by vote and value) of stock of the payor. If the 
recipient owns more than 20 percent of the stock the deduction 
is increased to 80 percent. If the recipient owns more than 80 
percent of the payor's stock, the deduction is further 
increased to 100 percent for qualifying dividends.
    The dividends-received deduction is allowed to a corporate 
shareholder only if the shareholder satisfies a 46-day holding 
period for the dividend-paying stock (or a 91-day period for 
certain dividends on preferred stock). The 46- or 91-day 
holding period generally does not include any time in which the 
shareholder is protected from the risk of loss otherwise 
inherent in the ownership of an equity interest. The holding 
period must be satisfied only once, rather than with respect to 
each dividend received.

                           Reasons for Change

    Under present law, dividend-paying stocks can be marketed 
to corporate investors with accompanying attempts to hedge or 
relieve the holder from risk for much of the holding period of 
the stock, after the initial holding period has been satisfied. 
In addition, because of the limited application of section 1059 
of the Code requiring basis reduction, many investors whose 
basis includes a price paid with the expectation of a dividend 
may be able to sell the stock after the receipt of a dividend 
not subject to tax at an artificial loss, even though the 
holder may actually have been relieved of the risk of loss for 
much of the period it has held the stock.
    The Committee believes that no deduction for a distribution 
on stock should be allowed when the owner of stock does not 
bear the risk of loss otherwise inherent in the ownership of an 
equity interest at a time proximate to the time the 
distribution is made.

                        Explanation of Provision

    The bill provides that a taxpayer is not entitled to a 
dividends-received deduction if the taxpayer's holding period 
for the dividend-paying stock is not satisfied over a period 
immediately before or immediately after the taxpayer becomes 
entitled to receive the dividend.

                             Effective Date

    The provision is effective for dividends paid or accrued 
after the 30th day after the date of the enactment of the bill.

                     c. other corporate provisions

1. Registration of confidential corporate tax shelters and substantial 
 understatement penalty (sec. 1021 of the bill and secs. 6111 and 6662 
                              of the Code)

                              Present Law

Tax shelter registration

    An organizer of a tax shelter is required to register the 
shelter with the Internal Revenue Service (IRS) (sec. 6111). If 
the principal organizer does not do so, the duty may fall upon 
any other participant in the organization of the shelter or any 
person participating in its sale or management. The shelter's 
identification number must be furnished to each investor who 
purchases or acquires an interest in the shelter. Failure to 
furnish this number to the tax shelter investors will subject 
the organizer to a $100 penalty for each such failure (sec. 
6707(b)).
    A penalty may be imposed against an organizer who fails 
without reasonable cause to timely register the shelter or who 
provides false or incomplete information with respect to it. 
The penalty is the greater of one percent of the aggregate 
amount invested in the shelter or $500. Any person claiming any 
tax benefit with respect to a shelter must report its 
registration number on her return. Failure to do so without 
reasonable cause will subject that person to a $250 penalty 
(sec. 6707(b)(2)).
    A person who organizes or sells an interest in a tax 
shelter subject to the registration rule or in any other 
potentially abusive plan or arrangement must maintain a list of 
the investors (sec. 6112). A $50 penalty may be assessed for 
each name omitted from the list. The maximum penalty per year 
is $100,000 (sec. 6708).
    For this purpose, a tax shelter is defined as any 
investment that meets two requirements. First, the investment 
must be (1) required to be registered under a Federal or state 
law regulating securities, (2) sold pursuant to an exemption 
from registration requiring the filing of a notice with a 
Federal or state agency regulating the offering or sale of 
securities, or (3) a substantial investment. Second, it must be 
reasonable to infer that the ratio of deductions and 350 
percent of credits to investment for any investor (i.e., the 
tax shelter ratio) may be greater than two to one as of the 
close of any of the first five years ending after the date on 
which the investment is offered for sale. An investment that 
meets these requirements will be considered a tax shelter 
regardless of whether it is marketed or customarily designated 
as a tax shelter (sec. 6111(c)(1)).

Accuracy-related penalty

    The accuracy-related penalty, which is imposed at a rate of 
20 percent, applies to the portion of any underpayment that is 
attributable to (1) negligence, (2) any substantial 
understatement of income tax, (3) any substantial valuation 
misstatement, (4) any substantial overstatement of pension 
liabilities, or (5) any substantial estate or gift tax 
valuation understatement.
    The substantial understatement penalty applies in the 
following manner. If the correct income tax liability of a 
taxpayer for a taxable year exceeds that reported by the 
taxpayer by the greater of 10 percent of the correct tax or 
$5,000 ($10,000 in the case of most corporations), then a 
substantial understatement exists and a penalty may be imposed 
equal to 20 percent of the underpayment of tax attributable to 
the understatement. In determining whether a substantial 
understatement exists, the amount of the understatement is 
reduced by any portion attributable to an item if (1) the 
treatment of the item on the return is or was supported by 
substantial authority, or (2) facts relevant to the tax 
treatment of the item were adequately disclosed on the return 
or on a statement attached to the return and there was a 
reasonable basis for the tax treatment of the item. Special 
rules apply to tax shelters.
    With respect to tax shelter items of non-corporate 
taxpayers, the penalty may be avoided only if the taxpayer 
establishes that, in addition to having substantial authority 
for his position, he reasonably believed that the treatment 
claimed was more likely than not the proper treatment of the 
item. This reduction in the penalty is unavailable to corporate 
tax shelters. The reduction in the understatement for items 
disclosed on the return is inapplicable to both corporate and 
non-corporate tax shelters. For this purpose, a tax shelter is 
a partnership or other entity, plan, or arrangement the 
principal purpose of which is the avoidance or evasion of 
Federal income tax.
    The Secretary may waive the penalty with respect to any 
item if the taxpayer establishes reasonable cause for his 
treatment of the item and that he acted in good faith.

                           Reasons for Change

    The provision will improve compliance with the tax laws by 
giving the Treasury Department earlier notification than it 
generally receives under present law of transactions that may 
not comport with the tax laws. In addition, the provision will 
improve compliance by discouraging taxpayers from entering into 
questionable transactions. Also, the provision will improve 
economic efficiency, because investments that are not 
economically motivated, but that are instead tax-motivated, may 
reduce the supply of capital available for economically 
motivated activities, which could cause a loss of economic 
efficiency.

                        Explanation of Provision

Tax shelter registration

    The provision requires a promoter of a corporate tax 
shelter to register the shelter with the Secretary. 
Registration is required not later than the next business day 
after the day when the tax shelter is first offered to 
potential users. If the promoter is not a U.S. person, or if a 
required registration is not otherwise made, then any U.S. 
participant is required to register the shelter. An exception 
to this special rule provides that registration would not be 
required if the U.S. participant notifies the promoter in 
writing not later than 90 days after discussions began that the 
U.S. participant will not participate in the shelter and the 
U.S. person does not in fact participate in the shelter.
    A corporate tax shelter is any investment, plan, 
arrangement or transaction (1) a significant purpose of the 
structure of which is tax avoidance or evasion by a corporate 
participant, (2) that is offered to any potential participant 
under conditions of confidentiality, and (3) for which the tax 
shelter promoters may receive total fees in excess of $100,000.
    A transaction is offered under conditions of 
confidentiality if: (1) an offeree (or any person acting on its 
behalf) has an understanding or agreement with or for the 
benefit of any promoter to restrict or limit its disclosure of 
the transaction or any significant tax features of the 
transaction; or (2) the promoter claims, knows or has reason to 
know (or the promoter causes another person to claim or 
otherwise knows or has reason to know that a party other than 
the potential offeree claims) that the transaction (or one or 
more aspects of its structure) is proprietary to the promoter 
or any party other than the offeree, or is otherwise protected 
from disclosure or use. The promoter includes specified related 
parties.
    Registration will require the submission of information 
identifying and describing the tax shelter and the tax benefits 
of the tax shelter, as well as such other information as the 
Treasury Department may require.
    Tax shelter promoters are required to maintain lists of 
those who have signed confidentiality agreements, or otherwise 
have been subjected to nondisclosure requirements, with respect 
to particular tax shelters. In addition, promoters must retain 
lists of those paying fees with respect to plans or 
arrangements that have previously been registered (even though 
the particular party may not have been subject to 
confidentiality restrictions).
    All registrations will be treated as taxpayer information 
under the provisions of section 6103 and will therefore not be 
subject to any public disclosure.
    The penalty for failing to timely register a corporate tax 
shelter is the greater of $10,000 or 50 percent of the fees 
payable to any promoter with respect to offerings prior to the 
date of late registration (i.e., this part of the penalty does 
not apply to fee payments with respect to offerings after late 
registration). A similar penalty is applicable to actual 
participants in any corporate tax shelter who were required to 
register the tax shelter but did not. With respect to 
participants, however, the 50-percent penalty is based only on 
fees paid by that participant. Intentional disregard of the 
requirement to register by either a promoter or a participant 
increases the 50-percent penalty to 75 percent of the 
applicable fees.

Substantial understatement penalty

    The provision makes two modifications to the substantial 
understatement penalty. The first modification affects the 
reduction in the amount of the understatement which is 
attributable to an item if there is a reasonable basis for the 
treatment of the item. The provision provides that in no event 
would a corporation have a reasonable basis for its tax 
treatment of an item attributable to a multi-party financing 
transaction if such treatment does not clearly reflect the 
income of the corporation. No inference is intended that such a 
multi-party financing transaction could not also be a tax 
shelter as defined under the modification described below or 
under present law.
    The second modification affects the special tax shelter 
rules, which define a tax shelter as an entity the principal 
purpose of which is the avoidance or evasion of Federal income 
tax. The provision instead provides that a significant purpose 
(rather than the principal purpose) of the entity must be the 
avoidance or evasion of Federal income tax for the entity to be 
considered a tax shelter. This modification conforms the 
definition of tax shelter for purposes of the substantial 
understatement penalty to the definition of tax shelter for 
purposes of these new confidential corporate tax shelter 
registration requirements.

Treasury report

    The provision also directs the Treasury Department, in 
consultation with the Department of Justice, to issue a report 
to the tax-writing committees on the following tax shelter 
issues: (1) a description of enforcement efforts under section 
7408 of the Code (relating to actions to enjoin promoters of 
abusive tax shelters) with respect to corporate tax shelters 
and the lawyers, accountants, and others who provide opinions 
(whether or not directly addressed to the taxpayer) regarding 
aspects of corporate tax shelters; (2) an evaluation of whether 
the penalties regarding corporate tax shelters are generally 
sufficient; and (3) an evaluation of whether confidential tax 
shelter registration should be extended to transactions where 
the investor (or potential investor) is not a corporation. The 
report is due one year after the date of enactment.

                             Effective Date

    The tax shelter registration provision applies to any tax 
shelter offered to potential participants after the date the 
Treasury Department issues guidance with respect to the filing 
requirements. The modifications to the substantial 
understatement penalty apply to items with respect to 
transactions entered into after the date of enactment.

2. Treat certain preferred stock as ``boot'' (sec. 1022 of the bill and 
             secs. 351, 354, 355, 356 and 1036 of the Code)

                              Present Law

    In reorganization transactions within the meaning of 
section 368 and certain other retructurings, no gain or loss is 
recognized except to the extent ``other property'' (often 
called ``boot'') is received, that is, property other than 
certain stock, including preferred stock. Thus, preferred stock 
can be received tax-free in a reorganization. Upon the receipt 
of ``other property,'' gain but not loss can be recognized. A 
special rule permits debt securities to be received tax-free, 
but only to the extent debt securities of no lesser principal 
amount are surrendered in the exchange. Other than this debt-
for-debt rule, similar rules generally apply to transactions 
described in section 351.

                           Reasons for Change

    Certain preferred stocks have been widely used in corporate 
transactions to afford taxpayers non-recognition treatment, 
even though the taxpayer may receive relatively secure 
instruments in exchange for relatively risky instruments.
    As one example, a shareholder of a corporation that is to 
be acquired for cash may not wish to recognize gain on a sale 
of his or her stock at that time. Transactions are structured 
so that a new holding company is formed, to which the 
shareholder contributes common stock of the company to be 
acquired, and receives in exchange a preferred stock. The 
acquiring corporation contributes cash to a holding company, 
which uses the cash to acquire the stock of the other 
shareholders. In the final acquisition structure, the 
shareholder who received the preferred stock may also have the 
additional benefit that the holding company, in which the 
shareholder now owns preferred stock, may itself own highly 
secure investments. (Similar results might also be obtained if 
the corporation to be acquired recapitalized by issuing the 
preferred stock in exchange for the common stock of the 
shareholder.) Features such as puts and calls may effectively 
determine the period within which total payment is to occur. In 
the case of an individual shareholder, the preferred stock may 
be puttable or redeemable only at death, in which case the 
shareholder obtains a basis step-up and never recognizes gain 
on the transaction.
    Similarly, as another type of example, so called ``auction 
rate'' preferred stock has a mechanism to reset the dividend 
rate on preferred stock so that it tracks changes in interest 
rates over the term of the instrument, thus diminishing any 
risk that the ``principal'' amount of stock would change if 
interest rates changed.
    The Committee believes that when such preferred stock 
instruments are received in certain exchange transactions, it 
is appropriate to view such instruments as taxable 
consideration since the investor has often obtained a more 
secure form of investment.

                        Explanation of Provision

    The bill amends the relevant provisions (secs. 351, 354, 
355, 356 and 1036) to treat certain preferred stock as ``other 
property'' (i.e., ``boot'') subject to certain exceptions. 
Thus, when a taxpayer exchanges property for this preferred 
stock in a transaction that qualifies under either section 351, 
355, 368, or 1036, gain but not loss is recognized.
    The bill applies to preferred stock (i.e., stock that is 
limited and preferred as to dividends and does not participate, 
including through a conversion privilege, in corporate growth 
to any significant extent), where (1) the holder has the right 
to require the issuer or a related person (within the meaning 
of secs. 267(b) and 707(b)) to redeem or purchase the stock, 
(2) the issuer or a related person is required to redeem or 
purchase the stock, (3) the issuer (or a related person) has 
the right to redeem or purchase the stock and, as of the issue 
date, it is more likely than not that such right will be 
exercised, or (4) the dividend rate on the stock varies in 
whole or in part (directly or indirectly) with reference to 
interest rates, commodity prices, or other similar indices, 
regardless of whether such varying rate is provided as an 
express term of the stock (for example, in the case of an 
adjustable rate stock) or as a practical result of other 
aspects of the stock (for example, in the case of auction rate 
stock). For this purpose, the rules of (1), (2), and (3) apply 
if the right or obligation may be exercised within 20 years of 
the date the instrument is issued and such right or obligation 
is not subject to a contingency which, as of the issue date, 
makes remote the likelihood of the redemption or purchase. In 
addition, if neither the stock surrendered nor the stock 
received in the exchange is stock of a corporation any class of 
stock of which (or of a related corporation) is publicly 
traded, a right or obligation is disregarded if it may be 
exercised only upon the death, disability, or mental 
incompetency of the holder. Also, a right or obligation is 
disregarded in the case of stock transferred in connection with 
the performance of services if it may be exercised only upon 
the holder's separation from service.
    The following exchanges are excluded from this gain 
recognition: (1) certain exchanges of preferred stock for 
comparable preferred stock of the same or lesser value; (2) an 
exchange of preferred stock for common stock; (3) certain 
exchanges of debt securities for preferred stock of the same or 
lesser value; and (4) exchanges of stock in certain 
recapitalizations of family-owned corporations. For this 
purpose, a family-owned corporation is defined as any 
corporation if at least 50 percent of the total voting power 
and value of the stock of such corporation is owned by members 
of the same family for five years preceding the 
recapitalization. In addition, a recapitalization does not 
qualify for the exception if the same family does not own 50 
percent of the total voting power and value of the stock 
throughout the three-year period following the 
recapitalization. Members of the same family are defined by 
reference to the definition in section 447(e). Thus, a family 
includes children, parents, brothers, sisters, and spouses, 
with a limited attribution for directly and indirectly owned 
stock of the corporation. Shares held by a family member are 
treated as not held by a family member to the extent a non-
family member had a right, option or agreement to acquire the 
shares (directly or indirectly, for example, through 
redemptions by the issuer), or with respect to shares as to 
which a family member has reduced its risk of loss with respect 
to the share, for example, through an equity swap. Even though 
the provision excepts certain family recapitalizations, the 
special valuation rules of section 2701 for estate and gift tax 
consequences continue to apply.
    An exchange of nonqualified preferred stock for 
nonqualified preferred stock in an acquiring corporation may 
qualify for tax-free treatment under section 354, but not 
section 351. In cases in which both sections 354 and 351 may 
apply to a transaction, section 354 generally will apply for 
purposes of this proposal. Thus, in that situation, the 
exchange would be tax free.
    The Treasury Secretary has regulatory authority to (1) 
apply installment sale-type rules to preferred stock that is 
subject to this proposal in appropriate cases and (2) prescribe 
treatment of preferred stock subject to this provision under 
other provisions of the Code (e.g., secs. 304, 306, 318, and 
368(c)). Until regulations are issued, preferred stock that is 
subject to the proposal shall continue to be treated as stock 
under other provisions of the Code.

                             Effective Date

    The provision is effective for transactions after June 8, 
1997, but will not apply to such transactions (1) made pursuant 
to a written agreement which was binding on such date and at 
all times thereafter, (2) described in a ruling request 
submitted to the Internal Revenue Service on or before such 
date, or (3) described in a public announcement or filing with 
the Securities and Exchange Commission on or before such date.

                      D. Administrative Provisions

 1. Reporting of certain payments made to attorneys (sec. 1031 of the 
                    bill and sec. 6045 of the Code)

                              Present Law

    Information reporting is required by persons engaged in a 
trade or business and making payments in the course of that 
trade or business of ``rent, salaries, wages, * * * or other 
fixed or determinable gains, profits, and income'' (Code sec. 
6041(a)). Treas. reg. sec. 1.6041-1(d)(2) provides that 
attorney's fees are required to be reported if they are paid by 
a person in a trade or business in the course of a trade or 
business. Reporting is required to be done on Form 1099-Misc. 
If, on the other hand, the payment is a gross amount and it is 
not known what portion is the attorney's fee, no reporting is 
required on any portion of the payment.

                           Reasons for Change

    The provision will have a positive impact on compliance 
with the tax laws by requiring additional information 
reporting. Although some might consider it inappropriate to 
single out payments to one profession for additional 
information reporting, requiring reporting is appropriate in 
this instance because attorneys are generally the only 
professionals who receive this type of payment, a portion of 
which may be income to them and a portion of which may belong 
to their client.

                        Explanation of Provision

    The provision requires gross proceeds reporting on all 
payments to attorneys made by a trade or business in the course 
of that trade or business. It is anticipated that gross 
proceeds reporting would be required on Form 1099-B (currently 
used by brokers to report gross proceeds). The only exception 
to this new reporting requirement would be for any payments 
reported on either Form 1099-Misc under section 6041 (reports 
of payment of income) or on Form W-2 under section 6051 
(payments of wages).
    In addition, the present exception in the regulations 
exempting from reporting any payments made to corporations will 
not apply to payments made to attorneys. Treasury regulation 
section 1.6041-3(c) exempts payments to corporations generally 
(although payments to most corporations providing medical 
services must be reported). Reporting will be required under 
both Code sections 6041 and 6045 (as proposed) for payments to 
corporations that provide legal services. The exception of 
Treasury regulation section 1.6041-3(g) exempting from 
reporting payments of salaries or profits paid or distributed 
by a partnership to the individual partners would continue to 
apply to both sections (since these amounts are required to 
reported on Form K-1).
    First, the provision applies to payments made to attorneys 
regardless of whether the attorney is the exclusive payee. 
Second, payments to law firms are payments to attorneys, and 
therefore are subject to this reporting provision. Third, 
attorneys are required to promptly supply their TINs to persons 
required to file these information reports, pursuant to section 
6109. Failure to do so could result in the attorney being 
subject to penalty under section 6723 and the payments being 
subject to backup withholding under section 3406. Fourth, the 
IRS should administer this provision so that there is no 
overlap between reporting under section 6041 and reporting 
under section 6045. For example, if two payments are 
simultaneously made to an attorney, one of which represents the 
attorney's fee and the second of which represents the 
settlement with the attorney's client, the first payment would 
be reported under section 6041 and the second payment would not 
be reported under either section 6041 or section 6045, since it 
is known that the entire payment represents the settlement with 
the client (and therefore no portion of it represents income to 
the attorney).

                             Effective Date

    The provision is effective for payments made after December 
31, 1997. Consequently, the first information reports will be 
filed with the IRS (and copies will be provided to recipients 
of the payments) in 1999, with respect to payments made in 
1998.

 2. Information reporting on persons receiving contract payments from 
 certain Federal agencies (sec. 1032 of the bill and sec. 6041A of the 
                                 Code)

                              Present Law

    A service recipient (i.e., a person for whom services are 
performed) engaged in a trade or business who makes payments of 
remuneration in the course of that trade or business to any 
person for services performed must file with the IRS an 
information return reporting such payments (and the name, 
address, and taxpayer identification number of the recipient) 
if the remuneration paid to the person during the calendar year 
is $600 or more (sec. 6041A(a)). A similar statement must also 
be furnished to the person to whom such payments were made 
(sec. 6041A(e)). Treasury regulations explicitly exempt from 
this reporting requirement payments made to a corporation 
(Treas. reg. sec. 1.6041A-1(d)(2)).
    The head of each Federal executive agency must file an 
information return indicating the name, address, and taxpayer 
identification number (TIN) of each person (including 
corporations) with which the agency enters into a contract 
(sec. 6050M). The Secretary of the Treasury has the authority 
to require that the returns be in such form and be made at such 
time as is necessary to make the returns useful as a source of 
information for collection purposes. The Secretary is given the 
authority both to establish minimum amounts for which no 
reporting is necessary as well as to extend the reporting 
requirements to Federal license grantors and subcontractors of 
Federal contracts. Treasury regulations provide that no 
reporting is required if the contract is for $25,000 or less 
(Treas. reg. sec. 1.6050M-1(c)(1)(i)).

                           Reasons for Change

    Lowering the information reporting threshold from $25,000 
to $600 will improve compliance because additional, small-
dollar value contracts will be reported.

                        Explanation of Provision

    The provision requires reporting of all payments of $600 or 
more made by a Federal executive agency to any person 
(including a corporation) for services. In addition, the 
provision requires that a copy of the information return be 
sent by the Federal agency to the recipient of the payment. An 
exception is provided for certain classified or confidential 
contracts.

                             Effective Date

    The provision is effective for returns the due date for 
which (without regard to extensions) is more than 90 days after 
the date of enactment.

 3. Disclosure of tax return information for administration of certain 
  veterans programs (sec. 1033 of the bill and sec. 6103 of the Code)

                              Present Law

    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized disclosure is a felony punishable by a fine 
not exceeding $5,000 or imprisonment of not more than five 
years, or both (sec. 7213). An action for civil damages also 
may be brought for unauthorized disclosure (sec. 7431). No tax 
information may be furnished by the Internal Revenue Service 
(``IRS'') to another agency unless the other agency establishes 
procedures satisfactory to the IRS for safeguarding the tax 
information it receives (sec. 6103(p)).
    Among the disclosures permitted under the Code is 
disclosure to the Department of Veterans Affairs (``DVA'') of 
self-employment tax information and certain tax information 
supplied to the Internal Revenue Service and Social Security 
Administration by third parties. Disclosure is permitted to 
assist DVA in determining eligibility for, and establishing 
correct benefit amounts under, certain of its needs-based 
pension, health care, and other programs (sec. 
6103(1)(7)(D)(viii)). The income tax returns filed by the 
veterans themselves are not disclosed to DVA.
    The DVA is required to comply with the safeguards currently 
contained in the Code and in section 1137(c) of the Social 
Security Act (governing the use of disclosed tax information). 
These safeguards include independent verification of tax data, 
notification to the individual concerned, and the opportunity 
to contest agency findings based on such information.
    The DVA disclosure provision is scheduled to expire after 
September 30, 1998.

                           Reasons for Change

    It is appropriate to permit disclosure of otherwise 
confidential tax information to ensure the correctness of 
government benefits payments.

                        Explanation of Provision

    The provision permanently extends the DVA disclosure 
provision.

                             Effective Date

    The provision is effective on the date of enactment.

  4. Establish IRS continuous levy and improve debt collection (secs. 
 1034, 1035, and 1036 of the bill and secs. 6331 and 6334 of the Code)

a. Continuous levy

                              Present Law

    If any person is liable for any internal revenue tax and 
does not pay it within 10 days after notice and demand \22\ by 
the IRS, the IRS may then collect the tax by levy upon all 
property and rights to property belonging to the person,\23\ 
unless there is an explicit statutory restriction on doing so. 
A levy is the seizure of the person's property or rights to 
property. Property that is not cash is sold pursuant to 
statutory requirements.\24\
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    \22\ Notice and demand is the notice given to a person liable for 
tax stating that the tax has been assessed and demanding that payment 
be made. The notice and demand must be mailed to the person's last 
known address or left at the person's dwelling or usual place of 
business (Code sec. 6303).
    \23\ Code sec. 6331.
    \24\ Code secs. 6335-6343.
---------------------------------------------------------------------------
    In general, a levy does not apply to property acquired 
after the date of the levy,\25\ regardless of whether the 
property is held by the taxpayer or by a third party (such as a 
bank) on behalf of a taxpayer. Successive seizures may be 
necessary if the initial seizure is insufficient to satisfy the 
liability.\26\ The only exception to this rule is for salary 
and wages.\27\ A levy on salary and wages is continuous from 
the date it is first made until the date it is fully paid or 
becomes unenforceable.
---------------------------------------------------------------------------
    \25\ Code sec. 6331(b).
    \26\ Code sec. 6331(c).
    \27\ Code sec. 6331(e).
---------------------------------------------------------------------------
    A minimum exemption is provided for salary and wages.\28\ 
It is computed on a weekly basis by adding the value of the 
standard deduction plus the aggregate value of personal 
exemptions to which the taxpayer is entitled, divided by 
52.\29\ For a family of four for taxable year 1996, the weekly 
minimum exemption is $325.\30\
---------------------------------------------------------------------------
    \28\ Code sec. 6334(a)(9).
    \29\ Code sec. 6334(d).
    \30\ Standard deduction of $6,700 plus four personal exemptions at 
$2,550 each equals $16,900, which when divided by 52 equals $325.
---------------------------------------------------------------------------

                           Reasons for Change

    The extension of the continuous levy provisions will 
substantially ease the administrative burdens of collecting 
taxes by levy. The Committee anticipates that taxpayers who 
already comply with the tax laws will have a positive view of 
increased collections of taxes owed by taxpayers who have not 
complied with the tax laws.

                        Explanation of Provision

    The provision amends the Code to provide that a continuous 
levy is also applicable to non-means tested recurring Federal 
payments. This is defined as a Federal payment for which 
eligibility is not based on the income and/or assets of a 
payee. For example, Social Security payments, which are subject 
to levy under present law, would become subject to continuous 
levy.
    In addition, the provision provides that this levy would 
attach up to 15 percent of any specified payment due the 
taxpayer. This rule explicitly replaces the other specifically 
enumerated exemptions from levy in the Code. A continuous levy 
of up to 15 percent would also apply to unemployment benefits 
and means-tested public assistance.
    The bill also permits the disclosure of otherwise 
confidential tax return information to the Treasury 
Department's Financial Management Service only for the purpose 
of, and to the extent necessary in, implementing these levy 
provisions.

                             Effective Date

    The provision is effective for levies issued after the date 
of enactment.

b. Modifications of levy exemptions

                              Present Law

    The Code exempts from levy workmen's compensation payments 
\31\ and annuity or pension payments under the Railroad 
Retirement Act and benefits under the Railroad Unemployment 
Insurance Act \32\ described above, unemployment benefits \33\ 
and means-tested public assistance.\34\
---------------------------------------------------------------------------
    \31\ Code sec. 6334(a)(7).
    \32\ Code sec. 6334(a)(6).
    \33\ Sec. 6334(a)(4).
    \34\ Sec. 6334(a)(11).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that if wages are subject to levy, 
wage replacement payments should also be subject to levy. In 
addition, the Committee believes that it is inappropriate to 
exempt from levy one type of annuity or pension payment while 
most other types of these payments are subject to levy.

                        Explanation of Provision

    The provision provides that the following property is not 
exempt from levy if the Secretary of the Treasury (or his 
delegate) approves the levy of such property:
          (1) workmen's compensation payments,
          (2) annuity or pension payments under the Railroad 
        Retirement Act and benefits under the Railroad 
        Unemployment Insurance Act,
          (3) unemployment benefits, and
          (4) means-tested public assistance.

                             Effective Date

    The provision applies to levies issued after the date of 
enactment.

5. Consistency rule for beneficiaries of trusts and estates (sec. 1037 
                of the bill and sec. 6034A of the Code)

                              Present Law

    An S corporation is required to file a return for the 
taxable year and is required to furnish to its shareholders a 
copy of certain information shown on such return. The 
shareholder is required to file its return in a manner that is 
consistent with the information received from the S 
corporation, unless the shareholder files with the Secretary of 
the Treasury a notification of inconsistent treatment (sec. 
6037(c)). Similar rules apply in the case of partnerships and 
their partners (sec. 6222).
    The fiduciary of an estate or trust that is required to 
file a return for any taxable year is required to furnish to 
beneficiaries certain information shown on such return 
(generally via a Schedule K-1) (sec. 6034A). In addition, a 
U.S. person that is treated as the owner of any portion of a 
foreign trust is required to ensure that the trust files a 
return for the taxable year and furnishes certain required 
information to each U.S. person who is treated as an owner of a 
portion of the trust or who receives any distribution from the 
trust (sec. 6048(b)). However, rules comparable to the 
consistency rules that apply to S corporation shareholders and 
partners in partnerships are not specified in the case of 
beneficiaries of estates and trusts.

                           Reasons for Change

    Both partners in partnerships and shareholders of S 
corporations are required either to file their returns on a 
basis that is consistent with the information received from the 
partnership or S corporation or to identify any inconsistent 
treatment. The Committee believes that it is appropriate to 
apply such requirement also to beneficiaries of estates and 
trusts.

                        Explanation of Provision

    Under the bill, a beneficiary of an estate or trust is 
required to file its return in a manner that is consistent with 
the information received from the estate or trust, unless the 
beneficiary files with its return a notification of 
inconsistent treatment identifying the inconsistency.

                             Effective Date

    The provision is effective for returns filed after date of 
enactment.

                        E. Excise Tax Provisions

 1. Extension and modification of Airport and Airway Trust Fund excise 
  taxes (sec. 1041 of the bill and secs. 4081, 4091, and 4261 of the 
                                 Code)

                              Present Law

    Present law imposes a variety of excise taxes on air 
transportation to finance the Airport and Airway Trust Fund 
programs administered by the Federal Aviation Administration 
(the ``FAA''). In general, the full cost of FAA capital 
programs is financed from the Airport and Airway Trust Fund, 
while only a portion of FAA operational expenses is Trust Fund-
financed. Overall, the portion of total FAA expenditures that 
has been financed from the Trust Fund has declined from 75 
percent through the early 1990s to 62 percent for the 1997 
fiscal year. The balance is financed by general taxpayers, 
rather than directly by program users. Each of the Airport and 
Airway Trust Fund excise taxes is scheduled to expire after 
September 30, 1997.

Commercial air passenger transportation taxes

    Domestic air passenger transportation is subject to an ad 
valorem excise tax equal to 10 percent of the amount paid for 
the transportation. Taxable domestic air transportation 
includes both travel within the United States and certain 
travel between the United States and points in Canada or Mexico 
that are within 225 miles of the U.S. border (the ``225-mile 
zone'').
    International air passenger transportation is subject to a 
$6 departure excise tax imposed on passengers departing the 
United States for other countries. No tax is imposed on 
passengers arriving in the United States from other countries. 
International transportation is defined to include separate 
domestic flights that connect to international flights, 
provided that stopover time at any point within the United 
States does not exceed 12 hours. Thus, these ``domestic legs'' 
associated with international transportation (e.g., a flight 
from Los Angeles to New York from which the passenger boards a 
connecting flight to London) are exempt from the 10-percent ad 
valorem excise tax otherwise imposed on such transportation 
between two domestic points.
    Because both the domestic and international air passenger 
excise taxes are imposed only on transportation for which an 
amount is paid, no tax is imposed on ``free'' travel (e.g., 
frequent flyer travel and airline industry employee travel for 
which the passenger is not directly charged) even if third 
parties (e.g., credit card companies) make cash or in kind 
payments for the right to award the ``free'' or reduced-rate 
travel to their customers.
    The air passenger transportation excise taxes are imposed 
on passengers; transportation providers (generally airlines) 
are responsible for collecting and remitting the taxes to the 
Federal Government. In general, both the domestic and 
international air passenger transportation excise taxes are 
imposed without regard to whether the transportation is 
purchased within the United States. An exception provides that 
travel between the United States and the 225-mile zone is 
subject to the ad valorem domestic tax only if it is purchased 
within the United States.
    The Code requires all advertising for taxable air passenger 
transportation either (1) to state the fare on a tax-inclusive 
basis or (2) if the Federal tax is stated separately, to state 
the amount of the tax at least as prominently as the underlying 
airline fare and to identify that amount as ``user taxes to pay 
for airport construction and airway safety and operations'' 
(sec. 7275(b)).
    The amount of air passenger transportation excise tax 
collected from a passenger must be stated separately on the 
ticket.

Commercial air cargo transportation

    Domestic air cargo transportation is subject to a 6.25-
percent ad valorem excise tax. This tax, like the air passenger 
excise taxes, is imposed on the consumer, with the 
transportation provider being required to collect and remit the 
tax to the Federal Government. However, there is no requirement 
that the tax be stated separately on shipping invoices.

Noncommercial aviation

    Noncommercial aviation, or transportation on private 
aircraft which is not ``for hire,'' is subject to excise taxes 
imposed on fuel in lieu of the commercial air passenger ticket 
and air cargo excise taxes. The current Airport and Airway 
Trust Fund tax rates on these fuels are 15 cents per gallon on 
aviation gasoline and 17.5 cents per gallon on jet fuel.
    The aviation gasoline excise tax is imposed on removal of 
the fuel from a registered terminal facility (the same point as 
the highway gasoline excise tax). The jet fuel excise tax is 
imposed on sale of the fuel by a wholesale distributor. Many 
larger airports have dedicated pipeline facilities that 
directly service aircraft; in such a case, the tax effectively 
is imposed at the retail level. The person removing the 
gasoline from a terminal facility or the wholesale distributor 
of the jet fuel is liable for these taxes.

General Fund aviation fuels excise tax

    Fuels used in air transportation are subject to a 4.3-
cents-per-gallon excise tax, receipts from which are retained 
in the General Fund. This fuels tax is identical to taxes also 
imposed on motor fuels used in other transportation sectors, 
including highway, inland waterway, and rail.

Deposit of air transportation excise taxes

    Under present law, the air passenger ticket and freight 
excise taxes are collected from passengers and freight shippers 
by the commercial air carriers. The air carriers then remit the 
funds to the Treasury Department; however, the air carriers are 
not required to remit monies immediately. Excise tax returns 
are filed quarterly (similar to annual income tax returns) with 
taxes being deposited on a semi-monthly basis (similar to 
estimated income taxes). For air transportation sold during a 
semi-monthly period, air carriers may elect to treat the taxes 
as collected on the last day of the first week of the second 
following semi-monthly period. Under these ``deemed collected'' 
rules, for example, the taxes on air transportation sold 
between August1 and August 15, are treated as collected by the 
air carriers on or before September 7, with the amounts generally being 
deposited with the Treasury Department by September 10. A special rule 
requires certain amounts deemed collected during the second half of 
September to be deposited by September 29.
    Semi-monthly deposits and quarterly excise tax returns also 
are required with respect to the fuels excise taxes imposed on 
air transportation.

Overflight user fees

    Non-tax user fees are imposed on air transportation (both 
commercial and noncommercial aviation) that travels through 
airspace for which the United States provides air traffic 
control services, but that neither lands in nor takes off from 
a point in the United States. These fees are imposed and 
collected by the FAA with respect to mileage actually flown, 
and apply both to travel within U.S. territorial airspace and 
to travel within international oceanic airspace for which the 
United States is responsible for providing air traffic control 
services.

                           Reasons for Change

    The Committee determined that provisions to ensure a long-
term, stable funding source for the Airport and Airway Trust 
Fund should be enacted at this time. As illustrated by the 
recent events when a shortfall in fiscal year 1997 FAA funding 
was narrowly averted by an emergency extension of the present-
law excise taxes through September 30, 1997, longer-term 
assurance of these funding needs is imperative. Therefore, the 
bill extends (with certain modifications) the current Airport 
and Airway excise taxes for a 10-year period, a move that is 
believed will resolve, for this period, concerns about the 
availability of adequate user tax revenues to fund the portion 
of FAA programs to be appropriated from the Airport and Airway 
Trust Fund.
    The Committee determined limited modifications to the 
current passenger excise tax structure are warranted. First, 
the structure of the tax is modified to include a reduced ad 
valorem rate and a fixed dollar amount tax rate applicable to 
all revenue passengers. In addition, the Committee determined 
that the perceived fairness of the passenger air transportation 
excise taxes will be improved if certain currently untaxed 
payments and passengers were required to contribute to the 
financing of the FAA programs from which they benefit. In 
furtherance of this goal, the bill extends the tax to 
internationally arriving passengers and clarifies that the tax 
applies to payments to airlines (and related parties) from 
credit card and other companies in exchange for the right to 
award frequent flyer or other reduced air travel rights.

                        Explanation of Provision

Extension of Airport and Airway Trust Fund taxes

    The Airport and Airway Trust Fund excise taxes, as modified 
below, are extended for 10 years, for the period October 1, 
1997, through September 30, 2007. The taxes that are extended 
include the domestic and international air passenger excise 
taxes, the air cargo excise tax, and the noncommercial aviation 
fuels taxes. Gross receipts from these taxes will continue to 
be deposited in the Airport and Airway Trust Fund.

Modification of commercial air passenger transportation taxes

    Modify tax rates.--The current 10-percent domestic air 
passenger excise tax is changed to a tax equal to the total of 
7.5 percent of the gross amount paid by the passenger for the 
transportation plus a $2.00 fixed dollar amount per flight 
segment. The fixed dollar amount per flight segment will be 
increased each January 1 for a four-year period, as follows:
                                               Per flight segment charge
Calendar year:
    1999.......................................................... $2.25
    2000..........................................................  2.50
    2001..........................................................  2.75
    2002..........................................................  3.00

    Beginning on January 1, 2003, and each January 1 
thereafter, the fixed dollar amount per flight segment will be 
indexed annually for inflation occurring after 2001, measured 
by changes in the Consumer Price Index (the ``CPI'') rounded to 
the nearest 10 cents. Inflation adjustments will be effective 
for transportation provided beginning after December 31, 2002, 
and in each subsequent calendar year.
    The term ``flight segment'' is defined as transportation 
involving a single take-off and a single landing.\35\ The bill 
provides that there is no change in the number of flight 
segments for which a passenger is charged (increase or 
decrease) in the case of transportation routing changes 
initiated by the air carrier, provided there is no change in 
the fare charged. Generally, this rule applies to flight 
changes for travel between the same origin and destination as a 
result of, e.g., aircraft mechanical problems. The rule 
similarly covers itinerary changes such as a diversion to 
another intermediate or destination airport as a result of 
inclement weather conditions.
---------------------------------------------------------------------------
    \35\ For example, travel from New York to San Francisco, with an 
intermediate stop in Chicago, would consist of two flight segments 
(without regard to whether the passenger changed aircraft in Chicago).
---------------------------------------------------------------------------
    All transportation between points within the 48 contiguous 
States (and within Hawaii or Alaska), other than domestic 
segments associated with international transportation, is 
subject to tax at the 7.5 percent and $2.00 rates.
    The current $6 international departure tax is increased to 
$15.50 per departure, and an identical $15.50 per passenger tax 
is imposed on arrivals in the United States from international 
locations. The international departure and arrival taxes are 
indexed for inflation occurring after 1997, measured by changes 
in the CPI rounded to the nearest 10 cents. Inflation 
adjustments will be effective for transportation provided 
beginning after December 31, 1998, and each subsequent calendar 
year.
    As under present law, certain air transportation between 
the United States and points within the 225-mile zone of Canada 
or Mexico is taxed as domestic transportation subject to the 
7.5 percent and $2.00 rates. The present-law rules classifying 
transportation between the 48 contiguous States and Alaska or 
Hawaii (or between those States) as part domestic and part 
international are retained, without change, other than a 
clarification that a single flight segment between the 48 
contiguous States and Alaska or Hawaii (or between those 
States) is subject to only one $15.50 per passenger 
international tax despite the fact that the flight both departs 
into and arrives from international airspace.
    Extension of tax to certain currently exempt passengers.--
As described above, passengers arriving in the United States 
from other countries, who currently are the only group of 
travelers whose transportation is subject neither to an excise 
tax nor a user fee for U.S.-provided aviation services, are 
subject to tax on their arriving international flights.
    Clarification further is provided that any amounts paid to 
air carriers (in cash or in kind) for the right to award or 
otherwise distribute free or reduced-rate air transportation 
are treated as amounts paid for taxable air transportation, 
subject to the 7.5 percent ad valorem tax rate. Examples of 
such taxable amounts include (1) payments for frequent flyer 
miles purchased by credit card companies, telephone companies, 
rental car companies, television networks, restaurants and 
hotels, and other businesses for distribution to their 
customers and others and (2) amounts received by airlines 
pursuant to joint venture credit card or other marketing 
arrangements. The Treasury Department is authorized 
specifically to disregard accounting allocations or other 
arrangements which have the effect of reducing artificially the 
base to which the 7.5-percent tax is applied. No inference is 
intended from this provision as to the proper treatment of 
these payments under present law.
    Advertising requirements.--The Code advertising 
requirements are modified to mandate that the Federal air 
transportation tax be stated separately. The tax must be stated 
proximate to the airfare in type at least 50 percent as large 
as the fare is stated, and be identified as a user tax as 
required under present law.
    Liability for tax.--The present-law provision imposing 
liability for the tax on passengers (with transportation 
providers being liable for collecting and remitting revenues to 
the Federal Government) are modified to impose secondary 
liability on air carriers. As with the current tax, the 
aggregate tax will continue to be required to be stated 
separately on passenger tickets.

Transfer of 4.3-cents-per-gallon fuels excise tax to Airport and Airway 
        Trust Fund

    The 4.3-cents-per-gallon excise tax on aviation gasoline 
and jet fuel will be deposited in the Airport and Airway Trust 
Fund, rather than in the General Fund, beginning with fuels 
sold or removed after September 30, 1997.

Modify air passenger excise tax deposit rules

    The deposit rules with respect to the commercial air 
passenger excise taxes are modified to permit payment of these 
taxes that otherwise would have been required to be deposited 
during the period August 15, 1997 through September 30, 1997, 
to be deposited on October 10, 1997.

                             Effective Date

    These provisions generally are effective on the date of 
enactment, for air transportation beginning after September 30, 
1997.
    Present law requires transportation providers to continue 
collecting the commercial aviation excise taxes (at the current 
rates) on transportation to be provided after September 30, 
1997, if the transportation is purchased before October 1, 
1997. The bill requires transportation providers to collect the 
taxes at the modified rates for transportation purchased after 
the date of enactment for travel beginning after September 30, 
1997.
    The extension of the general aviation fuels excise taxes is 
effective for fuels removed or sold after September 30, 1997.
    The provision clarifying application of the commercial air 
passenger excise tax to certain amounts paid for the right to 
award air transportation is effective for amounts paid (or 
benefits transferred) after September 30, 1997, except payments 
(or transfers) between related parties occurring after June 11, 
1997 and before October 1, 1997, are subject to tax if the 
payments relate to rights to transportation to be awarded or 
otherwise distributed after September 30, 1997.
    The provisions transferring certain General Fund fuels tax 
revenues and modifying the commercial air passenger excise tax 
deposit rules are effective on the date of enactment.

 2. Extend diesel fuel excise tax rules to kerosene (sec. 1042 of the 
                  bill and sec. 4081-4083 of the Code)

                              Present Law

    Diesel fuel used as a transportation motor fuel generally 
is taxed at 24.3 cents per gallon. This tax is collected on all 
diesel fuel upon removal from a pipeline or barge terminal 
unless the fuel is indelibly dyed and is destined for a 
nontaxable use. Diesel fuel also commonly is used as heating 
oil; diesel fuel used as heating oil is not subject to tax. 
Certain other uses also are exempt from tax, and some 
transportation uses (e.g., rail and intercity buses) are taxed 
at reduced rates. Both exemptions and reduced-rates are 
realized through refund claims if undyed diesel fuel is used in 
a qualifying use.
    Aviation gasoline and jet fuel (both commercial and 
noncommercial use) currently are subject to a 4.3-cents-per-
gallon General Fund tax rate. In addition, through September 
30, 1997, gasoline and jet fuel used in noncommercial aviation 
are subject to an additional 15-cents-per- gallon rate 
(gasoline) and 17.5-cents-per-gallon rate (jet fuel) for the 
Airport and Airway Trust Fund. These combined rates produce an 
aggregate tax of 21.8 cents per gallon on noncommercial 
aviation jet fuel and 19.3 cents per gallon on noncommercial 
aviation gasoline.The tax on non-gasoline aviation fuel is 
imposed on the sale of the fuel by a ``producer,'' typically a 
wholesale distributor. Thus, this tax is imposed at a point in the fuel 
distribution chain subsequent to removal from a terminal facility.
    Kerosene is used both as a transportation fuel and as an 
aviation fuel. Kerosene also is blended with diesel fuel 
destined both for taxable (highway) and nontaxable (heating 
oil) uses to, among other things, prevent gelling of the diesel 
fuel in colder temperatures. Under present law, kerosene is not 
subject to excise tax unless it is blended with taxable diesel 
fuel or is sold for use as aviation fuel. When kerosene is 
blended with dyed diesel fuel to be used in a nontaxable use, 
the dye concentration of the fuel mixture must be adjusted to 
ensure that it meets Treasury Department requirements for 
untaxed, dyed diesel fuel.
    Clear, low-sulphur kerosene (K-1) also is used in space 
heaters, and often is sold for this purpose at retail service 
stations. As with other heating oil uses, kerosene used in 
space heaters, is not subject to Federal excise tax. Although 
heating oil often has minor amounts of kerosene blended with it 
in colder weather, this blending typically occurs before 
removal of the fuel from the terminal facilities where Federal 
excise taxes are imposed. However, it may be necessary during 
periods of extreme or unseasonably cold weather to add kerosene 
to heating oil after its removal from the terminal. Other 
nontaxable uses of kerosene include feedstock use in the 
petrochemical industry.

                           Reasons for Change

    The Internal Revenue Service has discovered significant 
evidence that kerosene is being blended with taxable highway 
diesel fuel during periods when the blending is not necessary 
due to colder weather conditions. Some wholesale distributors 
of diesel fuel also have suggested that their competitors have 
not been paying the tax on the kerosene that they blend with 
diesel fuel for highway use. These reports of increased use of 
kerosene as a taxable highway fuel without payment of tax 
coincided with implementation of enhanced diesel fuel tax 
compliance measures that have significantly reduced 
opportunities to evade that tax. The Committee determined 
therefore, that these same compliance measures should be 
extended to kerosene.

                        Explanation of Provision

    The diesel fuel-excise tax rules are extended to kerosene. 
Thus, kerosene is be taxed when it is removed from a registered 
terminal unless it is indelibly dyed and destined for a 
nontaxable use. However, aviation-grade kerosene that is 
removed from the terminal by a registered producer of aviation 
fuel is not subject to the dyeing requirement and would be 
taxed under the present law rules applicable to aviation fuel. 
Feedstock kerosene that a registered industrial user receives 
by pipeline or vessel also is exempt from the dyeing 
requirement. Other feedstock kerosene would be exempt from the 
dyeing requirement to the extent and under conditions 
(including satisfaction of registration and certification 
requirements) prescribed by Treasury Department regulation.
    To accommodate State safety regulations that require the 
use of clear (K-1) kerosene in certain space heaters, a refund 
procedure would be provided under which registered ultimate 
vendors may claim refunds of the tax paid on kerosene sold for 
that use. In addition, the Internal Revenue Service is given 
discretion to refund to a registered ultimate vendor the tax 
paid on kerosene that is blended with heating oil for use 
during periods of extreme or unseasonable cold.

                             Effective Date

    The provision is effective for kerosene removed from 
terminal facilities after June 30, 1998. Appropriate floor 
stocks taxes will be imposed on kerosene held beyond the point 
of taxation on July 1, 1998.

3. Modify tax benefits for ethanol and renewable source methanol (sec. 
1043 of the bill and secs. 40, 4041, 4081, 4091, and 6427, and new sec. 
                           4476 of the Code)

                              Present Law

    Present law provides a 54-cents-per-gallon income tax 
credit for ethanol and a 60-cents-per-gallon income tax credit 
for methanol produced from renewable sources (e.g., biomass) 
that are used as a motor fuel or that are blended with other 
fuels (e.g., gasoline) for such a use. As an alternative to 
claiming the income tax credits directly, these tax benefits 
may be claimed as a reduction in the amount of excise tax paid 
on gasoline or diesel fuel with which the ethanol or renewable 
source methanol are blended or as a reduction in the special 
motor fuels rate applicable to ``neat'' ethanol or renewable 
source methanol fuels. The excise tax delivery of the benefits 
occurs either through reduced tax rate sales to registered 
blenders of e.g., gasoline or diesel fuel, or through expedited 
refunds of gasoline or diesel fuel tax paid.
    In addition to these general ethanol benefits, a separate 
10-cents-per-gallon credit is provided for small ethanol 
producers, defined generally as persons whose production does 
not exceed 15 million gallons per year and whose production 
capacity does not exceed 30 million gallons per year. No 
comparable small producer credit is provided for small 
renewable source methanol producers.
    Treasury Department regulations provide that ethyl tertiary 
butyl ether (``ETBE''), which is made using ethanol, qualifies 
for the blender income tax credit and the excise tax exemption.
    The alcohol fuels tax benefits are scheduled to expire 
after December 31, 2000. The provision allowing the ethanol 
blender benefits to be claimed through the motor fuels excise 
tax system is scheduled to expire after September 30, 2000.

                           Reasons for Change

    The ethanol tax subsidies originally were enacted in 1978 
to promote development of alternative fuels at a time when oil 
prices were projected to exceed $50 per barrel. The benefits 
were assumed to be temporary measures that would allow these 
fuels to become economical without permanent Federal subsidies. 
Nearly 20 years have passed since that enactment, and neither 
the projected prices of oil nor the ability of ethanol to be a 
viable fuel without Federalsubsidies has been realized. The 
Committee determined, therefore, that enactment of an orderly 
termination of this Federal subsidy program is appropriate at this 
time.

                        Explanation of Provision

    The bill retains the current blender ethanol (at a reduced 
level) and renewable source methanol benefits through their 
scheduled expirations in 2000, but limits the amount of 
production of these fuels eligible for tax benefits. The bill 
also clarifies that ETBE and similar ethers are not eligible 
for the alcohol fuel tax benefits.

Limit on production eligible for tax benefits

    The alcohol fuels income tax credits (other than the small 
ethanol producer tax credit) and the excise tax exemptions for 
ethanol and methanol from renewable sources will be available 
only for alcohol fuels produced by distilling equipment placed 
in service before June 9, 1997.\36\ Additionally, producers 
other than small producers (defined as under present law) will 
receive these benefits only to the extent that annual 
production after December 31, 1997, does not exceed average 
annual production of fuel alcohol by the equipment during a 
prescribed three-year period (the ``eligible production 
ceiling''). The eligible production ceiling is determined first 
by ascertaining annual production during each year of the five-
year period ending on May 31, 1997. The year when production 
was the greatest and the year when production was the lowest 
are eliminated. The production ceiling equals the average of 
the annual production during the remaining three years. A safe-
harbor production level equal to 50 percent of capacity as of 
June 8, 1997, is provided.
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    \36\ Property placed in service after June 8, 1997, pursuant to a 
binding contract entered into before June 9, 1997, would be treated as 
if placed in service before June 9, 1997.
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    To ensure that only eligible production continues to 
receive the blender tax benefits after the date of the bill's 
enactment, an ``excess production penalty'' is imposed on all 
production from equipment placed in service after June 8, 1997, 
and on production from existing equipment (by producers other 
than small producers) that exceeds the producer's eligible 
production ceiling. Beginning on January 1, 2001, all ethanol 
production will be treated as ``excess'' production, but the 
penalty will not apply during any period when no ethanol or 
renewable source methanol tax benefits are statutorily 
available. The penalty is non-deductible for Federal income tax 
purposes. Receipts from the penalty will be deposited in the 
Highway Trust Fund. The penalty offsets the benefit provided to 
excess production by the current general income tax and excise 
tax provisions; therefore, no changes (other than those 
described herein) are made to those provisions. Thus, blenders 
will remain eligible to claim the tax benefits in the same 
manner as provided under present law, through 2000.

Reduce ethanol tax benefits to reflect carbon dioxide by-product value; 
        offset for small producers

    Carbon dioxide is a naturally occurring by-product of 
ethanol production. This carbon dioxide is commercially 
valuable and currently is being captured and sold by ethanol 
producers. The 54-cents-per-gallon ethanol income tax credit 
and the 5.4-cents-per-gallon ethanol excise tax exemptions are 
reduced to 51 cents per gallon and 5.1 cents per gallon, 
respectively, to reflect the value of carbon dioxide recovered 
as a by-product in ethanol production.
    The present-law small ethanol producers credit is increased 
from 10 cents per gallon to 13 cents per gallon to offset the 
effect of this reduction for small producers.

ETBE and similar ethers not to qualify

    Statutory clarification is provided that ETBE and similar 
ethers (and alcohol used to produce these ethers) are not 
qualified alcohol fuels for either the ethanol or methanol from 
renewable sources tax benefits.

                             Effective Date

Limit on eligible production

    The provision limiting production eligible for the alcohol 
fuels tax benefits to production from facilities placed in 
service before June 9, 1997, is effective on the date of 
enactment. The production limits applicable to such 
grandfathered facilities is effective for production occurring 
after December 31, 1997.

Reduce ethanol tax benefits to reflect carbon dioxide by-product value

    The reduction in the ethanol blenders credit and excise tax 
exemption to reflect the value of carbon dioxide produced as a 
by-product and the offsetting increase in the small producer's 
income tax credit are effective on January 1, 1998.

ETBE and similar ethers not to qualify

    The provision reversing the Treasury Department regulations 
defining ethers as qualified alcohol fuels is effective for 
ethers produced after December 31, 1997.

  4. Reinstate Leaking Underground Storage Tank Trust Fund excise tax 
(sec. 1044 of the bill and secs. 4041(d), 4081(a)(2), and 4081(d)(2) of 
                               the Code)

                              Present Law

    Before January 1, 1996, an excise tax of 0.1 cent per 
gallon was imposed on gasoline, diesel fuel (including train 
diesel fuel), special motor fuels (other than liquefied 
petroleum gas), aviation fuels, and inland waterways fuels. 
Revenues from the tax were dedicated to the Leaking Underground 
Storage Tank Trust Fund to finance cleanups of leaking 
underground storage tanks.

                           Reasons for Change

    The Committee determined that the Leaking Underground 
Storage Tank Trust Fund excise tax should be reinstated for a 
5-year period to ensure the availability of funds to pay 
cleanup costs of leaking underground storage tanks.

                        Explanation of Provision

    The bill reinstates for a 5-year period the prior-law 
Leaking Underground Storage Tank Trust Fund excise tax.

                             Effective Date

    The provision is effective on the date of enactment.

5. Application of communications tax to long-distance prepaid telephone 
        cards (sec. 1045 of the bill and sec. 4251 of the Code)

                              Present Law

    A 3-percent excise tax is imposed on amounts paid for local 
and toll (long-distance) telephone service and teletypewriter 
exchange service. The tax is collected by the provider of the 
service from the consumer (business and personal service).

                           Reasons for Change

    The Committee understands that communication service 
providers sometimes sell units of long-distance service to 
third parties who, in turn, resell or distribute these units of 
long-distance telephone service to the ultimate customer in the 
form of prepaid telephone cards or similar arrangements. The 
Committee believes that such payments clearly represent 
payments for long-distance telephone service and clarifies that 
such payments are subject to the communications excise tax.

                        Explanation of Provision

    The bill provides that any amounts paid to communications 
service providers (in cash or in kind) for the right to award 
or otherwise distribute free or reduced-rate long-distance 
telephone service are treated as amounts paid for taxable 
communication services, subject to the 3-percent ad valorem tax 
rate. Examples of such taxable amounts include (1) prepaid 
telephone cards offered through service stations, convenience 
stores and other businesses to their customers and others and 
(2) amounts received by communication service providers 
pursuant to joint venture credit card or other marketing 
arrangements. The Treasury Department is authorized 
specifically to disregard accounting allocations or other 
arrangements which have the effect of reducing artificially the 
base to which the 3-percent tax is applied. No inference is 
intended from this provision as to the proper treatment of 
these payments under present law.

                             Effective Date

    The provision is effective for amounts paid on or after the 
date of enactment.

             f. provisions relating to tax-exempt entities

1. Extend UBIT rules to second-tier subsidiaries and amend control test 
        (sec. 1051 of the bill and sec. 512(b)(13) of the Code)

                              Present Law

    In general, interest, rents, royalties and annuities are 
excluded from unrelated taxable business income (UBTI) of tax-
exempt organizations. However, section 512(b)(13) treats 
otherwise excluded rent, royalty, annuity, and interest income 
as UBTI if such income is received from a taxable or tax-exempt 
subsidiary that is 80 percent controlled by the parent tax-
exempt organization.\37\ In the case of a stock subsidiary, the 
80 percent control test is met if the parent organization owns 
80 percent or more of the voting stock and all other classes of 
stock of the subsidiary.\38\ In the case of a non-stock 
subsidiary, the applicable Treasury regulations look to factors 
such as the representation of the parent corporation on the 
board of directors of the nonstock subsidiary, or the power of 
the parent corporation to appoint or remove the board of 
directors of the subsidiary.\39\
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    \37\ For this purpose, a ``controlled organization'' is defined 
under section 368(c). Under present law, rent, royalty. annuity, and 
interest payments are treated as UBTI when received by the parent 
organization based on the percentage of the subsidiary's income that is 
UBTI (either in the hands of the subsidiary if the subsidiary is tax-
exempt, or in the hands of the parent organization if the subsidiary is 
taxable).
    \38\ Treas. reg. sec. 1.512(b)-1(1)(4)(I)(a).
    \39\ Treas. reg. sec. 1.512(b)-1(1)(4)(I)(b).
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    The control test under section 512(b)(13) does not, 
however, incorporate any indirect ownership rules.\40\ 
Consequently, rents, royalties, annuities and interest derived 
from second-tier subsidiaries generally do not constitute UBTI 
to the tax-exempt parent organization.\41\
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    \40\ See PLR 9338003 (June 16, 1993) (holding that because no 
indirect ownership rules are applicable under section 512(b)(13), rents 
paid by a second-tier taxable subsidiary are not UBTI to a tax-exempt 
parent organization). In contrast, an example of an indirect ownership 
rule can be found in Code section 318. Section 318(a)(2)(C) provides 
that if 50 precent or more in value of the stock in a corporation is 
owned, directly or indirectly, by or for any person, such person shall 
be considered as owning the stock owned, directly or indirectly by or 
for such corporation, in the proportion the value of the person's stock 
ownership bears to the total value of all stock in the corporation.
    \41\ See PLR 9542045 (July 28, 1995) (holding that first-tier 
holding company and second-tier operating subsidiary were organized 
with bona fide business functions and were not agents of the tax-exempt 
parent organization; therefore, rents, royalties, and interest received 
by tax-exempt parent organization from second-tier subsidiary were not 
UBTI).
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                           Reasons for Change

    Section 512(b)(13) was enacted to prevent subsidiaries of 
tax-exempt organizations from reducing their otherwise taxable 
income by borrowing, leasing, or licensing assets from a tax-
exempt parent organization at inflated levels. Because section 
512(b)(13) was narrowly drafted, organizations were able to 
circumvent its application through, for example, the issuance 
of 21 percent of nonvoting stock with nominal value to a 
separate friendly party or through the use of tiered or 
brother/sister subsidiaries. The Committee believes that the 
modifications to the control requirement and inclusion of 
attribution rules will ensure that section 512(b)(13) operate 
consistent with its intended purpose.

                        Explanation of Provision

    The bill modifies the test for determining control for 
purposes of section 512(b)(13). Under the bill, ``control'' 
means (in the case of a stock corporation) ownership by vote or 
value of more than 50 percent of the stock. In the case of a 
partnership or other entity, control means ownership of more 
than 50 percent of the profits, capital or beneficial 
interests.
    In addition, the bill applies the constructive ownership 
rules of section 318 for purposes of section 512(b)(13). Thus, 
a parent exempt organization is deemed to control any 
subsidiary in which it holds more than 50 percent of the voting 
power or value, directly (as in the case of a first-tier 
subsidiary) or indirectly (as in the case of a second-tier 
subsidiary).
    The bill also makes technical modifications to the method 
provided in section 512(b)(13) for determining how much of an 
interest, rent, annuity, or royalty payment made by a 
controlled entity to a tax-exempt organization is includible in 
the latter organization's UBTI. Such payments are subject to 
the unrelated business income tax to the extent the payment 
reduces the net unrelated income (or increases any net 
unrelated loss) of the controlled entity.

                             Effective Date

    The modification of the control test to one based on vote 
or value, the application of the constructive ownership rules 
of section 318, and the technical modifications to the flow-
through method apply to taxable years beginning after the date 
of enactment. The reduction of the ownership threshold for 
purposes of the control test from 80 percent to more than 50 
percent applies to taxable years beginning after December 31, 
1998.

 2. Limitation on increase in basis of property resulting from sale by 
  tax-exempt entity to related person (sec. 1052 of the bill and sec. 
                           1061 of the Code)

                              Present Law

    If a tax-exempt entity transfers assets to a controlled 
taxable entity in a transaction that is treated as a sale, the 
transferee taxable entity obtains a fair market value basis in 
the assets. Because the transferor is tax-exempt, no gain is 
recognized on the transfer except to the extent of certain 
unrelated business taxable income, if any.
    Other provisions of the Code deny certain tax benefits when 
a transferor and transferee are related parties. For example, 
losses on sales between related parties are not recognized 
(sec. 267).

                           Reasons for Change

    The Committee recognizes that a tax-exempt entity can sell 
assets to a taxable party without recognition of gain, while 
that party receives a fair market value basis in the property. 
However, the Committee is concerned that tax-exempt entities 
may in effect structure transactions in which assets are 
transferred to taxable entities controlled by the tax-exempt 
entity, in a form such that a stepped-up basis and depreciation 
are available to reduce the amount that would otherwise have 
been taxable unrelated business income, if the tax-exempt 
entity had converted the same assets to taxable operation and 
operated the business itself.

                        Explanation of Provision

    In the case of a sale or exchange of property directly or 
indirectly between a tax-exempt entity and a related person, 
the basis of the related person in the property will not exceed 
the adjusted basis of such property immediately before the sale 
in the hands of the tax-exempt entity, increased by the amount 
of any gain recognized to the tax-exempt entity under the 
unrelated business taxable income rules of section 511.
    A related person means any person having a relationship to 
the tax-exempt entity described in section 267(b) or 707(b)(1) 
(generally, certain more-than-50-percent relationships, with 
specified attribution rules). For purposes of applying section 
267(b)(2), such an entity is treated as if it were an 
individual.

                             Effective Date

    The provision applies to sales or exchanges after June 8, 
1997; except that it will not apply to a sale or exchange made 
pursuant to a written agreement which was binding on such date 
and at all times thereafter.

  3. Reporting and proxy tax requirements for political and lobbying 
expenditures of certain tax-exempt organizations (sec. 1053 of the bill 
                     and sec. 6033(e) of the Code)

                              Present Law

    Section 162(e) denies deductions as a trade or business 
expense for certain lobbying and political expenditures. 
Section 162(e)(3) provides a flow-through rule to disallow a 
deduction for a portion of membership dues or similar payments 
paid to a tax-exempt organization if the organization notifies 
the member under section 6033(e) that such portion of the 
membership dues is allocable to political or lobbying 
activities engaged in by the organization.
    Under section 6033(e), tax-exempt organizations (other than 
charities described in section 501(c)(3)) that engage in 
lobbying or political campaign activities must disclose the 
amount of members' dues allocable to lobbying or political 
campaign expenditures to their members and to the Internal 
Revenue Service (IRS), except for certain in-house, de minimis 
expenses.\42\ If an organization fails to meet the disclosure 
requirement under section 6033(e), then the organization 
generally is subject to a so-called ``proxy tax'' equal to 35 
percent of the amount of members' dues allowable to lobbying or 
political campaign expenditures. However, under section 
6033(e)(3), organizations are exempt from the disclosure 
requirements and proxy tax if they can establish to the 
satisfaction of the Secretary of the Treasury that 
substantially all dues or other similar amounts received by the 
organization are not deductible without regard to whether or 
not the organization conducts lobbying or political campaign 
activities. In Rev. Proc. 95-35, the IRS announced that all 
tax-exempt organizations--other than (1) organizations 
described in section 501(c)(4) that are not veterans 
organizations, (2) agricultural and horticultural organizations 
described in section 501(c)(5), and (3) trade associations and 
other organizations described in section 501(c)(6)--are deemed 
automatically to qualify for the section 6033(e)(3) exemption 
from the general disclosure requirements and proxy tax. Rev. 
Proc. 95-35 further provides that an organization described in 
section 501(c)(4) or an agricultural or horticultural 
organization described in section 501(c)(5) qualified for the 
section 6033(e)(3) exemption if the organization receives at 
least 90 percent of its dues from (a) members with annual dues 
of less than $50 or (b) other tax-exempt organizations. Under 
Rev. Proc. 95-35, a trade association or other organization 
described in section 501(c)(6) qualifies for the section 
6033(e)(3) exemption if the organization receives at least 90 
percent of its dues from other tax-exempt organizations.\43\
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    \42\ Such disclosure is not required, however with respect to 
political expenditures if tax is imposed on the organization with 
respect to such expenditures under section 527(f) (see sec. 
6033(e)(1)(B)(iii)).
    \43\ In addition, Rev. Proc. 95-35 provides that any organization 
may establish that it satisfies the section 6033(e)(3) exemption by (1) 
maintaining records establishing that 90 percent or more of the annual 
dues paid to the organization are not deductible without regard to 
whether or not the organization conducts lobbying or political campaign 
activities, and (2) notifying the IRS that it is described in section 
6033(e)(3) on any Form 990 (i.e., annual information return) that is 
required to file. Additionally, an organization may request a private 
letter ruling that the organization is eligible for the section 
6033(e)(3) exemption.
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                           Reasons for Change

    The Committee believes that it is appropriate to modify 
present-law section 6033(e) to ensure that tax-exempt 
organizations (other than charities and organizations that 
receive annual dues of less than $100) do not use tax-
deductible dues payments to fund lobbying or political 
activities, the costs of which would not be deductible for 
Federal income tax purposes if incurred directly by members of 
the organization.

                        Explanation of Provision

    Section 6033(e)(3) is amended to provide that an exemption 
from the general disclosure requirements and proxy tax of 
section 6033(e) is available to a tax-exempt organization if 
more than 90 percent of the amount of aggregate annual dues (or 
similar payments) received by the organization are paid by (1) 
individuals or families whose annual dues (or similar amounts) 
are less than $100,\44\ or (2) tax-exempt entities. For 
purposes of the provision, all organizations sharing a name, 
charter, historic affiliation, or similar characteristics and 
coordinating their activities would be treated as a single 
entity. As under present law, charities described in section 
501(c)(3) are not subject to the section 6033(e) disclosure 
requirements and proxy tax.
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    \44\ The $100 amount will be indexed for inflation after December 
31, 1997 (rounded to the nearest multiple of $5).
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                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

4. Repeal grandfather rule with respect to pension business of certain 
insurers (sec. 1054 of the bill and sec. 1012(c) of the Tax Reform Act 
                                of 1986)

                              Present Law

    Present law provides that an organization described in 
sections 501(c) (3) or (4) of the Code is exempt from tax only 
if no substantial part of its activities consists of providing 
commercial-type insurance. When this rule was enacted in 1986, 
certain treatment (described below) applied to Blue Cross and 
Blue Shield organizations providing health insurance that (1) 
were in existence on August 16, 1986; (2) were determined at 
any time to be tax-exempt under a determination that had not 
been revoked; and (3) were tax-exempt for the last taxable year 
beginning before January 1, 1987 (when the present-law rule 
became effective), provided that no material change occurred in 
the structure or operations of the organizations after August 
16, 1986, and before the close of 1986 or any subsequent 
taxable year.
    The treatment applicable to such organizations, which 
became taxable organizations under the provision, is as 
follows. A special deduction applies with respect to health 
business equal to 25 percent of the claims and expenses 
incurred during the taxable year less the adjusted surplus at 
the beginning of the year. An exception is provided for such 
organizations from the application of the 20-percent reduction 
in the deduction for increases in unearned premiums that 
applies generally to property and casualty insurance companies. 
A fresh start was provided with respect to changes in 
accounting methods resulting from the change from tax-exempt to 
taxable status. Thus, no adjustment was made under section 481 
on account of an accounting method change. Such an organization 
was required to compute its ending 1986 loss reserves without 
artificial changes that would reduce 1987 income. Thus, any 
reserve weakening after August 16, 1986 was treated as 
occurring in the organization's first taxable year beginning 
after December 31, 1986. The basis of such an organization's 
assets was deemed to be equal to the amount of the assets' fair 
market value on the first day of the organization's taxable 
year beginning after December 31, 1986, for purposes of 
determining gain or loss (but not for determining depreciation 
or for other purposes).
    Grandfather rules were provided in the 1986 Act relating to 
the provision. It was provided that the provision does not 
apply to that portion of the business of the Teachers Insurance 
Annuity Association-College Retirement Equities Fund which is 
attributable to pension business, nor does the provision apply 
with respect to that portion of the business of Mutual of 
America which is attributable to pension business. Pension 
business means the administration of any plan described in 
section 401(a) of the Code which includes a trust exempt from 
tax under section 501(a), and plan under which amounts are 
contributed by an individual's employer for an annuity contract 
described in section 403(b) of the Code, any individual 
retirement plan described in section 408 of the Code, and any 
eligible deferred compensation plan to which section 457(a) of 
the Code applies.

                           Reasons for Change

    The Committee is concerned that the continued tax-exempt 
status of certain organizations that engage in insurance 
activities gives such organizations an unfair competitive 
advantage. The Committee believes that the provision of 
insurance at a price sufficient to cover the costs of insurance 
generally constitutes an activity that is commercial. Thus, the 
Committee believes, it is no longer appropriate to continue the 
grandfather rule that permits certain organizations to retain 
tax-exempt status with respect to pension business that 
constitutes commercial-type insurance.

                        Explanation of Provision

    The provision repeals the grandfather rules applicable to 
that portion of the business of the Teachers Insurance Annuity 
Association-College Retirement Equities Fund which is 
attributable to pension business and to that portion of the 
business of Mutual of America which is attributable to pension 
business. The Teachers Insurance Annuity Association and 
College Retirement Equities Fund and Mutual of America are to 
be treated for Federal tax purposes as life insurance 
companies.
    A fresh start is provided with respect to changes in 
accounting methods resulting from the change from tax-exempt to 
taxable status. Thus, no adjustment is made under section 481 
on account of an accounting method change. The Teachers 
Insurance Annuity Association and College Retirement Equities 
Fund and Mutual of America are required to compute ending 1997 
loss reserves without artificial changes that would reduce 1998 
income. Thus, any reserve weakening after June 8, 1997, is 
treated as occurring in the organization's first taxable year 
beginning after December 31, 1997. The basis of assets of 
Teachers Insurance Annuity Association and College Retirement 
Equities Fund and Mutual of America is deemed to be equal to 
the amount of the assets' fair market value on the first day of 
the organization's taxable year beginning after December 31, 
1997, for purposes of determining gain or loss (but not for 
determining depreciation or for other purposes).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

                  G. Other Revenue-Increase Provisions

  1. Phase out suspense accounts for certain large farm corporations 
            (sec. 1061 of the bill and sec. 477 of the Code)

                              Present Law

    A corporation (or a partnership with a corporate partner) 
engaged in the trade or business of farming must use an accrual 
method of accounting for such activities unless such 
corporation (or partnership), for each prior taxable year 
beginning after December 31, 1975, did not have gross receipts 
exceeding $1 million. If a farm corporation is required to 
change its method of accounting, the section 481 adjustment 
resulting from such change is included in gross income ratably 
over a 10-year period, beginning with the year of change. This 
rule does not apply to a family farm corporation.
    A provision of the Revenue Act of 1987 (``1987 Act'') 
requires a family corporation (or a partnership with a family 
corporation as a partner) to use an accrual method of 
accounting for its farming business unless, for each prior 
taxable year beginning after December 31, 1985, such 
corporation (and any predecessor corporation) did not have 
gross receipts exceeding $25 million. A family corporation is 
one where at 50 percent or more of the stock of the corporation 
is held by one (or in some limited cases, two or three) 
families.
    A family farm corporation that must change to an accrual 
method of accounting as a result of the 1987 Act provision is 
to establish a suspense account in lieu of including the entire 
amount of the section 481 adjustment in gross income. The 
initial balance of the suspense account equals the lesser of 
(1) the section 481 adjustment otherwise required for the year 
of change, or (2) the section 481 adjustment computed as if the 
change in method of accounting had occurred as of the beginning 
of the taxable year preceding the year of change.
    The amount of the suspense account is required to be 
included in gross income if the corporation ceases to be a 
family corporation. In addition, if the gross receipts of the 
corporation attributable to farming for any taxable year 
decline to an amount below the lesser of (1) the gross receipts 
attributable to farming for the last taxable year for which an 
accrual method of accounting was not required, or (2) the gross 
receipts attributable to farming for the most recent taxable 
year for which a portion of the suspense account was required 
to be included in income, a portion of the suspense account is 
required to be included in gross income.

                           Reasons for Change

    The Committee believes that an accrual method of accounting 
more accurately measures the economic income of a corporation 
than does the cash receipts and disbursements method and that 
changes from one method of accounting to another should be 
taken into account under section 481. However, the Committee 
believes that it may be appropriate for a family farm 
corporation to retain the use of the cash method of accounting 
until such corporation reaches a certain size. At that time, 
the corporation should be subject to tax accounting rules to 
which other corporations are so subject. In addition, the 
Committee believes that the present-law suspense account 
provision applicable to large family farm corporations may 
effectively provide an exclusion for, rather than a deferral 
of, amounts otherwise properly taken into account under section 
481 upon the required change in the method of accounting for 
such corporations. However, the Committee recognizes that 
requiring the recognition of previously established suspense 
accounts may impose liquidity concerns upon some farm 
corporations. Thus, the Committee provides an extended period 
over which existing suspense accounts must be restored to 
income and provides further deferral where the corporation has 
insufficient income for the year.

                        Explanation of Provision

    The bill repeals the ability of a family farm corporation 
to establish a suspense account when it is required to change 
to an accrual method of accounting. Thus, under the bill, any 
family farm corporation required to change to an accrual method 
of accounting would restore the section 481 adjustment 
applicable to the change in gross income ratably over a 10-year 
period beginning with the year of change.
    In addition, any taxpayer with an existing suspense account 
is required to restore the account into income ratably over a 
20-year period beginning in the first taxable year beginning 
after June 8, 1997, subject to the present-law requirements to 
restore such accounts more rapidly. The amount required to be 
restored to income for a taxable year pursuant to the 20-year 
spread period shall not exceed the net operating loss of the 
corporation for the year (in the case of a corporation with a 
net operating loss) or 50 percent of the net income of the 
taxpayer for the year (for corporations with taxable income). 
For this purpose, a net operating loss or taxable income is 
determined without regard to the amount restored to income 
under the bill. Any reduction in the amount required to be 
restored to income is taken into account ratably over the 
remaining years in the 20-year period or, if applicable, after 
the end of the 20-year period. Amounts that extend beyond the 
20-year period remain subject to the net operating loss and 50-
percent-of-taxable income rules. The net operating loss and 50-
percent-of-taxable income rules do not apply to restorations of 
suspense accounts pursuant to present law.

                             Effective Date

    The provision is effective for taxable years ending after 
June 8, 1997.

  2. Modify net operating loss carryback and carryforward rules (sec. 
               1062 of the bill and sec. 172 of the Code)

                              Present Law

    The net operating loss (``NOL'') of a taxpayer (generally, 
the amount by which the business deductions of a taxpayer 
exceeds its gross income) may be carried back three years and 
carried forward 15 years to offset taxable income in such 
years. A taxpayer may elect to forgo the carryback of an NOL. 
Special rules apply to real estate investment trusts 
(``REITs'') (no carrybacks), specified liability losses (10-
year carryback), and excess interest losses (no carrybacks).

                           Reason for Change

    The Committee recognizes that while Federal income tax 
reporting requires a taxpayer to report income and file returns 
based on a 12-month period, the natural business cycle of a 
taxpayer may exceed 12 months. However, the Committee believes 
that allowing a two-year carryback of NOLs is sufficient to 
account for these business cycles, particularly since (1) many 
deductions allowed for tax purposes relate to future, rather 
than past, income streams and (2) certain deductions that do 
relate to past income streams are granted special, longer 
carryback periods under present law (which are retained by the 
bill).

                        Explanation of Provision

    The bill limits the NOL carryback period to two years and 
extends the NOL carryforward period to 20 years. The bill does 
not apply to the carryback rules relating to REITs, specified 
liability losses, excess interest losses, and corporate capital 
losses. In addition, the bill does not apply to NOLs arising 
from casualty losses of individual taxpayers.

                             Effective Date

    The provision is effective for NOLs arising in taxable 
years beginning after the date of enactment.

  3. Expand the limitations on deductibility of premiums and interest 
 with respect to life insurance, endowment and annuity contracts (sec. 
               1063 of the bill and sec. 264 of the Code)

                              Present Law

Exclusion of inside buildup and amounts received by reason of death

    No Federal income tax generally is imposed on a 
policyholder with respect to the earnings under a life 
insurance contract (``inside buildup'').\45\ Further, an 
exclusion from Federal income tax is provided for amounts 
received under a life insurance contract paid by reason of the 
death of the insured (sec. 101(a)).
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    \45\ This favorable tax treatment is available only if a life 
insurance contract meets certain requirements designed to limit the 
investment character of the contract (sec. 7702). Distributions from a 
life insurance contract (other than a modified endowment contract) that 
are made prior to the death of the insured generally are includible in 
income, to the extent that the amounts distributed exceed the 
taxpayer's basis in the contract; such distributions generally are 
treated first as a tax-free recovery of basis, and then as income (sec. 
72(e)). In the case of a modified endowment contract, however, in 
general, distributions are treated as income first, loans are treated 
as distributions (i.e., income rather than basis recovery first), and 
an additional 10 percent tax is imposed on the income portion of 
distributions made before age 59\1/2\ and in certain other 
circumstances (secs. 72(e) and (v)). A modified endowment contract is a 
life insurance contract that does not meet a statutory ``7-pay'' test, 
i.e., generally is funded more rapidly than 7 annual level premiums 
(sec. 7702A). Certain amounts received under a life insurance contract 
on the life of a terminally or chronically ill individual, and certain 
amounts paid for the sale or assignment to viatical settlement provider 
of a life insurance contract on the life of terminally ill or 
chronically ill individual, are treated as excludable as if paid of the 
death of insured (sec. 101(g)).
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Premium deduction limitation

    No deduction is permitted for premiums paid on any life 
insurance policy covering the life of any officer or employee, 
or of any person financially interested in any trade or 
business carried on by the taxpayer, when the taxpayer is 
directly or indirectly a beneficiary under such policy (sec. 
264(a)(1)).

Interest deduction disallowance with respect to life insurance

    Present law provides generally that no deduction is allowed 
for interest paid or accrued on any indebtedness with respect 
to one or more life insurance contracts or annuity or endowment 
contracts owned by the taxpayer covering any individual who is 
or was (1) an officer or employee of, or (2) financially 
interested in, any trade or business currently or formerly 
carried on by the taxpayer (the ``COLI'' rules).
    This interest deduction disallowance rule generally does 
not apply to interest on debt with respect to contracts 
purchased on or before June 20, 1986; rather, an interest 
deduction limit based on Moody's Corporate Bond Yield Average--
Monthly Average Corporates applies in the case of such 
contract.\46\
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    \46\ Phase-in rules apply generally with respect to otherwise 
deductible interest paid or accrued after December 31, 1995, and before 
January 1, 1999, in the case of debt incurred before January 1, 1996. 
In addition, transition rules apply.
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    An exception to this interest disallowance rule is provided 
for interest on indebtedness with respect to life insurance 
policies covering up to 20 key persons. A key person is an 
individual who is either an officer or a 20-percent owner of 
the taxpayer. The number of individuals that can be treated as 
key persons may not exceed the greater of (1) 5 individuals, or 
(2) the lesser of 5 percent of the total number of officers and 
employees of the taxpayer, or 20 individuals. For determining 
who is a 20-percent owner, all members of a controlled group 
are treated as one taxpayer. Interest paid or accrued on debt 
with respect to a contract covering a key person is deductible 
only to the extent the rate of interest does not exceed Moody's 
Corporate Bond Yield Average--Monthly Average Corporates for 
each month beginning after December 31, 1995, that interest is 
paid or accrued.
    The foregoing interest deduction limitation was added in 
1996 to existing interest deduction limitations with respect to 
life insurance and similar contracts.\47\
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    \47\ Since 1942, a limitation has applied to the deductibility of 
interest with respect to single premium contracts (sec. 264(a)(2)). For 
this purpose, a contract is treated as a single premium contract if (1) 
substantially all the premiums on the contract are paid within a period 
of 4 years from the date on which the contract is purchased, or (2) and 
amount is deposited with the insurer for payment of a substantial 
number of future premiums on the contract. Further, under a limitation 
added in 1964, no deduction is allowed for any amount paid or accrued 
on debt incurred or continued to purchase or carry a life insurance, 
endowment, or annuity contract pursuant to a plan of purchase that 
contemplates the systematic direct or indirect borrowing of part or all 
the increases in the cash value of the contract (sec. 264(a)(3)). An 
exception to the latter rule is provided, permitting deductibility of 
interest on bona fide debt that is part of such a plan, if no part of 4 
of the annual premiums due during the first 7 years is paid by means of 
debt (the ``4-out-of-7 rule'') (sec. 264(a)(1)). In addition to the 
specific disallowance rules of section 264, generally applicable 
principles of tax law apply.
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Interest deduction limitation with respect to tax-exempt interest 
        income

    Present law provides that no deduction is allowed for 
interest on debt incurred or continued to purchase or carry 
obligations the interest on which is wholly exempt from Federal 
income tax (sec. 265(a)(2)). In addition, in the case a 
financial institution, a proration rule provides that no 
deduction is allowed for that portion of the taxpayer's 
interest that is allocable to tax-exempt interest (sec. 
265(b)). The portion of the interest deduction that is 
disallowed under this rule generally is the portion determined 
by the ratio of the taxpayer's (1) average adjusted bases of 
tax-exempt obligations acquired after August 7, 1986, to (2) 
the average adjusted bases for all of the taxpayer's assets 
(sec. 265(b)(2)).\48\
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    \48\ Special rules apply for certain tax-exempt obligations of 
small issuers (sec. 265(b)(3)).
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                           Reasons for Change

    The Committee understands that, under applicable State 
laws, the holder of a life insurance policy generally is 
required to have an insurable interest in the life of the 
insured individual only when the policyholder purchases the 
life insurance policy. The Committee understands that under 
State laws relating to insurable interests, a taxpayer 
generally has an insurable interest in the lives of its 
debtors. Further, rules governing permitted investments of 
financial institutions may allow the institutions to acquire 
cash value life insurance covering the lives of debtors, as 
well as the lives of individuals with other relationships to 
the taxpayer such as shareholders, employees or officers. In 
addition, insurable interest laws in many States have been 
expanded in recent years, and States could decide in the future 
to expand further the range of persons in whom a taxpayer has 
an insurable interest.
    For example, a business could purchase cash value life 
insurance on the lives of its debtors, and increase the 
investment in these contracts as the debt diminishes and even 
after the debt is repaid. If a mortgage lender can (under 
applicable State law and banking regulations) buy a cash value 
life insurance policy on the lives of mortgage borrowers, the 
lender may be able to deduct premiums or interest on debt with 
respect to such a contract, if no other deduction disallowance 
rule or principle of tax law applies to limit the deductions. 
The premiums or interest could be deductible even after the 
individual's mortgage loan is sold to another lender or to a 
mortgage pool. If the loan were sold to a second lender, the 
second lender might also be able to buy a cash value life 
insurance contract on the life of the same borrower, and to 
deduct premiums or interest with respect to that contract. The 
Committee bill addresses this issue by providing that no 
deduction is allowed for premiums on any life insurance policy, 
or endowment or annuity contract, if the taxpayer is directly 
or indirectly a beneficiary under the policy or contract, and 
by providing that no deduction is allowed for interest paid or 
accrued on any indebtedness with respect to life insurance 
policy, or endowment or annuity contract, covering the life of 
any individual.
    In addition, the Committee understands that taxpayers may 
be seeking new means of deducting interest on debt that in 
substance funds the tax-free inside build-up of life insurance, 
annuity and endowment contracts.\49\ The Committee believes 
that present law was not intended to promote tax arbitrage by 
allowing financial or other business that have the ongoing 
ability to borrow funds from depositors, bondholders, investors 
or other lenders to concurrently invest a portion of their 
assets in cash value life insurance contracts, or endowment or 
annuity contracts. Therefore, the bill provides that, for 
taxpayers other than natural persons, no deduction is allowed 
for the portion of the taxpayer's interest expense that is 
allocable to unborrowed policy cash surrender values of any 
life insurance policy or annuity or endowment contract issued 
after June 8, 1997.
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    \49\ See ``Fannie Mae Designing a Program to Link Life Insurance, 
Loans,'' Washington Post, p. E3, February 8, 1997; ``Fannie Mae 
Considers Whether to Bestow Mortgage Insurance,'' Wall St. Journal, p. 
C1, April 22, 1997.
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                        Explanation of Provision

Expansion of premium deduction limitation to individuals in whom 
        taxpayer has an insurable interest

    Under the provision, the present-law premium deduction 
limitation is modified to provide that no deduction is 
permitted for premiums paid on any life insurance, annuity or 
endowment contract, if the taxpayer is directly or indirectly a 
beneficiary under the contract.

Expansion of interest disallowance to individuals in whom taxpayer has 
        insurable interest

    Under the provision, no deduction is allowed for interest 
paid or accrued on any indebtedness with respect to life 
insurance policy, or endowment or annuity contract, covering 
the life of any individual. Thus, the provision limits interest 
deductibility in the case of such a contract covering any 
individual in whom the taxpayer has an insurable interest when 
thecontract is first issued under applicable State law, except 
as otherwise provided under present law with respect to key persons and 
pre-1986 contracts.

Pro rata disallowance of interest on debt to fund life insurance

    In the case of a taxpayer other than a natural person, no 
deduction is allowed for the portion of the taxpayer's interest 
expense that is allocable to unborrowed policy cash surrender 
values with respect to any life insurance policy or annuity or 
endowment contract issued after June 8, 1997. Interest expense 
is so allocable based on the ratio of (1) the taxpayer's 
average unborrowed policy cash values of life insurance 
policies, and annuity and endowment contracts, issued after 
June 8, 1997, to (2) the average adjusted bases for all assets 
of the taxpayer. This rule does not apply to any policy or 
contract owned by an entity engaged in a trade or business, 
covering any individual who is an employee, officer or director 
of the trade or business at the time first covered by the 
policy or contract. Such a policy or contract is not taken into 
account in determining unborrowed policy cash values.
    The unborrowed policy cash values means the cash surrender 
value of the policy or contract determined without regard to 
any surrender charge, reduced by the amount of any loan with 
respect to the policy or contract. The cash surrender value is 
to be determined without regard to any other contractual or 
noncontractual arrangement that artificially depresses the cash 
value of a contract.
    If a trade or business (other than a sole proprietorship or 
a trade or business of performing services as an employee) is 
directly or indirectly the beneficiary under any policy or 
contract, then the policy or contract is treated as held by the 
trade or business. For this purpose, the amount of the 
unborrowed cash value is treated as not exceeding the amount of 
the benefit payable to the trade or business. In the case of a 
partnership or S corporation, the provision applies at the 
partnership or corporate level. The amount of the benefit is 
intended to take into account the amount payable to the 
business under the contract (e.g., as a death benefit) or 
pursuant to another agreement (e.g., under a split dollar 
agreement). The amount of the benefit is intended also to 
include any amount by which liabilities of the business would 
be reduced by payments under the policy or contract (e.g., when 
payments under the policy reduce the principal or interest on a 
liability owed to or by the business).
    As provided in regulations, the issuer or policyholder of 
the life insurance policy or endowment or annuity contract is 
required to report the amount of the amount of the unborrowed 
cash value in order to carry out this rule.
    If interest expense is disallowed under other provisions of 
section 264 (limiting interest deductions with respect to life 
insurance policies or endowment or annuity contracts) or under 
section 265 (relating to tax-exempt interest), then the 
disallowed interest expense is not taken into account under 
this provision, and the average adjusted bases of assets is 
reduced by the amount of debt, interest on which is so 
disallowed. The provision is applied before present-law rules 
relating to capitalization of certain expenses where the 
taxpayer produces property (sec. 263A).
    An aggregation rule is provided, treating related persons 
as one for purposes of the provision.
    The provision does not apply to any insurance company 
subject to tax under subchapter L of the Code. Rather, the 
rules reducing certain deductions for losses incurred, in the 
case of property and casualty companies, and reducing reserve 
deductions or dividends received deductions of life insurance 
companies, are modified to take into account the increase in 
cash values of life insurance policies or annuity or endowment 
contracts held by insurance companies.

                             Effective Date

    The provisions apply with respect to contracts issued after 
June 8, 1997. For this purpose, a material increase in the 
death benefit or other material change in the contract causes 
the contract to be treated as a new contract. To the extent of 
additional covered lives under a contract after June 8, 1997, 
the contract is treated as a new contract. In the case of an 
increase in the death benefit of a contract that is converted 
to extended term insurance pursuant to nonforfeiture 
provisions, in a transaction to which section 501(d)(2) of the 
Health Insurance Portability and Accountability Act of 1996 
applies, the contract is not treated as a new contract.

  4. Allocation of basis of properties distributed to a partner by a 
    partnership (sec. 1064 of the bill and sec. 732(c) of the Code)

                              Present Law

In general

    The partnership provisions of present law generally permit 
partners to receive distributions of partnership property 
without recognition of gain or loss (sec. 731).\50\ Rules are 
provided for determining the basis of the distributed property 
in the hands of the distributee, and for allocating basis among 
multiple properties distributed, as well as for determining 
adjustments to the distributee partner's basis in its 
partnership interest. Property distributions are tax-free to a 
partnership. Adjustments to the basis of the partnership's 
remaining undistributed assets are not required unless the 
partnership has made an election that requires basis 
adjustments both upon partnership distributions and upon 
transfers of partnership interests (sec. 754).
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    \50\ Exceptions to this nonrecognition rule apply: (1) when money 
(and the fair market value of marketable securities) received exceeds a 
partner's adjusted basis in the partnership sec. 731(a)(1)); (2) when 
only money, inventory and unrealized receivables are received in 
liquidation of partner's interest and loss is realized (sec., 731 
(a)(2)); (3) to certain disproportionate distributions involving 
inventory and unrealized receivables (sec. 751(b)); and (4) to certain 
distributions relating to contributed property (secs. 704(c) and 737). 
In addition, if a partner engages in a transaction with a partnership 
other than in its capacity as a member of the partnership, the 
transaction generally is considered as occurring between the 
partnership and one who is not a partner (sec. 707).
---------------------------------------------------------------------------

Partner's basis in distributed properties and partnership interest

    Present law provides two different rules for determining a 
partner's basis in distributed property, depending on whether 
or not the distribution is in liquidation of the partner's 
interest in the partnership. Generally, a substituted basis 
rule applies to property distributed to a partner in 
liquidation. Thus, the basis of property distributed in 
liquidation of a partner's interest is equal to the partner's 
adjusted basis in its partnership interest (reduced by any 
money distributed in the same transaction) (sec. 732(b)).
    By contrast, generally, a carryover basis rule applies to 
property distributed to a partner other than in liquidation of 
its partnership interest, subject to a cap (sec. 732(a)). Thus, 
in a non-liquidating distribution, the distributee partner's 
basis in the property is equal to the partnership's adjusted 
basis in the property immediately before the distribution, but 
not to exceed the partner's adjusted basis in its partnership 
interest (reduced by any money distributed in the same 
transaction). In a non-liquidating distribution, the partner's 
basis in its partnership interest is reduced by the amount of 
the basis to the distributee partner of the property 
distributed and is reduced by the amount of any money 
distributed (sec. 733).

Allocating basis among distributed properties

    In the event that multiple properties are distributed by a 
partnership, present law provides allocation rules for 
determining their bases in the distributee partner's hands. An 
allocation rule is needed when the substituted basis rule for 
liquidating distributions applies, in order to assign a portion 
of the partner's basis in its partnership interest to each 
distributed asset. An allocation rule is also needed in a non-
liquidating distribution of multiple assets when the total 
carryover basis would exceed the partner's basis in its 
partnership interest, so a portion of the partner's basis in 
its partnership interest is assigned to each distributed asset.
    Present law provides for allocation in proportion to the 
partnership's adjusted basis. The rule allocates basis first to 
unrealized receivables and inventory items in an amount equal 
to the partnership's adjusted basis (or if the allocated basis 
is less than partnership basis, then in proportion to the 
partnership's basis), and then among other properties in 
proportion to their adjusted bases to the partnership (sec. 
732(c)).\51\ Under this allocation rule, in the case of a 
liquidating distribution, the distributee partner can have a 
basis in the distributed property that exceeds the 
partnership's basis in the property.
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    \51\ A special rule allows a partner that acquired a partnership 
interest by transfer within two years of a distribution to elect to 
allocate the basis of property received in the distribution as if the 
partnership had a section 754 election in effect (sec. 732(d)). The 
special rule also allows the Service to require such an allocation 
where the value at the time of transfer of the property received 
exceeds 110 percent of its adjusted basis to the partnership (sec. 
732(d)). Tres. Reg. sec. 1.732-1(d)(4) generally requires the 
application of section 732(d) where the allocation of basis under 
section 732(c) upon a liquidation of the partner's interest would have 
resulted in a shift of basis from non-depreciable property to 
depreciable property.
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                           Reasons for Change

    The rule providing that distributee partners allocate basis 
in proportion to the partnership's adjusted basis in the 
distributed property gives rise to problems in application.\52\ 
The Committee is concerned that the present-law rule permits 
basis shifting transactions in which basis is allocated so as 
to increase basis artificially, giving rise to inflated 
depreciation deductions or artificially large losses, for 
example. The Committee believes that these problems would be 
significantly reduced by taking into account the fair market 
value of property distributed by a partnership for purposes of 
allocating basis in the hands of the distributee partner.
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    \52\ ``The failure of these rules to take fair market value into 
account puts a high premium on tax planning in connection with in-kind 
liquidating distributions. Allocation of the portion of the basis in 
excess of the partnerships basis in the distributed assets according to 
their relative market values would be a conceptually sound approach, 
and would eliminate the strange results and manipulation possibilities 
. . .'' W. McKee, W. Nelson and R. Whitmire, Federal Taxation of 
Partnerships and Partners (3rd ed. 1997), para. 19.06.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision modifies the basis allocation rules for 
distributee partners. It allocates a distributee partner's 
basis adjustment among distributed assets first to unrealized 
receivables and inventory items in an amount equal to the 
partnership's basis in each such property (as under present 
law).
    Under the provision, basis is allocated first to the extent 
of each distributed property's adjusted basis to the 
partnership. Any remaining basis adjustment, if an increase, is 
allocated among properties with unrealized appreciation in 
proportion to their respective amounts of unrealized 
appreciation (to the extent of each property's appreciation), 
and then in proportion to their respective fair market values. 
For example, assume that a partnership with two assets, A and 
B, distributes them both in liquidation to a partner whose 
basis in its interest is 55. Neither asset consists of 
inventory or unrealized receivables. Asset A has a basis to the 
partnership of 5 and a fair market value of 40, and asset B has 
a basis to the partnership of 10 and a fair market value of 10. 
Under the provision, basis is first allocated to asset in the 
amount of 5 and to asset B in the amount of 10 (their adjusted 
bases to the partnership). The remaining basis adjustment is an 
increase totaling 40 (the partner's 55 basis minus the 
partnership's total basis in distributed assets of 15). Basis 
is then allocated to asset A in the amount of 35, its 
unrealized appreciation, with no allocation to asset B 
attributable to unrealized appreciation because its fair market 
value equals the partnership's adjusted basis. The remaining 
basis adjustment of 5 is allocated in the ratio of the assets' 
fair market values, i.e., 4 to asset A (for a total basis of 
44) and 1 to asset B (for a total basis of 11).
    If the remaining basis adjustment is a decrease, it is 
allocated among properties with unrealized depreciation in 
proportion to their respective amounts of unrealized 
depreciation (to the extent of each property's depreciation), 
and then in proportion to their respective adjustedbases 
(taking into account the adjustments already made). A remaining basis 
adjustment that is a decrease arises under the provision when the 
partnership's total adjusted basis in the distributed properties 
exceeds the amount of the partner's basis in its partnership interest, 
and the latter amount is the basis to be allocated among the 
distributed properties. For example, assume that a partnership with two 
assets, C and D, distributes them both in liquidation to a partner 
whose basis in its partnership interest is 20. Neither asset consists 
of inventory or unrealized receivables. Asset C has a basis to the 
partnership of 15 and a fair market value of 15, and asset D has a 
basis to the partnership of 15 and a fair market value of 5. Under the 
provision, basis is first allocated to the extent of the partnership's 
basis in each distributed property, or 15 to each distributed property, 
for a total of 30. Because the partner's basis in its interest is only 
20, a downward adjustment of 10 (30 minus 20) is required. The entire 
amount of the 10 downward adjustment is allocated to the property D, 
reducing its basis to 5. Thus, the basis of property C is 15 in the 
hands of the distributee partner, and the basis of property D is 5 in 
the hands of the distributee partner.

                             Effective Date

    The provision applies to partnership distributions after 
the date of enactment.

5. Treatment of inventory items of a partnership (sec. 1065 of the bill 
                       and sec. 751 of the Code)

                              Present Law

    Under present law, upon the sale or exchange of a 
partnership interest, any amount received that is attributable 
to unrealized receivables, or to inventory that has 
substantially appreciated, is treated as an amount realized 
from the sale or exchange of property that is not a capital 
asset (sec. 751(a)).
    Present law provides a similar rule to the extent that a 
distribution is treated as a sale or exchange of a partnership 
interest. A distribution by a partnership in which a partner 
receives substantially appreciated inventory or unrealized 
receivables in exchange for its interest in certain other 
partnership property (or receives certain other property in 
exchange for its interest in substantially appreciated 
inventory or unrealized receivables) is treated as a taxable 
sale or exchange of property, rather than as a nontaxable 
distribution (sec. 751(b)).
    For purposes of these rules, inventory of a partnership 
generally is treated as substantially appreciated if the fair 
market value of the inventory exceeds 120 percent of adjusted 
basis of the inventory to the partnership (sec. 751(d)(1)(A)). 
In applying this rule, inventory property is excluded from the 
calculation if a principal purpose for acquiring the inventory 
property was to avoid the rules relating to inventory (sec. 
751(d)(1)(B)).

                           Reasons for Change

    The substantial appreciation requirement with respect to 
inventory of a partnership has been criticized as both 
ineffective at insulating partnerships from the potential 
complexity of the disproportionate distribution rules of 
section 751(b), and also ineffective at properly treating 
income attributable to inventory as ordinary income under the 
section 751 rules for partnerships with profit margins below 20 
percent.\53\ Because the Committee believes that income 
attributable to inventory should be treated as ordinary income, 
the bill repeals the substantial appreciation requirement with 
respect to inventory, in the case of partnership sales, 
exchanges and distributions.
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    \53\ The 1984 ALI study on partnership rules referred to the 
substantial appreciation requirement as subject to manipulation and tax 
planning (American Law Institute, Federal Income Tax Project: 
Subchapter K: Proposals on the Taxation of Partners (R. Cohen, 
reporter, 1984), 26. In 1993 the definition of substantially 
appreciated inventory was modified, and the present-law test relating 
to a principal purpose of avoidance was added (Omnibus Budget 
Reconciliation Act of 1993, P.L. 103-66, sec. 13206(e)(1)). 
Nevertheless, the substantial appreciation requirement is still 
criticized as ineffective (W. McKee, W. Nelson and R. Whitmire, Federal 
Taxation of Partners and Partnerships, (3rd ed. 1997) sec. 16.04[2]).
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                        Explanation of Provision

    The provision eliminates the requirement that inventory be 
substantially appreciated in order to give rise to ordinary 
income under the rules relating to sales and exchanges of 
partnership interests and certain partnership distributions. 
This conforms the treatment of inventory to the treatment of 
unrealized receivables under these rules.

                             Effective Date

    The provision is effective for sales, exchanges, and 
distributions after the date of enactment.

6. Treatment of appreciated property contributed to a partnership (sec. 
      1066 of the bill and secs. 704(c)(1)(B) and 737 of the Code)

                              Present Law

    Under present law, if a partner contributes appreciated 
property to a partnership, no gain is recognized to the 
contributing partner at the time of the contribution. The 
contributing partner's basis in its partnership interest is 
increased by the basis of the contributed property at the time 
of the contribution. The pre-contribution gain is reflected in 
the difference between the partner's capital account and its 
basis in its partnership interest (``book/tax differential''). 
Income, gain, loss, and deduction with respect to the 
contributed property must be shared among the partners so as to 
take account of the variation between the basis of the property 
to the partnership and its fair market value at the time of 
contribution (sec. 704(c)(1)(A)).
    If the property is subsequently distributed to another 
partner within 5 years of the contribution, the contributing 
partner generally recognizes gain as if the property had been 
sold for its fair market value at the time of the distribution 
(sec. 704(c)(1)(B)). Similarly, thecontributing partner 
generally includes pre-contribution gain in income to the extent that 
the value of other property distributed by the partnership to that 
partner exceeds its adjusted basis in its partnership interest, if the 
distribution by the partnership is made within 5 years after the 
contribution of the appreciated property (sec. 737).
    If a partnership distributes property to a partner, the 
partner does not recognize gain except to the extent any money 
(including marketable securities) received in the distribution 
exceeds the partner's basis for its partnership interest (sec. 
731(a)). In addition, a partnership does not recognize gain on 
a distribution to a partner (sec. 731(b)).

                           Reasons for Change

    The Committee is concerned that the inconsistency in 
treatment of partnership sales and partnership distributions of 
property contributed by partners makes it possible for partners 
to circumvent the rule requiring pre-contribution gain on 
contributed property to be allocated to the contributing 
partner. In order to limit the inconsistency and to reduce 
opportunities for circumventing this rule, the Committee 
believes that the contributing partner should recognize pre-
contribution gain when the contributed property is distributed 
to another partner, or the partnership distributes to the 
contributing partner other property whose value exceeds that 
partner's basis in its partnership interest, within 10 years 
after the contribution of the appreciated property.

                        Explanation of Provision

    The provision extends to 10 years the period in which a 
partner recognizes pre-contribution gain with respect to 
property contributed to a partnership. Thus, under the 
provision, a partner that contributes appreciated property to a 
partnership generally recognizes pre-contribution gain in the 
event that the partnership distributes the contributed property 
to another partner, or distributes to the contributing partner 
other property whose value exceeds that partner's basis in its 
partnership interest, if the distribution occurs within 10 
years after the contribution to the partnership.

                             Effective Date

    The provision is effective for property contributed to a 
partnership after June 8, 1997.

 7. Earned income credit compliance provisions (sec. 1067 of the bill 
              and secs. 32, 6213(g) and 6695 of the Code)

                                Overview

    Certain eligible low-income workers are entitled to claim a 
refundable earned income credit on their income tax return. A 
refundable credit is a credit that not only reduces an 
individual's tax liability but allows refunds to the individual 
in excess of income tax liability. The amount of the credit an 
eligible individual may claim depends upon whether the 
individual has one, more than one, or no qualifying children, 
and is determined by multiplying the credit rate by the 
individual's \54\ earned income up to an earned income amount. 
The maximum amount of the credit is the product of the credit 
rate and the earned income amount. The credit is reduced by the 
amount of the alternative minimum tax (``AMT'') the taxpayer 
owes for the year. The credit is phased out above certain 
income levels. For individuals with earned income (or AGI, if 
greater) in excess of the beginning of the phaseout range, the 
maximum credit amount is reduced by the phaseout rate 
multiplied by the amount of earned income (or AGI, if greater) 
in excess of the beginning of the phaseout range. For 
individuals with earned income (or AGI, if greater) in excess 
of the end of the phaseout range, no credit is allowed. The 
definition of AGI used for phasing out the earned income credit 
disregards certain losses. The losses disregarded are: (1) net 
capital losses (if greater than zero); (2) net losses from 
trusts and estates; (3) net losses from nonbusiness rents and 
royalties; and (4) 50 percent of the net losses from business, 
computed separately with respect to sole proprietorships (other 
than in farming), sole proprietorships in farming, and other 
businesses. Also, an individual is not eligible for the earned 
income credit if the aggregate amount of ``disqualified 
income'' of the taxpayer for the taxable year exceeds $2,250. 
Disqualified income is the sum of: (1) interest (taxable and 
tax-exempt); (2) dividends; (3) net rent and royalty income (if 
greater than zero); (4) capital gain net income; and (5) net 
passive income (if greater than zero) that is not self-
employment income. The earned income amount, the phaseout 
amount and the disqualified income amount are indexed for 
inflation.
---------------------------------------------------------------------------
    \54\ In the case of a married individual who files a joint return 
with his or her spouse, the income for purposes of these tests is the 
combined income of the couple.
---------------------------------------------------------------------------
    The parameters for the credit depend upon the number of 
qualifying children the individual claims. For 1997, the 
parameters are given in the following table:

               PRESENT-LAW EARNED INCOME CREDIT PARAMETERS              
------------------------------------------------------------------------
                                        Two or                          
                                         more         One         No    
                                      qualifying  qualifying  qualifying
                                       children      child     children 
------------------------------------------------------------------------
Credit rate (percent)...............       40.00       34.00        7.65
Earned income amount................      $9,140      $6,500      $4,340
Maximum credit......................      $3,656      $2,210        $332
                                                                        
Phaseout begins.....................     $11,930     $11,930      $5,430
Phaseout rate (percent).............       21.06       15.98        7.65
                                                                        
Phaseout ends.......................     $29,290     $25,760      $9,770
------------------------------------------------------------------------

    In order to claim the credit, an individual must either 
have a qualifying child or meet other requirements. A 
qualifying child must meet a relationship test, an age test, an 
identification test, and a residence test. In order to claim 
the credit without a qualifying child, an individual must not 
be a dependent and must be over age 24 and under age 65.

a. Deny EIC eligibility for prior acts of recklessness or fraud (sec. 
        1067 of the bill and sec. 32 of the Code)

                              Present Law

    The accuracy-related penalty, which is imposed at a rate of 
20 percent, applies to the portion of any underpayment that is 
attributable to (1) negligence, (2) any substantial 
understatement of income tax, (3) any substantial valuation 
overstatement, (4) any substantial overstatement of pension 
liabilities, or (5) any substantial estate or gift tax 
valuation understatement (sec. 6662). Negligence includes any 
careless, reckless, or intentional disregard of rules or 
regulations, as well as any failure to make a reasonable 
attempt to comply with the provisions of the Code.
    The fraud penalty, which is imposed at a rate of 75 
percent, applies to the portion of any underpayment that is 
attributable to fraud (sec. 6663).
    Neither the accuracy-related penalty nor the fraud penalty 
is imposed with respect to any portion of an underpayment if it 
is shown that there was a reasonable cause for that portion and 
that the taxpayer acted in good faith with respect to that 
portion.

                           Reason for Change

    The Committee believes that taxpayers who fraudulently 
claim the EIC or recklessly or intentionally disregard EIC 
rules or regulations should be penalized for doing so.

                        Explanation of Provision

    A taxpayer who fraudulently claims the earned income credit 
(EIC) is ineligible to claim the EIC for a subsequent period of 
10 years. In addition, a taxpayer who erroneously claims the 
EIC due to reckless or intentional disregard of rules or 
regulations is ineligible to claim the EIC for a subsequent 
period of two years. These sanctions are in addition to any 
other penalty imposed under present law. The determination of 
fraud or of reckless or intentional disregard of rules or 
regulations are made in a deficiency proceeding (which provides 
for judicial review).

                             Effective Date

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

b. Recertification required when taxpayer found to be ineligible for 
        EIC in past (sec. 1067 of the bill and secs. 32 and 6213(g) of 
        the Code)

                              Present Law

    If an individual fails to provide a correct TIN and claims 
the EIC, such omission is treated as a mathematical or clerical 
error. Also, if an individual who claims the EIC with respect 
to net earnings from self employment fails to pay the proper 
amount of self-employment tax on such net earnings, the failure 
is treated as a mathematical or clerical error for purposes of 
the amount of EIC claimed. Generally, taxpayers have 60 days in 
which they can either provide a correct TIN or request that the 
IRS follow the current-law deficiency procedures. If a taxpayer 
fails to respond within this period, he or she must file an 
amended return with a correct TIN or clarify that any self-
employment tax has been paid in order to obtain the EIC 
originally claimed.
    The IRS must follow deficiency procedures when 
investigating other types of questionable EIC claims. Under 
these procedures, contact letters are first sent to the 
taxpayer. If the necessary information is not provided by the 
taxpayer, a statutory notice of deficiency is sent by certified 
mail, notifying the taxpayer that the adjustment will be 
assessed unless the taxpayer files a petition in Tax Court 
within 90 days. If a petition is not filed within that time and 
there is no other response to the statutory notice, the 
assessment is made and the EIC is denied.

                           Reason for Change

    The Committee believes that the requirement of additional 
information to determine EIC eligibility is prudent for 
taxpayers who have incorrectly claimed the EIC in the past.

                        Explanation of Provision

    A taxpayer who has been denied the EIC as a result of 
deficiency procedures is ineligible to claim the EIC in 
subsequent years unless evidence of eligibility for the credit 
is provided by the taxpayer. To demonstrate current 
eligibility, the taxpayer is required to meet evidentiary 
requirements established by the Secretary of the Treasury. 
Failure to provide this information when claiming the EIC is 
treated as a mathematical or clerical error. If a taxpayer is 
recertified as eligible for the credit, the taxpayer is 
required to provide this information in the future unless the 
IRS again denies the EIC as a result of a deficiency procedure. 
Ineligibility for the EIC under the provision is subject to 
review by the courts.

                             Effective Date

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

c. Due diligence requirements for paid preparers (sec. 1067 of the bill 
        and sec. 6695 of the Code)

                              Present Law

    There are several penalties that apply in the case of an 
understatement of tax that is caused by an income tax return 
preparer. First, if any part of an understatement of tax on a 
return or claim for refund is attributable to a position for 
which there was not a realistic possibility of being sustained 
on its merits and if any person who is an income tax return 
preparer with respect to such return or claim for refund knew 
(or reasonably should have known) of such position and such 
position was not disclosed or was frivolous, then that return 
preparer is subject to a penalty of $250 with respect to that 
return or claim (sec. 6694(a)). The penalty is notimposed if 
there is reasonable cause for the understatement and the return 
preparer acted in good faith.
    In addition, if any part of an understatement of tax on a 
return or claim for refund is attributable to a willful attempt 
by an income tax return preparer to understate the tax 
liability of another person or to any reckless or intentional 
disregard of rules or regulations by an income tax return 
preparer, then the income tax return preparer is subject to a 
penalty of $1,000 with respect to that return or claim (sec. 
6694(b)).
    Also, a penalty for aiding and abetting the understatement 
of tax liability is imposed in cases where any person aids, 
assists in, procures, or advises with respect to the 
preparation or presentation of any portion of a return or other 
document if (1) the person knows or has reason to believe that 
the return or other document will be used in connection with 
any material matter arising under the tax laws, and (2) the 
person knows that if the portion of the return or other 
document were so used, an understatement of the tax liability 
of another person would result (sec. 6701).
    Additional penalties are imposed on return preparers with 
respect to each failure to (1) furnish a copy of a return or 
claim for refund to the taxpayer, (2) sign the return or claim 
for refund, (3) furnish his or her identifying number, (4) 
retain a copy or list of the returns prepared, and (5) file a 
correct information return (sec. 6695). The penalty is $50 for 
each failure and the total penalties imposed for any single 
type of failure for any calendar year are limited to $25,000.

                           Reason for Change

    The Committee believes that more thorough efforts by return 
preparers are important to improving EIC compliance.

                        Explanation of Provision

    Return preparers are required to fulfill certain due 
diligence requirements with respect to returns they prepare 
claiming the EIC. The penalty for failure to meet these 
requirements is $100. This penalty is in addition to any other 
penalty imposed under present law.

                             Effective Date

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

 8. Eligibility for income forecast method (sec. 1068 of the bill and 
                     secs. 167 and 168 of the Code)

                              Present Law

    A taxpayer generally recovers the cost of property used in 
a trade or business through depreciation or amortization 
deductions over time. Tangible property generally is 
depreciated under the modified Accelerated Cost Recovery System 
(``MACRS'') of section 168, which applies specific recovery 
periods and depreciation methods to the cost of various types 
of depreciable property. Intangible property generally is 
amortized under section 197, which applies a 15-year recovery 
period and the straight-line method to the cost of applicable 
property.
     MACRS does not apply to certain property, including any 
motion picture film, video tape, or sound recording or to other 
any property if the taxpayer elects to exclude such property 
from MACRS and the taxpayer applies a unit-of-production method 
or other method of depreciation not expressed in a term of 
years. Section 197 does not apply to certain intangible 
property, including property produced by the taxpayer or any 
interest in a film, sound recording, video tape, book or 
similar property not acquired in transaction (or a series of 
related transactions) involving the acquisition of assets 
constituting a trade or business or substantial portion 
thereof. Thus, the cost of a film, video tape, or similar 
property that is produced by the taxpayer or is acquired on a 
``stand-alone'' basis by the taxpayer may not be recovered 
under either the MACRS depreciation provisions or under the 
section 197 amortization provisions. The cost of such property 
may be depreciated under the ``income forecast'' method.
    The income forecast method is considered to be a method of 
depreciation not expressed in a term of years. Under the income 
forecast method, the depreciation deduction for a taxable year 
for a property is determined by multiplying the cost of the 
property (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 is available 
to any property if (1) the taxpayer elects to exclude such 
property from MACRS and (2) for the first taxable year for 
which depreciation is allowable, the property is properly 
depreciated under such method. 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.\55\ Most recently, the income forecast method has been 
held applicable to consumer durable property subject to short-
term ``rent-to-own'' leases.\56\
---------------------------------------------------------------------------
    \55\ See, e.g., Rev. Rul. 60-358, 1960-2 C.B. 68; Rev. Rul. 64-273, 
1964-2 C.B. 62; Rev. Rul. 79-285, 1979-2 C.B. 91; and Rev. Rul. 89-62, 
1989-1 C.B. 78.
    \56\ See, ABC Rentals of San Antonio v. Comm., No. 95-9008 (10th 
Cir. 9/27/96), where the Tenth Circuit decision reversed the holding of 
ABC Rentals of San Antonio v. Comm., 68 TCM 1362 (1994) and held that 
consumer durable property subject to short-term, ``rent-to-own'' leases 
were eligible for the income forecast method. For decisions supporting 
the Tax Court memorandum decision denying eligibility for certain 
tangible personal property, see El Charro TV Rental v. Comm., No. 95-
60301 (5th Cir., 1995) (rent-to-own property not eligible) and Carland, 
Inc. v. Comm., 90 T.C. 505 (1988), aff'd on this issue, 909 F.2d 1101 
(8th Cir., 1990) (railroad rolling stock subject to a lease not 
eligible).
---------------------------------------------------------------------------

                           Reasons for Change

    Depreciation allowances attempt to measure the decline in 
the value of property due to wear, tear, and obsolescence and 
to match the cost recovery for the property with the 
incomestream produced by the property. The Committee believes that the 
income forecast method of depreciation is, in theory, an appropriate 
method to match the recovery of cost of property with the income stream 
produced by the property. However, when compared to MACRS, the income 
forecast method involves significant complexities, including the 
determination of the income estimated to be generated by the property, 
the determination of the residual value of the property, and the 
application of the look-back method. Thus, the Committee believes that 
the availability of the income forecast method should be limited to 
instances where the economic depreciation of the property cannot be 
adequately reflected by the passage of time alone or where the income 
stream from the property is sufficiently unpredictable or uneven such 
that the application of another method of depreciation may result in 
the distortion of income. In addition, because the income forecast 
method is elective, the Committee is concerned about taxpayer 
selectivity.
    Finally, the Committee provides a MACRS class life for 
consumer durables subject to rent-to-own contracts, in order to 
avoid future controversies with respect to the proper treatment 
of such property.

                        Explanation of Provision

    The bill clarifies the types of property to which the 
income forecast method may be applied. Under the bill, the 
income forecast method is available to motion picture films, 
television films and taped shows, books, patents, master sound 
recordings, copyrights, and other such property as designated 
by the Secretary of the Treasury. It is expected that the 
Secretary will exercise this authority such that the income 
forecast method will be available to property the economic 
depreciation of which cannot be adequately measured by the 
passage of time alone or to property the income from which is 
sufficiently unpredictable or uneven so as to result in the 
distortion of income. The mere fact that property is subject to 
a lease should not make the property eligible for the income 
forecast method. The income forecast method is not be 
applicable to property to which section 197 applies.
    In addition, consumer durables subject to rent-to-own 
contracts are provided a three-year recovery period and a four-
year class life for MACRS purposes (and would not be eligible 
for the income forecast method). Such property generally is 
described in Rev. Proc. 95-38, 1995-34 I.R.B. 25.

                             Effective Date

    The provision is effective for property placed in service 
after the date of enactment.

  9. Require taxpayers to include rental value of residence in income 
  without regard to period of rental (sec. 1069 of the bill and secs. 
                       280A and 1016 of the Code)

                              Present Law

    Gross income for purposes of the Internal Revenue Code 
generally includes all income from whatever source derived, 
including rents. The Code (sec. 280A(g)) provides a de minimis 
exception to this rule where a dwelling unit is used during the 
taxable year by the taxpayer as a residence and such dwelling 
unit is actually rented for less than 15 days during the 
taxable year. In this case, the income from such rental is not 
included in gross income and no deductions arising from such 
rental use are allowed as a deduction.

                           Reasons for Change

    The de minimis exception allows certain taxpayers to 
exclude from income large rental payments for the short-term 
rental of the taxpayer's residence. The Committee believes that 
such amounts generally should be included in income of the 
taxpayers.

                        Explanation of Provision

    The bill repeals the 15-day rules of section 280A(g). The 
bill also provides that no reduction in basis is required if 
the taxpayer: (1) rented the dwelling unit for less than 15 
days during the taxable year and (2) did not claim depreciation 
on the dwelling unit for the period of rental.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1997.

10. Modify the exception to the related party rule of section 1033 for 
 individuals to only provide an exception for de minimis amounts (sec. 
              1070 of the bill and sec. 1033 of the Code)

                              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 or use to the converted property within a specified 
replacement period of time. Pursuant to a provision of Public 
Law 104-7, subchapter C corporations (and certain partnerships 
with corporate partners) are not entitled to defer gain under 
section 1033 if the replacement property or stock is purchased 
from a related person. A person is treated as related to 
another person if the person bears a relationship to the other 
person described in section 267(b) or 707(b)(1). An exception 
to this related party rule provides that a taxpayer could 
purchase replacement property or stock from a related person 
and defer gain under section 1033 to the extent the related 
person acquired the replacement property or stock from an 
unrelated person within the replacement period.

                           Reasons for Change

    The Committee believes that, except for de minimis cases, 
individuals should be subject to the same rules with respect to 
the acquisition of replacement property from a related person 
as are other taxpayers.

                        Explanation of Provision

    The bill expands the present-law denial of the application 
of section 1033 to any other taxpayer (including an individual) 
that acquires replacement property from a related party (as 
defined by secs. 267(b) and 707(b)(1)) unless the taxpayer has 
aggregate realized gain of $100,000 or less for the taxable 
year with respect to converted property with aggregate realized 
gains. In the case of a partnership (or S corporation), the 
annual $100,000 limitation applies to both the partnership (or 
S corporation) and each partner (or shareholder).

                             Effective Date

    The provision applies to involuntary conversions occurring 
after June 8, 1997.

 11. Repeal of exception for certain sales by manufacturers to dealer 
(sec. 1071 of the bill and sec. 811(c)(9) of the Tax Reform Act of 1986 
                             (P.L. 99-514))

                              Present Law

    In general, the installment sales method of accounting may 
not be used by dealers in personal property. Present law 
provides an exception which permits the use of the installment 
method for installment obligations arising from the sale of 
tangible personal property by a manufacturer of the property 
(or an affiliate of the manufacturer) to a dealer,\57\ but only 
if the dealer is obligated to make payments of principal only 
when the dealer resells (or rents) the property, the 
manufacturer has the right to repurchase the property at a 
fixed (or ascertainable) price after no longer than a nine 
month period following the sale to the dealer, and certain 
other conditions are met. In order to meet the other 
conditions, the aggregate face amount of the installment 
obligations that otherwise qualify for the exception must equal 
at least 50 percent of the total sales to dealers that gave 
rise to such receivables (the ``fifty percent test'') in both 
the taxable year and the preceding taxable year, except that, 
if the taxpayer met all of the requirements for the exception 
in the preceding taxable year, the taxpayer would not be 
treated as failing to meet the fifty percent test before the 
second consecutive year in which the taxpayer did not actually 
meet the test. For purposes of applying the fifty percent test, 
the aggregate face amount of the taxpayer's receivables is 
computed using the weighted average of the taxpayer's 
receivables outstanding at the end of each month during the 
taxpayer's taxable year. In addition, these requirements must 
be met by the taxpayer in its first taxable year beginning 
after October 22, 1986, except that obligations issued before 
that date are treated as meeting the applicable requirements if 
such obligations were conformed to the requirements of the 
provision within 60 days of that date.
---------------------------------------------------------------------------
    \57\ I.e, the sale of the property must be intended to be for 
resale or leasing by the dealer.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that the special exception that 
permitted certain dealers to use the installment method is no 
longer necessary or appropriate and the installment sale method 
of accounting should not be available to such dealers. 
Accordingly, the Committee bill repeals that exception.

                        Explanation of Provision

    The bill repeals the exception that permits the use of the 
installment method of accounting for certain sales by 
manufacturers to dealers.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment. Any resulting adjustment from a 
required change in accounting will be includible ratably over 
the 4-year taxable years beginning after that date.

                    Title XI. Foreign Tax Provisions

                         A. General Provisions

   1. Eligibility of licenses of computer software for foreign sales 
 corporation benefits (sec. 1101 of the bill and sec. 927 of the Code)

                              Present Law

    Under special tax provisions that provide an export 
benefit, a portion of the foreign trade income of an eligible 
foreign sales corporation (``FSC'') is exempt from Federal 
income tax. Foreign trade income is defined as the gross income 
of an FSC that is attributable to foreign trading gross 
receipts. The term ``foreign trading gross receipts'' includes 
the gross receipts of an FSC from the sale, lease, or rental of 
export property and from services related and subsidiary to 
such sales, leases, or rentals.
    For purposes of the FSC rules, export property is defined 
as property (1) which is manufactured, produced, grown, or 
extracted in the United States by a person other than an FSC; 
(2) which is held primarily for sale, lease, or rental in the 
ordinary conduct of a trade or business by or to an FSC for 
direct use, consumption, or disposition outside the United 
States; and (3) not more than 50 percent of the fair market 
value of which is attributable to articles imported into the 
United States. Intangible property generally is excluded from 
the definition of export property for purposes of the FSC 
rules; this exclusion applies to copyrights other than films, 
tapes, records, or similar reproductions for commercial or home 
use. The temporary Treasury regulations provide that a license 
of a master recording tape for reproduction outside the United 
States is not excluded from the definition of export property 
(Treas. Reg. sec. 1.927(a)-1T(f)(3)). The statutory exclusion 
for intangible property does not contain any specific reference 
to computer software. However, the temporary Treasury 
regulations provide that a copyright on computer software does 
not constitute export property, and that standardized, mass 
marketed computer software constitutes export property if such 
software is not accompanied by a right to reproduce for 
external use (Treas. Reg. sec. 1.927(a)-1T(f)(3)).

                           Reasons for Change

    For purposes of the FSC provisions, films, tapes, records 
and similar reproductions explicitly are included within the 
definition of export property. In light of technological 
developments, the Committee believes that computer software is 
virtually indistinguishable from the enumerated films, tapes, 
and records. Accordingly, the Committee believes that the 
benefits of the FSC provisions similarly should be available to 
computer software.

                        Explanation of Provision

    The bill provides that computer software licensed for 
reproduction abroad is not excluded from the definition of 
export property for purposes of the FSC provisions. 
Accordingly, computer software that is exported with a right to 
reproduce is eligible for the benefits of the FSC provisions. 
In light of the rapid innovations in the computer and software 
industries, the Committee intends that the term ``computer 
software'' be construed broadly to accommodate technological 
changes in the products produced by both industries. No 
inference is intended regarding the qualification as export 
property of computer software licensed for reproduction abroad 
under present law.

                             Effective Date

    The provision generally applies to gross receipts from 
computer software licenses attributable to periods after 
December 31, 1997. Accordingly, in the case of a multi-year 
license, the provision applies to gross receipts attributable 
to the period of such license that is after December 31, 1997. 
In the case of gross receipts attributable to 1998, the 
provision applies to only one-third of such gross receipts. In 
the case of gross receipts attributable to 1999, the provision 
applies to only two-thirds of such gross receipts.

 2. Increase dollar limitation on section 911 exclusion (sec. 1102 of 
                   the bill and sec. 911 of the Code)

                              Present Law

    U.S. citizens generally are subject to U.S. income tax on 
all their income, whether derived in the United States or 
elsewhere. A U.S. citizen who earns income in a foreign country 
also may be taxed on such income by that foreign country. A 
credit against the U.S. income tax imposed on foreign source 
income is allowed for foreign taxes paid on such income.
    U.S. citizens living abroad may be eligible to exclude from 
their income for U.S. tax purposes certain foreign earned 
income and foreign housing costs. In order to qualify for these 
exclusions, a U.S. citizen must be either (1) a bona fide 
resident of a foreign country for an uninterrupted period that 
includes an entire taxable year or (2) present overseas for 330 
days out of any 12 consecutive month period. In addition, the 
taxpayer must have his or her tax home in a foreign country.
    The exclusion for foreign earned income generally applies 
to income earned from sources outside the United States as 
compensation for personal services actually rendered by the 
taxpayer. The maximum exclusion for foreign earned income for a 
taxable year is $70,000.
    The exclusion for housing costs applies to reasonable 
expenses, other than deductible interest and taxes, paid or 
incurred by or on behalf of the taxpayer for housing for the 
taxpayer and his or her spouse and dependents in a foreign 
country. The exclusion amount for housing costs for a taxable 
year is equal to the excess of such housing costs for the 
taxable year over an amount computed pursuant to a specified 
formula.
    The combined earned income exclusion and housing cost 
exclusion may not exceed the taxpayer's total foreign earned 
income. The taxpayer's foreign tax credit is reduced by the 
amount the credit that is attributable to excluded income.

                           Reasons for Change

    The Committee recognizes that for U.S. businesses to be 
effective competitors overseas it is necessary to dispatch U.S. 
citizens or residents to sites of foreign operations. Being 
stationed abroad typically imposes additional financial burdens 
on the employee and his family. These burdens may arise from 
maintaining two homes (one in the United States and one 
abroad), additional personal travel to maintain family ties, or 
the added expenses of living in a foreign location that has a 
high cost of living. Businesses often remunerate their 
employees for these additional burdens by paying higher wages. 
Because the increased remuneration is offset by larger burdens, 
the remuneration does not truly reflect an increase in economic 
well being. The Committee, therefore, believes that the 
exclusion of section 911 is a simple way to prevent taxpayers 
from facing an increased tax burden when there has been no 
increase in economic well being by accepting an overseas 
assignment.
    The Committee further observes that the present-law $70,000 
exclusion has remained unchanged for the past 10 years, while 
the extra costs from working abroad have increased with 
worldwide inflation. The Committee, therefore, believes it is 
appropriate to increase the exclusion permitted under section 
911. In addition, as a rough measure for the increased burden 
that may be expected to arise from future inflation, the 
Committee believes it is appropriate to index the level of the 
section 911 exclusion amount to future changes in the domestic 
cost of living.

                        Explanation of Provision

    Under the bill, the $70,000 limitation on the exclusion for 
foreign earned income is increased to $80,000, in increments of 
$2,000 each year beginning in 1998. Under the bill, the 
limitation on the exclusion for foreign earned income then is 
indexed for inflation beginning in 2008 (for inflation after 
2006).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

3. Simplify foreign tax credit limitation for individuals (sec. 1103 of 
                   the bill and sec. 904 of the Code)

                              Present Law

    In order to compute the foreign tax credit, a taxpayer 
computes foreign source taxable income and foreign taxes paid 
in each of the applicable separate foreign tax credit 
limitation categories. In the case of an individual, this 
requires the filing of IRS Form 1116.
    In many cases, individual taxpayers who are eligible to 
credit foreign taxes may have only a modest amount of foreign 
source gross income, all of which is income from investments. 
Taxable income of this type ordinarily is includible in the 
single foreign tax credit limitation category for passive 
income. However, under certain circumstances, the Code treats 
investment-type income (e.g., dividends and interest) as income 
in one of several other separate limitation categories (e.g., 
high withholding tax interest income or general limitation 
income). For this reason, any taxpayer with foreign source 
gross income is required to provide sufficient detail on Form 
1116 to ensure that foreign source taxable income from 
investments, as well as all other foreign source taxable 
income, is allocated to the correct limitation category.

                           Reasons for Change

    The Committee believes that a significant number of 
individuals are entitled to credit relatively small amounts of 
foreign tax imposed at modest effective tax rates on foreign 
source investment income. For taxpayers in this class, the 
applicable foreign tax credit limitations typically exceed the 
amounts of taxes paid. Therefore, exempting these taxpayers 
from the foreign tax credit limitation rules significantly 
reduces the complexity of the tax law without significantly 
altering actual tax liabilities. At the same time, however, the 
Committee believes that this exemption should be limited to 
those cases where the taxpayer receives a payee statement 
showing the amount of the foreign source income and the foreign 
tax.

                        Explanation of Provision

    The bill allows individuals with no more than $300 ($600 in 
the case of married persons filing jointly) of creditable 
foreign taxes, and no foreign source income other than passive 
income, an exemption from the foreign tax credit limitation 
rules. (The Committee intends that an individual electing this 
exemption will not be required to file Form 1116 in order to 
obtain the benefit of the foreign tax credit.) An individual 
making this election is not entitled to any carryover of excess 
foreign taxes to or from a taxable year to which the election 
applies.
    For purposes of this election, passive income generally is 
defined to include all types of income that is foreign personal 
holding company income under the subpart F rules, plus income 
inclusions from foreign personal holding companies and passive 
foreign investment companies, provided that the income is shown 
on a payee statement furnished to the individual. For purposes 
of this election, creditable foreign taxes include only foreign 
taxes that are shown on a payee statement furnished to the 
individual.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1997.

  4. Simplify translation of foreign taxes (sec. 1104 of the bill and 
                   secs. 905(c) and 986 of the Code)

                              Present Law

Translation of foreign taxes

    Foreign income taxes paid in foreign currencies are 
required to be translated into U.S. dollar amounts using the 
exchange rate as of the time such taxes are paid to the foreign 
country or U.S. possession. This rule applies to foreign taxes 
paid directly by U.S. taxpayers, whichtaxes are creditable in 
the year paid or accrued, and to foreign taxes paid by foreign 
corporations that are deemed paid by a U.S. corporation that is a 
shareholder of the foreign corporation, and hence creditable, in the 
year that the U.S. corporation receives a dividend or has an income 
inclusion from the foreign corporation.

Redetermination of foreign taxes

    For taxpayers that utilize the accrual basis of accounting 
for determining creditable foreign taxes, accrued and unpaid 
foreign tax liabilities denominated in foreign currencies are 
translated into U.S. dollar amounts at the exchange rate as of 
the last day of the taxable year of accrual. If a difference 
exists between the dollar value of accrued foreign taxes and 
the dollar value of those taxes when paid, a redetermination of 
foreign taxes arises. A foreign tax redetermination may occur 
in the case of a refund of foreign taxes. A foreign tax 
redetermination also may arise because the amount of foreign 
currency units actually paid differs from the amount of foreign 
currency units accrued. In addition, a redetermination may 
arise due to fluctuations in the value of the foreign currency 
relative to the dollar between the date of accrual and the date 
of payment.
    As a general matter, a redetermination of foreign tax paid 
or accrued directly by a U.S. person requires notification of 
the Internal Revenue Service and a redetermination of U.S. tax 
liability for the taxable year for which the foreign tax was 
claimed as a credit. The Treasury regulations provide 
exceptions to this rule for de minimis cases. In the case of a 
redetermination of foreign taxes that qualify for the indirect 
(or ``deemed-paid'') foreign tax credit under sections 902 and 
960, the Treasury regulations generally require taxpayers to 
make appropriate adjustments to the payor foreign corporation's 
pools of earnings and profits and foreign taxes.

                           Reasons for Change

    The Committee believes that the administrative burdens 
associated with the foreign tax credit can be reduced 
significantly by permitting foreign taxes to be translated 
using reasonably accurate average translation rates for the 
period in which the tax payments are made. This approach will 
reduce, sometimes substantially, the number of translation 
calculations that are required to be made. In addition, the 
Committee believes that taxpayers that are on the accrual basis 
of accounting for purposes of determining creditable foreign 
taxes should be permitted to translate those taxes into U.S. 
dollar amounts in the year to which those taxes relate, and 
should not be required to make adjustments or redetermination 
to those translated amounts, if actual tax payments are made 
within a reasonably short period of time after the close of 
such year. Moreover, the Committee believes that it is 
appropriate to use an average exchange rate for the taxable 
year with respect to which such foreign taxes relate for 
purposes of translating those taxes. On the other hand, the 
Committee believes that a foreign tax not paid within a 
reasonably short period after the close of the year to which 
the taxes relate should not be treated as a foreign tax for 
such year. By drawing a bright line between those foreign tax 
payment delays that do and do not require a redetermination, 
the Committee believes that a reasonable degree of certainty 
and clarity will be added to the law in this area.

                        Explanation of Provision

Translation of foreign taxes

            Translation of certain accrued foreign taxes
    With respect to taxpayers that take foreign income taxes 
into account when accrued, the bill generally provides for 
foreign taxes to be translated at the average exchange rate for 
the taxable year to which such taxes relate. This rule does not 
apply (1) to any foreign income tax paid after the date two 
years after the close of the taxable year to which such taxes 
relate, (2) with respect to taxes of an accrual-basis taxpayer 
that are actually paid in a taxable year prior to the year to 
which they relate, or (3) to tax payments that are denominated 
in an inflationary currency (as defined by regulations).
            Translation of all other foreign taxes
    Under the bill, foreign taxes not eligible for application 
of the preceding rule generally are translated into U.S. 
dollars using the exchange rates as of the time such taxes are 
paid. The bill provides the Secretary of the Treasury with 
authority to issue regulations that would allow foreign tax 
payments to be translated into U.S. dollar amounts using an 
average exchange rate for a specified period.

Redetermination of foreign taxes

    Under the bill, a redetermination is required if: (1) 
accrued taxes when paid differ from the amounts claimed as 
credits by the taxpayer, (2) accrued taxes are not paid before 
the date two years after the close of the taxable year to which 
such taxes relate, or (3) any tax paid is refunded in whole or 
in part. Thus, for example, the bill provides that if at the 
close of the second taxable year after the taxable year to 
which an accrued tax relates, any portion of the tax so accrued 
has not yet been paid, a foreign tax redetermination under 
section 905(c) is required for the amount representing the 
unpaid portion of that accrued tax. In other words, the 
previous accrual of any tax that is unpaid as of that date is 
denied. In cases where a redetermination is required, as under 
present law, the bill specifies that the taxpayer must notify 
the Secretary, who will redetermine the amount of the tax for 
the year or years affected. In the case of indirect foreign tax 
credits, regulatory authority is granted to prescribe 
appropriate adjustments to the foreign tax credit pools in lieu 
of such a redetermination.
    The bill provides that in the case of accrued taxes not 
paid within the date two years after the close of the taxable 
year to which such taxes relate, any such taxes if subsequently 
paid are taken into account for the taxable year to which such 
taxes relate. These taxes are translated into U.S. dollar 
amounts using the exchange rates in effect as of the time such 
taxes are paid.
    For example, assume that in year 1 a taxpayer accrues 1,000 
units of foreign tax that relate to year 1 and that the 
currency involved is not inflationary. Further assume that as 
of the end of year 1 the tax is unpaid. In this case, the bill 
provides that the taxpayer translates 1,000 units of accrued 
foreign tax into U.S. dollars at the average exchange rate for 
year 1. If the 1,000units of tax are paid by the taxpayer in 
either year 2 or year 3, no redetermination of foreign tax is required. 
If any portion of the tax so accrued remains unpaid as of the end of 
year 3, however, the taxpayer is required to redetermine its foreign 
tax accrued in year 1 to eliminate the accrued but unpaid tax, thereby 
reducing its foreign tax credit for such year. If the taxpayer pays the 
disallowed taxes in year 4, the taxpayer again redetermines its foreign 
taxes (and foreign tax credit) for year 1, but the taxes paid in year 4 
are translated into U.S. dollars at the exchange rate for year 4.

                             Effective Date

    The provision generally is effective for foreign taxes paid 
(in the case of taxpayers using the cash basis for determining 
the foreign tax credit) or accrued (in the case of taxpayers 
using the accrual basis for determining the foreign tax credit) 
in taxable years beginning after December 31, 1997. The 
provision's changes to the foreign tax redetermination rules 
apply to foreign taxes which relate to taxable years beginning 
after December 31, 1997.

    5. Election to use simplified foreign tax credit limitation for 
alternative minimum tax purposes (sec. 1105 of the bill and sec. 59 of 
                               the Code)

                              Present Law

    Computing foreign tax credit limitations requires the 
allocation and apportionment of deductions between items of 
foreign source income and items of U.S. source income. Foreign 
tax credit limitations must be computed both for regular tax 
purposes and for purposes of the alternative minimum tax (AMT). 
Consequently, the allocation and apportionment of deductions 
must be done separately for regular tax foreign tax credit 
limitation purposes and AMT foreign tax credit limitation 
purposes.

                           Reasons for Change

    The process of allocating and apportioning deductions for 
purposes of calculating the regular and AMT foreign tax credit 
limitations can be complex. Taxpayers that have allocated and 
apportioned deductions for regular tax purposes generally must 
reallocate and reapportion the same deductions for AMT foreign 
tax credit purposes, based on assets and income that reflect 
AMT adjustments (including depreciation). However, the 
differences between regular taxable income and alternative 
minimum taxable income often are relevant primarily to U.S. 
source income. The Committee believes that permitting taxpayers 
to use foreign source regular taxable income in computing their 
AMT foreign tax credit limitation would provide an appropriate 
simplification of the necessary computations by eliminating the 
need to reallocate and reapportion every deduction.

                        Explanation of Provision

    The provision permits taxpayers to elect to use as their 
AMT foreign tax credit limitation fraction the ratio of foreign 
source regular taxable income to entire alternative minimum 
taxable income, rather than the ratio of foreign source 
alternative minimum taxable income to entire alternative 
minimum taxable income. Under this election, foreign source 
regular taxable income is used, however, only to the extent it 
does not exceed entire alternative minimum taxable income. In 
the event that foreign source regular taxable income does 
exceed entire alternative minimum taxable income, and the 
taxpayer has income in more than one foreign tax credit 
limitation category, the Committee intends that the foreign 
source taxable income in each such category generally would be 
reduced by a pro rata portion of that excess.
    The election is available only in the first taxable year 
beginning after December 31, 1997 for which the taxpayer claims 
an AMT foreign tax credit. The Committee intends that a 
taxpayer will be treated, for this purpose, as claiming an AMT 
foreign tax credit for any taxable year for which the taxpayer 
chooses to have the benefits of the foreign tax credit and in 
which the taxpayer is subject to the alternative minimum tax or 
would be subject to the alternative minimum tax but for the 
availability of the AMT foreign tax credit. The election, once 
made, will apply to all subsequent taxable years, and may be 
revoked only with the consent of the Secretary of the Treasury.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1997.

  6. Simplify treatment of personal transactions in foreign currency 
            (sec. 1106 of the bill and sec. 988 of the Code)

                              Present Law

    When a U.S. taxpayer makes a payment in a foreign currency, 
gain or loss (referred to as ``exchange gain or loss'') 
generally arises from any change in the value of the foreign 
currency relative to the U.S. dollar between the time the 
currency was acquired (or the obligation to pay was incurred) 
and the time that the payment is made. Gain or loss results 
because foreign currency, unlike the U.S. dollar, is treated as 
property for Federal income tax purposes.
    Exchange gain or loss can arise in the course of a trade or 
business or in connection with an investment transaction. 
Exchange gain or loss also can arise where foreign currency was 
acquired for personal use. For example, the IRS has ruled that 
a taxpayer who converts U.S. dollars to a foreign currency for 
personal use while traveling abroad realizes exchange gain or 
loss on reconversion of appreciated or depreciated foreign 
currency (Rev. Rul. 74-7, 1974-1 C.B. 198).
    Prior to the Tax Reform Act of 1986 (``1986 Act''), most of 
the rules for determining the Federal income tax consequences 
of foreign currency transactions were embodied in a series of 
court cases and revenue rulings issued by the IRS. Additional 
rules of limited application were provided by Treasury 
regulations. Pre-1986 law was believed to be unclear regarding 
the character, the timing of recognition, and the source of 
gain or loss due to fluctuations in the exchange rate of 
foreign currency. The 1986 Act provided a comprehensive set of 
rules for the U.S. tax treatment of transactions involving 
foreign currencies.
    However, the 1986 Act provisions designed to clarify the 
treatment of currency transactions, primarily found in section 
988 of the Code, apply to transactions entered into by an 
individual only to the extent that expenses attributable to 
such transactions are deductible under section 162 (as a trade 
or business expense) or section 212 (as an expense of producing 
income). Therefore, the principles of pre-1986 law continue to 
apply to personal currency transactions.

                           Reasons for Change

    An individual who lives or travels abroad generally cannot 
use U.S. dollars to make all of the purchases incident to daily 
life. If an individual must treat foreign currency in this 
instance as property giving rise to U.S.-dollar income or loss 
every time the individual, in effect, ``barters the foreign 
currency for goods or services, the U.S. individual living in 
or visiting a foreign country will have a significant 
administrative burden that may bear little or no relation to 
whether U.S.-dollar measured income has increased or decreased. 
The Committee believes that individuals should be given relief 
from the requirement to keep track of exchange gains on a 
transaction-by-transaction basis in de minimis cases.

                        Explanation of Provision

    If an individual acquires foreign currency and disposes of 
it in a personal transaction and the exchange rate changes 
between the acquisition and disposition of such currency, the 
provision applies nonrecognition treatment to any resulting 
exchange gain, provided that such gain does not exceed $200. 
The provision does not change the treatment of resulting 
exchange losses. The Committee understands that under other 
Code provisions such losses typically are not deductible by 
individuals (e.g., sec. 165(c)).

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1997.

  7. Simplify foreign tax credit limitation for dividends from 10/50 
       companies (sec. 1107 of the bill and sec. 904 of the Code)

                              Present Law

    U.S. persons may credit foreign taxes against U.S. tax on 
foreign source income. The amount of foreign tax credits that 
can be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S. source income. Separate limitations are 
applied to specific categories of income.
    Special foreign tax credit limitation rules apply in the 
case of dividends received from a foreign corporation in which 
the taxpayer owns at least 10 percent of the stock by vote and 
which is not a controlled foreign corporation (a so-called 
``10/50 company''). Dividends received by the taxpayer from 
each 10/50 company are subject to a separate foreign tax credit 
limitation.

                           Reasons for Change

    The Committee finds that the present-law rule that subjects 
the dividends received from each so-called 10/50 company to a 
separate foreign tax credit limitation imposes a substantial 
record-keeping burden on companies and has the additional 
negative effect of discouraging minority-position joint 
ventures abroad. Indeed, the Committee is aware that recent 
academic research suggests that the present-law requirements 
may distort the form and amount of overseas investment 
undertaken by U.S.-based enterprises. The research findings 
suggest that the present-law limitation ``greatly reduces the 
attractiveness of joint ventures to American investors, 
particularly ventures in low-tax foreign countries. Aggregate 
data indicate that U.S. participation in international joint 
ventures fell sharply after [enactment of present law] in 1986. 
The decline in U.S. joint venture activity is most pronounced 
in low-tax countries. * * * Moreover, joint ventures in low-tax 
countries use more debt and pay greater royalties to their U.S. 
parents after 1986, which reflects their incentives to 
economize on dividend payments.'' \58\
---------------------------------------------------------------------------
    \58\ See, Mihir A. Desai and James R. Hines, Jr., `` `Basket' 
Cases: International Joint Ventures after the Tax Reform Act of 1986,'' 
National Bureau of Economic Research, Working Paper #5755, September 
1996.
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    The Committee believes that the joint venture can be an 
efficient way for American business to exploit its know-how and 
technology in foreign markets. If the present-law limitation is 
discouraging such joint ventures or altering the structure of 
new ventures, the ability of American business to succeed 
abroad may be diminished. The Committee believes it is 
appropriate to modify the present-law limitation to promote 
simplicity and the ability of American business to compete 
abroad.

                        Explanation of Provision

    Under the bill, a single foreign tax credit limitation 
generally applies to dividends received by the taxpayer from 
all 10/50 companies. However, separate foreign tax credit 
limitations continue to apply to dividends received by the 
taxpayer from each 10/50 company that qualifies as a passive 
foreign investment company. Regulatory authority is granted to 
provide rules regarding the treatment of distributions out of 
earning and profits for periods prior to the taxpayer's 
acquisition of such stock. To the extent the regulations treat 
distributions from a foreign corporation out of earnings and 
profits for pre-acquisition periods as subject to a separate 
foreign tax credit limitation, it is expected that the 
regulations would allow the taxpayer to elect to apply that 
separate foreign tax credit limitation (rather than the 
limitation applicable to dividends from all 10/50 companies) 
also to distributions out of post-acquisition earnings and 
profits of such corporation.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

    B. General Provisions Affecting Treatment of Controlled Foreign 
Corporations (secs. 1111-1113 of the bill and secs. 902, 904, 951, 952, 
               959, 960, 961, 964, and 1248 of the Code)

                              Present Law

    If an upper-tier controlled foreign corporation (``CFC'') 
sells stock of a lower-tier CFC, the gain generally is included 
in the income of U.S. 10-percent shareholders as subpart F 
income and such U.S. shareholder's basis in the stock of the 
first-tier CFC is increased to account for the inclusion. The 
inclusion is not characterized for foreign tax credit 
limitation purposes by reference to the nature of the income of 
the lower-tier CFC; instead it generally is characterized as 
passive income.
    For purposes of the foreign tax credit limitations 
applicable to so-called 10/50 companies, a CFC is not treated 
as a 10/50 company with respect to any distribution out of its 
earnings and profits for periods during which it was a CFC and, 
except as provided in regulations, the recipient of the 
distribution was a U.S. 10-percent shareholder in such 
corporation.
    If subpart F income of a lower-tier CFC is included in the 
gross income of a U.S. 10-percent shareholder, no provision of 
present law allows adjustment of the basis of the upper-tier 
CFC's stock in the lower-tier CFC.
    The subpart F income earned by a foreign corporation during 
its taxable year is taxed to the persons who are U.S. 10-
percent shareholders of the corporation on the last day, in 
that year, on which the corporation is a CFC. In the case of a 
U.S. 10-percent shareholder who acquired stock in a CFC during 
the year, such inclusions are reduced by all or a portion of 
the amount of dividends paid in that year by the foreign 
corporation to any person other than the acquiror with respect 
to that stock.
    As a general rule, subpart F income does not include income 
earned from sources within the United States if the income is 
effectively connected with the conduct of a U.S. trade or 
business by the CFC. This general rule does not apply, however, 
if the income is exempt from, or subject to a reduced rate of, 
U.S. tax pursuant to a provision of a U.S. treaty.
    A U.S. corporation that owns at least 10 percent of the 
voting stock of a foreign corporation is treated as if it had 
paid a share of the foreign income taxes paid by the foreign 
corporation in the year in which the foreign corporation's 
earnings and profits become subject to U.S. tax as dividend 
income of the U.S. shareholder. A U.S. corporation also may be 
deemed to have paid taxes paid by a second- or third-tier 
foreign corporation if certain conditions are satisfied.

                           Reasons for Change

    The Committee believes that complexities are caused by 
uncertainties and gaps in the present statutory schemes for 
taxing gains on dispositions of stock in CFCs as dividend 
income or subpart F income. The Committee believes that it is 
appropriate to reduce complexities by rationalizing these 
rules.
    The Committee also understands that certain arbitrary 
limitations placed on the operation of the indirect foreign tax 
credit may have resulted in taxpayers undergoing burdensome and 
sometimes costly corporate restructuring. In other cases, there 
is concern that these limitations may have contributed to 
decisions by U.S. companies against acquiring foreign 
subsidiaries. The Committee deems it appropriate to ease these 
restrictions.

                        Explanation of Provision

Lower-tier CFCs

            Characterization of gain on stock disposition
    Under the bill, if a CFC is treated as having gain from the 
sale or exchange of stock in a foreign corporation, the gain is 
treated as a dividend to the same extent that it would have 
been so treated under section 1248 if the CFC were a U.S. 
person. This provision, however, does not affect the 
determination of whether the corporation whose stock is sold or 
exchanged is a CFC.
    Thus, for example, if a U.S. corporation owns 100 percent 
of the stock of a foreign corporation, which owns 100 percent 
of the stock of a second foreign corporation, then under the 
bill, any gain of the first corporation upon a sale or exchange 
of stock of the second corporation is treated as a dividend for 
purposes of subpart F income inclusions to the U.S. 
shareholder, to the extent of earnings and profits of the 
second corporation attributable to periods in which the first 
foreign corporation owned the stock of the second foreign 
corporation while the latter was a CFC with respect to the U.S. 
shareholder.
    Gain on disposition of stock in a related corporation 
created or organized under the laws of, and having a 
substantial part of its assets in a trade or business in, the 
same foreign country as the gain recipient, even if 
recharacterized as a dividend under the proposal, is not 
excluded from foreign personal holding company income under the 
same-country exception that applies to actual dividends.
    Under the bill, for purposes of this rule, a CFC is treated 
as having sold or exchanged stock if, under any provision of 
subtitle A of the Code, the CFC is treated as having gain from 
the sale or exchange of such stock. Thus, for example, if a CFC 
distributes to its shareholder stock in a foreign corporation, 
and the distribution results in gain being recognized by the 
CFC under section 311(b) as if the stock were sold to the 
shareholder for fair market value, the bill makes clear that, 
for purposes of this rule, the CFC is treated as having sold or 
exchanged the stock.
    The bill also repeals a provision added to the Code by the 
Technical and Miscellaneous Revenue Act of 1988 that, except as 
provided by regulations, requires a recipient of a distribution 
from a CFC to have been a U.S. 10-percent shareholder of that 
CFC for the period during which the earnings and profits which 
gave rise to the distribution were generated in order to avoid 
treating the distribution as one coming from a 10/50 company. Thus, 
under the bill, a CFC is not treated as a 10/50 company with respect to 
any distribution out of its earnings and profits for periods during 
which it was a CFC, whether or not the recipient of the distribution 
was a U.S. 10-percent shareholder of the corporation when the earnings 
and profits giving rise to the distribution were generated.
            Adjustments to basis of stock
    Under the bill, when a lower-tier CFC earns subpart F 
income, and stock in that corporation is later disposed of by 
an upper-tier CFC, the resulting income inclusion of the U.S. 
10-percent shareholders, under regulations, is to be adjusted 
to account for previous inclusions, in a manner similar to the 
adjustments provided to the basis of stock in a first-tier CFC. 
Thus, just as the basis of a U.S. 10-percent shareholder in a 
first-tier CFC rises when subpart F income is earned and falls 
when previously taxed income is distributed, so as to avoid 
double taxation of the income on a later disposition of the 
stock of that company, the subpart F income from gain on the 
disposition of a lower-tier CFC generally is reduced by income 
inclusions of earnings that were not subsequently distributed 
by the lower-tier CFC.
    For example, assume that a U.S. person is the owner of all 
of the stock of a first-tier CFC which, in turn, is the sole 
shareholder of a second-tier CFC. In year 1, the second-tier 
CFC earns $100 of subpart F income which is included in the 
U.S. person's gross income for that year. In year 2, the first-
tier CFC disposes of the second-tier CFC's stock and recognizes 
$300 of income with respect to the disposition. All of that 
income constitutes subpart F foreign personal holding company 
income. Under the bill, the Secretary is granted regulatory 
authority to reduce the U.S. person's year 2 subpart F 
inclusion by $100--the amount of year 1 subpart F income of the 
second-tier CFC that was included, in that year, in the U.S. 
person's gross income. Such an adjustment, in effect, allows 
for a step-up in the basis of the stock of the second-tier CFC 
to the extent of its subpart F income previously included in 
the U.S. person's gross income.

Subpart F inclusions in year of acquisition

    If a U.S. 10-percent shareholder acquires the stock of a 
CFC from another U.S. 10-percent shareholder during a taxable 
year of the CFC in which it earns subpart F income, the 
proposal reduces the acquiror's subpart F income inclusion for 
that year by a portion of the amount of the dividend deemed 
(under sec. 1248) to be received by the transferor. The portion 
by which the inclusion is reduced (as is the case if a dividend 
was paid to the previous owner of the stock) does not exceed 
the lesser of the amount of dividends with respect to such 
stock deemed received (under sec. 1248) by other persons during 
the year or the amount determined by multiplying the subpart F 
income for the year by the proportion of the year during which 
the acquiring shareholder did not own the stock.

Treatment of U.S. income earned by a CFC

    Under the bill, an exemption or reduction by treaty of the 
branch profits tax that would be imposed under section 884 on a 
CFC does not affect the general statutory exemption from 
subpart F income that is granted for U.S. source effectively 
connected income. For example, assume a CFC earns income of a 
type that generally would be subpart F income, and that income 
is earned from sources within the United States in connection 
with business operations therein. Further assume that 
repatriation of that income is exempted from the U.S. branch 
profits tax under a provision of an applicable U.S. income tax 
treaty. The bill provides that, notwithstanding the treaty's 
effect on the branch tax, the income is not treated as subpart 
F income as long as it is not exempt from U.S. taxation (or 
subject to a reduced rate of tax) under any other treaty 
provision.

Extension of indirect foreign tax credit

    The bill extends the application of the indirect foreign 
tax credit (secs. 902 and 960) to taxes paid or accrued by 
certain fourth-, fifth-, and sixth-tier foreign corporations. 
In general, three requirements are required to be satisfied by 
a foreign company at any of these tiers to qualify for the 
credit. First, the company must be a CFC. Second, the U.S. 
corporation claiming the credit under section 902(a) must be a 
U.S. shareholder (as defined in sec. 951(b)) with respect to 
the foreign company. Third, the product of the percentage 
ownership of voting stock at each level from the U.S. 
corporation down must equal at least 5 percent. The bill limits 
the application of the indirect foreign tax credit below the 
third tier to taxes paid or incurred in taxable years during 
which the payor is a CFC. Foreign taxes paid below the sixth 
tier of foreign corporations remain ineligible for the indirect 
foreign tax credit.

                            Effective Dates

    Lower-tier CFCs.--The provision that treats gains on 
dispositions of stock in lower-tier CFCs as dividends under 
section 1248 principles applies to gains recognized on 
transactions occurring after the date of enactment.
    The provision that expands look-through treatment, for 
foreign tax credit limitation purposes, of dividends from CFCs 
is effective for distributions after the date of enactment.
    The provision that provides for regulatory adjustments to 
U.S. shareholder inclusions, with respect to gains of CFCs from 
dispositions of stock in lower-tier CFCs is effective for 
determining inclusions for taxable years of U.S. shareholders 
beginning after December 31, 1997. Thus, the bill permits 
regulatory adjustments to an inclusion occurring after the 
effective date to account for income that was previously taxed 
under the subpart F provisions either prior to or subsequent to 
the effective date.
    Subpart F inclusions in year of acquisition.--The provision 
that permits dispositions of stock to be taken into 
consideration in determining a U.S. shareholder's subpart F 
inclusion for a taxable year is effective with respect to 
dispositions occurring after the date of enactment.
    Treatment of U.S. source income earned by a CFC.--The 
provision concerning the effect of treaty exemptions from, or 
reductions of, the branch profits tax on the determination of 
subpart F income is effective for taxable years beginning after 
December 31, 1986.
    Extension of indirect foreign tax credit.--The provision 
that extends application of the indirect foreign tax credit to 
certain CFCs below the third tier is effective for foreign 
taxes paid or incurred by CFCs for taxable years of such 
corporations beginning after the date of enactment.
    In the case of any chain of foreign corporations, the taxes 
of which would be eligible for the indirect foreign tax credit, 
under present law or under the bill, but for the denial of 
indirect credits below the third or sixth tier, as the case may 
be, no liquidation, reorganization, or similar transaction in a 
taxable year beginning after the date of enactment will have 
the effect of permitting taxes to be taken into account under 
the indirect foreign tax credit provisions of the Code which 
could not have been taken into account under those provisions 
but for such transaction.

  C. Modification of Passive Foreign Investment Company Provisions to 
 Eliminate Overlap with Subpart F and to Allow Mark-to-Market Election 
     (secs. 1121-1123 of the bill and secs. 1291-1297 of the Code)

                              Present Law

Overview

    U.S. citizens and residents and U.S. corporations 
(collectively, ``U.S. persons'') are taxed currently by the 
United States on their worldwide income, subject to a credit 
against U.S. tax on foreign income based on foreign income 
taxes paid with respect to such income. A foreign corporation 
generally is not subject to U.S. tax on its income from 
operations outside the United States.
    Income of a foreign corporation generally is taxed by the 
United States when it is repatriated to the United States 
through payment to the corporation's U.S. shareholders, subject 
to a foreign tax credit. However, a variety of regimes imposing 
current U.S. tax on income earned through a foreign corporation 
have been reflected in the Code. Today the principal anti-
deferral regimes set forth in the Code are the controlled 
foreign corporation rules of subpart F (secs. 951-964) and the 
passive foreign investment company rules (secs. 1291-1297). 
Additional anti-deferral regimes set forth in the Code are the 
foreign personal holding company rules (secs. 551-558); the 
personal holding company rules (secs. 541-547); the accumulated 
earnings tax (secs. 531-537); and the foreign investment 
company and electing foreign investment company rules (secs. 
1246-1247). The anti-deferral regimes included in the Code 
overlap such that a given taxpayer may be subject to multiple 
sets of anti-deferral rules.

Controlled foreign corporations

    A controlled foreign corporation (CFC) is defined generally 
as any foreign corporation if U.S. persons own more than 50 
percent of the corporation's stock (measured by vote or value), 
taking into account only those U.S. persons that own at least 
10 percent of the stock (measured by vote only) (sec. 957). 
Stock ownership includes not only stock owned directly, but 
also stock owned indirectly or constructively (sec. 958).
    Certain income of a CFC (referred to as ``subpart F 
income'') is subject to current U.S. tax. The United States 
generally taxes the U.S. 10-percent shareholders of a CFC 
currently on their pro rata shares of the subpart F income of 
the CFC. In effect, the Code treats those U.S. shareholders as 
having received a current distribution out of the CFC's subpart 
F income. Such shareholders also are subject to current U.S. 
tax on their pro rata shares of the CFC's earnings invested in 
U.S. property. The foreign tax credit may reduce the U.S. tax 
on these amounts.

Passive foreign investment companies

    The Tax Reform Act of 1986 established an anti-deferral 
regime for passive foreign investment companies (PFICs). A PFIC 
is any foreign corporation if (1) 75 percent or more of its 
gross income for the taxable year consists of passive income, 
or (2) 50 percent or more of the average fair market value of 
its assets consists of assets that produce, or are held for the 
production of, passive income. Two alternative sets of income 
inclusion rules apply to U.S. persons that are shareholders in 
a PFIC. One set of rules applies to PFICs that are ``qualified 
electing funds,'' under which electing U.S. shareholders 
include currently in gross income their respective shares of 
the PFIC's total earnings, with a separate election to defer 
payment of tax, subject to an interest charge, on income not 
currently received. The second set of rules applies to PFICs 
that are not qualified electing funds (``nonqualified funds''), 
under which the U.S. shareholders pay tax on income realized 
from the PFIC and an interest charge that is attributable to 
the value of deferral.

Overlap between subpart F and the PFIC provisions

    A foreign corporation that is a CFC is also a PFIC if it 
meets the passive income test or the passive asset test 
described above. In such a case, the 10-percent U.S. 
shareholders are subject both to the subpart F provisions 
(which require current inclusion of certain earnings of the 
corporation) and to the PFIC provisions (which impose an 
interest charge on amounts distributed from the corporation and 
gains recognized upon the disposition of the corporation's 
stock, unless an election is made to include currently all of 
the corporation's earnings).

                           Reasons for Change

    The anti-deferral rules for U.S. persons owning stock in 
foreign corporations are very complex. Moreover, the 
interactions between the anti-deferral regimes cause additional 
complexity. The overlap between the subpart F rules and the 
PFIC provisions is of particular concern to the Committee. The 
PFIC provisions, which do not require a threshold level of 
ownership by U.S. persons, apply where the U.S.-ownership 
requirements of subpart F are not satisfied. However, the PFIC 
provisions also apply to a U.S. shareholder that is subject to 
the current inclusion rules of subpart F with respect to the 
same corporation. The Committee believes that the additional 
complexity caused by this overlap is unnecessary.
    The Committee also understands that the interest-charge 
method for income inclusion provided in the PFIC rules is a 
substantial source of complexity for shareholders of PFICs. 
Even without eliminating the interest-charge method, 
significant simplification can be achieved by providing an 
alternative income inclusion method for shareholders of PFICs. 
Further, some taxpayers have argued that they would have 
preferred choosing the current-inclusion method afforded by the 
qualified fund election, but were unable to do so because they 
could not obtain the necessary information from the PFIC. 
Accordingly, the Committee believes that a mark-to-market 
election would provide PFIC shareholders with a fair 
alternative method for including income with respect to the 
PFIC.

                        Explanation of Provision

Elimination of overlap between subpart F and the PFIC provisions

    In the case of a PFIC that is also a CFC, the bill 
generally treats the corporation as not a PFIC with respect to 
certain 10-percent shareholders. This rule applies if the 
corporation is a CFC (within the meaning of section 957(a)) and 
the shareholder is a U.S. shareholder (within the meaning of 
section 951(b)) of such corporation (i.e., if the shareholder 
is subject to the current inclusion rules of subpart F with 
respect to such corporation). Moreover, the rule applies for 
that portion of the shareholder's holding period with respect 
to the corporation's stock which is after December 31, 1997 and 
during which the corporation is a CFC and the shareholder is a 
U.S. shareholder. Accordingly, a shareholder that is subject to 
current inclusion under the subpart F rules with respect to 
stock of a PFIC that is also a CFC generally is not subject 
also to the PFIC provisions with respect to the same stock. The 
PFIC provisions continue to apply in the case of a PFIC that is 
also a CFC to shareholders that are not subject to subpart F 
(i.e., to shareholders that are U.S. persons and that own 
(directly, indirectly, or constructively) less than 10 percent 
of the corporation's stock by vote).
    If a shareholder of a PFIC is subject to the rules 
applicable to nonqualified funds before becoming eligible for 
the special rules provided under the proposal for shareholders 
that are subject to subpart F, the stock held by such 
shareholder continues to be treated as PFIC stock unless the 
shareholder makes an election to pay tax and an interest charge 
with respect to the unrealized appreciation in the stock or the 
accumulated earnings of the corporation.
    If, under the bill, a shareholder is not subject to the 
PFIC provisions because the shareholder is subject to subpart F 
and the shareholder subsequently ceases to be subject to 
subpart F with respect to the corporation, for purposes of the 
PFIC provisions, the shareholder's holding period for such 
stock is treated as beginning immediately after such cessation. 
Accordingly, in applying the rules applicable to PFICs that are 
not qualified electing funds, the earnings of the corporation 
are not attributed to the period during which the shareholder 
was subject to subpart F with respect to the corporation and 
was not subject to the PFIC provisions.

Mark-to-market election

    The bill allows a shareholder of a PFIC to make a mark-to-
market election with respect to the stock of the PFIC, provided 
that such stock is marketable (as defined below). Under such an 
election, the shareholder includes in income each year an 
amount equal to the excess, if any, of the fair market value of 
the PFIC stock as of the close of the taxable year over the 
shareholder's adjusted basis in such stock. The shareholder is 
allowed a deduction for the excess, if any, of the adjusted 
basis of the PFIC stock over its fair market value as of the 
close of the taxable year. However, deductions are allowable 
under this rule only to the extent of any net mark-to-market 
gains with respect to the stock included by the shareholder for 
prior taxable years.
    Under the bill, this mark-to-market election is available 
only for PFIC stock that is ``marketable.'' For this purpose, 
PFIC stock is considered marketable if it is regularly traded 
on a national securities exchange that is registered with the 
Securities and Exchange Commission or on the national market 
system established pursuant to section 11A of the Securities 
and Exchange Act of 1934. In addition, PFIC stock is considered 
marketable if it is regularly traded on any exchange or market 
that the Secretary of the Treasury determines has rules 
sufficient to ensure that the market price represents a 
legitimate and sound fair market value. Any option on stock 
that is considered marketable under the foregoing rules is 
treated as marketable, to the extent provided in regulations. 
PFIC stock also is treated as marketable, to the extent 
provided in regulations, if the PFIC offers for sale (or has 
outstanding) stock of which it is the issuer and which is 
redeemable at its net asset value in a manner comparable to a 
U.S. regulated investment company (RIC).
    In addition, the bill treats as marketable any PFIC stock 
owned by a RIC that offers for sale (or has outstanding) any 
stock of which it is the issuer and which is redeemable at its 
net asset value. The bill treats as marketable any PFIC stock 
held by any other RIC that otherwise publishes net asset 
valuations at least annually, except to the extent provided in 
regulations. It is believed that even for RICs that do not make 
a market in their own stock, but that do regularly report their 
net asset values in compliance with the securities laws, 
inaccurate valuation may bring exposure to legal liabilities, 
and this exposure may ensure the reliability of the values such 
RICs assign to the PFIC stock they hold.
    The shareholder's adjusted basis in the PFIC stock is 
adjusted to reflect the amounts included or deducted under this 
election. In the case of stock owned indirectly by a U.S. 
person through a foreign entity (as discussed below), the basis 
adjustments for mark-to-market gains and losses apply to the 
basis of the PFIC in the hands of the intermediary owner, but 
only for purposes of the subsequent application of the PFIC 
rules to the tax treatment of the indirect U.S. owner. In 
addition, similar basis adjustments are made to the adjusted 
basis of the property actually held by the U.S. person by 
reason of which the U.S. person is treated as owning PFIC 
stock.
    Amounts included in income pursuant to a mark-to-market 
election, as well as gain on the actual sale or other 
disposition of the PFIC stock, is treated as ordinary income. 
Ordinary loss treatment also applies to the deductible portion 
of any mark-to-market loss on PFIC stock, as well as to any 
loss realized on the actual sale or other disposition of PFIC 
stock to the extent that the amount of such loss does not 
exceed the net mark-to-market gains previously included with 
respect to such stock. The source of amounts with respect to a 
mark-to-market election generally is determined in the same 
manner as if such amounts were gain or loss from the sale of 
stock in the PFIC.
    An election to mark to market applies to the taxable year 
for which made and all subsequent taxable years, unless the 
PFIC stock ceases to be marketable or the Secretary of the 
Treasury consents to the revocation of such election.
    Under constructive ownership rules, U.S. persons that own 
PFIC stock through certain foreign entities may make this 
election with respect to the PFIC. These constructive ownership 
rules apply to treat PFIC stock owned directly or indirectly by 
or for a foreign partnership, trust, or estate as owned 
proportionately by the partners or beneficiaries, except as 
provided in regulations. Stock in a PFIC that is thus treated 
as owned by a person is treated as actually owned by that 
person for purposes of again applying the constructive 
ownership rules. In the case of a U.S. person that is treated 
as owning PFIC stock by application of this constructive 
ownership rule, any disposition by the U.S. person or by any 
other person that results in the U.S. person being treated as 
no longer owning the PFIC stock, as well as any disposition by 
theperson actually owning the PFIC stock, is treated as a 
disposition by the U.S. person of the PFIC stock.
    In addition, a CFC that owns stock in a PFIC is treated as 
a U.S. person that may make the election with respect to such 
PFIC stock. Any amount includible (or deductible) in the CFC's 
gross income pursuant to this mark-to-market election is 
treated as foreign personal holding company income (or a 
deduction allocable to foreign personal holding company 
income). The source of such amounts, however, is determined by 
reference to the actual residence of the CFC.
    In the case of a taxpayer that makes the mark-to-market 
election with respect to stock in a PFIC that is a nonqualified 
fund after the beginning of the taxpayer's holding period with 
respect to such stock, a coordination rule applies to ensure 
that the taxpayer does not avoid the interest charge with 
respect to amounts attributable to periods before such 
election. A similar rule applies to RICs that make the mark-to-
market election under this bill after the beginning of their 
holding period with respect to PFIC stock (to the extent that 
the RIC had not previously marked to market the stock of the 
PFIC).
    Except as provided in the coordination rules described 
above, the rules of section 1291 (with respect to nonqualified 
funds) do not apply to a shareholder of a PFIC if a mark-to-
market election is in effect for the shareholder's taxable 
year. Moreover, in applying section 1291 in a case where a 
mark-to-market election was in effect for any prior taxable 
year, the shareholder's holding period for the PFIC stock is 
treated as beginning immediately after the last taxable year 
for which such election applied.
    A special rule applicable in the case of a PFIC shareholder 
that becomes a U.S. person treats the adjusted basis of any 
PFIC stock held by such person on the first day of the year in 
which such shareholder becomes a U.S. person as equal to the 
greater of its fair market value on such date or its adjusted 
basis on such date. Such rule applies only for purposes of the 
mark-to- market election.

                             Effective Date

    The provision is effective for taxable years of U.S. 
persons beginning after December 31, 1997, and taxable years of 
foreign corporations ending with or within such taxable years 
of U.S. persons.

  d. simplify formation and operation of international joint ventures 
 (secs. 1131, 1141-1145, and 1151 of the bill and secs. 367, 721, 1491-
         1494, 6031, 6038, 6038B, 6046A, and 6501 of the code)

                              Present Law

    Under section 1491, an excise tax generally is imposed on 
transfers of property by a U.S. person to a foreign corporation 
as paid-in surplus or as a contribution to capital or to a 
foreign partnership, estate or trust. The tax is 35 percent of 
the amount of gain inherent in the property transferred but not 
recognized for income tax purposes at the time of the transfer. 
However, several exceptions to the section 1491 excise tax are 
available. Under section 1494(c), a substantial penalty applies 
in the case of a failure to report a transfer described in 
section 1491.
    Section 367 applies to require gain recognition upon 
certain transfers by U.S. persons to foreign corporations. 
Under section 367(d), a U.S. person that contributes intangible 
property to a foreign corporation is treated as having sold the 
property to the corporation and is treated as receiving deemed 
royalty payments from the corporation. These deemed royalty 
payments are treated as U.S. source income. A U.S. person may 
elect to apply similar rules to a transfer of intangible 
property to a foreign partnership that otherwise would be 
subject to the section 1491 excise tax.
    A foreign partnership may be required to file a partnership 
return. If a foreign partnership fails to file a required 
return, losses and credits with respect to the partnership may 
be disallowed to the partnership. A U.S. person that acquires 
or disposes of an interest in a foreign partnership, or whose 
proportional interest in the partnership changes substantially, 
may be required to file an information return with respect to 
such event.
    A partnership generally is considered to be a domestic 
partnership if it is created or organized in the United States 
or under the laws of the United States or any State. A foreign 
partnership generally is any partnership that is not a domestic 
partnership.

                           Reasons for Change

    The Committee understands that the present-law rules 
imposing an excise tax on certain transfers of appreciated 
property to a foreign entity unless the requirements for an 
exception from such excise tax are satisfied operate as a trap 
for the unwary. The Committee further understands that the 
special source rule of present law for deemed royalty payments 
with respect to a transfer of an appreciated intangible to a 
foreign corporation was intended to discourage such transfers. 
The Committee believes that the imposition of enhanced 
information reporting obligations with respect to both foreign 
partnerships and foreign corporations would eliminate the need 
for both of these sets of rules.

                        Explanation of Provision

    The bill repeals the sections 1491-1494 excise tax rules 
that apply to certain transfers of appreciated property by a 
U.S. person to a foreign entity. Instead of the excise tax that 
applies under present law to transfers to a foreign estate or 
trust, gain recognition is required upon a transfer of 
appreciated property by a U.S. person to a foreign estate or 
trust. Instead of the excise tax that applies under present law 
to certain transfers to foreign corporations, regulatory 
authority is granted under section 367 to deny nonrecognition 
treatment to such a transfer in a transaction that is not 
otherwise described in section 367. Instead of the excise tax 
that applies under present law to transfers to foreign 
partnerships, regulatory authority is granted to provide for 
gain recognition on a transfer of appreciated property to a 
partnership in cases where such gain otherwise would be 
transferred to a foreign partner. In addition, regulatory 
authority is granted to deny the nonrecognition treatment that 
is provided under section 1035 to certain exchanges of 
insurance policies, where the transfer is to a foreign person.
    The bill repeals the rule that treats as U.S. source income 
any deemed royalty arising under section 367(d). Under the 
bill, in the case of a transfer of intangible property to a 
foreign corporation, the deemed royalty payments under section 
367(d) are treated as foreign source income to the same extent 
that an actual royalty payment would be considered to be 
foreign source income. Regulatory authority is granted to 
provide similar treatment in the case of a transfer of 
intangible property to a foreign partnership.
    The bill provides detailed information reporting rules in 
the case of foreign partnerships. A foreign partnership 
generally is required to file a partnership return for a 
taxable year if the partnership has U.S. source income or is 
engaged in a U.S. trade or business, except to the extent 
provided in regulations.
    Under the bill, reporting rules similar to those applicable 
under present law in the case of controlled foreign 
corporations apply in the case of foreign partnerships. A U.S. 
partner that controls a foreign partnership is required to file 
an annual information return with respect to such partnership. 
For this purpose, a U.S. partner is considered to control a 
foreign partnership if the partner holds a more than 50 percent 
or greater interest in the capital, profits, or, to the extent 
provided in regulations, losses, of the partnership. Similar 
information reporting also will be required from a U.S. 10-
percent partner of a foreign partnership that is controlled by 
U.S. 10-percent partners. A $10,000 penalty applies to a 
failure to comply with these reporting requirements; additional 
penalties of up to $50,000 apply in the case of continued 
noncompliance after notification by the Secretary of the 
Treasury. Under the bill, the penalties for failure to report 
information with respect to a controlled foreign corporation 
are conformed with these penalties.
    Under the bill, reporting by a U.S. person of an 
acquisition or disposition of an interest in a foreign 
partnership, or a change in the person's proportional interest 
in the partnership, is required only in the case of 
acquisitions, dispositions, or changes involving at least a 10-
percent interest. A $10,000 penalty applies to a failure to 
comply with these reporting requirements; additional penalties 
of up to $50,000 apply in the case of continued noncompliance 
after notification by the Secretary. Under the bill, the 
penalties for failure to report information with respect to a 
foreign corporation are conformed with these penalties.
    Under the bill, reporting rules similar to those applicable 
under present law in the case of transfers by U.S. persons to 
foreign corporations apply in the case of transfers to 
foreignpartnerships. These reporting rules apply in the case of a 
transfer to a foreign partnership only if the U.S. person holds at 
least a 10-percent interest in the partnership or the value of the 
property transferred by such person to the partnership during a 12-
month period exceeded $100,000. A penalty equal to 10 percent of the 
value of the property transferred applies to a failure to comply with 
these reporting requirements. Under the bill, the penalty under present 
law for failure to report transfers to a foreign corporation is 
conformed with this penalty. In the case of a transfer to a foreign 
partnership, failure to comply also results in gain recognition with 
respect to the property transferred.
    Under the bill, in the case of a failure to report required 
information with respect to a foreign corporation, partnership, 
or trust, the statute of limitations with respect to any event 
or period to which such information relates not expire before 
the date that is three years after the date on which such 
information is provided.
    Under the bill, regulatory authority is granted to provide 
rules treating a partnership as a foreign partnership where 
such treatment is more appropriate. It is expected that a 
recharcterization of a partnership as foreign rather than 
domestic under such regulations will be based only on material 
factors such as the residence of the partners and the extent to 
which the partnership is engaged in business in the United 
States or earns U.S. source income. It also is expected that 
such regulations will provide guidance regarding the 
determination of whether an entity that is a partnership for 
Federal income tax purposes is to be considered to be created 
or organized in the United States or under the law of the 
United States or any State.

                             Effective Date

    The provisions with respect to the repeal of sections 1491-
1494 are effective upon date of enactment. The provisions with 
respect to the source of a deemed royalty under section 367(d) 
also are effective for transfers made and royalties deemed 
received after date of enactment.
    The provisions regarding information reporting with respect 
to foreign partnerships generally are effective for partnership 
taxable years beginning after date of enactment. The provisions 
regarding information reporting with respect to interests in, 
and transfers to, foreign partnerships are effective for 
transfers to, and changes in interest in, foreign partnerships 
after date of enactment. Taxpayers may elect to apply these 
rules to transfers made after August 20, 1996 (and thereby 
avoid a penalty under section 1494(c)) and the Secretary may 
prescribe simplified reporting requirements for these cases. 
The provision with respect to the statute of limitations in the 
case of noncompliance with reporting requirements is effective 
for information returns due after date of enactment.
    The provision granting regulatory authority with respect to 
the treatment of partnerships as foreign or domestic is 
effective for partnership taxable years beginning after date of 
enactment.

e. modification of reporting threshold for stock ownership of a foreign 
     corporation (sec. 1146 of the bill and sec. 6046 of the Code)

                              Present Law

    Several provisions of the Code require U.S. persons to 
report information with respect to a foreign corporation in 
which they are shareholders or officers or directors. Sections 
6038 and 6035 generally require every U.S. citizen or resident 
who is an officer, or director, or who owns at least 10 percent 
of the stock, of a foreign corporation that is a controlled 
foreign corporation or a foreign personal holding company to 
file Form 5471 annually.
    Section 6046 mandates the filing of information returns by 
certain U.S. persons with respect to a foreign corporation upon 
the occurrence of certain events. U.S. persons required to file 
these information returns are those who acquire 5 percent or 
more of the value of the stock of a foreign corporation, others 
who become U.S. persons while owning that percentage of the 
stock of a foreign corporation, and U.S. citizens and residents 
who are officers or directors of foreign corporations with such 
U.S. ownership.
    A failure to file the required information return under 
section 6038 may result in monetary penalties or reduction of 
foreign tax credit benefits. A failure to file the required 
information returns under sections 6035 or 6046 may result in 
monetary penalties.

                           Reasons for Change

    The Committee believes that it is appropriate to make the 
stock ownership threshold at which reporting with respect to an 
ownership interest in a foreign corporation is required 
generally parallel to the thresholds that apply in the case of 
other annual information reporting with respect to foreign 
corporations. The Committee believes that increasing the 
threshold for such reporting from 5 percent to 10 percent will 
reduce the compliance burdens on taxpayers.

                        Explanation of Provision

    The bill increases the threshold for stock ownership of a 
foreign corporation that results in information reporting 
obligations under section 6046 from 5 percent (based on value) 
to 10 percent (based on vote or value).

                             Effective Date

    The provision is effective for reportable transactions 
occurring after December 31, 1997.

               f. other foreign simplification provisions

 1. Transition rule for certain trusts (sec. 1161 of the bill and sec. 
                        7701(a)(30) of the Code)

                              Present Law

    Under rules enacted with the Small Business Job Protection 
Act of 1996, a trust is considered to be a U.S. trust if two 
criteria are met. First, a court within the United States must 
be able to exercise primary supervision over the administration 
of the trust. Second, U.S. fiduciaries of the trust must have 
the authority to control all substantial decisions of the 
trust. A trust that does not satisfy both of these criteria is 
considered to be a foreign trust. These rules for defining a 
U.S. trust generally are effective for taxable years of a trust 
that begin after December 31, 1996. A trust that qualified as a 
U.S. trust under prior law could fail to qualify as a U.S. 
trust under these new criteria.

                           Reasons for Change

    The change in the criteria for qualification as a U.S. 
trust could cause large numbers of existing domestic trusts to 
become foreign trusts, unless they are able to make the 
modifications necessary to satisfy the new criteria. The 
Committee believes that an election is appropriate for those 
existing domestic trusts that prefer to continue to be subject 
to tax as U.S. trusts.

                        Explanation of Provision

    Under the bill, the Secretary of the Treasury is granted 
authority to allow nongrantor trusts that had been treated as 
U.S. trusts under prior law to elect to continue to be treated 
as U.S. trusts, notwithstanding the new criteria for 
qualification as a U.S. trust.

                             Effective Date

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

2. Simplify application of the stock and securities trading safe harbor 
       (sec. 1162 of the bill and sec. 864(b)(2)(A) of the Code)

                              Present Law

    A non-resident alien individual or foreign corporation that 
is engaged in a trade or business within the United States is 
subject to U.S. taxation on its net income that is effectively 
connected with the trade or business, at graduated rates of 
tax. Under a ``safe harbor'' rule, foreign persons that trade 
in stocks or securities for their own accounts are not treated 
as engaged in a U.S. trade or business for this purpose.
    For a foreign corporation to qualify for the safe harbor, 
it must not be a dealer in stock or securities. In addition, if 
the principal business of the foreign corporation is trading in 
stock or securities for its own account, the safe harbor 
generally does not apply if the principal office of the 
corporation is in the United States.
    For foreign persons who invest in securities trading 
partnerships, the safe harbor applies only if the partnership 
is not a dealer in stock and securities. In addition, if the 
principal business of the partnership is trading stock or 
securities for its own account, the safe harbor generally does 
not apply if the principal office of the partnership is in the 
United States.
    Under Treasury regulations which apply to both corporations 
and partnerships, the determination of the location of the 
entity's principal office turns on the location of various 
functions relating to operation of the entity, including 
communication with investors and the general public, 
solicitation and acceptance of sales of interests, and 
maintenance and audits of its books of account (Treas. reg. 
sec. 1.864-2(c)(2)(iii)). Under the regulations, the location 
of the entity's principal office does not depend on the 
location of the entity's management or where investment 
decisions are made.

                           Reasons for Change

    The stock and securities trading safe harbor serves to 
promote foreign investment in U.S. capital markets. The 
Committee understands that the principal office rule operates 
simply to shift certain administrative functions with respect 
to securities trading--and the associated jobs--offshore. The 
Committee believes that the elimination of this rule would 
facilitate the foreign investment in U.S. markets that the safe 
harbor was designed to promote.

                        Explanation of Provision

    The bill modifies the stock and securities trading safe 
harbor by eliminating the requirement for both partnerships and 
foreign corporations that trade stock or securities for their 
own account that the entity's principal office not be within 
the United States.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

                      g. other foreign provisions

  1. Inclusion of income from notional principal contracts and stock 
 lending transactions under subpart F (sec. 1171 of the bill and sec. 
                            954 of the Code)

                              Present Law

    Under the subpart F rules, the U.S. 10-percent shareholders 
of a controlled foreign corporation (``CFC'') are subject to 
U.S. tax currently on certain income earned by the CFC, whether 
or not such income is distributed to the shareholders. The 
income subject to current inclusion under the subpart F rules 
includes, among other things, ``foreign personal holding 
company income.''
    Foreign personal holding company income generally consists 
of the following: dividends, interest, royalties, rents and 
annuities; net gains from sales or exchanges of (1) property 
that gives rise to the foregoing types of income, (2) property 
that does not give rise to income, and (3) interests in trusts, 
partnerships, and REMICs; net gains from commodities 
transactions; net gains from foreign currency transactions; and 
income that is equivalent to interest. Income from notional 
principal contracts referenced to commodities, foreign 
currency, interest rates, or indices thereon is treated as 
foreign personal holding company income; income from equity 
swaps or other types of notional principal contracts is not 
treated as foreign personal holding company income. Income 
derived from transfers of debt securities (but not equity 
securities) pursuant to the rules governing securities lending 
transactions (sec. 1058) is treated as foreign personal holding 
company income.
    Income earned by a CFC that is a regular dealer in the 
property sold or exchanged generally is excluded from the 
definition of foreign personal holding company income. However, 
no exception is available for a CFC that is a regular dealer in 
financial instruments referenced to commodities.
    A U.S. shareholder of a passive foreign investment company 
(``PFIC'') is subject to U.S. tax and an interest charge with 
respect to certain distributions from the PFIC and gains on 
dispositions of the stock of the PFIC, unless the shareholder 
elects to include in income currently for U.S. tax purposes its 
share of the earnings of the PFIC. A foreign corporation is a 
PFIC if it satisfies either a passive income test or a passive 
assets test. For this purpose, passive income is defined by 
reference to foreign personal holding company income.

                           Reasons for Change

    The Committee understands that income from notional 
principal contracts and stock-lending transactions is 
economically equivalent to types of income that are treated as 
foreign personal holding company income under present law. 
Accordingly, the Committee believes that the categories of 
foreign personal holding company income should be expanded to 
cover such income. In addition, the Committee believes that an 
exception from the foreign personal holding company income 
rules should be available for dealers in financial instruments 
referenced to commodities.

                        Explanation of Provision

    The bill treats net income from all types of notional 
principal contracts as a new category of foreign personal 
holding company income. However, income, gain, deduction or 
loss from a notional principal contract entered into to hedge 
an item of income in another category of foreign personal 
holding company income is included in that other category.
    The bill treats payments in lieu of dividends derived from 
equity securities lending transactions pursuant to section 1058 
as another new category of foreign personal holding company 
income.
    The bill provides an exception from foreign personal 
holding company income for certain income, gain, deduction, or 
loss from transactions (including hedging transactions) entered 
into in the ordinary course of a CFC's business as a regular 
dealer in property, forward contracts, options, notional 
principal contracts, or similar financial instruments 
(including instruments referenced to commodities).
    These modifications to the definition of foreign personal 
holding company income apply for purposes of determining a 
foreign corporation's status as a PFIC.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment.

  2. Restrict like-kind exchange rules for certain personal property 
           (sec. 1172 of the bill and sec. 1031 of the Code)

                              Present Law

Like-kind exchanges

    An exchange of property, like a sale, generally is a 
taxable event. However, no gain or loss is recognized if 
property held for productive use in a trade or business or for 
investment is exchanged for property of a ``like-kind'' which 
is to be held for productive use in a trade or business or for 
investment (sec. 1031). In general, any kind of real estate is 
treated as of a like-kind with other real property as long as 
the properties are both located either within or both outside 
the United States. In addition, certain types of property, such 
as inventory, stocks and bonds, and partnership interests, are 
not eligible for nonrecognition treatment under section 1031.
    If section 1031 applies to an exchange of properties, the 
basis of the property received in the exchange is equal to the 
basis of the property transferred, decreased by any money 
received by the taxpayer, and further adjusted for any gain or 
loss recognized on the exchange.

Application of depreciation rules

    Tangible personal property that is used predominantly 
outside the United States generally is accorded a less 
favorable depreciation regime than is property that is used 
predominantly within the United States. Thus, under present 
law, if a taxpayer exchanges depreciable U.S. property with a 
low adjusted basis (relative to its fair market value) for 
similar property situated outside the United States, the 
adjusted basis of the acquired property will be the same as the 
adjusted basis of the relinquished property, but the 
depreciation rules applied to such acquired property generally 
will be different than the rules that were applied to the 
relinquished property.

                           Reasons for Change

    The Committee believes that the depreciation rules 
applicable to foreign- and domestic-use are sufficiently 
dissimilar so as to treat such property as not ``like-kind'' 
property for purposes of section 1031.

                        Explanation of Provision

    The bill provides that personal property predominantly used 
within the United States and personal property predominantly 
used outside the United States are not ``like-kind'' 
properties. For this purpose, the use of the property 
surrendered in the exchange will be determined based upon the 
use during the 24 months immediately prior to the exchange. 
Similarly, for section 1031 to apply, property received in the 
exchange must continue in the same use (i.e., foreign or 
domestic) for the 24 months immediately after the exchange.
     The 24-month period is reduced to such lesser time as the 
taxpayer held the property, unless such shorter holding period 
is a result of a transaction (or series of transactions) 
structured to avoid the purposes of the provision. Property 
described in section 168(g)(4) (generally, property used both 
within and without the United States that is eligible for 
accelerated depreciation as if used in the United States) will 
be treated as property predominantly used in the United States.

                             Effective Date

    The provision is effective for exchanges after June 8, 
1997, unless the exchange is pursuant to a binding contract in 
effect on such date and all times thereafter. A contract will 
not fail to be considered to be binding solely because (1) it 
provides for a sale in lieu of an exchange or (2) either the 
property to be disposed of as relinquished property or the 
property to be acquired as replacement property (whichever is 
applicable) was not identified under the contract before June 
9, 1997.

 3. Impose holding period requirement for claiming foreign tax credits 
with respect to dividends (sec. 1173 of the bill and new sec. 901(k) of 
                               the Code)

                              Present Law

    A U.S. person that receives a dividend from a foreign 
corporation generally is entitled to a credit for income taxes 
paid to a foreign government on the dividend, regardless of the 
U.S. person's holding period for the foreign corporation's 
stock. A U.S. corporation that receives a dividend from a 
foreign corporation in which it has a 10-percent or greater 
voting interest may be entitled to a credit for the foreign 
taxes paid by the foreign corporation, also without regard to 
the U.S. shareholder's holding period for the corporation's 
stock (sections 902 and 960).
    As a consequence of the foreign tax credit limitations of 
the Code, certain taxpayers are unable to utilize their 
creditable foreign taxes to reduce their U.S. tax liability. 
U.S. shareholders that are tax-exempt receive no U.S. tax 
benefit for foreign taxes paid on dividends they receive.

                           Reasons for Change

    Although present law imposes a holding period requirement 
for the dividends-received deduction for a corporate 
shareholder (sec. 246), there is no similar holding period 
requirement for foreign tax credits with respect to dividends. 
As a result, some U.S. persons have engaged in tax-motivated 
transactions designed to transfer foreign tax credits from 
persons that are unable to benefit from such credits (such as a 
tax-exempt entity or a taxpayer whose use of foreign tax 
credits is prevented by the limitation) to persons that can use 
such credits. These transactions sometimes involve a short-term 
transfer of ownership of dividend-paying shares. Other 
transactions involve the use of derivatives to allow a person 
that cannot benefit from the foreign tax credits with respect 
to a dividend to retain the economic benefit of the dividend 
while another person receives the foreign tax credit benefits.

                        Explanation of Provision

    The bill denies a shareholder the foreign tax credits 
normally available with respect to a dividend from a 
corporation or a regulated investment company (``RIC'') if the 
shareholder has not held the stock for a minimum period during 
which it is not protected from risk of loss. Under the bill, 
the minimum holding period for dividends on common stock is 16 
days. The minimum holding period for preferred stock is 46 
days.
    Where the holding period requirement is not met for stock 
of a foreign corporation, the bill disallows the foreign tax 
credits for the foreign withholding taxes that are paid with 
respect to a dividend. Such credits are denied both to the 
shareholder and any other taxpayer who would otherwise be 
entitled to claim foreign tax credits for such withholding 
taxes (secs. 853, 902 and 960). In addition, the bill applies 
to all foreign tax credits otherwise allowable for taxes paid 
by a lower-tier foreign corporation (secs. 902 and 960) and for 
foreign taxes credits of a RIC that elects to treat its foreign 
taxes as paid by the shareholders (section 853). The bill 
denies such credits where any of the stock in the chain of 
ownership that is a requirement for claiming the credits is 
held for less than the required holding period.
    The bill denies these same foreign tax credit benefits, 
regardless of the shareholder's holding period for the stock, 
to the extent that the taxpayer has an obligation to make 
payments related to the dividend (whether pursuant to a short 
sale or otherwise) with respect to substantially similar or 
related property.
    The 16- or 46-day holding period under the bill (whichever 
applies) must be satisfied over a period immediately before or 
immediately after the shareholder becomes entitled to receive 
each dividend. For purposes of determining whether the required 
holding period is met, any period during which the shareholder 
has protected itself from risk of loss (under the rules of 
section 246(c)(4)) would not be included. For example, assume a 
taxpayer buys foreign common stock. Assume also that, the day 
after stock is purchased, the taxpayer enters into an equity 
swap under which the taxpayer is entitled to receive payments 
equal to the losses on the stock, and the taxpayer retains the 
swap position for the entire period it holds the stock. Under 
the bill, the taxpayer would not be able to claim any foreign 
tax credits with respect to dividends on the stock because the 
taxpayer's holding period is limited to the single day during 
which the loss on the stock was not protected. The bill 
provides a special rule that treats a bona fide contract to 
sell stock as not protecting a stockholder from risk of loss 
for purposes of the holding period requirement.
    The bill provides an exception for foreign tax credits with 
respect to certain dividends received by active dealers in 
securities. In order to qualify for the exception, the 
following requirements must be met (1) the dividend must be 
received by the entity on stock which it holds in its capacity 
as a dealer in securities, (2) the entity must be subject to 
net income taxation on the dividend (on either a residence or 
worldwide income basis) in a foreign country, and (3) the 
foreign taxes to which the exception applies must be taxes that 
are creditable under the foreign country's tax system. A 
securities dealer for purposes of the exception must be an 
entity which (1) regularly enters into stock or securities 
transactions with customers (section 475(c)(1)) and (2) is 
registered as a securities dealer under the Securities Exchange 
Act of 1934 or is licenced or authorized to sell stock to or 
from customers and subject to bona fide regulation by the 
securities regulatory authority of the foreign country in which 
the relevant dividend is subject to net-basis taxation. Under 
the bill, the Treasury is granted authority to issue 
regulations necessary or appropriate to prevent abuse of this 
exception. It is expected that such regulations will provide 
guidance as to the determination of whether stock is held in a 
taxpayer's capacity as a dealer or in connection with its 
securities trading activities.
    If a taxpayer is denied foreign tax credits under the bill 
because the 16- or 46-day holding period requirement is not 
satisfied, the taxpayer would be entitled to a deduction for 
the foreign taxes for which the credit is disallowed. This 
deduction would be available even if the taxpayer claimed the 
foreign tax credit for other taxes in the same taxable year.
    No inference is intended as to the treatment under present 
law of tax-motivated transactions intended to transfer foreign 
tax credit benefits.

                             Effective Date

    The provision would be effective for dividends paid or 
accrued more than 30 days after the date of enactment.

  4. Penalties for failure to file disclosure of exemption for income 
   from the international operation of ships or aircraft by foreign 
    persons (sec. 1174 of the bill and sec. 872 and 883 of the Code)

                              Present Law

    The United States generally imposes a 4-percent tax on the 
U.S.-source gross transportation income of foreign persons that 
is not effectively connected with the foreign person's conduct 
of a U.S. trade or business (sec. 887). Foreign persons 
generally are subject to U.S. tax at regular graduated rates on 
net income, including transportation income, that is 
effectively connected with a U.S. trade or business (secs. 
871(b) and 882).
    Transportation income is any income derived from, or in 
connection with, the use (or hiring or leasing for use) of a 
vessel or aircraft (or a container used in connection 
therewith) or the performance of services directly related to 
such use (sec. 863(c)(3)). Income attributable to 
transportation that begins and ends in the United States is 
treated as derived from sources in the United States (sec. 
863(c)(1)). In the case of transportation that either begins or 
ends in the United States, generally 50 percent of such income 
is treated as U.S. source and 50 percent is treated as foreign 
source (sec. 863(c)(2)). U.S.-source transportation income is 
treated as effectively connected with a foreign person's 
conduct of U.S. trade or business only if the foreign person 
has a fixed place of business in the United States that is 
involved in the earning of such income and substantially all of 
such income of the foreign person is attributable to regularly 
scheduled transportation (sec. 887(b)(4)).
    An exemption from U.S. tax is provided for income derived 
by a nonresident alien individual or foreign corporation from 
the international operation of a ship or aircraft, provided 
that the foreign country in which such individual is resident 
or such corporation is organized grants an equivalent exemption 
to individual residents of the United States or corporations 
organized in the United States (secs. 872(b) (1) and (2) and 
883(a) (1) and (2)).
    Pursuant to guidance published by the Internal Revenue 
Service, a nonresident alien individual or foreign corporation 
that is entitled to an exemption from U.S. tax for its income 
from the international operation of ships or aircraft must file 
a U.S. income tax return and must attach to such return a 
statement claiming the exemption (Rev. Proc. 91-12, 1991-1 C.B. 
473). If the foreign person is claiming an exemption based on 
an applicable income tax treaty, the foreign person must 
disclose that fact as required by the Secretary of the Treasury 
(sec. 6114). The penalty for failure to make disclosure of a 
treaty-based position as required under section 6114 is $1,000 
for an individual and $10,000 for a corporation (sec. 6712).
    At the time the 4-percent tax on U.S.-source gross 
transportation income was enacted, concern was expressed about 
whether compliance with the tax, which is collected by return, 
would be adequate. It was intended that the tax-writing 
committees of Congress and the Secretary of the Treasury would 
study the issue of compliance and that the Secretary would make 
recommendations if compliance did not prove adequate. Joint 
Committee on Taxation, ``General Explanation of the Tax Reform 
Act of 1986'' (JCS-10-87), May 4, 1987, at 930.

                           Reasons for Change

    The Committee understands that there is an extremely high 
level of noncompliance by foreign persons that have U.S.-source 
shipping income. The Committee believes that, in order 
toaddress these noncompliance problems, it is appropriate to impose 
significant penalties for a failure to satisfy the filing requirements 
for claiming the exemption from U.S. tax that is available to certain 
foreign persons with respect to income from the international operation 
of ships or aircraft.

                        Explanation of Provision

    Under the bill, a foreign person that claims exemption from 
U.S. tax for income from the international operation of ships 
or aircraft, but does not satisfy the filing requirements for 
claiming such exemption, is subject to the penalty of the 
denial of such exemption and any deductions or credits 
otherwise allowable in determining the U.S. tax liability with 
respect to such income. If a foreign person that has a fixed 
place of business in the United States fails to satisfy the 
filing requirements for claiming an exemption from U.S. tax for 
its income from the international operation of ships or 
aircraft, such person is subject to the additional penalty that 
foreign source income from the international operation of ships 
or aircraft would be treated as effectively connected with the 
conduct of a U.S. trade or business, but only to the extent 
that such income is attributable to such fixed place of 
business in the United States. Income so treated as effectively 
connected with a U.S. business is subject to U.S. tax at 
graduated rates (and is subject to the disallowance of 
deductions and credits described above). These penalties do not 
apply in the case of a failure to disclose that is due to 
reasonable cause. The provision would not apply to the extent 
the application would be contrary to any treaty obligation of 
the United States.
    The bill also provides for the provision of information by 
the U.S. Customs Service to the Secretary of the Treasury 
regarding foreign-flag ships engaged in shipping to or from the 
United States.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

5. Limitation on treaty benefits for payments to hybrid entities (sec. 
                           1175 of the bill)

                              Present Law

    Nonresident alien individuals and foreign corporations 
(collectively, foreign persons) that are engaged in business in 
the United States are subject to U.S. tax on the income from 
such business in the same manner as a U.S. person. In addition, 
the United States imposes tax on certain types of U.S. source 
income, including interest, dividends and royalties, of foreign 
persons not engaged in business in the United States. Such tax 
is imposed on a gross basis and is collected through 
withholding. The statutory rate of this withholding tax is 30 
percent. However, most U.S. income tax treaties provide for a 
reduction in rate, or elimination, of this withholding tax. 
Treaties generally provide for different applicable withholding 
tax rates for different types of income. Moreover, the 
applicable withholding tax rates differ among treaties. The 
specific withholding tax rates pursuant to a treaty are the 
result of negotiations between the United States and the treaty 
partner.
    The application of the withholding tax is more complicated 
in the case of income derived through an entity, such as a 
limited liability company, that is treated as a partnership for 
U.S. tax purposes but may be treated as a corporation for 
purposes of the tax laws of a treaty partner. The Treasury 
regulations include specific rules that apply in the case of 
income derived through an entity that is treated as a 
partnership for U.S. tax purposes. In the case of a payment of 
an item of U.S. source income to a U.S. partnership, the 
partnership is required to impose the withholding tax to the 
extent the item of income is includible in the distributive 
share of a partner who is a foreign person. Tax-avoidance 
opportunities may arise in applying the reduced rates of 
withholding tax provided under a treaty to cases involving 
income derived through a limited liability company or other 
hybrid entity (e.g., an entity that is treated as a partnership 
for U.S. tax purposes but as a corporation for purposes of the 
treaty partner's tax laws). Regulations that have been proposed 
but not yet finalized would address this issue in the case of 
an item received by a foreign entity by allowing an interest 
holder in that entity to claim a reduced rate of withholding 
tax with respect to that item under a treaty only if the treaty 
partner requires the interest holder to include in income its 
distributive share of the entity's income on a flow-through 
basis. Prop. Treas. Reg. Sec. 1.1441-6(b)(4). This provision in 
the proposed regulations does not apply in the case of a U.S. 
entity.

                           Reasons for Change

    The Committee is concerned about the potential tax-
avoidance opportunities available for foreign persons that 
invest in the United States through hybrid entities. In 
particular, the Committee understands that the interaction of 
the tax laws and the applicable tax treaty may provide a 
business structuring opportunity that would allow Canadian 
corporations with U.S. subsidiaries to avoid both U.S. and 
Canadian income taxes with respect to those U.S. operations. 
The Committee believes that such tax-avoidance opportunities 
should be eliminated.

                        Explanation of Provision

    The bill limits the availability of a reduced rate of 
withholding tax pursuant to an income tax treaty in order to 
prevent tax avoidance. Under the bill, a foreign person is 
entitled to a reduced rate of withholding tax under a treaty 
with a foreign country on an item of income derived through an 
entity that is a partnership (or is otherwise treated as 
transparent) for U.S. tax purposes only if such item is treated 
for purposes of the taxation laws of such foreign country as an 
item of income of such person. This rule does not apply if the 
treaty itself contains a provision addressing the applicability 
of the treaty in the case of income derived through a 
partnership. Moreover, the rule does not apply if the foreign 
country imposes tax on an actual distribution of such item of 
income from such partnership to such person. In this regard, 
the foreign country will be considered to impose tax on a 
distribution even though such tax may be reduced or eliminated 
by reason of deductions or credits otherwise available to the 
taxpayer.
    This bill addresses a potential tax-avoidance opportunity 
for Canadian corporations with U.S. subsidiaries that arises 
because of the interaction between the U.S. tax law, the 
Canadian tax law, and the income tax treaty between the United 
States and Canada. Through the use of a U.S. limited liability 
company, which is treated as a partnership for U.S. tax 
purposes but as acorporation for Canadian tax purposes, a 
payment of interest (which is deductible for U.S. tax purposes) may be 
converted into a dividend (which is excludable for Canadian tax 
purposes). Accordingly, interest paid by a U.S. subsidiary through a 
U.S. limited liability company to a Canadian parent corporation would 
be deducted by the U.S. subsidiary for U.S. tax purposes and would be 
excluded by the Canadian parent corporation for Canadian tax purposes; 
the only tax on such interest would be a U.S. withholding tax, which 
may be imposed at a reduced rate of 10 percent (rather than the full 
statutory rate of 30 percent) pursuant to the income tax treaty between 
the United States and Canada. Under the bill, withholding tax is 
imposed at the full statutory rate of 30 percent in such case. The bill 
would not apply if the U.S.-Canadian income tax treaty is amended to 
include a provision reaching a similar result. In this regard, the 
United States and Canada recently negotiated a proposed protocol that 
would amend the provision in the treaty governing cross-border social 
security payments and this issue could be addressed in the context of 
that protocol or an additional protocol. Moreover, the bill would not 
apply if Canada were to impose tax on the Canadian parent on dividends 
received from the U.S. limited liability company.
    The Committee believes that the provision generally is 
consistent with U.S. treaty obligations, including the U.S.-
Canada treaty. The United States has recognized authority to 
implement its tax treaties so as to avoid abuses.

                             Effective Date

    The provision is effective upon date of enactment.

  6. Interest on underpayment reduced by foreign tax credit carryback 
      (sec. 1176 of the bill and secs. 6601 and 6611 of the Code)

                              Present Law

    U.S. persons may credit foreign taxes against U.S. tax on 
foreign source income. The amount of foreign tax credits that 
can be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S. source income. Separate limitations are 
applied to specific categories of income. The amount of 
creditable taxes paid or accrued in any taxable year which 
exceeds the foreign tax credit limitation is permitted to be 
carried back two years and carried forward five years.
    For purposes of the computation of interest on overpayments 
of tax, if an overpayment for a taxable year results from a 
foreign tax credit carryback from a subsequent taxable year, 
the overpayment is deemed not to arise prior to the filing date 
for the subsequent taxable year in which the foreign taxes were 
paid or accrued (sec. 6611(g)). Accordingly, interest does not 
accrue on the overpayment prior to the filing date for the year 
of the carryback that effectively created such overpayment. In 
Fluor Corp. v. United States, 35 Fed. Cl. 520 (1996), the court 
held that in the case of an underpayment of tax (rather than an 
overpayment) for a taxable year that is eliminated by a foreign 
tax credit carryback from a subsequent taxable year, interest 
does not accrue on the underpayment that is eliminated by the 
foreign tax credit carryback. The Government has filed an 
appeal in the Fluor case.

                           Reasons for Change

    The Committee believes that the application of the interest 
rules in the case of a deficiency that is reduced or eliminated 
by a foreign tax credit carryback must be consistent with the 
application of the interest rules in the case of an overpayment 
that is created by a foreign tax credit carryback. The 
Committee believes that in such cases the deficiency cannot be 
considered to have been eliminated, and the overpayment cannot 
be considered to have been created, until the filing date for 
the taxable year in which the foreign tax credit carryback 
arises. Accordingly, interest should continue to accrue on the 
deficiency through such date. In addition, the Committee 
believes that it is appropriate to clarify the interest rules 
that apply in the case of a foreign tax credit carryback that 
is itself triggered by another carryback from a subsequent 
year.

                        Explanation of Provision

    Under the bill, if an underpayment for a taxable year is 
reduced or eliminated by a foreign tax credit carryback from a 
subsequent taxable year, such carryback does not affect the 
computation of interest on the underpayment for the period 
ending with the filing date for such subsequent taxable year in 
which the foreign taxes were paid or accrued. The bill also 
clarifies the application of the interest rules of both section 
6601 and section 6611 in the case of a foreign tax credit 
carryback that is triggered by a net operating loss or net 
capital loss carryback; in such a case, a deficiency is not 
considered to have been reduced, and an overpayment is not 
considered to have been created, until the filing date for the 
subsequent year in which the loss carryback arose. No inference 
is intended regarding the computation of interest under present 
law in the case of a foreign tax credit carryback (including a 
foreign tax credit carryback that is triggered by a net 
operating loss or net capital loss carryback).

                             Effective Date

    The provision is effective for foreign taxes actually paid 
or accrued in taxable years beginning after date of enactment.

   7. Determination of period of limitations relating to foreign tax 
      credits (sec. 1177 of the bill and sec. 6511(d) of the Code)

                              Present Law

    U.S. persons may credit foreign taxes against U.S. tax on 
foreign source income. The amount of foreign tax credits that 
can be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S. source income. Separate limitations are 
applied to specific categories of income. The amount of 
creditable taxes paid or accrued in any taxable year which 
exceeds the foreign tax credit limitation is permitted to be 
carried back two years and carried forward five years.
    For purposes of the period of limitations on filing claims 
for credit or refund, in the case of a claim relating to an 
overpayment attributable to foreign tax credits, the 
limitations period is ten years from the filing date for the 
taxable year with respect to which the claim is made. 
TheInternal Revenue Service has taken the position that, in the case of 
a foreign tax credit carryforward, the period of limitations is 
determined by reference to the year in which the foreign taxes were 
paid or accrued (and not the year to which the foreign tax credits are 
carried ) (Rev. Rul. 84-125, 1984-2 C.B. 125). However, the court in 
Ampex Corp. v. United States, 620 F.2d 853 (1980), held that, in the 
case of a foreign tax credit carryforward, the period of limitations is 
determined by reference to the year to which the foreign tax credits 
are carried (and not the year in which the foreign taxes were paid or 
accrued).

                           Reasons for Change

    The Committee believes that it is appropriate to identify 
clearly the date on which the ten-year period of limitations 
for claims with respect to foreign tax credits begins.

                        Explanation of Provision

    Under the bill, in the case of a claim relating to an 
overpayment attributable to foreign tax credits, the 
limitations period is determined by reference to the year in 
which the foreign taxes were paid or accrued (and not the year 
to which the foreign tax credits are carried). No inference is 
intended regarding the determination of such limitations period 
under present law.

                             Effective Date

    The provision is effective for foreign taxes paid or 
accrued in taxable years beginning after date of enactment.

 8. Clarification of determination of foreign taxes deemed paid (sec. 
             1178(a) of the bill and sec. 902 of the Code)

                              Present Law

    Under section 902, a domestic corporation that receives a 
dividend from a foreign corporation in which it owns 10 percent 
or more of the voting stock is deemed to have paid a portion of 
the foreign taxes paid by such foreign corporation. The 
domestic corporation that receives a dividend is deemed to have 
paid a portion of the foreign corporation's post-1986 foreign 
income taxes based on the ratio of the amount of such dividend 
to the foreign corporation's post-1986 undistributed earnings. 
The foreign corporation's post-1986 foreign income taxes is the 
sum of the foreign income taxes with respect to the taxable 
year in which the dividend is distributed plus certain foreign 
income taxes with respect to prior taxable years (beginning 
after December 31, 1986).

                           Reasons for Change

    The Committee believes that it is appropriate to clarify 
the determination of foreign taxes deemed paid for purposes of 
the indirect foreign tax credit.

                        Explanation of Provision

    The bill clarifies that, for purposes of the deemed paid 
credit under section 902 for a taxable year, a foreign 
corporation's post-1986 foreign income taxes includes foreign 
income taxes with respect to prior taxable years (beginning 
after December 31, 1986) only to the extent such taxes are not 
attributable to dividends distributed by the foreign 
corporation in prior taxable years. No inference is intended 
regarding the determination of foreign taxes deemed paid under 
present law.

                             Effective Date

    The provision is effective on date of enactment.

    9. Clarification of foreign tax credit limitation for financial 
  services income (sec. 1178(b) of the bill and sec. 904 of the Code)

                              Present Law

    Under section 904, separate foreign tax credit limitations 
apply to various categories of income. Two of these separate 
limitation categories are passive income and financial services 
income. For purposes of the separate foreign tax credit 
limitation applicable to passive income, certain income that is 
treated as high-taxed income is excluded from the definition of 
passive income. For purposes of the separate foreign tax credit 
limitation applicable to financial services income, the 
definition of financial services income generally incorporates 
passive income as defined for purposes of the separate 
limitation applicable to passive income.

                           Reasons for Change

    The Committee believes that it is appropriate to clarify 
that high-taxed income is not excluded from the separate 
foreign tax credit limitation for financial services income.

                        Explanation of Provision

    The bill clarifies that the exclusion of income that is 
treated as high-taxed income does not apply for purposes of the 
separate foreign tax credit limitation applicable to financial 
services income. No inference is intended regarding the 
treatment of high-taxed income for purposes of the separate 
foreign tax credit limitation applicable to financial services 
income under present law.

                             Effective Date

    The provision is effective on date of enactment.

   Title XII. Simplification Provisions Relating to Individuals and 
                               Businesses

                 A. Provisions Relating to Individuals

1. Modifications to standard deduction of dependents; AMT treatment of 
   certain minor children (sec. 1201 of the bill and secs. 59(j) and 
                         63(c)(5) of the Code)

                              Present Law

    Standard deduction of dependents.--The standard deduction 
of a taxpayer for whom a dependency exemption is allowed on 
another taxpayer's return can not exceed the lesser of (1) the 
standard deduction for an individual taxpayer (projected to be 
$4,250 for 1998) or (2) the greater of $500 (indexed) \1\ or 
the dependent's earned income (sec. 63(c)(5)).
---------------------------------------------------------------------------
    \1\ The indexed amount is projected to be $700 for 1998.
---------------------------------------------------------------------------
    Taxation of unearned income of children under age 14.--The 
tax on a portion of the unearned income (e.g., interest and 
dividends) of a child under age 14 is the additional tax that 
the child's custodial parent would pay if the child's unearned 
income were included in that parent's income. The portion of 
the child's unearned income which is taxed at the parent's top 
marginal rate is the amount by which the child's unearned 
income is more than the sum of (1) $500 \2\ (indexed) plus (2) 
the greater of (a) $500 \3\ (indexed) or (b) the child's 
itemized deductions directly connected with the production of 
the unearned income (sec. 1(g)).
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    \2\ Projected to be $700 for 1998.
    \3\ Projected to be $700 for 1998.
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    Alternative minimum tax (``AMT'') exemption for children 
under age 14.--Single taxpayers are entitled to an exemption 
from the alternative minimum tax (``AMT'') of $33,750. However, 
in the case of a child under age 14, his exemption from the 
AMT, in substance, is the unused alternative minimum tax 
exemption of the child's custodial parent, limited to sum of 
earned income and $1,400 (sec. 59(j)).

                           Reasons for Change

    The Committee believes that significant simplification of 
the existing income tax system can be achieved by providing 
larger exemptions such that taxpayers with incomes less than 
the exemption are not required to compute and pay any tax. The 
Committee particularly believes that the present-law exemptions 
of dependent children are too small.

                        Explanation of Provision

    Standard deduction of dependents.--The bill increases the 
standard deduction for a taxpayer with respect to whom a 
dependency exemption is allowed on another taxpayer's return to 
the lesser of (1) the standard deduction for individual 
taxpayers or (2) the greater of: (a) $500 \4\ (indexed for 
inflation as under present law), or (b) the individual's earned 
income plus $250. The $250 amount is indexed for inflation 
after 1998.
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    \4\ Projected to be $700 for 1998.
---------------------------------------------------------------------------
    Alternative minimum tax exemption for children under age 
14.--The bill increases the AMT exemption amount for a child 
under age 14 to the lesser of (1) $33,750 or (2) the sum of the 
child's earned income plus $5,000. The $5,000 amount is indexed 
for inflation after 1998.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

   2. Increase de minimis threshold for estimated tax to $1,000 for 
     individuals (sec. 1202 of the bill and sec. 6654 of the Code)

                              Present Law

    An individual taxpayer generally is subject to an addition 
to tax for any underpayment of estimated tax (sec. 6654). An 
individual generally does not have an underpayment of estimated 
tax if he or she makes timely estimated tax payments at least 
equal to: (1) 100 percent of the tax shown on the return of the 
individual for the preceding year (the ``100 percent of last 
year's liability safe harbor'') or (2) 90 percent of the tax 
shown on the return for the current year. The 100 percent of 
last year's liability safe harbor is modified to be a 110 
percent of last year's liability safe harbor for any individual 
with an AGI of more than $150,000 as shown on the return for 
the preceding taxable year. Income tax withholding from wages 
is considered to be a payment of estimated taxes. In general, 
payment of estimated taxes must be made quarterly. The addition 
to tax is not imposed where the total tax liability for the 
year, reduced by any withheld tax and estimated tax payments, 
is less than $500.

                           Reasons for Change

    Raising the individual estimated tax de minimis threshold 
will simplify the tax laws for a number of taxpayers.

                        Explanation of Provision

    The bill increases the $500 individual estimated tax de 
minimis threshold to $1,000.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

 3. Optional methods for computing SECA tax combined (sec. 1203 of the 
                    bill and sec. 1402 of the Code)

                              Present Law

    The Self-Employment Contributions Act (``SECA'') imposes 
taxes on net earnings from self-employment to provide social 
security coverage to self-employed workers. The maximum amount 
of earnings subject to the SECA tax is coordinated with, and is 
set at the same level as, the maximum level of wages and 
salaries subject to FICA taxes ($65,000 for OASDI taxes in 1997 
and indexed annually, and without limit for the Hospital 
Insurance tax). Special rules allow certain self-employed 
individuals to continue to maintain social security coverage 
during a period of low income. The method applicable to farmers 
is slightly more favorable than the method applicable to other 
self-employed persons.
    A farmer may increase his or her self-employment income, 
for purposes of obtaining social security coverage, by 
reporting two-thirds of the first $2,400 of gross income as net 
earnings from self-employment, i.e., the optional amount of net 
earnings from self-employment would not exceed $1,600. There is 
no limit on the number of times a farmer may use this method. 
The optional method for non farm income is similar, also 
permitting two-thirds of the first $2,400 of gross income to be 
treated as self-employment income. However, the optional non 
farm method may not be used more than five times by any 
individual, and may only be used if the taxpayer had net 
earnings from self-employment of $400 or more in at least two 
of the three years immediately preceding the year in which the 
optional method is elected.
    In general, to receive benefits, including Disability 
Insurance Benefits, under the Social Security Act, a worker 
must have a minimum number of quarters of coverage. A minimum 
amount of wages or self-employment income must be reported to 
obtain a quarter of coverage. A maximum of four quarters of 
coverage may be obtained each year. In 1978, the amount of 
earnings required to obtain a quarter of coverage began 
increasing each year. Starting in 1994, a farmer could obtain 
only two quarters of coverage under the optional method 
applicable to farmers.

                           Reasons for Change

    The Committee believes that providing different optional 
methods for farm and non farm income is unduly complex and 
unwarranted. In addition, current law is misleading in that a 
worker may qualify for the optional method but not be eligible 
for a full four quarters of Social Security coverage. A single 
optional method benefits self-employed workers by simplifying 
the rules for obtaining Social Security coverage.

                        Explanation of Provision

    The bill combines the farm and non farm optional methods 
into a single combined optional method applicable to all self-
employed workers. A self-employed worker may elect to use the 
optional method an unlimited number of times. If it is used, it 
must be applied to all self-employment earnings for the year, 
both farm and non farm.
    The $2,400 amount is increased to an amount which would 
provide four quarters of coverage in 1998 (the ``lower 
limit''). Such amount increases each year based on the earnings 
requirements under the Social Security Act.
    The optional method in this provision is elected on a year-
by-year basis. An election for a taxable year must be filed 
with the original Federal income tax return for the year, and 
may not be made retroactively by filing an amended return.

                             Effective Date

    The provision is effective for taxable years beginning 
after January 1, 1998.

 4. Treatment of certain reimbursed expenses of rural letter carriers' 
       vehicles (sec. 1204 of the bill and sec. 162 of the Code)

                              Present Law

    A taxpayer who uses his or her automobile for business 
purposes may deduct the business portion of the actual 
operation and maintenance expenses of the vehicle, plus 
depreciation (subject to the limitations of sec. 280F). 
Alternatively, the taxpayer may elect to utilize a standard 
mileage rate in computing the deduction allowable for business 
use of an automobile that has not been fully depreciated. Under 
this election, the taxpayer's deduction equals the applicable 
rate multiplied by the number of miles driven for business 
purposes and is taken in lieu of deductions for depreciation 
and actual operation and maintenance expenses.
    An employee of the U.S. Postal Service may compute his 
deduction for business use of an automobile in performing 
services involving the collection and delivery of mail on a 
rural route by using, for all business use mileage, 150 percent 
of the standard mileage rate.
    Rural letter carriers are paid an equipment maintenance 
allowance (EMA) to compensate them for the use of their 
personal automobiles in delivering the mail. The tax 
consequences of the EMA are determined by comparing it with the 
automobile expense deductions that each carrier is allowed to 
claim (using either the actual expenses method or the 150 
percent of the standard mileage rate). If the EMA exceeds the 
allowable automobile expense deductions, the excess generally 
is subject to tax. If the EMA falls short of the allowable 
automobile expense deductions, a deduction is allowed only to 
the extent that the sum of this shortfall and all other 
miscellaneous itemized deductions exceeds two percent of the 
taxpayer's adjusted gross income.

                           Reasons for Change

    The filing of tax returns by rural letter carriers can be 
complex. Under present law, those who are reimbursed at more 
than the 150 percent rate must report their reimbursement as 
income and deduct their expenses as miscellaneous itemized 
deductions (subject to the two-percent floor). Permitting the 
income and expenses to wash, so that neither will have to be 
reported on the rural letter carrier's tax return, will 
simplify these tax returns.

                        Explanation of Provision

    The bill repeals the special rate for Postal Service 
employees of 150 percent of the standard mileage rate. In its 
place, the bill requires that the rate of reimbursement 
provided by the Postal Service to rural letter carriers be 
considered to be equivalent to their expenses. The rate of 
reimbursement that is considered to be equivalent to their 
expenses is the rate of reimbursement contained in the 1991 
collective bargaining agreement, which may be increased by no 
more than the rate of inflation.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

  5. Travel expenses of Federal employees participating in a Federal 
criminal investigation (sec. 1205 of the bill and sec. 162 of the Code)

                              Present Law

    Unreimbursed ordinary and necessary travel expenses paid or 
incurred by an individual in connection with temporary 
employment away from home (e.g., transportation costs and the 
cost of meals and lodging) are generally deductible, subject to 
the two-percent floor on miscellaneous itemized deductions. 
Travel expenses paid or incurred in connection with indefinite 
employment away from home, however, are not deductible. A 
taxpayer's employment away from home in a single location is 
indefinite rather than temporary if it lasts for one year or 
more; thus, no deduction is permitted for travel expenses paid 
or incurred in connection with such employment (sec. 162(a)). 
If a taxpayer's employment away from home in a single location 
lasts for less than one year, whether such employment is 
temporary or indefinite is determined on the basis of the facts 
and circumstances.

                           Reasons for Change

    The Committee believes that it would be inappropriate if 
this provision in the tax laws were to be a hindrance to the 
investigation of a Federal crime.

                        Explanation of Provision

    The one-year limitation with respect to deductibility of 
expenses while temporarily away from home does not include any 
period during which a Federal employee is certified by the 
Attorney General (or the Attorney General's designee) as 
traveling on behalf of the Federal Government in a temporary 
duty status to investigate or provide support services to the 
investigation of a Federal crime. Thus, expenses for these 
individuals during these periods are fully deductible, 
regardless of the length of the period for which certification 
is given (provided that the other requirements for 
deductibility are satisfied).

                             Effective Date

    The provision is effective for amounts paid or incurred 
with respect to taxable years ending after the date of 
enactment.

6. Payment of taxes by commercially acceptable means (sec. 1206 of the 
                    bill and sec. 6311 of the Code)

                              Present Law

    Payment of taxes may be made by checks or money orders, to 
the extent and under the conditions provided by Treasury 
regulations (sec. 6311).

                           Reasons for Change

    Additional payment mechanisms (such as credit cards, debit 
cards, and charge cards) have become commonly used and reliable 
forms of payment. Some taxpayers may find paying taxes by these 
mechanisms more convenient than paying by check or money order.

                        Explanation of Provision

In general

    The Internal Revenue Service (IRS) is engaged in a long-
term modernization of its information systems, the Tax Systems 
Modernization (TSM) Program. This modernization is intended to 
address deficiencies in the current IRS information systems and 
to plan effectively for future information system needs and 
requirements. The systems changes are designed to reduce the 
burden on taxpayers, generate additional revenue through 
improved voluntary compliance, and achieve productivity gains 
throughout the IRS. One key element of this program is 
electronic filing of tax returns.
    At the present time, increasing reliance is being placed 
upon electronic funds transfers for payment of obligations. In 
light of this, the IRS seeks to integrate these payment methods 
in its TSM program, including electronic filing of returns, as 
well as into its traditional collection functions. The bill 
allows the IRS to accept payment by any commercially acceptable 
means that the Secretary deems appropriate, to the extent and 
under the conditions provided in Treasury regulations. This 
will include, for example, electronic funds transfers, 
including those arising from credit cards, debit cards, and 
charge cards.
    The IRS contemplates that it will proceed to negotiate 
contracts to implement this provision with one or more private 
sector credit and debit card systems. The bill provides that 
the Federal Government may pay fees with respect to any such 
contracts only out of amounts specifically appropriated for 
that purpose.

Billing error resolution

    In the course of processing these transactions, it will be 
necessary to resolve billing errors and other disputes. The 
Internal Revenue Code contains mechanisms for the determination 
of taxliability, defenses and other taxpayer protections, and 
the resolution of disputes with respect to those liabilities. The 
Truth-in-Lending Act contains provisions for determination of credit 
card liabilities, defenses and other consumer protections, and the 
resolution of disputes with respect to these liabilities.
    The bill excludes credit card, debit card, and charge card 
issuers and processing mechanisms from the resolution of tax 
liability, but makes IRS subject to the Truth-in-Lending 
provisions insofar as those provisions impose obligations and 
responsibilities with regard to the ``billing error'' 
resolution process. It is not intended that consumers obtain 
additional ways to dispute their tax liabilities under the 
Truth-in-Lending provisions.
    The bill also specifically includes the use of debit cards 
in this provision and provides that the corresponding defenses 
and ``billing error'' provisions of the Electronic Fund 
Transfer Act will apply in a similar manner.
    The bill adds new section 6311(d)(3) to the Code. This 
section describes the circumstances under which section 161 of 
the Truth-in-Lending Act (``TILA'') and section 908 of the 
Electronic Fund Transfer Act (``EFTA'') apply to disputes that 
may arise in connection with payments of taxes made by credit 
card or debit card. Subsections (A) through (C) recognize that 
``billing errors'' relating to the credit card account, such as 
an error arising from a credit card transaction posted to a 
cardholder's account without the cardholder's authorization, an 
amount posted to the wrong cardholder's account, or an 
incorrect amount posted to a cardholder's account as a result 
of a computational error or numerical transposition, are 
governed by the billing error provisions of section 161 of 
TILA. Similarly, subsections 6311(d)(3) (A)-(C) provide that 
errors such as those described above which arise in connection 
with payments of internal revenue taxes made by debit card, are 
governed by section 908 of EFTA.
    The Internal Revenue Code provides that refunds are only 
authorized to be paid to the person who made the overpayment 
(generally the taxpayer). Subsection 6311(d)(3)(E), however, 
provides that where a taxpayer is entitled to receive funds as 
a result of the correction of a billing error made under 
section 161 of TILA in connection with a credit card 
transaction, or under section 908 of EFTA in connection with a 
debit card transaction, the IRS is authorized to utilize the 
appropriate credit card or debit card system to initiate a 
credit to the taxpayer's credit card or debit card account. The 
IRS may, therefore, provide such funds through the taxpayer's 
credit card or debit card account rather than directly to the 
taxpayer.
    On the other hand, subsections 6311(d)(3)(A)-(C) provide 
that any alleged error or dispute asserted by a taxpayer 
concerning the merits of the taxpayer's underlying tax 
liability or tax return is governed solely by existing tax 
laws, and is not subject to section 161 or section 170 of TILA, 
section 908 of EFTA, or any similar provisions of State law. 
Absent the exclusion from section 170 of TILA, in a collection 
action brought against the cardholder by the card issuer the 
cardholder might otherwise assert as a defense that the IRS had 
incorrectly computed his tax liability. A collection action 
initiated by a credit card issuer against the taxpayer/
cardholder will be an inappropriate vehicle for the 
determination of a taxpayer's tax liability, especially since 
the United States will not be a party to such an action.
    Similarly, without the exclusion from section 161 of TILA 
and section 908 of EFTA, a taxpayer could contest the merits of 
his tax liability by putting the charge which appears on the 
credit card bill in dispute. Pursuant to TILA or EFTA, the 
taxpayer's card issuer will have to investigate the dispute, 
thereby finding itself in the middle of a dispute between the 
IRS and the taxpayer. It is believed that it is improper to 
attempt to resolve tax disputes through the billing process. It 
is also noted that the taxpayer retains the traditional, 
existing remedies for resolving tax disputes, such as resolving 
the dispute administratively with the IRS, filing a petition 
with the Tax Court after receiving a statutory notice of 
deficiency, or paying the disputed tax and filing a claim for 
refund (and subsequently filing a refund suit if the claim is 
denied or not acted upon).

Creditor status

    The TILA imposes various responsibilities and obligations 
on creditors. Although the definition of the term ``creditor'' 
set forth in 15 U.S.C. sec. 1602 is limited, and will generally 
not include the IRS, in the case of an open-end credit plan 
involving a credit card, the card issuer and any person who 
honors the credit card are, pursuant to 15 U.S.C. sec. 1602(f), 
creditors.
    In addition, 12 CFR sec. 226.12(e) provides that the 
creditor must transmit a credit statement to the card issuer 
within 7 business days from accepting the return or forgiving 
the debt. There is a concern that the response deadlines 
otherwise imposed by 12 CFR sec. 226.12(e), if applicable, will 
be difficult for the IRS to comply with (given the volume of 
payments the IRS is likely to receive in peak periods). This 
could subject the IRS to unwarranted damage actions. 
Consequently, the bill generally provides an exception to 
creditor status for the IRS.

Privacy protections

    The bill also addresses privacy questions that arise from 
the IRS' participation in credit card processing systems. It is 
believed that taxpayers expect that the maximum possible 
protection of privacy will be accorded any transactions they 
have with the IRS. Accordingly, the bill provides the greatest 
possible protection of taxpayers' privacy that is consistent 
with developing and operating an efficient tax administration 
system. It is expected that the principle will be fully 
observed in the implementation of this provision.
    A key privacy issue is the use and redisclosure of tax 
information by financial institutions for purposes unrelated to 
the processing of credit card charges, i.e., marketing and 
related uses. To accept credit card charges by taxpayers, the 
IRS will have to disclose tax information to financial 
institutions to obtain payment and to resolve billing disputes. 
To obtain payment, the IRS will have to disclose, at a minimum, 
information on the ``credit slip,'' i.e., the dollar amount of 
the payment and the taxpayer's credit card number.
    The resolution of billing disputes may require the 
disclosure of additional tax information to financial 
institutions. In most cases, providing a copy of the credit 
slip and verifying the transaction amount will be sufficient. 
Conceivably, financial institutions could require some 
information regarding the underlying liability even where the 
dispute concerns a ``billingdispute'' matter. This additional 
information will not necessarily be shared as widely as the initial 
payment data. In lieu of disclosing further information, the IRS may 
elect to allow disputed amounts to be charged back to the IRS and to 
reinstate the corresponding tax liability.
    Despite the language in most cardholder agreements that 
permits redisclosure of credit card transaction information, 
the public may be largely unaware of how widely that 
information is shared. For example, some financial institutions 
may share credit, payment, and purchase information with 
private credit bureaus, who, in turn, may sell this information 
to direct mail marketers, and others. Without use and 
redisclosure restrictions, taxpayers may discover that some 
traditionally confidential tax information might be widely 
disseminated to direct mail marketers and others.
    It is intended that credit or debit card transaction 
information will generally be restricted to those uses 
necessary to process payments and resolve billing errors, as 
well as other purposes that are specified in the statute. The 
bill directs the Secretary to issue published procedures on 
what constitutes authorized uses and disclosures. It is 
anticipated that the Secretary's published procedures will 
prohibit the use of transaction information for marketing tax-
related services by the issuer or any marketing that targets 
only those who use their credit card to pay their taxes. It is 
also anticipated that the published procedures will prohibit 
the sale of transaction information to a third party.

                             Effective Date

    The provision is effective nine months after the date of 
enactment. The IRS may, in this interim period, conduct 
internal tests and negotiate with card issuers, but may not 
accept credit or debit cards for payment of tax liability.

             B. Provisions Relating to Businesses Generally

1. Modifications to look-back method for long-term contracts (sec. 1211 
           of the bill and secs. 460 and 167(g) of the Code)

                              Present Law

    Taxpayers engaged in the production of property under a 
long-term contract generally must compute income from the 
contract under the percentage of completion method. Under the 
percentage of completion method, a taxpayer must include in 
gross income for any taxable year an amount that is based on 
the product of (1) the gross contract price and (2) the 
percentage of the contract completed as of the end of the year. 
The percentage of the contract completed as of the end of the 
year is determined by comparing costs incurred with respect to 
the contract as of the end of the year with estimated total 
contract costs.
    Because the percentage of completion method relies upon 
estimated, rather than actual, contract price and costs to 
determine gross income for any taxable year, a ``look-back 
method'' is applied in the year a contract is completed in 
order to compensate the taxpayer (or the Internal Revenue 
Service) for the acceleration (or deferral) of taxes paid over 
the contract term. The first step of the look-back method is to 
reapply the percentage of completion method using actual 
contract price and costs rather than estimated contract price 
and costs. The second step generally requires the taxpayer to 
recompute its tax liability for each year of the contract using 
gross income as reallocated under the look-back method. If 
there is any difference between the recomputed tax liability 
and the tax liability as previously determined for a year, such 
difference is treated as a hypothetical underpayment or 
overpayment of tax to which the taxpayer applies a rate of 
interest equal to the overpayment rate, compounded daily.\5\ 
The taxpayer receives (or pays) interest if the net amount of 
interest applicable to hypothetical overpayments exceeds (or is 
less than) the amount of interest applicable to hypothetical 
underpayments.
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    \5\ The overpayment rate equals the applicable Federal short-term 
rate plus two percentage points. This rate is adjusted quarterly by the 
IRS. Thus, in applying the look-back method for a contract year, a 
taxpayer may be required to use five different interest rates.
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     The look-back method must be reapplied for any item of 
income or cost that is properly taken into account after the 
completion of the contract.
    The look-back method does not apply to any contract that is 
completed within two taxable years of the contract commencement 
date and if the gross contract price does not exceed the lesser 
of (1) $1 million or (2) one percent of the average gross 
receipts of the taxpayer for the preceding three taxable years. 
In addition, a simplified look-back method is available to 
certain pass-through entities and, pursuant to Treasury 
regulations, to certain other taxpayers. Under the simplified 
look-back method, the hypothetical underpayment or overpayment 
of tax for a contract year generally is determined by applying 
the highest rate of tax applicable to such taxpayer to the 
change in gross income as recomputed under the look-back 
method.

                           Reasons for Change

    Present law may require multiple applications of the look-
back method with respect to a single contract or may otherwise 
subject contracts to the look-back method even though amounts 
necessitating the look-back calculations are de minimis 
relative to the aggregate contract income. In addition, the use 
of multiple interest rates complicates the mechanics of the 
look-back calculation. The Committee wishes to address these 
concerns.

                        Explanation of Provision

Election not to apply the look-back method for de minimis amounts

    The provision provides that a taxpayer may elect not to 
apply the look-back method with respect to a long-term contract 
if for each prior contract year, the cumulative taxable income 
(or loss) under the contract as determined using estimated 
contract price and costs is within 10 percent of the cumulative 
taxable income (or loss) as determined using actual contract 
price and costs.
    Thus, under the election, upon completion of a long-term 
contract, a taxpayer would be required to apply the first step 
of the look-back method (the reallocation of gross income using 
actual, rather than estimated, contract price and costs), but 
is not required to apply the additional steps of the look-back 
method if the application of the first step resulted in de 
minimis changes to the amount of income previously taken into 
account for each prior contract year.
    The election applies to all long-term contracts completed 
during the taxable year for which the election is made and to 
all long-term contracts completed during subsequent taxable 
years, unless the election is revoked with the consent of the 
Secretary of the Treasury.
    Example 1.--A taxpayer enters into a three-year contract 
and upon completion of the contract, determines that annual net 
income under the contract using actual contract price and costs 
is $100,000, $150,000, and $250,000, respectively, for Years 1, 
2, and 3 under the percentage of completion method. An electing 
taxpayer need not apply the look-back method to the contract if 
it had reported cumulative net taxable income under the 
contract using estimated contract price and costs of between 
$90,000 and $110,000 as of the end of Year 1; and between 
$225,000 and $275,000 as of the end of Year 2.

Election not to reapply the look-back method

    The provision provides that a taxpayer may elect not to 
reapply the look-back method with respect to a contract if, as 
of the close of any taxable year after the year the contract is 
completed, the cumulative taxable income (or loss) under the 
contract is within 10 percent of the cumulative look-back 
income (or loss) as of the close of the most recent year in 
which the look-back method was applied (or would have applied 
but for the other de minimis exception described above). In 
applying this rule, amounts that are taken into account after 
completion of of the contract are not discounted.
    Thus, an electing taxpayer need not apply or reapply the 
look-back method if amounts that are taken into account after 
the completion of the contract are de minimis.
    The election applies to all long-term contracts completed 
during the taxable year for which the election is made and to 
all long-term contracts completed during subsequent taxable 
years, unless the election is revoked with the consent of the 
Secretary of the Treasury.
    Example 2.--A taxpayer enters into a three-year contract 
and reports taxable income of $12,250, $15,000 and $12,750, 
respectively, for Years 1 through 3 with respect to the 
contract. Upon completion of the contract, cumulative look-back 
income with respect to the contract is $40,000, and 10 percent 
of such amount is $4,000. After the completion of the contract, 
the taxpayer incurs additional costs of $2,500 in each of the 
next three succeeding years (Years 4, 5, and 6) with respect to 
the contract. Under the provision, an electing taxpayer does 
not reapply the look-back method for Year 4 because the 
cumulative amount of contract taxable income ($37,500) is 
within 10 percent of contract look-back income as of the 
completion of the contract ($40,000). However, the look-back 
method must be applied for Year 5 because the cumulative amount 
of contract taxable income ($35,000) is not within 10 percent 
of contract look-back income as of the completion of the 
contract ($40,000). Finally, the taxpayer does not reapply the 
look-back method for Year 6 because the cumulative amount of 
contract taxable income ($32,500) is within 10 percent of 
contract look-back income as of the last application of the 
look-back method ($35,000).

Interest rates used for purposes of the look-back method

    The provision provides that for purposes of the look-back 
method, only one rate of interest is to apply for each accrual 
period. An accrual period with respect to a taxable year begins 
on the day after the return due date (determined without regard 
to extensions) for the taxable year and ends on such return due 
date for the following taxable year. The applicable rate of 
interest is the overpayment rate in effect for the calendar 
quarter in which the accrual period begins.

                             Effective Date

    The provision applies to contracts completed in taxable 
years ending after the date of enactment. The change in the 
interest rate calculation also applies for purposes of the 
look-back method applicable to the income forecast method of 
depreciation for property placed in service after September 13, 
1995.

  2. Minimum tax treatment of certain property and casualty insurance 
   companies (sec. 1212 of the bill and sec. 56(g)(4)(B) of the Code)

                              Present Law

    Present law provides that certain property and casualty 
insurance companies may elect to be taxed only on taxable 
investment income for regular tax purposes (sec. 831(b)). 
Eligible property and casualty insurance companies are those 
whose net written premiums (or if greater, direct written 
premiums) for the taxable year exceed $350,000 but do not 
exceed $1,200,000.
    Under present law, all corporations including insurance 
companies are subject to an alternative minimum tax. 
Alternative minimum taxable income is increased by 75 percent 
of the excess of adjusted current earnings over alternative 
minimum taxable income (determined without regard to this 
adjustment and without regard to net operating losses).

                           Reasons for Change

    The Committee believes that property and casualty companies 
small enough to be eligible to simplify their regular tax 
computation by electing to be taxed only on taxable investment 
income should be accorded comparable simplicity in the 
calculation of their alternative minimum tax. Under present 
law, the simplicity under the regular tax is nullified because 
electing companies must calculate underwriting income for tax 
purposes under the alternative minimum tax. The provision thus 
simplifies the entire Federal income tax calculation for a 
group of small taxpayers whom Congress has previously 
determined merit a simpler tax calculation.

                        Explanation of Provision

    The bill provides that a property and casualty insurance 
company that elects for regular tax purposes to be taxed only 
on taxable investment income determines its adjusted current 
earnings under the alternative minimum tax without regard to 
any amount not taken into account in determining its gross 
investment income under section 834(b). Thus, adjusted current 
earnings of an electing company is determined without regard to 
underwriting income (or underwriting expense, as provided in 
sec. 56(g)(4)(B)(I)(II)).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1997.

                C. Partnership Simplification Provisions

                         1. General provisions

a. Simplified flow-through for electing large partnerships (sec. 1221 
        of the bill and new secs. 771-777 of the Code)

                              Present Law

Treatment of partnerships in general

    A partnership generally is treated as a conduit for Federal 
income tax purposes. Each partner takes into account separately 
his distributive share of the partnership's items of income, 
gain, loss, deduction or credit. The character of an item is 
the same as if it had been directly realized or incurred by the 
partner. Limitations affecting the computation of taxable 
income generally apply at the partner level.
    The taxable income of a partnership is computed in the same 
manner as that of an individual, except that no deduction is 
permitted for personal exemptions, foreign taxes, charitable 
contributions, net operating losses, certain itemized 
deductions, or depletion. Elections affecting the computation 
of taxable income derived from a partnership are made by the 
partnership, except for certain elections such as those 
relating to discharge of indebtedness income and the foreign 
tax credit.

Capital gains

    The net capital gain of an individual is taxed generally at 
the same rates applicable to ordinary income, subject to a 
maximum marginal rate of 28 percent. Net capital gain is the 
excess of net long-term capital gain over net short-term 
capital loss. Individuals with a net capital loss generally may 
deduct up to $3,000 of the loss each year against ordinary 
income. Net capital losses in excess of the $3,000 limit may be 
carried forward indefinitely.
    A special rule applies to gains and losses on the sale, 
exchange or involuntary conversion of certain trade or business 
assets (sec. 1231). In general, net gains from such assets are 
treated as long-term capital gains but net losses are treated 
as ordinary losses.
    A partner's share of a partnership's net short-term capital 
gain or loss and net long-term capital gain or loss from 
portfolio investments is separately reported to the partner. A 
partner's share of a partnership's net gain or loss under 
section 1231 generally is also separately reported.

Deductions and credits

    Miscellaneous itemized deductions (e.g., certain investment 
expenses) are deductible only to the extent that, in the 
aggregate, they exceed two percent of the individual's adjusted 
gross income.
    In general, taxpayers are allowed a deduction for 
charitable contributions, subject to certain limitations. The 
deduction allowed an individual generally cannot exceed 50 
percent of the individual's adjusted gross income for the 
taxable year. The deduction allowed a corporation generally 
cannot exceed 10 percent of the corporation's taxable income. 
Excess contributions are carried forward for five years.
    A partner's distributive share of a partnership's 
miscellaneous itemized deductions and charitable contributions 
is separately reported to the partner.
    Each partner is allowed his distributive share of credits 
against his taxable income.

Foreign taxes

    The foreign tax credit generally allows U.S. taxpayers to 
reduce U.S. income tax on foreign income by the amount of 
foreign income taxes paid or accrued with respect to that 
income. In lieu of electing the foreign tax credit, a taxpayer 
may deduct foreign taxes. The total amount of the credit may 
not exceed the same proportion of the taxpayer's U.S. tax which 
the taxpayer's foreign source taxable income bears to the 
taxpayer's worldwide taxable income for the taxable year.

Unrelated business taxable income

    Tax-exempt organizations are subject to tax on income from 
unrelated businesses. Certain types of income (such as 
dividends, interest and certain rental income) are not treated 
as unrelated business taxable income. Thus, for a partner that 
is an exempt organization, whether partnership income is 
unrelated business taxable income depends on the character of 
the underlying income. Income from a publicly traded 
partnership, however, is treated as unrelated business taxable 
income regardless of the character of the underlying income.

Special rules related to oil and gas activities

    Taxpayers involved in the search for and extraction of 
crude oil and natural gas are subject to certain special tax 
rules. As a result, in the case of partnerships engaged in such 
activities, certain specific information is separately reported 
to partners.
    A taxpayer who owns an economic interest in a producing 
deposit of natural resources (including crude oil and natural 
gas) is permitted to claim a deduction for depletion of the 
deposit as the minerals are extracted. In the case of oil and 
gas produced in the United States, a taxpayer generally is 
permitted to claim the greater of a deduction for cost 
depletion or percentage depletion. Cost depletion is computed 
by multiplying a taxpayer's adjusted basis in the depletable 
property by a fraction, the numerator of which is the amount of 
current year production from the property and the denominator 
of which is the property's estimated reserves as of the 
beginning of that year. Percentage depletion is equal to a 
specified percentage (generally, 15 percent in the case of oil 
and gas) of gross income from production. Cost depletion is 
limited to the taxpayer's basis in the depletable property; 
percentage depletion is notso limited. Once a taxpayer has 
exhausted its basis in the depletable property, it may continue to 
claim percentage depletion deductions (generally referred to as 
``excess percentage depletion'').
    Certain limitations apply to the deduction for oil and gas 
percentage depletion. First, percentage depletion is not 
available to oil and gas producers who also engage (directly or 
indirectly) in significant levels of oil and gas retailing or 
refining activities (so-called ``integrated producers'' of oil 
and gas). Second, the deduction for percentage depletion may be 
claimed by a taxpayer only with respect to up to 1,000 barrels-
per-day of production. Third, the percentage depletion 
deduction may not exceed 100 percent of the taxpayer's net 
income for the taxable year from the depletable oil and gas 
property. Fourth, a percentage depletion deduction may not be 
claimed to the extent that it exceeds 65 percent of the 
taxpayer's pre-percentage depletion taxable income.
    In the case of a partnership that owns depletable oil and 
gas properties, the depletion allowance is computed separately 
by the partners and not by the partnership. In computing a 
partner's basis in his partnership interest, basis is increased 
by the partner's share of any partnership-related excess 
percentage depletion deductions and is decreased (but not below 
zero) by the partner's total amount of depletion deductions 
attributable to partnership property.
    Intangible drilling and development costs (``IDCs'') 
incurred with respect to domestic oil and gas wells generally 
may be deducted at the election of the taxpayer. In the case of 
integrated producers, no more than 70 percent of IDCs incurred 
during a taxable year may be deducted. IDCs not deducted are 
capitalized and generally are either added to the property's 
basis and recovered through depletion deductions or amortized 
on a straight-line basis over a 60-month period.
    The special treatment granted to IDCs incurred in the 
pursuit of oil and gas may give rise to an item of tax 
preference or (in the case of corporate taxpayers) an adjusted 
current earnings (``ACE'') adjustment for the alternative 
minimum tax. The tax preference item is based on a concept of 
``excess IDCs.'' In general, excess IDCs are the excess of IDCs 
deducted for the taxable year over the amount of those IDCs 
that would have been deducted had they been capitalized and 
amortized on a straight-line basis over 120 months commencing 
with the month production begins from the related well. The 
amount of tax preference is then computed as the difference 
between the excess IDC amount and 65 percent of the taxpayer's 
net income from oil and gas (computed without a deduction for 
excess IDCs). For IDCs incurred in taxable years beginning 
after 1992, the ACE adjustment related to IDCs is repealed for 
taxpayers other than integrated producers. Moreover, beginning 
in 1993, the IDC tax preference generally is repealed for 
taxpayers other than integrated producers. In this case, 
however, the repeal of the excess IDC preference may not result 
in more than a 40 percent reduction (30 percent for taxable 
years beginning in 1993) in the amount of the taxpayer's 
alternative minimum taxable income computed as if that 
preference had not been repealed.

Passive losses

    The passive loss rules generally disallow deductions and 
credits from passive activities to the extent they exceed 
income from passive activities. Losses not allowed in a taxable 
year are suspended and treated as current deductions from 
passive activities in the next taxable year. These losses are 
allowed in full when a taxpayer disposes of the entire interest 
in the passive activity to an unrelated person in a taxable 
transaction. Passive activities include trade or business 
activities in which the taxpayer does not materially 
participate. (Limited partners generally do not materially 
participate in the activities of a partnership.) Passive 
activities also include rental activities (regardless of the 
taxpayer's material participation).\6\ Portfolio income (such 
as interest and dividends), and expenses allocable to such 
income, are not treated as income or loss from a passive 
activity.
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    \6\ An individual who actively participates in a rental real estate 
activity and holds at least a 10-percent interest may deduct up to 
$25,000 of passive losses. The $25,000 amount phases out as the 
individual's income increases from $100,000 to $150,000.
---------------------------------------------------------------------------
    The $25,000 allowance also applies to low-income housing 
and rehabilitation credits (on a deduction equivalent basis), 
regardless of whether the taxpayer claiming the credit actively 
participates in the rental real estate activity generating the 
credit. In addition, the income phaseout range for the $25,000 
allowance for rehabilitation credits is $200,000 to $250,000 
(rather than $100,000 to $150,000). For interests acquired 
after December 31, 1989 in partnerships holding property placed 
in service after that date, the $25,000 deduction-equivalent 
allowance is permitted for the low-income housing credit 
without regard to the taxpayer's income.
    A partnership's operations may be treated as multiple 
activities for purposes of the passive loss rules. In such 
case, the partnership must separately report items of income 
and deductions from each of its activities.
    Income, loss and other items from a publicly traded 
partnership are treated as separate from income and loss from 
any other publicly traded partnership, and also as separate 
from any income or loss from passive activities.
    The Omnibus Budget Reconciliation Act of 1993 added a rule, 
effective for taxable years beginning after December 31, 1993, 
treating a taxpayer's rental real estate activities in which he 
materially participates as not subject to limitation under the 
passive loss rules if the taxpayer meets eligibility 
requirements relating to real property trades or businesses in 
which he performs services (sec. 469(c)(7)). Real property 
trade or business means any real property development, 
redevelopment, construction, reconstruction, acquisition, 
conversion, rental, operation, management, leasing, or 
brokerage trade or business. An individual taxpayer generally 
meets the eligibility requirements if (1) more than half of the 
personal services the taxpayer performs in trades or business 
during the taxable year are performed in real property trades 
or businesses in which the taxpayer materially participates, 
and (2) such taxpayer performs more than 750 hours of services 
during the taxable year in real property trades or businesses 
in which the taxpayer materially participates.

REMICs

    A tax is imposed on partnerships holding a residual 
interest in a real estate mortgage investment conduit 
(``REMIC''). The amount of the tax is the amount of excess 
inclusions allocable to partnership interests owned by certain 
tax-exempt organizations (``disqualified organizations'') 
multiplied by the highest corporate tax rate.

Contribution of property to a partnership

    In general, a partner recognizes no gain or loss upon the 
contribution of property to a partnership. However, income, 
gain, loss and deduction with respect to property contributed 
to a partnership by a partner must be allocated among the 
partners so as to take into account the difference between the 
basis of the property to the partnership and its fair market 
value at the time of contribution. In addition, the 
contributing partner must recognize gain or loss equal to such 
difference if the property is distributed to another partner 
within five years of its contribution (sec. 704(c)), or if 
other property is distributed to the contributor within the 
five year period (sec. 737).

Election of optional basis adjustments

    In general, the transfer of a partnership interest or a 
distribution of partnership property does not affect the basis 
of partnership assets. A partnership, however, may elect to 
make certain adjustments in the basis of partnership property 
(sec. 754). Under a section 754 election, the transfer of a 
partnership interest generally results in an adjustment in the 
partnership's basis in its property for the benefit of the 
transferee partner only, to reflect the difference between that 
partner's basis for his interest and his proportionate share of 
the adjusted basis of partnership property (sec. 743(b)). Also 
under the election, a distribution of property to a partner in 
certain cases results in an adjustment in the basis of other 
partnership property (sec. 734(b)).

Terminations

    A partnership terminates if either (1) all partners cease 
carrying on the business, financial operation or venture of the 
partnership, or (2) within a 12-month period 50 percent or more 
of the total partnership interests are sold or exchanged (sec. 
708).

                           Reasons for Change

    The requirement that each partner take into account 
separately his distributive share of a partnership's items of 
income, gain, loss, deduction and credit can result in the 
reporting of a large number of items to each partner. The 
schedule K-1, on which such items are reported, contains space 
for more than 40 items. Reporting so many separately stated 
items is burdensome for individual investors with relatively 
small, passive interests in large partnerships. In many 
respects such investments are indistinguishable from those made 
in corporate stock or mutual funds, which do not require 
reporting of numerous separate items.
    In addition, the number of items reported under the current 
regime makes it difficult for the Internal Revenue Service to 
match items reported on the K-1 against the partner's income 
tax return. Matching is also difficult because items on the K-1 
are often modified or limited at the partner level before 
appearing on the partner's tax return.
    By significantly reducing the number of items that must be 
separately reported to partners by an electing large 
partnership, the provision eases the reporting burden of 
partners and facilitates matching by the IRS. Moreover, it is 
understood that the Internal Revenue Service is considering 
restricting the use of substitute reporting forms by large 
partnerships. Reduction of the number of items makes possible a 
short standardized form.

                       Explanation of Provisions

In general

    The bill modifies the tax treatment of an electing large 
partnership (generally, any partnership that elects under the 
provision, if the number of partners in the preceding taxable 
year is 100 or more) and its partners. The provision provides 
that each partner takes into account separately the partner's 
distributive share of the following items, which are determined 
at the partnership level: (1) taxable income or loss from 
passive loss limitation activities; (2) taxable income or loss 
from other activities (e.g., portfolio income or loss); (3) net 
capital gain or loss to the extent allocable to passive loss 
limitation activities and other activities; (4) tax-exempt 
interest; (5) net alternative minimum tax adjustment separately 
computed for passive loss limitation activities and other 
activities; (6) general credits; (7) low-income housing credit; 
(8) rehabilitation credit; (9) credit for producing fuel from a 
nonconventional source; (10) creditable foreign taxes and 
foreign source items; and (11) any other items to the extent 
that the Secretary determines that separate treatment of such 
items is appropriate.\7\ Separate treatment may be appropriate, 
for example, should changes in the law necessitate such 
treatment for any items.
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    \7\ In determining the amounts required to be separately taken into 
account by a partner, those provisions of the large partnership rules 
governing computations of taxable income are applied * * * separately 
with respect to that partner by taking into account that partner's 
distributive share of the partnership's items of income, gain, loss, 
deduction or credit. This rule permits partnerships to make otherwise 
valid special allocations of partnership items to partners.
---------------------------------------------------------------------------
    Under the bill, the taxable income of an electing large 
partnership is computed in the same manner as that of an 
individual, except that the items described above are 
separately stated and certain modifications are made. These 
modifications include disallowing the deduction for personal 
exemptions, the net operating loss deduction and certain 
itemized deductions.\8\ All limitations and other provisions 
affecting the computation of taxable income or any credit 
(except for the at risk, passive loss and itemized deduction 
limitations, and any other provision specified in regulations) 
are applied at the partnership (and not the partner) level.
---------------------------------------------------------------------------
    \8\ An electing large partnership is allowed a deduction under 
section 212 for expenses incurred for the production of income, subject 
to 70-percent disallowance. No income from an electing large 
partnership is treated as fishing or farming income.
---------------------------------------------------------------------------
    All elections affecting the computation of taxable income 
or any credit generally are made by the partnership.

Capital gains

    Under the bill, netting of capital gains and losses occurs 
at the partnership level. A partner in a large partnership 
takes into account separately his distributive share of the 
partnership's net capital gain or net capital loss.\9\ Such net 
capital gain or loss is treated as long-term capital gain or 
loss.
---------------------------------------------------------------------------
    \9\ The term ``net capital gain'' has the same meaning as in 
section 1222(11). The term ``net capital loss'' means the excess of the 
losses from sales or exchanges of capital assets over the gains from 
sales or exchanges of capital assets. Thus, the partnership cannot 
offset any portion of capital losses against ordinary income.
---------------------------------------------------------------------------
    Any excess of net short-term capital gain over net long-
term capital loss is consolidated with the partnership's other 
taxable income and is not separately reported.
    A partner's distributive share of the partnership's net 
capital gain is allocated between passive loss limitation 
activities and other activities. The net capital gain is 
allocated to passive loss limitation activities to the extent 
of net capital gain from sales and exchanges of property used 
in connection with such activities, and any excess is allocated 
to other activities. A similar rule applies for purposes of 
allocating any net capital loss.
    Any gains and losses of the partnership under section 1231 
are netted at the partnership level. Net gain is treated as 
long-term capital gain and is subject to the rules described 
above. Net loss is treated as ordinary loss and consolidated 
with the partnership's other taxable income.

Deductions

    The bill contains two special rules for deductions. First, 
miscellaneous itemized deductions are not separately reported 
to partners. Instead, 70 percent of the amount of such 
deductions is disallowed at the partnership level; \10\ the 
remaining 30 percent is allowed at the partnership level in 
determining taxable income, and is not subject to the two- 
percent floor at the partner level.
---------------------------------------------------------------------------
    \10\ The 70 percent figure is intended to approximate the amount of 
such deductions that would be denied at the partner level as a result 
of the two-percent floor.
---------------------------------------------------------------------------
    Second, charitable contributions are not separately 
reported to partners under the bill. Instead, the charitable 
contribution deduction is allowed at the partnership level in 
determining taxable income, subject to the limitations that 
apply to corporate donors.

Credits in general

    Under the bill, general credits are separately reported to 
partners as a single item. General credits are any credits 
other than the low-income housing credit, the rehabilitation 
credit and the credit for producing fuel from a nonconventional 
source. A partner's distributive share of general credits is 
taken into account as a current year general business credit. 
Thus, for example, the credit for clinical testing expenses is 
subject to the present law limitations on the general business 
credit. The refundable credit for gasoline used for exempt 
purposes and the refund or credit for undistributed capital 
gains of a regulated investment company are allowed to the 
partnership, and thus are not separately reported to partners.
    In recognition of their special treatment under the passive 
loss rules, the low-income housing and rehabilitation credits 
are separately reported.\11\ In addition, the credit for 
producing fuel from a nonconventional source is separately 
reported.
---------------------------------------------------------------------------
    \11\ It is understood that the rehabilitation and low-income 
housing credits which are subject to the same passive loss rules (i.e., 
in the case of the low-income housing credit, where the partnership 
interest was acquired or the property was placed in service before 
1990) could be reported together on the same line.
---------------------------------------------------------------------------
    The bill imposes credit recapture at the partnership level 
and determines the amount of recapture by assuming that the 
credit fully reduced taxes. Such recapture is applied first to 
reduce the partnership's current year credit, if any; the 
partnership is liable for any excess over that amount. Under 
the bill, the transfer of an interest in an electing large 
partnership does not trigger recapture.

Foreign taxes

    The bill retains present-law treatment of foreign taxes. 
The partnership reports to the partner creditable foreign taxes 
and the source of any income, gain, loss or deduction taken 
into account by the partnership. Elections, computations and 
limitations are made by the partner.

Tax-exempt interest

    The bill retains present-law treatment of tax-exempt 
interest. Interest on a State or local bond is separately 
reported to each partner.

Unrelated business taxable income

    The bill retains present-law treatment of unrelated 
business taxable income. Thus, a tax-exempt partner's 
distributive share of partnership items is taken into account 
separately to the extent necessary to comply with the rules 
governing such income.

Passive losses

    Under the bill, a partner in an electing large partnership 
takes in an electing to account separately his distributive 
share of the partnership's taxable income or loss from passive 
loss limitation activities. The term ``passive loss limitation 
activity'' means any activity involving the conduct of a trade 
or business (including any activity treated as a trade or 
business under sec. 469(c)(5) or (6)) and any rental activity. 
A partner's share of an electing large partnership's taxable 
income or loss from passive loss limitation activities is 
treated as an item of income or loss from the conduct of a 
trade or business which is a single passive activity, as 
defined in the passive loss rules. Thus, an electing large 
partnership generally is not required to separately report 
items from multiple activities.
    A partner in an electing large partnership also takes into 
account separately his distributive share of the partnership's 
taxable income or loss from activities other than passive loss 
limitation activities. Such distributive share is treated as an 
item of income or expense with respect to property held for 
investment. Thus, portfolio income (e.g., interest and 
dividends) is reported separately and is reduced by portfolio 
deductions and allocable investment interest expense.
    In the case of a partner holding an interest in an electing 
large partnership which is not a limited partnership interest, 
such partner's distributive share of any items are taken into 
account separately to the extent necessary to comply with the 
passive loss rules. Thus, for example, income of an electing 
large partnership is not treated as passive income with respect 
to the general partnership interest of a partner who materially 
participates in the partnership's trade or business.
    Under the bill, the requirement that the passive loss rule 
be separately applied to each publicly traded partnership (sec. 
469(k) of the Code) continues to apply.

Alternative minimum tax

    Under the bill, alternative minimum tax (``AMT'') 
adjustments and preferences are combined at the partnership 
level. An electing large partnership would report to partners a 
net AMT adjustment separately computed for passive loss 
limitation activities and other activities. In determining a 
partner's alternative minimum taxable income, a partner's 
distributive share of any net AMT adjustment is taken into 
account instead of making separate AMT adjustments with respect 
to partnership items. The net AMT adjustment is determined by 
using the adjustments applicable to individuals (in the case of 
partners other than corporations), and by using the adjustments 
applicable to corporations (in the case of corporate partners). 
Except as provided in regulations, the net AMT adjustment is 
treated as a deferral preference for purposes of the section 53 
minimum tax credit.

Discharge of indebtedness income

    If an electing large partnership has income from the 
discharge of any indebtedness, such income is separately 
reported to each partner. In addition, the rules governing such 
income (sec. 108) are applied without regard to the large 
partnership rules. Partner-level elections under section 108 
are made by each partner separately. Thus, for example, the 
large partnership provisions do not affect section 108(d)(6), 
which provides that certain section 108 rules apply at the 
partner level, or section 108(b)(5), which provides for an 
election to reduce the basis of depreciable property. The large 
partnership provisions also do not affect the election under 
108(c) (added by the Omnibus Budget Reconciliation Act of 1993) 
to exclude discharge of indebtedness income with respect to 
qualified real property business indebtedness.

REMICs

    For purposes of the tax on partnerships holding residual 
interests in REMICs, all interests in an electing large 
partnership are treated as held by disqualified organizations. 
Thus, an electing large partnership holding a residual interest 
in a REMIC is subject to a tax equal to the excess inclusions 
multiplied by the highest corporate rate. The amount subject to 
tax is excluded from partnership income.
            Election of optional basis adjustments
    Under the bill, an electing large partnership may still 
elect to adjust the basis of partnership assets with respect to 
transferee partners. The computation of an electing large 
partnership's taxable income is made without regard to the 
section 743(b) adjustment. As under present law, the section 
743(b) adjustment is made only with respect to the transferee 
partner. In addition, an electing large partnership is 
permitted to adjust the basis of partnership property under 
section 734(b) if property is distributed to a partner, as 
under present law.

Terminations

    The bill provides that an electing large partnership does 
not terminate for tax purposes solely because 50 percent of its 
interests are sold or exchanged within a 12-month period.

Partnerships and partners subject to large partnership rules

            Definition of electing large partnership
    An ``electing large partnership'' is any partnership that 
elects under the provision, if the number of partners in the 
preceding taxable year is 100 or more. The number of partners 
is determined by counting only persons directly holding 
partnership interests in the taxable year, including persons 
holding through nominees; persons holding indirectly (e.g., 
through another partnership) are not counted. Regulations may 
provide, however, that if the number of partners in any taxable 
year falls below 100, the partnership may not be treated as an 
electing large partnership. The election applies to the year 
for which made and all subsequent years and cannot be revoked 
without the Secretary's consent.
            Special rules for certain service partnerships
    An election under this provision is not effective for any 
partnership if substantially all the partners are: (1) 
individuals performing substantial services in connection with 
the partnership's activities, or personal service corporations 
the owner-employees of which perform such services;(2) retired 
partners who had performed such services; or (3) spouses of partners 
who had performed such services. In addition, the term ``partner'' does 
not include any individual performing substantial services in 
connection with the partnership's activities and holding a partnership 
interest, or an individual who formerly performed such services and who 
held a partnership interest at the time the individual performed such 
services.

Exclusion for commodity partnerships

    An election under this provision is not effective for any 
partnership the principal activity of which is the buying and 
selling of commodities (not described in sec. 1221(1)), or 
options, futures or forwards with respect to commodities.

Special rules for partnerships holding oil and gas properties

            Simplified reporting treatment of electing large 
                    partnerships with oil and gas activities
    The bill provides special rules for electing large 
partnerships with oil and gas activities that operate under the 
simplified reporting regime. These partnerships are 
collectively referred to herein as ``oil and gas large 
partnerships.'' Generally, the bill provides that an oil and 
gas large partnership reports information to its partners under 
the general simplified large partnership reporting regime 
described above. To prevent the extension of percentage 
depletion deductions to persons excluded therefrom under 
present law, however, certain partners are treated as 
disqualified persons under the bill.
    The treatment of a disqualified person's distributive share 
of any item of income, gain, loss, deduction, or credit 
attributable to any partnership oil or gas property is 
determined under the bill without regard to the special rules 
applicable to large partnerships. Thus, an oil and gas large 
partnership reports information related to oil and gas 
activities to a partner who is a disqualified person in the 
same manner and to the same extent that it reports such 
information to that partner under present law. The simplified 
reporting rules of the bill, however, apply with respect to 
reporting such a partner's share of items not related to oil 
and gas activities.
    The bill defines two categories of taxpayers as 
disqualified persons. The first category encompasses taxpayers 
who do not qualify for the deduction for percentage depletion 
under section 613A (i.e., integrated producers of oil and gas). 
The second category includes any person whose average daily 
production of oil and gas (for purposes of determining the 
depletable oil and natural gas quantity under section 
613A(c)(2)) is at least 500 barrels for its taxable year in 
which (or with which) the partnership's taxable year ends. In 
making this computation, all production of domestic crude oil 
and natural gas attributable to the partner is taken into 
account, including such partner's proportionate share of any 
production of the large partnership.
    A taxpayer that falls within a category of disqualified 
person has the responsibility of notifying any large 
partnership in which it holds a direct or indirect interest 
(e.g., through a pass-through entity) of its status as such. 
Thus, for example, if an integrated producer owns an interest 
in a partnership which in turn owns an interest in an oil and 
gas large partnership, it is responsible for providing the 
management of the electing large partnership information 
regarding its status as a disqualified person and details 
regarding its indirect interest in the electing large 
partnership.
    Under the bill, an oil and gas large partnership computes 
its deduction for oil and gas depletion under the general 
statutory rules (subject to certain exceptions described below) 
under the assumptions that the partnership is the taxpayer and 
that it qualifies for the percentage depletion deduction. The 
amount of the depletion deduction, as well as other oil and gas 
related items, generally are reported to each partner (other 
than to partners who are disqualified persons) as components of 
that partner's distributive share of taxable income or loss 
from passive loss limitation activities. The bill provides that 
in computing the partnership's oil and gas percentage depletion 
deduction, the 1,000-barrel-per-day limitation does not apply. 
In addition, an oil and gas large partnership is allowed to 
compute percentage depletion under the bill without applying 
the 65-percent-of-taxable-income limitation under section 
613A(d)(1).
    As under present law, an election to deduct IDCs under 
section 263(c) is made at the partnership level. Since the bill 
treats those taxpayers required by the Code (sec. 291) to 
capitalize 30 percent of IDCs as disqualified persons, an oil 
and gas large partnership may pass through a full deduction of 
IDCs to its partners who are not disqualified persons. In 
contrast to present law, an oil and gas large partnership also 
has the responsibility with respect to its partners who are not 
disqualified persons for making an election under section 59(e) 
to capitalize and amortize certain specified IDCs. Partners who 
are disqualified persons are permitted to make their own 
separate section 59(e) elections under the bill.
    Consistent with the general reporting regime for electing 
large partnerships, the bill provides that a single AMT 
adjustment (under either corporate or non-corporate principles, 
as the case may be) is made and reported to the partners (other 
than disqualified persons) of an oil and gas large partnership 
as a separate item. This separately-reported item is affected 
by the limitation on the repeal of the tax preference for 
excess IDCs. For purposes of computing this limitation, the 
bill treats an oil and gas large partnership as the taxpayer. 
Thus, the limitation on repeal of the IDC preference is applied 
at the partnership level and is based on the cumulative 
reduction in the partnership's alternative minimum taxable 
income resulting from repeal of that preference.
    The bill provides that in making partnership-level 
computations, any item of income, gain, loss, deduction, or 
credit attributable to a partner who is a disqualified person 
is disregarded. For example, in computing the partnership's net 
income from oil and gas for purposes of determining the IDC 
preference (if any) to be reported to partners who are not 
disqualified persons as part of the AMT adjustment, 
disqualified persons' distributive shares of the partnership's 
net income from oil and gas are not to be taken into account.

Regulatory authority

    The Secretary of the Treasury is granted authority to 
prescribe such regulations as may be appropriate to carry out 
the purposes of the provisions.

                             Effective Date

    The provisions generally apply to partnership taxable years 
beginning after December 31, 1997.

 b. Simplified audit procedures for electing large partnerships (sec. 
 1222 of the bill and secs. 6240, 6241, 6242, 6245, 6246, 6247, 6249, 
                   6251, 6255, and 6256 of the Code)

                              Present Law

In general

    Prior to 1982, regardless of the size of a partnership, 
adjustments to a partnership's items of income, gain, loss, 
deduction, or credit had to be made in separate proceedings 
with respect to each partner individually. Because a large 
partnership sometimes had many partners located in different 
audit districts, adjustments to items of income, gains, losses, 
deductions, or credits of the partnership had to be made in 
numerous actions in several jurisdictions, sometimes with 
conflicting outcomes.
    The Tax Equity and Fiscal Responsibility Act of 1982 
(``TEFRA'') established unified audit rules applicable to all 
but certain small (10 or fewer partners) partnerships. These 
rules require the tax treatment of all ``partnership items'' to 
be determined at the partnership, rather than the partner, 
level. Partnership items are those items that are more 
appropriately determined at the partnership level than at the 
partner level, as provided by regulations.
    Under the TEFRA rules, a partner must report all 
partnership items consistently with the partnership return or 
must notify the IRS of any inconsistency. If a partner fails to 
report any partnership item consistently with the partnership 
return, the IRS may make a computational adjustment and 
immediately assess any additional tax that results.

Administrative proceedings

    Under the TEFRA rules, a partner must report all 
partnership items consistently with the partnership return or 
must notify the IRS of any inconsistency. If a partner fails to 
report any partnership item consistently with the partnership 
return, the IRS may make a computational adjustment and 
immediately assess any additional tax that results.
    The IRS may challenge the reporting position of a 
partnership by conducting a single administrative proceeding to 
resolve the issue with respect to all partners. But the IRS 
must still assess any resulting deficiency against each of the 
taxpayers who were partners in the year in which the 
understatement of tax liability arose.
    Any partner of a partnership can request an administrative 
adjustment or a refund for his own separate tax liability. Any 
partner also has the right to participate in partnership-level 
administrative proceedings. A settlement agreement with respect 
to partnership items binds all parties to the settlement.

Tax Matters Partner

    The TEFRA rules establish the ``Tax Matters Partner'' as 
the primary representative of a partnership in dealings with 
the IRS. The Tax Matters Partner is a general partner 
designated by the partnership or, in the absence of 
designation, the general partner with the largest profits 
interest at the close of the taxable year. If no Tax Matters 
Partner is designated, and it is impractical to apply the 
largest profits interest rule, the IRS may select any partner 
as the Tax Matters Partner.

Notice requirements

    The IRS generally is required to give notice of the 
beginning of partnership-level administrative proceedings and 
any resulting administrative adjustment to all partners whose 
names and addresses are furnished to the IRS. For partnerships 
with more than 100 partners, however, the IRS generally is not 
required to give notice to any partner whose profits interest 
is less than one percent.

Adjudication of disputes concerning partnership items

    After the IRS makes an administrative adjustment, the Tax 
Matters Partner (and, in limited circumstances, certain other 
partners) may file a petition for readjustment of partnership 
items in the Tax Court, the district court in which the 
partnership's principal place of business is located, or the 
Claims Court.

Statute of limitations

    The IRS generally cannot adjust a partnership item for a 
partnership taxable year if more than 3 years have elapsed 
since the later of the filing of the partnership return or the 
last day for the filing of the partnership return.

                           Reasons for Change

    Present audit procedures for large partnerships are 
inefficient and more complex than those for other large 
entities. The IRS must assess any deficiency arising from a 
partnership audit against a large number of partners, many of 
whom cannot easily be located and some of whom are no longer 
partners. In addition, audit procedures are cumbersome and can 
be complicated further by the intervention of partners acting 
individually.

                        Explanation of Provision

    The bill creates a new audit system for electing large 
partnerships. The provision defines ``electing large 
partnership'' the same way for audit and reporting purposes 
(generally, any partnership that elects under the reporting 
provisions, if the number of partners in the preceding taxable 
year is 100 or more).
    As under present law, electing large partnerships and their 
partners are subject to unified audit rules. Thus, the tax 
treatment of ``partnership items'' are determined at the 
partnership, rather than the partner, level. The term 
``partnership items'' is defined as under present law.
    Unlike present law, however, partnership adjustments 
generally will flow through to the partners for the year in 
which the adjustment takes effect. Thus, the current-year 
partners' share of current-year partnership items of income, 
gains, losses, deductions, or credits will be adjusted to 
reflect partnership adjustments that take effect in that year. 
The adjustments generally will not affect prior-year returns of 
any partners (except in the case of changes to any partner's 
distributive shares).
    In lieu of flowing an adjustment through to its partners, 
the partnership may elect to pay an imputed underpayment. The 
imputed underpayment generally is calculated by netting the 
adjustments to the income and loss items of the partnership and 
multiplying that amount by the highest tax rate (whether 
individual or corporate). A partner may not file a claim for 
credit or refund of his allocable share of the payment. A 
partnership may make this election only if it meets 
requirements set forth in Treasury regulations designed to 
ensure payment (for example, in the case of a foreign 
partnership).
    Regardless of whether a partnership adjustment flows 
through to the partners, an adjustment must be offset if it 
requires another adjustment in a year after the adjusted year 
and before the year the offsetted adjustment takes effect. For 
example, if a partnership expensed a $1,000 item in year 1, and 
it was determined in year 4 that the item should have been 
capitalized and amortized ratably over 10 years, the adjustment 
in year 4 would be $700, apart from any interest or penalty. 
(The $900 adjustment for the improper deduction would be offset 
by $200 of adjustments for amortization deductions.) The year 4 
partners would be required to include an additional $700 in 
income for that year. The partnership may ratably amortize the 
remaining $700 of expenses in years 4-10.
    In addition, the partnership, rather than the partners 
individually, generally is liable for any interest and 
penalties that result from a partnership adjustment. Interest 
is computed for the period beginning on the return due date for 
the adjusted year and ending on the earlier of the return due 
date for the partnership taxable year in which the adjustment 
takes effect or the date the partnership pays the imputed 
underpayment. Thus, in the above example, the partnership would 
be liable for 4 years' worth of interest (on a declining 
principal amount).
    Penalties (such as the accuracy and fraud penalties) are 
determined on a year-by-year basis (without offsets) based on 
an imputed underpayment. All accuracy penalty criteria and 
waiver criteria (such as reasonable cause, substantial 
authority, etc.) are determined as if the partnership were a 
taxable individual. Accuracy and fraud penalties are assessed 
and accrue interest in the same manner as if asserted against a 
taxable individual.
    Any payment (for Federal income taxes, interest, or 
penalties) that an electing large partnership is required to 
make is non-deductible.
    If a partnership ceases to exist before a partnership 
adjustment takes effect, the former partners are required to 
take the adjustment into account, as provided by regulations. 
Regulations are also authorized to prevent abuse and to enforce 
efficiently the audit rules in circumstances that present 
special enforcement considerations (such as partnership 
bankruptcy).

Administrative proceedings

    Under the electing large partnership audit rules, a partner 
is not permitted to report any partnership items inconsistently 
with the partnership return, even if the partner notifies the 
IRS of the inconsistency. The IRS may treat a partnership item 
that was reported inconsistently by a partner as a mathematical 
or clerical error and immediately assess any additional tax 
against that partner.
    As under present law, the IRS may challenge the reporting 
position of a partnership by conducting a single administrative 
proceeding to resolve the issue with respect to all partners. 
Unlike under present law, however, partners will have no right 
individually to participate in settlement conferences or to 
request a refund.

Partnership representative

    The bill requires each electing large partnership to 
designate a partner or other person to act on its behalf. If an 
electing large partnership fails to designate such a person, 
the IRS is permitted to designate any one of the partners as 
the person authorized to act on the partnership's behalf. After 
the IRS's designation, an electing large partnership could 
still designate a replacement for the IRS-designated partner.

Notice requirements

    Unlike under present law, the IRS is not required to give 
notice to individual partners of the commencement of an 
administrative proceeding or of a final adjustment. Instead, 
the IRS is authorized to send notice of a partnership 
adjustment to the partnership itself by certified or registered 
mail. The IRS could give proper notice by mailing the notice to 
the last known address of the partnership, even if the 
partnership had terminated its existence.

Adjudication of disputes concerning partnership items

    As under present law, an administrative adjustment could be 
challenged in the Tax Court, the district court in which the 
partnership's principal place of business is located, or the 
Claims Court. However, only the partnership, and not partners 
individually, can petition for a readjustment of partnership 
items.
    If a petition for readjustment of partnership items is 
filed by the partnership, the court with which the petition is 
filed will have jurisdiction to determine the tax treatment of 
all partnership items of the partnership for the partnership 
taxable year to which the notice of partnership adjustment 
relates, and the proper allocation of such items among the 
partners. Thus, the court's jurisdiction is not limited to the 
items adjusted in the notice.

Statute of limitations

    Absent an agreement to extend the statute of limitations, 
the IRS generally could not adjust a partnership item of an 
electing large partnership more than 3 years after the later of 
thefiling of the partnership return or the last day for the 
filing of the partnership return. Special rules apply to false or 
fraudulent returns, a substantial omission of income, or the failure to 
file a return. The IRS would assess and collect any deficiency of a 
partner that arises from any adjustment to a partnership item subject 
to the limitations period on assessments and collection applicable to 
the year the adjustment takes effect (secs. 6248, 6501 and 6502).

Regulatory authority

    The Secretary of the Treasury is granted authority to 
prescribe regulations as may be necessary to carry out the 
simplified audit procedure provisions, including regulations to 
prevent abuse of the provisions through manipulation. The 
regulations may include rules that address transfers of 
partnership interests, in anticipation of a partnership 
adjustment, to persons who are tax-favored (e.g., corporations 
with net operating losses, tax-exempt organizations, and 
foreign partners) or persons who are expected to be unable to 
pay tax (e.g., shell corporations). For example, if prior to 
the time a partnership adjustment takes effect, a taxable 
partner transfers a partnership interest to a nonresident alien 
to avoid the tax effect of the partnership adjustment, the 
rules may provide, among other things, that income related to 
the partnership adjustment is treated as effectively connected 
taxable income, that the partnership adjustment is treated as 
taking effect before the partnership interest was transferred, 
or that the former partner is treated as a current partner to 
whom the partnership adjustment is allocated.

                             Effective Date

    The provision applies to partnership taxable years 
beginning after December 31, 1997.

c. Due date for furnishing information to partners of electing large 
        partnerships (sec. 1223 of the bill and sec. 6031(b) of the 
        Code)

                              Present Law

    A partnership required to file an income tax return with 
the Internal Revenue Service must also furnish an information 
return to each of its partners on or before the day on which 
the income tax return for the year is required to be filed, 
including extensions. Under regulations, a partnership must 
file its income tax return on or before the fifteenth day of 
the fourth month following the end of the partnership's taxable 
year (on or before April 15, for calendar year partnerships). 
This is the same deadline by which most individual partners 
must file their tax returns.

                           Reasons for Change

    Information returns that are received on or shortly before 
April 15 (or later) are difficult for individuals to use in 
preparing their tax returns (or in computing their payments) 
that are due on that date.

                        Explanation of Provision

    The bill provides that an electing large partnership must 
furnish information returns to partners by the first March 15 
following the close of the partnership's taxable year. Electing 
large partnerships are those partnerships subject to the 
simplified reporting and audit rules (generally, any 
partnership that elects under the reporting provision, if the 
number of partners in the preceding taxable year is 100 or 
more).
    The provision also provides that, if the partnership is 
required to provide copies of the information returns to the 
Internal Revenue Service on magnetic media, each schedule (such 
as each Schedule K-1) with respect to each partner is treated 
as a separate information return with respect to the corrective 
periods and penalties that are generally applicable to all 
information returns.

                             Effective Date

    The provision is effective for partnership taxable years 
beginning after December 31, 1997.

d. Partnership returns required on magnetic media (sec. 1224 of the 
        bill and sec. 6011 of the Code)

                              Present Law

    Partnerships are permitted, but not required, to provide 
the tax return of the partnership (Form 1065), as well as 
copies of the schedules sent to each partner (Form K-1), to the 
Internal Revenue Service on magnetic media.

                           Reasons for Change

    Most entities that file large numbers of documents with the 
Internal Revenue Service must do so on magnetic media. 
Conforming the reporting provisions for partnerships to the 
generally applicable information reporting rules will 
facilitate integration of partnership information into already 
existing data systems.

                        Explanation of Provision

    The bill provides generally that any partnership is 
required to provide the tax return of the partnership (Form 
1065), as well as copies of the schedule sent to each partner 
(Form K-1), to the Internal Revenue Service on magnetic media. 
An exception is provided for partnerships with 100 or fewer 
partners.

                             Effective Date

    The provision is effective for partnership taxable years 
beginning after December 31, 1997.

e. Treatment of partnership items of individual retirement arrangements 
        (sec. 1225 of the bill and sec. 6012 of the Code)

                              Present Law

Return filing requirements

    An individual retirement account (``IRA'') is a trust which 
generally is exempt from taxation except for the taxes imposed 
on income from an unrelated trade or business. A fiduciary of a 
trust that is exempt from taxation (but subject to the taxes 
imposed on income from an unrelated trade or business) 
generally is required to file a return on behalf of the trust 
for a taxable year if the trust has gross income of $1,000 or 
more included in computing unrelated business taxable income 
for that year (Treas. Reg. sec. 1.6012-3(a)(5)).
    Unrelated business taxable income is the gross income 
(including gross income from a partnership) derived by an 
exempt organization from an unrelated trade or business, less 
certain deductions which are directly connected with the 
carrying on of such trade or business (sec. 512(a)(1). In 
calculating unrelated business taxable income, exempt 
organizations (including IRAs) generally also are permitted a 
specific deduction of $1,000 (sec. 512(b)(12)).

Unified audits of partnerships

    All but certain small partnerships are subject to unified 
audit rules established by the Tax Equity and Fiscal 
Responsibility Act of 1982. These rules require the tax 
treatment of all ``partnership items'' to be determined at the 
partnership, rather than the partner, level. Partnership items 
are those items that are more appropriately determined at the 
partnership level than at the partner level, including such 
items as gross income and deductions of the partnership.

                           Reasons for Change

    Under present law, tax returns often must be filed for IRAs 
that have no taxable income and, consequently, no tax 
liability. The filing of these returns by taxpayers, and the 
processing of these returns by the IRS, impose significant 
costs. Imposing this burden is unnecessary to the extent that 
the income of the IRA has been derived from an interest in a 
partnership that is subject to partnership-level audit rules. 
In these circumstances, the appropriateness of any deductions 
may be determined at the partnership level, and an additional 
filing is unnecessary to facilitate this determination.

                        Explanation of Provision

    The bill modifies the filing threshold for an IRA with an 
interest in a partnership that is subject to the partnership-
level audit rules. A fiduciary of such an IRA could treat the 
trust's share of partnership taxable income as gross income, 
for purposes of determining whether the trust meets the $1,000 
gross income filing threshold. A fiduciary of an IRA that 
receives taxable income from a partnership that is subject to 
partnership-level audit rules of less than $1,000 (before the 
$1,000 specific deduction) is not required to file an income 
tax return if the IRA does not have any other income from an 
unrelated trade or business.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1997.

                    2. Other partnership audit rules

a. Treatment of partnership items in deficiency proceedings (sec. 1231 
        of the bill and sec. 6234 of the Code)

                              Present Law

    Partnership proceedings under rules enacted in TEFRA \12\ 
must be kept separate from deficiency proceedings involving the 
partners in their individual capacities. Prior to the Tax 
Court's opinion in Munro v. Commissioner, 92 T.C. 71 (1989), 
the IRS computed deficiencies by assuming that all items that 
were subject to the TEFRA partnership procedures were correctly 
reported on the taxpayer's return. However, where the losses 
claimed from TEFRA partnerships were so large that they offset 
any proposed adjustments to nonpartnership items, no deficiency 
could arise from a non-TEFRA proceeding, and if the partnership 
losses were subsequently disallowed in a partnership 
proceeding, the non-TEFRA adjustments might be uncollectible 
because of the expiration of the statute of limitations with 
respect to nonpartnership items.
---------------------------------------------------------------------------
    \12\ Tax Equity and Fiscal Responsibility Act of 1982.
---------------------------------------------------------------------------
    Faced with this situation in Munro, the IRS issued a notice 
of deficiency to the taxpayer that presumptively disallowed the 
taxpayer's TEFRA partnership losses for computational purposes 
only. Although the Tax Court ruled that a deficiency existed 
and that the court had jurisdiction to hear the case, the court 
disapproved of the methodology used by the IRS to compute the 
deficiency. Specifically, the court held that partnership items 
(whether income, loss, deduction, or credit) included on a 
taxpayer's return must be completely ignored in determining 
whether a deficiency exists that is attributable to 
nonpartnership items.

                           Reasons for Change

    The opinion in Munro creates problems for both taxpayers 
and the IRS. For example, a taxpayer would be harmed in the 
case where he has invested in a TEFRA partnership and is also 
subject to the deficiency procedures with respect to 
nonpartnership item adjustments, since computing the tax 
liability without regard to partnership items will have the 
same effect as if the partnership items were disallowed. If the 
partnership items were losses, the effect will be a greatly 
increased deficiency for the nonpartnership items. If, when the 
partnership proceedings are completed, the taxpayer is 
ultimately allowed any part of the losses, the taxpayer will 
receive part of the increased deficiency back in the form of an 
overpayment. However, in the interim,the taxpayer will have 
been subject to assessment and collection of a deficiency inflated by 
items still in dispute in the partnership proceeding. In essence, a 
taxpayer in such a case would be deprived of a prepayment forum with 
respect to the partnership item adjustments. The IRS would be harmed if 
a taxpayer's income is primarily from a TEFRA partnership, since the 
IRS may be unable to adjust nonpartnership items such as medical 
expense deductions, home mortgage interest deductions or charitable 
contribution deductions because there would be no deficiency since, 
under Munro, the income must be ignored.

                        Explanation of Provision

    The bill overrules Munro and allow the IRS to return to its 
prior practice of computing deficiencies by assuming that all 
TEFRA items whose treatment has not been finally determined had 
been correctly reported on the taxpayer's return. This 
eliminates the need to do special computations that involve the 
removal of TEFRA items from a taxpayer's return, and will 
restore to taxpayers a prepayment forum with respect to the 
TEFRA items. In addition, the provision provides a special rule 
to address the factual situation presented in Munro.
    Specifically, the bill provides a declaratory judgment 
procedure in the Tax Court for adjustments to an oversheltered 
return. An oversheltered return is a return that shows no 
taxable income and a net loss from TEFRA partnerships. In such 
a case, the IRS is authorized to issue a notice of adjustment 
with respect to non-TEFRA items, notwithstanding that no 
deficiency would result from the adjustment. However, the IRS 
could only issue such a notice if a deficiency would have 
arisen in the absence of the net loss from TEFRA partnerships.
    The Tax Court is granted jurisdiction to determine the 
correctness of such an adjustment as well as to make a 
declaration with respect to any other item for the taxable year 
to which the notice of adjustment relates, except for 
partnership items and affected items which require partner-
level determinations. No tax is due upon such a determination, 
but a decision of the Tax Court is treated as a final decision, 
permitting an appeal of the decision by either the taxpayer or 
the IRS. An adjustment determined to be correct would thus have 
the effect of increasing the taxable income that is deemed to 
have been reported on the taxpayer's return. If the taxpayer's 
partnership items were then adjusted in a subsequent 
proceeding, the IRS has preserved its ability to collect tax on 
any increased deficiency attributable to the nonpartnership 
items.
    Alternatively, if the taxpayer chooses not to contest the 
notice of adjustment within the 90-day period, the bill 
provides that when the taxpayer's partnership items are finally 
determined, the taxpayer has the right to file a refund claim 
for tax attributable to the items adjusted by the earlier 
notice of adjustment for the taxable year. Although a refund 
claim is not generally permitted with respect to a deficiency 
arising from a TEFRA proceeding, such a rule is appropriate 
with respect to a defaulted notice of adjustment because 
taxpayers may not challenge such a notice when issued since it 
does not require the payment of additional tax.
    In addition, the bill incorporates a number of provisions 
intended to clarify the coordination between TEFRA audit 
proceedings and individual deficiency proceedings. Under these 
provisions, any adjustment with respect to a non-partnership 
item that caused an increase in tax liability with respect to a 
partnership item would be treated as a computational adjustment 
and assessed after the conclusion of the TEFRA proceeding. 
Accordingly, deficiency procedures do not apply with respect to 
this increase in tax liability, and the statute of limitations 
applicable to TEFRA proceedings is controlling.

                             Effective Date

    The provision is effective for partnership taxable years 
ending after the date of enactment.

b. Partnership return to be determinative of audit procedures to be 
        followed (sec. 1232 of the bill and sec. 6231 of the Code)

                              Present Law

    TEFRA established unified audit rules applicable to all 
partnerships, except for partnerships with 10 or fewer 
partners, each of whom is a natural person (other than a 
nonresident alien) or an estate, and for which each partner's 
share of each partnership item is the same as that partner's 
share of every other partnership item. Partners in the exempted 
partnerships are subject to regular deficiency procedures.

                           Reasons for Change

    The IRS often finds it difficult to determine whether to 
follow the TEFRA partnership procedures or the regular 
deficiency procedures. If the IRS determines that there were 
fewer than 10 partners in the partnership but was unaware that 
one of the partners was a nonresident alien or that there was a 
special allocation made during the year, the IRS might 
inadvertently apply the wrong procedures and possibly 
jeopardize any assessment. Permitting the IRS to rely on a 
partnership's return would simplify the IRS' task.

                        Explanation of Provision

    The bill permits the IRS to apply the TEFRA audit 
procedures if, based on the partnership's return for the year, 
the IRS reasonably determines that those procedures should 
apply. Similarly, the provision permits the IRS to apply the 
normal deficiency procedures if, based on the partnership's 
return for the year, the IRS reasonably determines that those 
procedures should apply.

                             Effective Date

    The provision is effective for partnership taxable years 
ending after the date of enactment.

c. Provisions relating to statute of limitations

            i. Suspend statute when an untimely petition is filed (sec. 
                    1233(a) of the bill and sec. 6229 of the Code)

                              Present Law

    In a deficiency case, section 6503(a) provides that if a 
proceeding in respect of the deficiency is placed on the docket 
of the Tax Court, the period of limitations on assessment and 
collection is suspended until the decision of the Tax Court 
becomes final, and for 60 days thereafter. The counterpart to 
this provision with respect to TEFRA cases is contained in 
section 6229(d). That section provides that the period of 
limitations is suspended for the period during which an action 
may be brought under section 6226 and, if an action is brought 
during such period, until the decision of the court becomes 
final, and for 1 year thereafter. As a result of this 
difference in language, the running of the statute of 
limitations in a TEFRA case will only be tolled by the filing 
of a timely petition whereas in a deficiency case, the statute 
of limitations is tolled by the filing of any petition, 
regardless of whether the petition is timely.

                           Reasons for Change

    Under present law, if an untimely petition is filed in a 
TEFRA case, the statute of limitations can expire while the 
case is still pending before the court. To prevent this from 
occurring, the IRS must make assessments against all of the 
investors during the pendency of the action and if the action 
is in the Tax Court, presumably abate such assessments if the 
court ultimately determines that the petition was timely. These 
steps are burdensome to the IRS and to taxpayers.

                        Explanation of Provision

    The bill conforms the suspension rule for the filing of 
petitions in TEFRA cases with the rule under section 6503(a) 
pertaining to deficiency cases. Under the provision, the 
statute of limitations in TEFRA cases is suspended by the 
filing of any petition under section 6226, regardless of 
whether the petition is timely or valid, and the suspension 
will remain in effect until the decision of the court becomes 
final, and for one year thereafter. Hence, if the statute of 
limitations is open at the time that an untimely petition is 
filed, the limitations period would no longer continue to run 
and possibly expire while the action is pending before the 
court.

                             Effective Date

    The provision is effective with respect to all cases in 
which the period of limitations has not expired under present 
law as of the date of enactment.
            ii. Suspend statute of limitations during bankruptcy 
                    proceedings (sec. 1233(b) of the bill and sec. 6229 
                    of the Code)

                              Present Law

    The period for assessing tax with respect to partnership 
items generally is the longer of the periods provided by 
section 6229 or section 6501. For partnership items that 
convert to nonpartnership items, section 6229(f) provides that 
the period for assessing tax shall not expire before the date 
which is 1 year after the date that the items become 
nonpartnership items. Section 6503(h) provides for the 
suspension of the limitations period during the pendency of a 
bankruptcy proceeding. However, this provision only applies to 
the limitations periods provided in sections 6501 and 6502.
    Under present law, because the suspension provision in 
section 6503(h) applies only to the limitations periods 
provided in section 6501 and 6502, some uncertainty exists as 
to whether section 6503(h) applies to suspend the limitations 
period pertaining to converted items provided in section 
6229(f) when a petition naming a partner as a debtor in a 
bankruptcy proceeding is filed. As a result, the limitations 
period provided in section 6229(f) may continue to run during 
the pendency of the bankruptcy proceeding, notwithstanding that 
the IRS is prohibited from making an assessment against the 
debtor because of the automatic stay provisions of the 
Bankruptcy Code.

                           Reasons for Change

    The ambiguity in present law makes it difficult for the IRS 
to adjust partnership items that convert to nonpartnership 
items by reason of a partner going into bankruptcy. In 
addition, any uncertainty may result in increased requests for 
the bankruptcy court to lift the automatic stay to permit the 
IRS to make an assessment with respect to the converted items.

                        Explanation of Provision

    The bill clarifies that the statute of limitations is 
suspended for a partner who is named in a bankruptcy petition. 
The suspension period is for the entire period during which the 
IRS is prohibited by reason of the bankruptcy proceeding from 
making an assessment, and for 60 days thereafter. The provision 
does not purport to create any inference as to the proper 
interpretation of present law.

                             Effective Date

    The provision is effective with respect to all cases in 
which the period of limitations has not expired under present 
law as of the date of enactment.
            iii. Extend statute of limitations for bankrupt TMPs (sec. 
                    1233(c) of the bill and sec. 6229 of the Code)

                              Present Law

    Section 6229(b)(1)(B) provides that the statute of 
limitations is extended with respect to all partners in the 
partnership by an agreement entered into between the tax 
matters partner (TMP) and the IRS. However, Temp. Treas. Reg. 
secs. 301.6231(a)(7)-1T(l)(4) and 301.6231(c)-7T(a) provide 
that upon the filing of a petition naming a partner as a debtor 
in a bankruptcy proceeding, that partner's partnership items 
convert to nonpartnership items, and if the debtor was the tax 
matters partner, such status terminates. These rules are 
necessary because of the automatic stay provision contained in 
11 U.S.C. sec. 362(a)(8). As a result, if a consent to extend 
the statute of limitations is signed by a person who would be 
the TMP but for the fact thatat the time that the agreement is 
executed the person was a debtor in a bankruptcy proceeding, the 
consent would not be binding on the other partners because the person 
signing the agreement was no longer the TMP at the time that the 
agreement was executed.

                           Reasons for Change

    The IRS is not automatically notified of bankruptcy filings 
and cannot easily determine whether a taxpayer is in 
bankruptcy, especially if the audit of the partnership is being 
conducted by one district and the taxpayer resides in another 
district, as is frequently the situation in TEFRA cases. If the 
IRS does not discover that a person signing a consent is in 
bankruptcy, the IRS may mistakenly rely on that consent. As a 
result, the IRS may be precluded from assessing any tax 
attributable to partnership item adjustments with respect to 
any of the partners in the partnership.

                        Explanation of Provision

    The bill provides that unless the IRS is notified of a 
bankruptcy proceeding in accordance with regulations, the IRS 
can rely on a statute extension signed by a person who is the 
tax matters partner but for the fact that said person was in 
bankruptcy at the time that the person signed the agreement. 
Statute extensions granted by a bankrupt TMP in these cases are 
binding on all of the partners in the partnership. The 
provision is not intended to create any inference as to the 
proper interpretation of present law.

                             Effective Date

    The provision is effective for extension agreements entered 
into after the date of enactment.

d. Expansion of small partnership exception (sec. 1234 of the bill and 
        sec. 6231 of the Code)

                              Present Law

    TEFRA established unified audit rules applicable to all 
partnerships, except for partnerships with 10 or fewer 
partners, each of whom is a natural person (other than a 
nonresident alien) or an estate, and for which each partner's 
share of each partnership item is the same as that partner's 
share of every other partnership item. Partners in the exempted 
partnerships are subject to regular deficiency procedures.

                           Reasons for Change

    The mere existence of a C corporation as a partner or of a 
special allocation does not warrant subjecting the partnership 
and its partners of an otherwise small partnership to the TEFRA 
procedures.

                        Explanation of Provision

    The bill permits a small partnership to have a C 
corporation as a partner or to specially allocate items without 
jeopardizing its exception from the TEFRA rules. However, the 
provision retains the prohibition of present law against having 
a flow-through entity (other than an estate of a deceased 
partner) as a partner for purposes of qualifying for the small 
partnership exception.

                             Effective Date

    The provision is effective for partnership taxable years 
ending after the date of enactment.

e. Exclusion of partial settlements from 1-year limitation on 
        assessment (sec. 1235 of the bill and sec. 6229(f) of the Code)

                              Present Law

    The period for assessing tax with respect to partnership 
items generally is the longer of the periods provided by 
section 6229 or section 6501. For partnership items that 
convert to nonpartnership items, section 6229(f) provides that 
the period for assessing tax shall not expire before the date 
which is 1 year after the date that the items become 
nonpartnership items. Section 6231(b)(1)(C) provides that the 
partnership items of a partner for a partnership taxable year 
become nonpartnership items as of the date the partner enters 
into a settlement agreement with the IRS with respect to such 
items.

                           Reasons for Change

    When a partial settlement agreement is entered into, the 
assessment period for the items covered by the agreement may be 
different than the assessment period for the remaining items. 
This fractured statute of limitations poses a significant 
tracking problem for the IRS and necessitates multiple 
computations of tax with respect to each partner's investment 
in the partnership for the taxable year.

                        Explanation of Provision

    The bill provides that if a partner and the IRS enter into 
a settlement agreement with respect to some but not all of the 
partnership items in dispute for a partnership taxable year and 
other partnership items remain in dispute, the period for 
assessing any tax attributable to the settled items is 
determined as if such agreement had not been entered into. 
Consequently, the limitations period that is applicable to the 
last item to be resolved for the partnership taxable year is 
controlling with respect to all disputed partnership items for 
the partnership taxable year. The provision does not purport to 
create any inference as to the proper interpretation of present 
law.

                             Effective Date

    The provision is effective for settlements entered into 
after the date of enactment.

f. Extension of time for filing a request for administrative adjustment 
        (sec. 1236 of the bill and sec. 6227 of the Code)

                              Present Law

    If an agreement extending the statute is entered into with 
respect to a non-TEFRA statute of limitations, that agreement 
also extends the statute of limitations for filing refund 
claims (sec. 6511(c)). There is no comparable provision for 
extending the time for filing refund claims with respect to 
partnership items subject to the TEFRA partnership rules.

                           Reasons for Change

    The absence of an extension for filing refund claims in 
TEFRA proceedings hinders taxpayers that may want to agree to 
extend the TEFRA statute of limitations but want to preserve 
their option to file a refund claim later.

                        Explanation of Provision

    The bill provides that if a TEFRA statute extension 
agreement is entered into, that agreement also extends the 
statute of limitations for filing refund claims attributable to 
partnership items or affected items until 6 months after the 
expiration of the limitations period for assessments.

                             Effective Date

    The provision is effective as if included in the amendments 
made by section 402 of the Tax Equity and Fiscal Responsibility 
Act of 1982.

g. Availability of innocent spouse relief in context of partnership 
        proceedings (sec. 1237 of the bill and sec. 6230 of the Code)

                              Present Law

    In general, an innocent spouse may be relieved of liability 
for tax, penalties and interest if certain conditions are met 
(sec. 6013(e)). However, existing law does not provide the 
spouse of a partner in a TEFRA partnership with a judicial 
forum to raise the innocent spouse defense with respect to any 
tax or interest that relates to an investment in a TEFRA 
partnership.

                           Reasons for Change

    Providing a forum in which to raise the innocent spouse 
defense with respect to liabilities attributable to adjustments 
to partnership items (including penalties, additions to tax and 
additional amounts) would make the innocent spouse rules more 
uniform.

                        Explanation of Provision

    The bill provides both a prepayment forum and a refund 
forum for raising the innocent spouse defense in TEFRA cases.
    With respect to a prepayment forum, the provision provides 
that within 60 days of the date that a notice of computational 
adjustment relating to partnership items is mailed to the 
spouse of a partner, the spouse could request that the 
assessment be abated. Upon receipt of such a request, the 
assessment is abated and any reassessment will be subject to 
the deficiency procedures. If an abatement is requested, the 
statute of limitations does not expire before the date which is 
60 days after the date of the abatement. If the spouse files a 
petition with the Tax Court, the Tax Court only has 
jurisdiction to determine whether the requirements of section 
6013(e) have been satisfied. In making this determination, the 
treatment of the partnership items that gave rise to the 
liability in question is conclusive.
    Alternatively, the bill provides that the spouse of a 
partner could file a claim for refund to raise the innocent 
spouse defense. The claim has to be filed within 6 months from 
the date that the notice of computational adjustment is mailed 
to the spouse. If the claim is not allowed, the spouse could 
file a refund action. For purposes of any claim or suit under 
this provision, the treatment of the partnership items that 
gave rise to the liability in question is conclusive.

                             Effective Date

    The provision is effective as if included in the amendments 
made by section 402 of the Tax Equity and Fiscal Responsibility 
Act of 1982.

h. Determination of penalties at partnership level (sec. 1238 of the 
        bill and sec. 6221 of the Code)

                              Present Law

    Partnership items include only items that are required to 
be taken into account under the income tax subtitle. Penalties 
are not partnership items since they are contained in the 
procedure and administration subtitle. As a result, penalties 
may only be asserted against a partner through the application 
of the deficiency procedures following the completion of the 
partnership-level proceeding.

                           Reasons for Change

    Many penalties are based upon the conduct of the taxpayer. 
With respect to partnerships, the relevant conduct often occurs 
at the partnership level. In addition, applying penalties at 
the partner level through the deficiency procedures following 
the conclusion of the unified proceeding at the partnership 
level increases the administrative burden on the IRS and can 
significantly increase the Tax Court's inventory.

                        Explanation of Provision

    The bill provides that the partnership-level proceeding is 
to include a determination of the applicability of penalties at 
the partnership level. However, the provision allows partners 
to raise any partner-level defenses in a refund forum.

                             Effective Date

    The provision is effective for partnership taxable years 
ending after the date of enactment.

i. Provisions relating to Tax Court jurisdiction (sec. 1239 of the bill 
        and secs. 6225 and 6226 of the Code)

                              Present Law

    Improper assessment and collection activities by the IRS 
during the 150-day period for filing a petition or during the 
pendency of any Tax Court proceeding, ``may be enjoined in the 
proper court.'' Present law may be unclear as to whether this 
includes the Tax Court.
    For a partner other than the Tax Matters Partner to be 
eligible to file a petition for redetermination of partnership 
items in any court or to participate in an existing case, the 
period for assessing any tax attributable to the partnership 
items of that partner must not have expired. Since such a 
partner would only be treated as a party to the action if the 
statute of limitations with respect to them was still open, the 
law is unclear whether the partner would have standing to 
assert that the statute of limitations had expired with respect 
to them.

                           Reasons for Change

    Clarifying the Tax Court's jurisdiction simplifies the 
resolution of tax cases.

                        Explanation of Provision

    The bill clarifies that an action to enjoin premature 
assessments of deficiencies attributable to partnership items 
may be brought in the Tax Court. The provision also permits a 
partner to participate in an action or file a petition for the 
sole purpose of asserting that the period of limitations for 
assessing any tax attributable to partnership items has expired 
for that person. Additionally, the provision clarifies that the 
Tax Court has overpayment jurisdiction with respect to affected 
items.

                             Effective Date

    The provision is effective for partnership taxable years 
ending after the date of enactment.

j. Treatment of premature petitions filed by notice partners or 5-
        percent groups (sec. 1240 of the bill and sec. 6226 of the 
        Code)

                              Present Law

    The Tax Matters Partner is given the exclusive right to 
file a petition for a readjustment of partnership items within 
the 90-day period after the issuance of the notice of a final 
partnership administrative adjustment (FPAA). If the Tax 
Matters Partner does not file a petition within the 90-day 
period, certain other partners are permitted to file a petition 
within the 60-day period after the close of the 90-day period. 
There are ordering rules for determining which action goes 
forward and for dismissing other actions.

                           Reasons for Change

    A petition that is filed within the 90-day period by a 
person who is not the Tax Matters Partner is dismissed. Thus, 
if the Tax Matters Partner does not file a petition within the 
90-day period and no timely and valid petition is filed during 
the succeeding 60-day period, judicial review of the 
adjustments set forth in the notice of FPAA is foreclosed and 
the adjustments are deemed to be correct.

                        Explanation of Provision

    The bill treats premature petitions filed by certain 
partners within the 90-day period as being filed on the last 
day of the following 60-day period under specified 
circumstances, thus affording the partnership with an 
opportunity for judicial review that is not available under 
present law.

                             Effective Date

    The provision is effective with respect to petitions filed 
after the date of enactment.

k. Bonds in case of appeals from certain proceedings (sec. 1241 of the 
        bill and sec. 7485 of the Code)

                              Present Law

    A bond must be filed to stay the collection of deficiencies 
pending the appeal of the Tax Court's decision in a TEFRA 
proceeding. The amount of the bond must be based on the court's 
estimate of the aggregate deficiencies of the partners.

                           Reasons for Change

    The Tax Court cannot easily determine the aggregate changes 
in tax liability of all of the partners in a partnership who 
will be affected by the Court's decision in the proceeding. 
Clarifying the calculation of the bond amount would simplify 
the Tax Court's task.

                        Explanation of Provision

    The bill clarifies that the amount of the bond should be 
based on the Tax Court's estimate of the aggregate liability of 
the parties to the action (and not all of the partners in the 
partnership). For purposes of this provision, the amount of the 
bond could be estimated by applying the highest individual rate 
to the total adjustments determined by the Tax Court and 
doubling that amount to take into account interest and 
penalties.

                             Effective Date

    The provision is effective as if included in the amendments 
made by section 402 of the Tax Equity and Fiscal Responsibility 
Act of 1982.

l. Suspension of interest where delay in computational adjustment 
        resulting from certain settlements (sec. 1242 of the bill and 
        sec. 6601 of the Code)

                              Present Law

    Interest on a deficiency generally is suspended when a 
taxpayer executes a settlement agreement with the IRS and 
waives the restrictions on assessments and collections, and the 
IRS does not issue a notice and demand for payment of such 
deficiency within 30 days. Interest on a deficiency that 
results from an adjustment of partnership items in TEFRA 
proceedings, however, is not suspended.

                           Reasons for Change

    Processing settlement agreements and assessing the tax due 
takes a substantial amount of time in TEFRA cases. A taxpayer 
is not afforded any relief from interest during this period.

                        Explanation of Provision

    The bill suspends interest where there is a delay in making 
a computational adjustment relating to a TEFRA settlement.

                             Effective Date

    The provision is effective with respect to adjustments 
relating to taxable years beginning after the date of 
enactment.

m. Special rules for administrative adjustment requests with respect to 
        bad debts or worthless securities (sec. 1243 of the bill and 
        sec. 6227 of the Code)

                              Present Law

    The non-TEFRA statute of limitations for filing a claim for 
credit or refund generally is the later of (1) three years from 
the date the return in question was filed or (2) two years from 
the date the claimed tax was paid, whichever is later (sec. 
6511(b)). However, an extended period of time, seven years from 
the date the return was due, is provided for filing a claim for 
refund of an overpayment resulting from a deduction for a 
worthless security or bad debt (sec. 6511(d)).
    Under the TEFRA partnership rules, a request for 
administrative adjustment (``RAA'') must be filed within three 
years after the later of (1) the date the partnership return 
was filed or (2) the due date of the partnership return 
(determined without regard to extensions) (sec. 6227(a)(1)). In 
addition, the request must be filed before a final partnership 
administrative adjustment (``FPAA'') is mailed for the taxable 
year (sec. 6227(a)(2)). There is no special provision for 
extending the time for filing an RAA that relates to a 
deduction for a worthless security or an entirely worthless bad 
debt.

                           Reasons for Change

    Whether and when a stock or debt becomes worthless is a 
question of fact that may not be determinable until after the 
year in which it appears the loss has occurred. An extended 
statute of limitations allows partners in a TEFRA partnership 
the same opportunity to file a delayed claim for refund in 
these difficult factual situations as other taxpayers are 
permitted.
    Further, on past occasions, the IRS issued FPAAs that did 
not adjust the partnership's tax return. This action created 
wasteful paperwork, and may have, in some cases truncated the 
appeals rights of individual partners. A special rule is 
necessary to permit partners who may have been adversely 
impacted by this past practice of the IRS to avail themselves 
of the extended period irrespective of whether an FPAA has been 
issued.

                        Explanation of Provision

    The bill extends the time for the filing of an RAA relating 
to the deduction by a partnership for a worthless security or 
bad debt. In these circumstances, in lieu of the three-year 
period provided in sec. 6227(a)(1), the period for filing an 
RAA is seven years from the date the partnership return was due 
with respect to which the request is made (determined without 
regard to extensions). The RAA is still required to be filed 
before the FPAA is mailed for the taxable year.

                             Effective Date

    The provision is effective as if included in the amendments 
made by section 402 of the Tax Equity and Fiscal Responsibility 
Act of 1982.

3. Closing of partnership taxable year with respect to deceased partner 
       (sec. 1246 of the bill and sec. 706(c)(2)(A) of the Code)

                              Present Law

    The partnership taxable year closes with respect to a 
partner whose entire interest is sold, exchanged, or 
liquidated. Such year, however, generally does not close upon 
the death of a partner. Thus, a decedent's entire share of 
items of income, gain, loss, deduction and credit for the 
partnership year in which death occurs is taxed to the estate 
or successor in interest rather than to the decedent on his or 
her final income tax return. See Estate of Hesse v. 
Commissioner, 74 T.C. 1307, 1311 (1980).

                           Reasons for Change

    The rule leaving open the partnership taxable year with 
respect to a deceased partner was adopted in 1954 to prevent 
the bunching of income that could occur with respect to a 
partnership reporting on a fiscal year other than the calendar 
year. Without this rule, as many as 23 months of income might 
have been reported on the partner's final return. Legislative 
changes occurring since 1954 have required most partnerships to 
adopt a calendar year, reducing the possibility of bunching. 
Consequently, income and deductions are better matched if the 
partnership taxable year closes upon a partner's death and 
partnership items are reported on the decedent's last return.
    Present law closes the partnership taxable year with 
respect to a deceased partner only if the partner's entire 
interest is sold or exchanged pursuant to an agreement existing 
at the time of death. By closing the taxable year automatically 
upon death, the provision reduces the need for such agreements.

                        Explanation of Provision

    The bill provides that the taxable year of a partnership 
closes with respect to a partner whose entire interest in the 
partnership terminates, whether by death, liquidation or 
otherwise. The bill does not change present law with respect to 
the effect upon the partnership taxable year of a transfer of a 
partnership interest by a debtor to the debtor's estate (under 
Chapters 7 or 11 of Title 11, relating to bankruptcy).

                             Effective Date

    The provision applies to partnership taxable years 
beginning after December 31, 1997.

  d. modifications of rules for real estate investment trusts (secs. 
        1251-1263 of the bill and secs. 856 and 857 of the code)

                              Present Law

Overview

    In general, a real estate investment trust (``REIT'') is an 
entity that receives most of its income from passive real 
estate related investments and that receives conduit treatment 
for income that is distributed to shareholders. If an entity 
meets the qualifications for REIT status, the portion of its 
income that is distributed to the investors each year generally 
is taxed to the investors without being subjected to a tax at 
the REIT level; the REIT generally is subject to a corporate 
tax only on the income that it retains and on certain income 
from property that qualifies as foreclosure property.

Election to be treated as a REIT

    In order to qualify as a REIT, and thereby receive conduit 
treatment, an entity must elect REIT status. A newly-electing 
entity generally cannot have earnings and profits accumulated 
from any year in which the entity was in existence and not 
treated as a REIT (sec. 857(a)(3)). To satisfy this 
requirement, the entity must distribute, during its first REIT 
taxable year, any earnings and profits that were accumulated in 
non-REIT years. For this purpose, distributions by the entity 
generally are treated as being made from the most recently 
accumulated earnings and profits.

Taxation of REITs

            Overview
    In general, if an entity qualifies as a REIT by satisfying 
the various requirements described below, the entity is taxable 
as a corporation on its ``real estate investment trust taxable 
income'' (``REITTI''), and also is taxable on certain other 
amounts (sec. 857). REITTI is the taxable income of the REIT 
with certain adjustments (sec. 857(b)(2)). The most significant 
adjustment is a deduction for dividends paid. The allowance of 
this deduction is the mechanism by which the REIT becomes a 
conduit for income tax purposes.
            Capital gains
    A REIT that has a net capital gain for a taxable year 
generally is subject to tax on such capital gain under the 
capital gains tax regime generally applicable to corporations 
(sec. 857(b)(3)). However, a REIT may diminish or eliminate its 
tax liability attributable to such capital gain by paying a 
``capital gain dividend'' to its shareholders (sec. 
857(b)(3)(C)). A capital gain dividend is any dividend or part 
of a dividend that is designated by the payor REIT as a capital 
gain dividend in a written notice mailed to shareholders. 
Shareholders who receive capital gain dividends treat the 
amount of such dividends as long-term capital gain regardless 
of their holding period of the stock (sec. 857(b)(3)(C)).
    A regulated investment company (``RIC''), but not a REIT, 
may elect to retain and pay income tax on net long-term capital 
gains it received during the tax year. If a RIC makes this 
election, the RIC shareholders must include in their income as 
long-term capital gains their proportionate share of these 
undistributed long-term capital gains as designated by the RIC. 
The shareholder is deemed to have paid the shareholder's share 
of the tax, which can be credited or refunded to the 
shareholder. Also, the basis of the shareholder's shares is 
increased by the amount of the undistributed long-term capital 
gains (less the amount of capital gains tax paid by the RIC) 
included in the shareholder's long-term capital gains.
            Income from foreclosure property
    In addition to tax on its REITTI, a REIT is subject to tax 
at the highest rate of tax paid by corporations on its net 
income from foreclosure property (sec. 857(b)(4)). Net income 
from foreclosure property is the excess of the sum of gains 
from foreclosure property that is held for sale to customers in 
the ordinary course of a trade or business and gross income 
from foreclosure property (other than income that otherwise 
would qualify under the 75-percent income test described below) 
over all allowable deductions directly connected with the 
production of such income.
    Foreclosure property is any real property or personal 
property incident to such real property that is acquired by a 
REIT as a result of default or imminent default on a lease of 
such property or indebtedness secured by such property, 
provided that (unless acquired as foreclosure property), such 
property was not held by the REIT for sale to customers (sec. 
856(e)). A property generally may be treated as foreclosure 
property for a period of two years after the date the property 
is acquired by the REIT. The IRS may grant extensions of the 
period for treating the property as foreclosure property if the 
REIT establishes that an extension of the grace period is 
necessary for the orderly liquidation of the REIT's interest in 
the property. The grace period cannot be extended beyond six 
years from the date the property is acquired by the REIT.
    Property will cease to be treated as foreclosure property 
if, after 90 days after the date of acquisition, the REIT 
operates the foreclosure property in a trade or business other 
than through an independent contractor from whom the REIT does 
not derive or receive any income (sec. 856(e)(4)(C)).
            Income or loss from prohibited transactions
    In general, a REIT must derive its income from passive 
sources and not engage in any active trade or business. 
Accordingly, in addition to the tax on its REITTI and on its 
net income from foreclosure property, a 100 percent tax is 
imposed on the net income of a REIT from ``prohibited 
transactions'' (sec. 857(b)(6)). A prohibited transaction is 
the sale or other disposition of property described in section 
1221(1) of the Code (property held for sale in the ordinary 
course of a trade or business) other than foreclosure property. 
Thus, the 100 percent tax on prohibited transactions helps to 
ensure that the REIT is a passive entity and may not engage in 
ordinary retailing activities such as sales to customers of 
condominium units or subdivided lots in a development project. 
A safe harbor is provided for certain sales that otherwise 
might be considered prohibited transactions (sec. 
857(b)(6)(C)). The safe harbor is limited to seven orfewer 
sales a year or, alternatively, any number of sales provided that the 
aggregate adjusted basis of the property sold does not exceed 10 
percent of the aggregate basis of all the REIT's assets at the 
beginning of the REIT's taxable year.

Requirements for REIT status

    A REIT must satisfy four tests on a year-by-year basis: 
organizational structure, source of income, nature of assets, 
and distribution of income. These tests are intended to allow 
conduit treatment in circumstances in which a corporate tax 
otherwise would be imposed, only if there really is a pooling 
of investment arrangement that is evidenced by its 
organizational structure, if its investments are basically in 
real estate assets, and if its income is passive income from 
real estate investment, as contrasted with income from the 
operation of business involving real estate. In addition, 
substantially all of the entity's income must be passed through 
to its shareholders on a current basis.

Organizational structure requirements

    To qualify as a REIT, an entity must be for its entire 
taxable year a corporation or an unincorporated trust or 
association that would be taxable as a domestic corporation but 
for the REIT provisions, and must be managed by one or more 
trustees (sec. 856(a)). The beneficial ownership of the entity 
must be evidenced by transferable shares or certificates of 
ownership. Except for the first taxable year for which an 
entity elects to be a REIT, the beneficial ownership of the 
entity must be held by 100 or more persons, and the entity may 
not be so closely held by individuals that it would be treated 
as a personal holding company if all its adjusted gross income 
constituted personal holding company income. A REIT is 
disqualified for any year in which it does not comply with 
regulations to ascertain the actual ownership of the REIT's 
outstanding shares.

Income requirements

            Overview
    In order for an entity to qualify as a REIT, at least 95 
percent of its gross income generally must be derived from 
certain passive sources (the ``95-percent test''). In addition, 
at least 75 percent of its income generally must be from 
certain real estate sources (the ``75-percent test''), 
including rents from real property.
    In addition, less than 30 percent of the entity's gross 
income may be derived from gain from the sale or other 
disposition of stock or securities held for less than one year, 
real property held less than four years (other than foreclosure 
property, or property subject to an involuntary conversion 
within the meaning of sec. 1033), and property that is sold or 
disposed of in a prohibited transaction (sec. 856(c)(4)).
            Definition of rents
    For purposes of the income requirements, rents from real 
property generally include rents from interests in real 
property, charges for services customarily rendered or 
furnished in connection with the rental of real property, 
whether or not such charges are separately stated, and rent 
attributable to personal property that is leased under or in 
connection with a lease of real property, but only if the rent 
attributable to such personal property does not exceed 15 
percent of the total rent for the year under the lease (sec. 
856(d)(1)).
    Services provided to tenants are regarded as customary if, 
in the geographic market within which the building is located, 
tenants in buildings that are of a similar class (for example, 
luxury apartment buildings) are customarily provided with the 
service. The furnishing of water, heat, light, and air 
conditioning, the cleaning of windows, public entrances, exits, 
and lobbies, the performance of general maintenance, and of 
janitorial and cleaning services, the collection of trash, the 
furnishing of elevator services, telephone answering services, 
incidental storage space, laundry equipment, watchman or guard 
service, parking facilities and swimming pool facilities are 
examples of services that are customarily furnished to tenants 
of a particular class of buildings in many geographical 
marketing areas (Treas. Reg. sec. 1.856-4(b)).
    In addition, amounts are not treated as qualifying rent if 
received from certain parties in which the REIT has an 
ownership interest of 10 percent or more (sec. 856(d)(2)(B)). 
For purposes of determining the REIT's ownership interest in a 
tenant, the attribution rules of section 318 apply, except that 
10 percent is substituted for 50 percent where it appears in 
subparagraph (C) of section 318(a)(2) and 318(a)(3) (sec. 
856(d)(5)).
    Finally, where a REIT furnishes or renders services to the 
tenants of rented property, amounts received or accrued with 
respect to such property generally are not treated as 
qualifying rents unless the services are furnished through an 
independent contractor (sec. 856(d)(2)(C)). A REIT may furnish 
or render a service directly, however, if the service would not 
generate unrelated business taxable income under section 
512(b)(3) if provided by an organization described in section 
511(a)(2). In general, an independent contractor is a person 
who does not own more than a 35 percent interest in the REIT, 
and in which no more than a 35 percent interest is held by 
persons with a 35 percent or greater interest in the REIT (sec. 
856(d)(3)).
            Hedging instruments
    Interest rate swaps or cap agreements that protect a REIT 
from interest rate fluctuations on variable rate debt incurred 
to acquire or carry real property are treated as securities 
under the 30-percent test and payments under these agreements 
are treated as qualifying under the 95-percent test (sec. 
856(c)(6)(G)).
            Treatment of shared appreciation mortgages
    For purposes of the income requirements for qualification 
as a REIT, and for purposes of the prohibited transaction 
provisions, any income derived from a ``shared appreciation 
provision'' is treated as gain recognized on the sale of the 
``secured property.'' For these purposes, a shared appreciation 
provision is any provision that is in connection with an 
obligation that is held by the REIT and secured by an interest 
in real property, which provision entitles the REIT to receive 
aspecified portion of any gain realized on the sale or exchange 
of such real property (or of any gain that would be realized if the 
property were sold on a specified date). Secured property for these 
purposes means the real property that secures the obligation that has 
the shared appreciation provision.
    In addition, for purposes of the income requirements for 
qualification as a REIT, and for purposes of the prohibited 
transactions provisions, the REIT is treated as holding the 
secured property for the period during which it held the shared 
appreciation provision (or, if shorter, the period during which 
the secured property was held by the person holding such 
property), and the secured property is treated as property 
described in section 1221(1) if it is such property in the 
hands of the obligor on the obligation to which the shared 
appreciation provision relates (or if it would be such property 
if held by the REIT). For purposes of the prohibited 
transaction safe harbor, the REIT is treated as having sold the 
secured property at the time that it recognizes income on 
account of the shared appreciation provision, and any 
expenditures made by the holder of the secured property are 
treated as made by the REIT.

Asset requirements

    To satisfy the asset requirements to qualify for treatment 
as a REIT, at the close of each quarter of its taxable year, an 
entity must have at least 75 percent of the value of its assets 
invested in real estate assets, cash and cash items, and 
government securities (sec. 856(c)(5)(A)). Moreover, not more 
than 25 percent of the value of the entity's assets can be 
invested in securities of any one issuer (other than government 
securities and other securities described in the preceding 
sentence). Further, these securities may not comprise more than 
five percent of the entity's assets or more than 10 percent of 
the outstanding voting securities of such issuer (sec. 
856(c)(5)(B)). The term real estate assets is defined to mean 
real property (including interests in real property and 
mortgages on real property) and interests in REITs (sec. 
856(c)(6)(B)).

REIT subsidiaries

    Under present law, all the assets, liabilities, and items 
of income, deduction, and credit of a ``qualified REIT 
subsidiary'' are treated as the assets, liabilities, and 
respective items of the REIT that owns the stock of the 
qualified REIT subsidiary. A subsidiary of a REIT is a 
qualified REIT subsidiary if and only if 100 percent of the 
subsidiary's stock is owned by the REIT at all times that the 
subsidiary is in existence. If at any time the REIT ceases to 
own 100 percent of the stock of the subsidiary, or if the REIT 
ceases to qualify for (or revokes an election of) REIT status, 
such subsidiary is treated as a new corporation that acquired 
all of its assets in exchange for its stock (and assumption of 
liabilities) immediately before the time that the REIT ceased 
to own 100 percent of the subsidiary's stock, or ceased to be a 
REIT as the case may be.

Distribution requirements

    To satisfy the distribution requirement, a REIT must 
distribute as dividends to its shareholders during the taxable 
year an amount equal to or exceeding (i) the sum of 95 percent 
of its REITTI other than net capital gain income and 95 percent 
of the excess of its net income from foreclosure property over 
the tax imposed on that income minus (ii) certain excess 
noncash income (described below).
    Excess noncash items include (a) the excess of the amounts 
that the REIT is required to include in income under section 
467 with respect to certain rental agreements involving 
deferred rents, over the amounts that the REIT otherwise would 
recognize under its regular method of accounting, (2) in the 
case of a REIT using the cash method of accounting, the excess 
of the amount of original issue discount and coupon interest 
that the REIT is required to take into account with respect to 
a loan to which section 1274 applies, over the amount of money 
and fair market value of other property received with respect 
to the loan, and (3) income arising from the disposition of a 
real estate asset in certain transactions that failed to 
qualify as like-kind exchanges under section 1031.

                           Reasons for Change

    The REIT serves as a means whereby numerous small investors 
can have a practical opportunity to invest in a diversified 
portfolio of real estate assets and have the benefit of 
professional management. The Committee believes that the asset 
requirements of present law ensure that a REIT acts as a pass-
through entity for taxpayers wishing to invest in real estate. 
Therefore, the Committee finds the 30-percent gross income test 
unnecessary and administratively burdensome. The Committee 
further finds that financial markets have changed over the past 
decade such that interest risk can be managed by many 
strategies other than swaps and caps. Recognizing these 
developments in the financial markets, the Committee believes 
it necessary to modify the classification of income from 
certain hedging instruments to provide flexibility to REITs in 
managing risk for their shareholders. The Committee also 
believes that, as a pass-through entity, REITs should be 
permitted to retain the proceeds of realized capital gains in a 
manner comparable to that accorded to RICs.

                       Explanation of Provisions

Overview

    The bill modifies many of the provisions relating to the 
requirements for qualification as, and the taxation of, a REIT. 
In particular, the modifications relate to the general 
requirements for qualification as a REIT, the taxation of a 
REIT, the income requirements for qualification as a REIT, and 
certain other provisions.

Clarification of limitation on maximum number of shareholders (sec. 
        1251 of the bill and secs. 856(k), 857(a), and 857(f) of the 
        Code)

    The bill replaces the rule that disqualifies a REIT for any 
year in which the REIT failed to comply with Treasury 
regulations to ascertain its ownership, with an intermediate 
penalty for failing to do so. The penalty would be $25,000 
($50,000 for intentional violations) for any year in which the 
REIT did not comply with the ownership regulations. The REIT 
also is required, when requested by the IRS, to send curative 
demand letters.
    In addition, a REIT that complied with the Treasury 
regulations for ascertaining its ownership, and which did not 
know, or have reason to know, that it was so closely held as to 
be classified as a personal holding company, is treated as 
meeting the requirement that it not be a personal holding 
company.

De minimis rule for tenant service income (sec. 1252 of the bill and 
        sec. 856(d) of the Code)

    The bill permits a REIT to render a de minimis amount of 
impermissible services to tenants, or in connection with the 
management of property, and still treat amounts received with 
respect to that property as rent. The value of the 
impermissible services may not exceed one percent of the gross 
income from the property. For these purposes, the services may 
not be valued at less than 150 percent of the REIT's direct 
cost of the services.

Attribution rules applicable to tenant ownership (sec. 1253 of the bill 
        and sec, 856(d)(5) of the Code)

    The bill modifies the application of section 318(a)(3)(A) 
(attribution to partnerships) for purposes of defining rent in 
section 856(d)(2), so that attribution occurs only when a 
partner owns a 25 percent or greater interest in the 
partnership.

Credit for tax paid by REIT on retained capital gains (sec. 1254 of the 
        bill and sec. 857(b)(3) of the Code)

    The bill permits a REIT to elect to retain and pay income 
tax on net long-term capital gains it received during the tax 
year, just as a RIC is permitted under present law. Thus, if a 
REIT made this election, the REIT shareholders would include in 
their income as long-term capital gains their proportionate 
share of the undistributed long-term capital gains as 
designated by the REIT. The shareholder would be deemed to have 
paid the shareholder's share of the tax, which would be 
credited or refunded to the shareholder. Also, the basis of the 
shareholder's shares would be increased by the amount of the 
undistributed long-term capital gains (less the amount of 
capital gains tax paid by the REIT) included in the 
shareholder's long-term capital gains.

Repeal of 30-percent gross income requirement (sec. 1255 of the bill 
        and sec. 856(c) of the Code

    The bill repeals the rule that requires less than 30 
percent of a REIT's gross income be derived from gain from the 
sale or other disposition of stock or securities held for less 
than one year, certain real property held less than four years, 
and property that is sold or disposed of in a prohibited 
transaction.

Modification of earnings and profits for determining whether REIT has 
        earnings and profits from non-REIT year (sec. 1256 of the bill 
        and sec. 857(d) of the Code

    The bill changes the ordering rule for purposes of the 
requirement that newly-electing REITs distribute earnings and 
profits that were accumulated in non-REIT years. Under the 
bill, distributions of accumulated earnings and profits 
generally are treated as made from the entity's earliest 
accumulated earnings and profits, rather than the most recently 
accumulated earnings and profits. These distributions are not 
treated as distributions for purposes of calculating the 
dividends paid deduction.

Treatment of foreclosure property (sec. 1257 of the bill and sec. 
        856(e) of the Code

    The bill lengthens the original grace period for 
foreclosure property until the last day of the third full 
taxable year following the election. The grace period also 
could be extended for an additional three years by filing a 
request to the IRS. Under the bill, a REIT could revoke an 
election to treat property as foreclosure property for any 
taxable year by filing a revocation on or before its due date 
for filing its tax return.
    In addition, the bill conforms the definition of 
independent contractor for purposes of the foreclosure property 
rule (sec. 856(e)(4)(C)) to the definition of independent 
contractor for purposes of the general rules (sec. 
856(d)(2)(C)).

Payments under hedging instruments (sec. 1258 of the bill and sec. 
        856(c)(5)(G) of the Code

    The bill treats income from all hedges that reduce the 
interest rate risk of REIT liabilities, not just from interest 
rate swaps and caps, as qualifying income under the 95-percent 
test. Thus, payments to a REIT under an interest rate swap, cap 
agreement, option, futures contract, forward rate agreement or 
any similar financial instrument entered into by the REIT to 
hedge its indebtedness incurred or to be incurred (and any gain 
from the sale or other disposition of these instruments) are 
treated as qualifying income for purposes of the 95-percent 
test.

Excess noncash income (sec. 1259 of the bill and sec. 857(e)(2) of the 
        Code

    The bill (1) expands the class of excess noncash items that 
are not subject to the distribution requirement to include 
income from the cancellation of indebtedness and (2) extends 
the treatment of original issue discount and coupon interest as 
excess noncash items to REITs that use an accrual method of 
taxation.

Prohibited transaction safe harbor (sec. 1260 of the bill and sec. 
        856(b)(6)(C) of the Code)

    The bill excludes from the prohibited sales rules property 
that was involuntarily converted.

Shared appreciation mortgages (sec. 1261 of the bill and sec. 856(j) of 
        the Code)

    The bill provides that interest received on a shared 
appreciation mortgage is not subject to the tax on prohibited 
transactions where the property subject to the mortgage is sold 
within 4 years of the REIT's acquisition of the mortgage 
pursuant to a bankruptcy plan of the mortgagor unless the REIT 
acquired the mortgage knew or had reason to know that the 
property subject to the mortgage would be sold in a bankruptcy 
proceeding.

Wholly-owned REIT subsidiaries (sec. 1262 of the bill and sec. 
        856(I)(2)of the Code)

    The bill permits any corporation wholly-owned by a REIT to 
be treated as a qualified subsidiary, regardless of whether the 
corporation had always been owned by the REIT. Where the REIT 
acquired an existing corporation, the bill treats any such 
corporation as being liquidated as of the time of acquisition 
by the REIT and then reincorporated (thus, any of the 
subsidiary's pre-REIT built-in gain would be subject to tax 
under the normal rules of section 337). In addition, any pre-
REIT earnings and profits of the subsidiary must be distributed 
before the end of the REIT's taxable year.

                             Effective Date

    The bill is effective for taxable years beginning after the 
date of enactment.

 E. Repeal of the Short-Short Test for Regulated Investment Companies 
         (sec. 1271 of the bill and sec. 851(b)(3) of the Code)

                              Present Law

    To qualify as a Regulated Investment Company (RIC), a 
company must derive less than 30 percent of its gross income 
from the sale or other disposition of stock or securities held 
for less than 3 months (the ``30-percent test'' or ``short-
short rule'').

                           Reasons for Change

    The short-short rule restricts the investment flexibility 
of RICs. The rule can, for example, limit a RIC's ability to 
``hedge'' its investments (e.g., to use options to protect 
against adverse market moves).
    The rule also burdens a RIC with significant recordkeeping, 
compliance, and administration costs. The RIC must keep track 
of the holding periods of assets and the relative percentages 
of short-term gain that it realizes throughout the year. The 
Committee believes that the short-short test places unnecessary 
limitations upon a RIC's activities.

                        Explanation of Provision

    The 30-percent test (or short-short rule) is repealed.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment.

                        F. Taxpayer Protections

 1. Provide reasonable cause exception for additional penalties (sec. 
        1281 of the bill and secs. 6652, 6683, 7519 of the Code)

                              Present Law

    Many penalties in the Code may be waived if the taxpayer 
establishes reasonable cause. For example, the accuracy-related 
penalty (sec. 6662) may be waived with respect to any item if 
the taxpayer establishes reasonable cause for his treatment of 
the item and that he acted in good faith (sec. 6664(c)).

                           Reasons for Change

    The Committee believes that it is appropriate to provide a 
reasonable cause exception for several additional penalties 
where one does not currently exist.

                        Explanation of Provision

    The bill provides that the following penalties may be 
waived if the failure is shown to be due to reasonable cause 
and not willful neglect:
          (1) the penalty for failure to make a report in 
        connection with deductible employee contributions to a 
        retirement savings plan (sec. 6652(g));
          (2) the penalty for failure to make a report as to 
        certain small business stock (sec. 6652(k));
          (3) the penalty for failure of a foreign corporation 
        to file a return of personal holding company tax (sec. 
        6683); and
          (4) the penalty for failure to make required payments 
        for entities electing not to have the required taxable 
        year (sec. 7519).

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment.

2. Clarification of period for filing claims for refunds (sec. 1282 of 
                  the bill and sec. 6512 of the Code)

                              Present Law

    The Code contains a series of limitations on tax refunds. 
Section 6511 of the Code provides both a limitation on the time 
period in which a claim for refund can be made (section 
6511(a)) and a limitation on the amount that can be allowed as 
a refund (section 6511(b)).Section 6511(a) provides the general 
rule that a claim for refund must be filed within 3 years of the date 
of the return or 2 years of the date of payment of the taxes at issue, 
whichever is later. Section 6511(b) limits the refund amount that can 
be covered: if a return was filed, a taxpayer can recover amounts paid 
within 2 years before the claim. Section 6512(b)(3) incorporates these 
rules where taxpayers who challenge deficiency notices in Tax Court are 
found to be entitled to refunds.
    In Commissioner v. Lundy, 116 S. Ct. 647 (1996), the 
taxpayer had not filed a return, but received a notice of 
deficiency within 3 years after the date the return was due and 
challenged the proposed deficiency in Tax Court. The Supreme 
Court held that the taxpayer could not recover overpayments 
attributable to withholding during the tax year, because no 
return was filed and the 2-year ``look back'' rule applied. 
Since overwithheld amounts are deemed paid as of the date the 
taxpayer's return was first due (i.e., more than 2 years before 
the notice of deficiency was issued), such overpayments could 
not be recovered. By contrast, if the same taxpayer had filed a 
return on the date the notice of deficiency was issued, and 
then claimed a refund, the 3-year ``look back'' rule would 
apply, and the taxpayer could have obtained a refund of the 
overwithheld amounts.

                           Reasons for Change

    The Committee believes that it is appropriate to eliminate 
this disparate treatment.

                        Explanation of Provision

    The bill permits taxpayers who initially fail to file a 
return, but who receive a notice of deficiency and file suit to 
contest it in Tax Court during the third year after the return 
due date, to obtain a refund of excessive amounts paid within 
the 3-year period prior to the date of the deficiency notice.

                             Effective Date

    The provision applies to claims for refund with respect to 
tax years ending after the date of enactment.

3. Repeal of authority to disclose whether a prospective juror has been 
       audited (sec. 1283 of the bill and sec. 6103 of the Code)

                              Present Law

    In connection with a civil or criminal tax proceeding to 
which the United States is a party, the Secretary must 
disclose, upon the written request of either party to the 
lawsuit, whether an individual who is a prospective juror has 
or has not been the subject of an audit or other tax 
investigation by the Internal Revenue Service (sec. 
6103(h)(5)).

                           Reasons for Change

    This disclosure requirement, as it has been interpreted by 
several recent court decisions, has created significant 
difficulties in the civil and criminal tax litigation process. 
First, the litigation process can be substantially slowed. It 
can take the Secretary a considerable period of time to compile 
the information necessary for a response (some courts have 
required searches going back as far as 25 years). Second, 
providing early release of the list of potential jurors to 
defendants (which several recent court decisions have required, 
to permit defendants to obtain disclosure of the information 
from the Secretary) can provide an opportunity for harassment 
and intimidation of potential jurors in organized crime, drug, 
and some tax protester cases. Third, significant judicial 
resources have been expended in interpreting this procedural 
requirement that might better be spent resolving substantive 
disputes. Fourth, differing judicial interpretations of this 
provision have caused confusion. In some instances, defendants 
convicted of criminal tax offenses have obtained reversals of 
those convictions because of failures to comply fully with this 
provision.

                        Explanation of Provision

    The bill repeals the requirement that the Secretary 
disclose, upon the written request of either party to the 
lawsuit, whether an individual who is a prospective juror has 
or has not been the subject of an audit or other tax 
investigation by the Internal Revenue Service.

                             Effective Date

    The provision is effective for judicial proceedings 
commenced after the date of enactment.

4. Clarify statute of limitations for items from pass-through entities 
           (sec. 1284 of the bill and sec. 6501 of the Code)

                              Present Law

    Pass through entities (such as S corporations, 
partnerships, and certain trusts) generally are not subject to 
income tax on their taxable income. Instead, these entities 
file information returns and the entities' shareholders (or 
beneficial owners) report their pro rata share of the gross 
income and are liable for any taxes due.
    Some believe that, prior to 1993, it may have been unclear 
as to whether the statute of limitations for adjustments that 
arise from distributions from passthrough entities should be 
applied at the entity or individual level (i.e., whether the 3-
year statute of limitations for assessments runs from the time 
that the entity files its information return or from the time 
that a shareholder timely files his or her income tax return). 
In 1993, the Supreme Court held that the limitations period for 
assessing the income tax liability of an S corporation 
shareholder runs from the date the shareholder's return is 
filed (Bufferd v. Comm., 113 S. Ct. 927 (1993)).

                           Reasons for Change

    Uncertainty regarding the correct statute of limitations 
hinders the resolution of factual and legal issues and creates 
needless litigation over collateral matters.

                        Explanation of Provision

    The bill clarifies that the return that starts the running 
of the statute of limitations for a taxpayer is the return of 
the taxpayer and not the return of another person from whom the 
taxpayer has received an item of income, gain, loss, deduction, 
or credit.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment.

 5. Awarding of administrative costs and attorneys fees (sec. 1285 of 
                  the bill and sec. 7430 of the Code)

                              Present Law

    Any person who substantially prevails in any action brought 
by or against the United States in connection with the 
determination, collection, or refund of any tax, interest, or 
penalty may be awarded reasonable administrative costs incurred 
before the IRS and reasonable litigation costs incurred in 
connection with any court proceeding.
    No time limit is specified for the taxpayer to apply to the 
IRS for an award of administrative costs. In addition, no time 
limit is specified for a taxpayer to appeal to the Tax Court an 
IRS decision denying an award of administrative costs. Finally, 
the procedural rules for adjudicating a denial of 
administrative costs are unclear.

                           Reasons for Change

    The proper procedures for applying for a cost award are 
uncertain in some instances. Clarifying these procedures will 
decrease litigation over these procedural issues and will 
provide for expedited settlement of these claims.

                        Explanation of Provision

    The bill provides that a taxpayer who seeks an award of 
administrative costs must apply for such costs within 90 days 
of the date on which the taxpayer was determined to be a 
prevailing party. The bill also provides that a taxpayer who 
seeks to appeal an IRS denial of an administrative cost award 
must petition the Tax Court within 90 days after the date that 
the IRS mails the denial notice.
    The bill clarifies that dispositions by the Tax Court of 
petitions relating only to administrative costs are to be 
reviewed in the same manner as other decisions of the Tax 
Court.

                             Effective Date

    The provision is effective with respect to costs incurred 
in civil actions or proceedings commenced after the date of 
enactment.

 6. Prohibition on browsing (secs. 1286 and 1287 of the bill and secs. 
                      7213A and 7431 of the Code)

                              Present Law

    The Internal Revenue Code prohibits disclosure of tax 
returns and return information, except to the extent 
specifically authorized by the Internal Revenue Code (sec. 
6103). Unauthorized willful disclosure is a felony punishable 
by a fine not exceeding $5,000 or imprisonment of not more than 
five years, or both (sec. 7213). An action for civil damages 
also may be brought for unauthorized disclosure (sec. 7431).
    There is no explicit criminal penalty in the Internal 
Revenue Code for unauthorized inspection (absent subsequent 
disclosure) of tax returns and return information. Such 
inspection is, however, explicitly prohibited by the Internal 
Revenue Service (``IRS'').\13\ In a recent case, an individual 
was convicted of violating the Federal wire fraud statute (18 
U.S.C. 1343 and 1346) and a Federal computer fraud statute (18 
U.S.C. 1030) for unauthorized inspection. However, the U.S. 
First Circuit Court of Appeals overturned this conviction.\14\ 
Unauthorized inspection of information of any department or 
agency of the United States (including the IRS) via computer 
was made a crime under 18 U.S.C. 1030 by the Economic Espionage 
Act of 1996.\15\ This provision does not apply to unauthorized 
inspection of paper documents.
---------------------------------------------------------------------------
    \13\ IRS Declaration of Privacy Principles, May 9, 1994.
    \14\ U.S. v. Czubinski, DTR 2/25/97, P. K-2.
    \15\ P.L. 104-294, sec. 201 (October 11, 1996).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that it is important to have a 
criminal penalty in the Internal Revenue Code to punish this 
type of behavior. The Committee also believes that it is 
appropriate to provide for civil damages for unauthorized 
inspection parallel to civil damages for unauthorized 
disclosure.

                       Explanation of Provisions

Criminal penalties

    The bill creates a new criminal penalty in the Internal 
Revenue Code. The penalty is imposed for willful inspection 
(except as authorized by the Code) of any tax return or return 
information by any Federal employee or IRS contractor. The 
penalty also applies to willful inspection (except as 
authorized) by any State employee or other person who acquired 
the taxreturn or return information under specific provisions 
of section 6103. Upon conviction, the penalty is a fine in any amount 
not exceeding $1,000,\16\ or imprisonment of not more than 1 year, or 
both, together with the costs of prosecution. In addition, upon 
conviction, an officer or employee of the United States would be 
dismissed from office or discharged from employment.
---------------------------------------------------------------------------
    \16\ Pursuant to 18 U.S.C. sec. 3571 (added by the Sentencing 
Reform Act of 1984), the amount of the fine is not more than the 
greater of the amount specified in this new Code section or $100,000.
---------------------------------------------------------------------------
    The Congress views any unauthorized inspection of tax 
returns or return information as a very serious offense; this 
new criminal penalty reflects that view. The Congress also 
believes that unauthorized inspection warrants very serious 
personnel sanctions against IRS employees who engage in 
unauthorized inspection, and that it is appropriate to fire 
employees who do this.

Civil damages

    The bill amends the provision providing for civil damages 
for unauthorized disclosure by also providing for civil damages 
for unauthorized inspection. Damages are available for 
unauthorized inspection that occurs either knowingly or by 
reason of negligence. Accidental or inadvertent inspection that 
may occur (such as, for example, by making an error in typing 
in a TIN) would not be subject to damages because it would not 
meet this standard. The bill also provides that no damages are 
available to a taxpayer if that taxpayer requested the 
inspection or disclosure.
    The bill also requires that, if any person is criminally 
charged by indictment or information with inspection or 
disclosure of a taxpayer's return or return information in 
violation of section 7213 (a) or (b), section 7213A (as added 
by the bill), or 18 USC section 1030(a)(2)(B), the Secretary 
notify that taxpayer as soon as practicable of the inspection 
or disclosure.

                             Effective Date

    The bill is effective for violations occurring on or after 
the date of enactment.

         Title XIII. Estate, Gift, and Trust Tax Simplification

1. Eliminate gift tax filing requirements for gifts to charities (sec. 
              1301 of the bill and sec. 6019 of the Code)

                              Present Law

    A gift tax generally is imposed on lifetime transfers of 
property by gift (sec. 2501). In computing the amount of 
taxable gifts made during a calendar year, a taxpayer generally 
may deduct the amount of any gifts made to a charity (sec. 
2522). Generally, this charitable gift deduction is available 
for outright gifts to charity, as well as gifts of certain 
partial interests in property (such as a remainder interest). A 
gift of a partial interest in property must be in a prescribed 
form in order to qualify for the deduction.
    Individuals who make gifts in excess of $10,000 to any one 
donee during the calendar year generally are required to file a 
gift tax return (sec. 6019). This filing requirement applies to 
all gifts, whether charitable or noncharitable, and whether or 
not the gift qualifies for a gift tax charitable deduction. 
Thus, under current law, a gift tax return is required to be 
filed for gifts to charity in excess of $10,000, even though no 
gift tax is payable on the transfer.

                           Reasons for Change

    Because a charitable gift does not give rise to a gift tax 
liability, many donors are unaware of the requirement to file a 
gift tax return for charitable gifts in excess of $10,000. 
Failure to file a gift tax return under these circumstances 
could expose the donor to penalties. The bill eliminates this 
potential trap for the unwary.

                        Explanation of Provision

    The bill provides that gifts to charity are not subject to 
the gift tax filing requirements of section 6019, as long as 
the entire value of the transferred property qualifies for the 
gift tax charitable deduction under section 2522. The filing 
requirements for gifts of partial interests in property remain 
unchanged.

                             Effective Date

    The provision is effective for gifts made after the date of 
enactment.

2. Clarification of waiver of certain rights of recovery (sec. 1302 of 
            the bill and secs. 2207A and 2207B of the Code)

                              Present Law

    For estate and gift tax purposes, a marital deduction is 
allowed for qualified terminable interest property (QTIP). Such 
property generally is included in the surviving spouse's gross 
estate upon his or her death. The surviving spouse's estate is 
entitled to recover the portion of the estate taxattributable 
to inclusion of QTIP from the person receiving the property, unless the 
spouse directs otherwise by will (sec. 2207A). For this purpose, a will 
provision specifying that all taxes shall be paid by the estate is 
sufficient to waive the right of recovery.
    A decedent's gross estate includes the value of previously 
transferred property in which the decedent retains enjoyment or 
the right to income (sec. 2036). The estate is entitled to 
recover from the person receiving the property a portion of the 
estate tax attributable to the inclusion (sec. 2207B). This 
right may be waived only by a provision in the will (or 
revocable trust) specifically referring to section 2207B.

                           Reasons for Change

    It is understood that persons utilizing standard 
testamentary language often inadvertently waive the right of 
recovery with respect to QTIP. Similarly, persons waiving a 
right to contribution are unlikely to refer to the code section 
granting the right. Accordingly, allowing the right of recovery 
(or right of contribution) to be waived only by specific 
reference should simplify the drafting of wills by better 
conforming with the testator's likely intent.

                        Explanation of Provision

    The bill provides that the right of recovery with respect 
to QTIP is waived only to the extent that language in the 
decedent's will or revocable trust specifically so indicates 
(e.g., by a specific reference to QTIP, the QTIP trust, section 
2044, or section 2207A). Thus, a general provision specifying 
that all taxes be paid by the estate is no longer sufficient to 
waive the right of recovery.
    The bill also provides that the right of contribution for 
property over which the decedent retained enjoyment or the 
right to income is waived by a specific indication in the 
decedent's will or revocable trust, but specific reference to 
section 2207B is no longer required.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

  3. Transitional rule under section 2056A (sec. 1303 of the bill and 
                        sec. 2056A of the Code)

                              Present Law

    A ``marital deduction'' generally is allowed for estate and 
gift tax purposes for the value of property passing to a 
spouse. The Technical and Miscellaneous Revenue Act of 1988 
(``TAMRA'') denied the marital deduction for property passing 
to an alien spouse outside a qualified domestic trust 
(``QDT''). An estate tax generally is imposed on corpus 
distributions from a QDT.
    TAMRA defined a QDT as a trust that, among other things, 
required all trustees be U.S. citizens or domestic 
corporations. This provision was modified in the Omnibus Budget 
Reconciliation Acts of 1989 and 1990 to require that at least 
one trustee be a U.S. citizen or domestic corporation and that 
no corpus distribution be made unless such trustee has the 
right to withhold any estate tax imposed on the distribution 
(the ``withholding requirement'').

                           Reasons for Change

    Wills drafted under the TAMRA rules must be revised to 
conform with the withholding requirement, even though both the 
TAMRA rule and its successor ensure that a U.S. trustee is 
personally liable for the estate tax on a QDT. Reinstatement of 
the TAMRA rule for wills drafted in reliance upon it reduces 
the number of will revisions necessary to comply with statutory 
changes, thereby simplifying estate planning.

                        Explanation of Provision

    Certain trusts created before the enactment of the Omnibus 
Budget Reconciliation Act of 1990 are treated as satisfying the 
withholding requirement if the governing instruments require 
that all trustees be U.S. citizens or domestic corporations.

                             Effective Date

    The provision applies as if included in the Omnibus Budget 
Reconciliation Act of 1990.

 4. Clarifications relating to disclaimers (sec. 1304 of the bill and 
                         sec. 2518 of the Code)

                              Present Law

    Historically, there must be acceptance of a gift in order 
for the gift to be completed under State law and there is no 
taxable gift for Federal gift tax purposes unless there is a 
completed gift. Most States have rules that provide that, where 
there is a disclaimer of a gift, the property passes to the 
person who is entitled to the property had the disclaiming 
party died before the purported transfer.
    In the Tax Reform Act of 1976, Congress provided a uniform 
disclaimer rule (section 2518) that specified how and when a 
disclaimer under State law must be made in order to be 
effective for Federal transfer tax purposes. Under section 
2518, a State law type disclaimer is effective for Federal 
transfer tax purposes if it is an irrevocable and unqualified 
refusal to accept an interest in property and certain other 
requirements are satisfied. One of these other requirements is 
that the disclaimer generally must be made in writing not later 
than nine months after the transfer creating the interest 
occurs. Section 2518 is not presently effective for Federal tax 
purposes other than transfer taxes.
    In 1981, Congress added a rule to section 2518 that allowed 
certain transfers of property to be treated as a qualified 
disclaimer. In order to qualify, these transfer-type 
disclaimers must be a written transfer of the disclaimant's 
``entire interest in the property'' to persons who would have 
received the property had there been a valid disclaimer under 
State law (sec. 2518(c)(3)). Like other disclaimers, the 
transfer-type disclaimer generally must be made within nine 
months of the transfer creating the interest.

                           Reasons for Change

    Under present law, a State law type disclaimer can be a 
qualified disclaimer even (1) where it is only a partial 
disclaimer of the property interest, or (2) where the 
disclaimant spouse retains an interest in the property. In 
contrast, it is presently unclear whether a transfer-type 
disclaimer can qualify under similar circumstances. Thus, in 
order to equalize the treatment of State law type disclaimers 
and transfer-type disclaimers, the Committee believes it is 
appropriate to allow a transfer-type disclaimer of an undivided 
portion of property or a transfer-type disclaimer where the 
disclaimant spouse has retained an interest in the property to 
be treated as a qualified disclaimer for transfer tax purposes.
    The Committee also believes that qualified disclaimers 
should be effective for Federal income tax purposes, as well as 
transfer tax purposes.

                        Explanation of Provision

    The bill allows a transfer-type disclaimer of an 
``undivided portion'' of the disclaimant transferor's interest 
in property to qualify under section 2518. Also, the bill 
allows a spouse to make a qualified transfer-type disclaimer 
where the disclaimed property is transferred to a trust in 
which the disclaimant spouse has an interest (e.g., a credit 
shelter trust). Finally, the bill provides that a qualified 
disclaimer for transfer tax purposes under section 2518 is also 
effective for Federal income tax purposes (e.g., disclaimers of 
interests in annuities and income in respect of a decedent).
    None of the foregoing provisions are intended to create an 
inference regarding the Federal tax treatment of disclaimers 
under present law.

                             Effective Date

    The provision applies to disclaimers made after the date of 
enactment.

 5. Amend ``5 or 5 power'' (sec. 1305 of the bill and secs. 2041(b)(2) 
                        and 2514(e) of the Code)

                              Present Law

    The exercise or release of a general power of appointment 
generally is considered a gift by the person holding the power 
(sec. 2514(b)). A special rule, however, provides that the 
lapse of a power of appointment during the life of the person 
holding the power is considered a release (and thus a taxable 
gift) only to the extent that the value of the property over 
which the power lapsed exceeds the greater of $5,000 or five 
percent of the value of the assets of the trust (sec. 2514(e)). 
A similar provision applies for purposes of estate taxation 
(sec. 2041(b)(2)).

                           Reasons for Change

    Because the present-law limitation equals the greater of 
$5,000 or five percent of the value of the assets of the trust, 
the $5,000 limitation has the practical effect of being binding 
only on those trusts with assets of $200,000 or less. The 
Committee understands that the limitation often is avoided 
through a series of complicated drafting techniques. Raising 
the limitation to $10,000 will ease the burden on these smaller 
trusts by eliminating the need to engage in such complicated 
drafting techniques.

                        Explanation of Provision

    The bill increases the limitations in sections 2514(e) and 
2041(b)(2) to the greater of $10,000 or 5 percent.

                             Effective Date

    The provision applies to lapses occurring in taxable years 
beginning after the date of enactment.

6. Treatment for estate tax purposes of short-term obligations held by 
  nonresident aliens (sec. 1306 of the bill and sec. 2105 of the Code)

                              Present Law

    The United States imposes estate tax on assets of 
noncitizen nondomiciliaries that were situated in the United 
States at the time of the individual's death. Debt obligations 
of a U.S. person, the United States, a political subdivision of 
a State, or the District of Columbia are considered property 
located within the United States if held by a nonresident not a 
citizen of the United States (sec. 2014(c)).
    Special rules apply to treat certain bank deposits and debt 
instruments the income from which qualifies for the bank 
deposit interest exemption and the portfolio interest exemption 
as property from without the United States despite the fact 
that such items are obligations of a U.S. person, the United 
States, a political subdivision of a State, or the District of 
Columbia (sec. 2105(b)). Income from such items is exempt from 
U.S. income tax in the hands of the nonresident recipient 
(secs. 871(h) and 871(I)(2)(A)). The effect of these special 
rules is to exclude these items from the U.S. gross estate of a 
nonresident not a citizen of the United States. However, 
because of an amendment to section 871(h) made by the Tax 
Reform Act of 1986, these special rules no longer cover 
obligations that generate short-term OID income despite the 
fact that such income is exempt from U.S. income tax in the 
hands of the nonresident recipient (sec. 871(g)(1)(B)(I)).

                           Reasons for Change

    The Committee believes that the income and estate tax 
treatments of short-term OID obligations held by nonresident 
aliens should conform. A purpose of exempting short-term OID 
income derived by nonresident aliens from U.S. income tax is to 
enhance the ability of U.S. borrowers to raise funds from 
foreign lenders, and such purpose is hindered by the lack of a 
corresponding exemption for U.S. estate tax. Moreover, to the 
extent the interest from such an obligation is exempt from U.S. 
income tax, the inclusion of the instrument in the nonresident 
noncitizen's U.S. estate would be a trap for the unwary.

                        Explanation of Provision

    The bill provides that any debt obligation, the income from 
which would be eligible for the exemption for short-term OID 
under section 871(g)(1)(B)(I) if such income were received by 
the decedent on the date of his death, is treated as property 
located outside of the United States in determining the U.S. 
estate tax liability of a nonresident not a U.S. citizen. No 
inference is intended with respect to the estate tax treatment 
of such obligations under present law.

                             Effective Date

    The provision is effective for estates of decedents dying 
after the date of enactment.

7. Certain revocable trusts treated as part of estate (sec. 1307 of the 
             bill and secs. 646 and 2652(b)(1) of the Code)

                              Present Law

    Both estates and revocable inter vivos trusts can function 
to settle the affairs of a decedent and distribute assets to 
heirs. In the case of revocable inter vivos trusts, the grantor 
transfers property into a trust which is revocable during his 
or her lifetime. Upon the grantor's death, the power to revoke 
ceases and the trustee then performs the settlement functions 
typically performed by the executor of an estate. While both 
estates and revocable trusts perform essentially the same 
function after the testator or grantor's death, there are a 
number of ways in which an estate and a revocable trust operate 
differently. First, there can be only one estate per decedent 
while there can be more than one revocable trust. Second, 
estates are in existence only for a reasonable period of 
administration; revocable trusts can perform the same 
settlement functions as an estate, but may continue in 
existence thereafter as testamentary trusts.
    Numerous differences presently exist between the income tax 
treatment of estates and revocable trusts, including: (1) 
estates are allowed a charitable deduction for amounts 
permanently set aside for charitable purposes while post death 
revocable trusts are allowed a charitable deduction only for 
amounts paid to charities; (2) the active participation 
requirement the passive loss rules under section 469 is waived 
in the case of estates (but not revocable trusts) for two years 
after the owner's death; and (3) estates can qualify for 
section 194 amortization of reforestation expenditures, while 
trusts do not.

                           Reasons for Change

    The use of revocable trusts may offer certain non-tax 
advantages for estate planning as compared to a traditional 
estate plan. There are several differences, however, between 
the Federal tax treatment of revocable trusts and an estate. 
These differences may discourage individuals from utilizing 
revocable trusts for estate planning where they might otherwise 
be appropriate or efficient. Accordingly, in an effort to 
minimize these tax differences, the Committee believes it is 
appropriate to allow an election to treat a revocable trust as 
part of the decedent's estate during a reasonable period of 
administration.

                        Explanation of Provision

    The bill provides an irrevocable election to treat a 
qualified revocable trust as part of the decedent's estate for 
Federal income tax purposes. This elective treatment is 
effective from the date of the decedent's death until two years 
after his or her death (if no estate tax return is required) 
or, if later, six months after the final determination of 
estate tax liability (if an estate tax return is required). The 
election must be made by both the executor of the decedent's 
estate (if any) and the trustee of the revocable trust no later 
than the time required for filing the income tax return of the 
estate for its first taxable year, taking into account any 
extensions. A conforming change is made to section 2652(b) for 
generation-skipping transfer tax purposes.
    For this purpose, a qualified revocable trust is any trust 
(or portion thereof) which was treated under section 676 as 
owned by the decedent with respect to whom the election is 
being made, by reason of a power in the grantor (i.e., trusts 
that are treated as owned by the decedent solely by reason of a 
power in a nonadverse party would not qualify).
    As described below, the separate share rule may apply when 
a qualified revocable trust is treated as part of the 
decedent's estate.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

 8. Distributions during first 65 days of taxable year of estate (sec. 
             1308 of the bill and sec. 663(b) of the Code)

                              Present Law

    In general, trusts and estates are treated as conduits for 
Federal income tax purposes; income received by a trust or 
estate that is distributed to a beneficiary in the trust or 
estate's taxable year ``ending with or within'' the taxable 
year of the beneficiary is taxable to the beneficiary in that 
year; income that is retained by the trust or estate is 
initially taxable to the trust or estate. In the case of 
distributions of previously accumulated income by trusts (but 
not estates), there may be additional tax under the so-called 
``throwback'' rules if the beneficiary to whom the 
distributions were made has marginal rates higher than those of 
the trust. Under the ``65-day rule,'' a trust may elect to 
treat distributions paid within 65 days after the close of its 
taxable year as paid on the last day of its taxable year. The 
65-day rule is not applicable to estates.

                           Reasons for Change

    In order to minimize the tax differences between estates 
and revocable trusts, the Committee believes that the 65-day 
rule should be allowed to estates as well as to trusts.

                        Explanation of Provision

    The bill extends application of the 65-day rule to 
distributions by estates. Thus, an executor can elect to treat 
distributions paid within 65 days after the close of the 
estate's taxable year as having been paid on the last day of 
such taxable year.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment.

9. Separate share rules available to estates (sec. 1309 of the bill and 
                        sec. 663(c) of the Code)

                              Present Law

    Trusts with more than one beneficiary must use the 
``separate share'' rule in order to provide different tax 
treatment of distributions to different beneficiaries to 
reflect the income earned by different shares of the trust's 
corpus.\17\ Treasury regulations provide that ``[t]he 
application of the separate share rule . . . will generally 
depend upon whether distributions of the trust are to be made 
in substantially the same manner as if separate trusts had been 
created. . . . Separate share treatment will not be applied to 
a trust or portion of a trust subject to a power to distribute, 
apportion, or accumulate income or distribute corpus to or for 
the use of one or more beneficiaries within a group or class of 
beneficiaries, unless the payment of income, accumulated 
income, or corpus of a share of one beneficiary cannot affect 
the proportionate share of income, accumulated income, or 
corpus of any shares of the other beneficiaries, or unless 
substantially proper adjustment must thereafter be made under 
the governing instrument so that substantially separate and 
independent shares exist.'' (Treas. Reg. sec. 1.663(c)-3). The 
separate share rule presently does not apply to estates.
---------------------------------------------------------------------------
    \17\ Application for the separate share rule is not elective; it is 
mandatory if there are separate shares in the trust.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee understands that estates typically do not 
have separate shares. Nonetheless, where separate shares do 
exist in an estate, the inapplicability of the separate share 
rule to estates may result in one beneficiary or class of 
beneficiaries being taxed on income payable to, or accruing to, 
a separate beneficiary or class of beneficiaries. Accordingly, 
the Committee believes that a more equitable taxation of an 
estate and its beneficiaries would be achieved with the 
application of the separate share rule to an estate where, 
under the provisions of the decedent's will or applicable local 
law, there are separate shares in the estate.

                        Explanation of Provision

    The bill extends the application of the separate share rule 
to estates. There are separate shares in an estate when the 
governing instrument of the estate (e.g., the will and 
applicable local law) creates separate economic interests in 
one beneficiary or class of beneficiaries such that the 
economic interests of those beneficiaries (e.g., rights to 
income or gains from specified items of property) are not 
affected by economic interests accruing to another separate 
beneficiary or class of beneficiaries. For example, a separate 
share in an estate would exist where the decedent's will 
provides that all of the shares of a closely-held corporation 
are devised to one beneficiary and that any dividends paid to 
the estate by that corporation should be paid only to that 
beneficiary and any such dividends would not affect any other 
amounts which that beneficiary would receive under the will. As 
in the case of trusts, the application of the separate share 
rule is mandatory where separate shares exist.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

10. Executor of estate and beneficiaries treated as related persons for 
  disallowance of losses (sec. 1310 of the bill and secs. 267(b) and 
                          1239(b) of the Code)

                              Present Law

    Section 267 disallows a deduction for any loss on the sale 
of an asset to a person related to the taxpayer. For the 
purposes of section 267, the following parties are related 
persons: (1) a trust and the trust's grantor, (2) two trusts 
with the same grantor, (3) a trust and a beneficiary of the 
trust, (4) a trust and a beneficiary of another trust, if both 
trusts have the same grantor, and (5) a trust and a corporation 
the stock of which is more than 50 percent owned by the trust 
or the trust's grantor.
    Section 1239 disallows capital gain treatment on the sale 
of depreciable property to a related person. For purposes of 
section 1239, a trust and any beneficiary of the trust are 
treated as related persons, unless the beneficiary's interest 
is a remote contingent interest.
    Neither section 267 or section 1239 presently treat an 
estate and a beneficiary of the estate as related persons.

                           Reasons for Change

    The Committee believes that the disallowance rules under 
sections 267 and 1239 with respect to transactions between 
related parties should apply to an estate and a beneficiary of 
that estate for the same reasons that such rules apply to a 
trust and a beneficiary of that trust.

                        Explanation of Provision

    Under the bill, an estate and a beneficiary of that estate 
are treated as related persons for purposes of sections 267 and 
1239, except in the case of a sale or exchange in satisfaction 
of a pecuniary bequest.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment.

 11. Limitation on taxable year of estates (sec. 1311 of the bill and 
                         sec. 645 of the Code)

                              Present Law

    The taxability of distributions from a trust or estate is 
based on the amount of income received by the trust or estate 
in the trust or estate's taxable year ``ending with or within'' 
the taxable year of the beneficiary (typically a calendar 
year). Trusts are required to use a calendar year and, 
consequently, income of a trust that is distributed to a 
calendar-year beneficiary in the year earned is taxed to the 
beneficiary in the year earned. Estates, on the other hand, are 
allowed to use any fiscal year. Consequently, in the case of 
estates, the taxation of distributions to a calendar-year 
beneficiary in up to the last 11 months of the calendar year 
can be deferred until the next taxable year depending upon the 
fiscal year selected.

                           Reasons for Change

    The Committee believes that allowing an estate to use a 
taxable year significantly different than the calendar year may 
result in an improper deferral of income by the beneficiaries 
of the estate. Thus, the Committee believes that the choice of 
taxable years allowable to an estate should be appropriately 
limited.

                        Explanation of Provision

    The bill limits the taxable year of an estate to a year 
ending on October 31, November 30, or December 31.\18\ Thus, 
the maximum deferral allowable to a calendar-year beneficiary 
is with respect to distributions made in the last two months of 
the calendar year.
---------------------------------------------------------------------------
    \18\ If an election is made to treat a revocable trust as part of 
the estate under section 14601 of the bill, such trust would switch to 
the taxable year of the estate during the period that the election was 
effective.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

 12. Simplified taxation of earnings of pre-need funeral trusts (sec. 
               1312 of the bill and sec. 684 of the Code)

                              Present Law

    A pre-need funeral trust is an arrangement where an 
individual purchases funeral services or merchandise from a 
funeral home in advance of the individual's death. The 
individual enters into a contract with the provider of such 
services or merchandise whereby the individual selects the 
services or merchandise to be provided upon his or her death, 
and agrees to pay for them in advance of his or her death. Such 
amounts (or a portion thereof) are held in trust during the 
individual's lifetime and are paid to the seller upon the 
individual's death.
    Under present law, pre-need funeral trusts generally are 
treated as grantor trusts, and the annual income earned by such 
trusts is taxed to the purchaser/grantor of the trust. Rev. 
Rul. 87-127. Any amount received from the trust by the seller 
(as payment for services or merchandise) is includible in the 
gross income of the seller.

                           Reasons for Change

    To the extent that pre-need funeral trusts are treated as 
grantor trusts under present law, numerous individual taxpayers 
are required to account for the earnings of such trusts on 
their tax returns, even though the earnings with respect to any 
one taxpayer may be small. The Committee believes that this 
recordkeeping burden on individuals could be eased, and that 
compliance with the tax laws would be improved, if such trusts 
instead were taxed at the entity level, with one simplified 
annual return filed by the trustee reporting the aggregate 
income from all such trusts administered by the trustee.

                        Explanation of Provision

    The bill allows the trustee of a pre-need funeral trust to 
elect special tax treatment for such a trust, to the extent the 
trust would otherwise be treated as a grantor trust. A 
qualified funeral trust is defined as one which meets the 
following requirements: (1) the trust arises as the result of a 
contract between a person engaged in the trade or business of 
providing funeral or burial services or merchandise and one or 
more individuals to have such services or property provided 
upon such individuals' death; (2) the only beneficiaries of the 
trust are individuals who have entered into contracts to have 
such services or merchandise provided upon their death; (3) the 
only contributions to the trust are contributions by or for the 
benefit of the trust beneficiaries; (4) the trust's only 
purpose is to hold and invest funds that will be used to make 
payments for funeral or burial services or merchandise for the 
trust beneficiaries; and (5) the trust has not accepted 
contributions totaling more than $7,000 by or for the benefit 
of any individual. For this purpose, ``contributions'' include 
all amounts transferred to the trust, regardless of how 
denominated in the contract. Contributions do not, however, 
include income or gain earned with respect to property in the 
trust. For purposes of applying the $7,000 limit, if a 
purchaser has more than one contract with a single trustee (or 
related trustees), all such trusts are treated as one trust. 
Similarly, if the Secretary of Treasury determines that a 
purchaser has entered into separate contracts with unrelated 
trustees to avoid the $7,000 limit described above, the 
Secretary may require that such trusts be treated as one trust. 
For contracts entered into after 1998, the $7,000 limit is 
indexed annually for inflation.
    The trustee's election to have this provision apply to a 
qualified funeral trust is to be made separately with respect 
to each purchaser's trust. It is anticipated that the 
Department of Treasury will issue prompt guidance with respect 
to the simplified reporting requirements so that if the 
election is made, a single annual trust return may be filed by 
the trustee, separately listing the amount of income earned 
with respect to each purchaser. If the election is made, the 
trust is not treated as a grantor trust and the amount of tax 
paid with respect to each purchaser's trust is determined in 
accordance with the income tax rate schedule generally 
applicable to estates and trusts (Code sec. 1(e)), but no 
deduction is allowed under section 642(b). The tax on the 
annual earnings of the trust is payable by the trustee.
    As under present law, amounts received from the trust by 
the seller are treated as payments for services and merchandise 
and are includible in the gross income of the seller. No gain 
or loss is recognized to the beneficiary of the trust for 
payments from the trust to the beneficiary upon cancellation of 
the contract, and the beneficiary takes a carryover basis in 
any assets received from the trust upon cancellation.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment.

13. Adjustments for gifts within three years of decedent's death (sec. 
         1313 of the bill and secs. 2035 and 2038 of the Code)

                              Present Law

    The first $10,000 of gifts of present interests to each 
donee during any one calendar year are excluded from Federal 
gift tax.
    The value of the gross estate includes the value of any 
previously transferred property if the decedent retained the 
power to revoke the transfer (sec. 2038). The gross estate also 
includes the value of any property with respect to which such 
power is relinquished during the three years before death (sec. 
2035). There has been significant litigation as to whether 
these rules require that certain transfers made from a 
revocable trust within three years of death be includible in 
the gross estate. See, e.g., Jalkut Estate v. Commissioner, 96 
T.C. 675 (1991) (transfers from revocable trust includible in 
gross estate); McNeely v. Commissioner, 16 F.3d 303 (8th Cir. 
1994) (transfers from revocable trust not includible in gross 
estate); Kisling v. Commissioner, 32 F.3d 1222 (8th Cir. 1994) 
(acq.) (transfers from revocable trust not includible in gross 
estate).

                           Reasons for Change

    The inclusion of certain property transferred during the 
three years before death is directed at transfers that would 
otherwise reduce the amount subject to estate tax by more than 
the amount subject to gift tax, disregarding appreciation 
between the times of gift and death. Because all amounts 
transferred from a revocable trust are subject to the gift tax, 
the Committee believes that inclusion of such amounts is 
unnecessary where the transferor has retained no power over the 
property transferred out of the trust. The Committee believes 
that clarifying these rules statutorily will lend certainty to 
these rules.

                        Explanation of Provision

    The provision codifies the rule set forth in the McNeely 
and Kisling cases to provide that a transfer from a revocable 
trust (i.e., a trust described under section 676) is treated as 
if made directly by the grantor. Thus, an annual exclusion gift 
from such a trust is not included in the gross estate.
    The provision also revises section 2035 to improve its 
clarity.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

    14. Clarify relationship between community property rights and 
 retirement benefits (sec. 1314 of the bill and sec. 2056(b)(7)(C) of 
                               the Code)

                              Present Law

Community property

    Under state community property laws, each spouse owns an 
undivided one-half interest in each community property asset. 
In community property jurisdictions, a nonparticipant spouse 
may be treated as having a vested community property interest 
in either his or her spouse's qualified plan, individual 
retirement arrangement (``IRA''), or simplified employee 
pension (``SEP'') plan.

Transfer tax treatment of qualified plans

    In the Retirement Equity Act of 1984 (``REA''), qualified 
retirement plans were required to provide automatic survivor 
benefits (1) in the case of a participant who retires under the 
plan, in the form of a qualified joint and survivor annuity, 
and (2) in the case of a vested participant who dies before the 
annuity starting date and who has a surviving spouse, in the 
form of a preretirement survivor annuity. A participant 
generally is permitted to waive such annuities, provided he or 
she obtains the written consent of his or her spouse.
    The Tax Reform Act of 1986 repealed the estate tax 
exclusion, formerly contained in sections 2039(c) and 2039(d), 
for certain interests in qualified plans owned by a 
nonparticipant spouse attributable to community property laws 
and made certain other changes to conform the transfer tax 
treatment of qualified and nonqualified plans.
    As a result of these changes made by REA and the Tax Reform 
Act of 1986, the transfer tax treatment of married couples 
residing in a community property state is unclear where either 
spouse is covered by a qualified plan.

                           Reasons for Change

    The Committee believes that survivorship interests in 
annuities in community property States should be accorded 
similar treatment to the tax treatment of interests in such 
annuities in non-community property States. Accordingly, the 
bill would clarify that the transfer at death of a survivorship 
interest in an annuity to a surviving spouse will be a 
deductible marital transfer under the QTIP rules regardless of 
whether the decedent's annuity interest arose out of his or her 
employment or arose under community property laws by reason of 
the employment of his or her spouse.

                        Explanation of Provision

    The bill clarifies that the marital deduction is available 
with respect to a nonparticipant spouse's interest in an 
annuity attributable to community property laws where he or she 
predeceases the participant spouse. Under the bill, the 
nonparticipant spouse's interest in an annuity arising under 
the community property laws of a State that passes to the 
surviving participant spouse may qualify for treatment as QTIP 
under section 2056(b)(7).
    The provision is not intended to create an inference 
regarding the treatment under present law of a transfer to a 
surviving spouse of the decedent spouse's interest in an 
annuity arising under community property laws.

                             Effective Date

    The provision applies to decedents dying, or waivers, 
transfers and disclaimers made, after the date of enactment.

    15. Treatment under qualified domestic trust rules of forms of 
ownership which are not trusts (sec. 1315 of the bill and sec. 2056A(c) 
                              of the Code)

                              Present Law

    A marital deduction generally is allowed for estate and 
gift tax purposes for the value of property passing to a 
spouse. The marital deduction is not available for property 
passing to an alien spouse outside a qualified domestic trust 
(``QDT''). An estate tax generally is imposed on corpus 
distributions from a QDT.
    Trusts are not permitted in some countries. (e.g., many 
civil law countries).\19\ As a result, it is not possible to 
create a QDT in those countries.
---------------------------------------------------------------------------
    \19\ Note that in some civil law States (e.g., Louisiana) an entity 
similar to a trust, called a usufruct, exists.
---------------------------------------------------------------------------

                           Reasons for Change

    The estate of a decedent with a nonresident spouse should 
not be precluded from qualifying for the marital deduction in 
situations where the use of a trust is prohibited by another 
country. Accordingly, the Committee believes it is appropriate 
to grant regulatory authority to allow qualification for the 
marital deduction in such situations where the Treasury 
Department determines that another similar arrangement allows 
the U.S. to retain jurisdiction and provides adequate security 
for the payment of U.S. transfer taxes on subsequent transfers 
by the surviving spouse of the property transferred by the 
decedent.

                        Explanation of Provision

    The bill provides the Treasury Department with regulatory 
authority to treat as trusts legal arrangements that have 
substantially the same effect as a trust. It is anticipated 
that such regulations, if any, would only permit a marital 
deduction with respect to non-trust arrangements under which 
the U.S. would retain jurisdiction and adequate security to 
impose U.S. transfer tax on transfers by the surviving spouse 
of the property transferred by the decedent. Possible 
arrangements could include the adoption of a bilateral treaty 
that provides for the collection of U.S. transfer tax from the 
noncitizen surviving spouse or a closing agreement process 
under which the surviving spouse waives treaty benefits, allows 
the U.S. to retain taxing jurisdiction and provides adequate 
security with respect to such transfer taxes.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

 16. Opportunity to correct certain failures under section 2032A (sec. 
              1316 of the bill and sec. 2032A of the Code)

                              Present Law

    For estate tax purposes, an executor may elect to value 
certain real property used in farming or other closely held 
business operations at its current use value rather than its 
highest and best use (sec. 2032A). A written agreement signed 
by each person with an interest in the property must be filed 
with the election.
    In 1984, section 2032A was amended to provide that if an 
executor makes a timely election that substantially complies 
with Treasury regulations, but fails to provide all required 
information or the signatures of all persons required to enter 
into the agreement, the executor may supply the missing 
information within a reasonable period of time (not exceeding 
90 days) after notification by the Treasury Department.
    Treasury regulations require that a notice of election and 
certain information be filed with the Federal estate tax return 
(Treas. Reg. sec. 20.2032A-8). The administrative policy of the 
Treasury Department is to disallow current use valuation 
elections unless the required information is supplied.

                           Reasons for Change

    It is understood that executors commonly fail to include 
with the filed estate tax return a recapture agreement signed 
by all persons with an interest in the property or all 
information required by Treasury regulations. It is believed 
that allowing such signatures or information to be supplied 
later is consistent with the legislative intent of section 
2032A and eases return filing.

                        Explanation of Provision

    The bill extends the procedures allowing subsequent 
submission of information to any executor who makes the 
election and submits the recapture agreement, without regard to 
compliance with the Treasury regulations. Thus, the bill allows 
the current use valuation election if the executor supplies the 
required information within a reasonable period of time (not 
exceeding 90 days) afternotification by the IRS. During that 
time period, the bill also allows the addition of signatures to a 
previously filed agreement.
    The Committee believes that the Treasury Department has 
taken an unnecessarily restrictive view of the 1984 amendment 
to section 2032A and intends no inference that the Treasury 
Department lacks the power, under the law in effect prior to 
the date of enactment, to correct the situation addressed by 
this provision. The Committee intends that, with respect to 
technically defective 2032A elections made prior to the date of 
enactment, prior law should be applied in a manner consistent 
with the provision.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

   17. Authority to waive requirement of U.S. trustee for qualified 
 domestic trusts (sec. 1317 of the bill and sec. 2056A(a)(1)(A) of the 
                                 Code)

                              Present Law

    In order for a trust to be a QDT, a U.S. trustee must have 
the power to approve all corpus distributions from the trust. 
In some countries, trusts cannot have any U.S. trustees. As a 
result, trusts established in those countries cannot qualify as 
a QDT.

                           Reasons for Change

    The estate of a decedent with a nonresident spouse should 
not be precluded from qualifying for the marital deduction in 
situations where the use of a U.S. trustee is prohibited by 
another country. Accordingly, the Committee believes it is 
appropriate to grant regulatory authority to allow 
qualification for the marital deduction in such situations 
where the Treasury Department determines that the U.S. can 
retain jurisdiction and other adequate security has been 
provided for the payment of U.S. transfer taxes on subsequent 
transfers by the surviving spouse of the property transferred 
by the decedent.

                        Explanation of Provision

    In order to permit the establishment of a QDT in those 
situations where a country prohibits a trust from having a U.S. 
trustee, the bill provides the Treasury Department with 
regulatory authority to waive the requirement that a QDT have a 
U.S. trustee. It is anticipated that such regulations, if any, 
provide an alternative mechanism under which the U.S. would 
retain jurisdiction and adequate security to impose U.S. 
transfer tax on transfers by the surviving spouse of the 
property transferred by the decedent. For example, one possible 
mechanism would be a closing agreement process under which the 
surviving spouse waives treaty benefits, allows the U.S. to 
retain taxing jurisdiction and provides adequate security with 
respect to such transfer taxes.

                             Effective Date

    The provision applies to decedents dying after the date of 
enactment.

       Title XIV. Excise Tax and Other Simplification Provisions

                A. Excise Tax Simplification Provisions

 1. Increase de minimis limit for after-market alterations subject to 
 heavy truck and luxury automobile excise taxes (sec. 1401 of the bill 
                  and sec. 4001 and 4051 of the Code)

                              Present Law

    An excise tax is imposed on retail sales of truck chassis 
and truck bodies suitable for use in a vehicle with a gross 
vehicle weight of over 33,000 pounds. The tax is equal to 12 
percent of the retail sales price. An excise tax also is 
imposed on retail sales of luxury automobiles. The tax 
currently is equal to 8 percent of the amount by which the 
retail sales price exceeds an inflation-adjusted $30,000 base. 
(The rate is scheduled to be reduced by 1 percentage point per 
year through 2002, and the tax is not imposed after 2002.) 
Anti-abuse rules prevent the avoidance of these taxes through 
separate purchases of major component parts. With certain 
exceptions, tax at the rate applicable to the vehicle is 
imposed on the subsequent installation of parts and accessories 
within six months after purchase of a taxable vehicle. The 
exceptions include a de minimis exception for parts and 
accessories with an aggregate price that does not exceed $200 
(or such other amount as Treasury may by regulation prescribe).

                           Reasons for Change

    Retailers are generally responsible for taxes on truck 
chassis and bodies and luxury automobiles. In the case of a 
subsequent installation, however, the owner or operator of the 
vehicle is responsible for paying the tax attributable to the 
installation and the installer is secondarily liable. 
Increasing the de minimis amount should significantly reduce 
the number of return filers and relieve many persons from the 
administrative burden of filing an excise tax return reporting 
a very small amount of tax.

                        Explanation of Provision

    The tax on subsequent installation of parts and accessories 
does not apply to parts and accessories with an aggregate price 
that does not exceed $1,000. Parts and accessories installed on 
a vehicle on or before that date are taken into account in 
determining whether the $1,000 threshold is exceeded. If the 
aggregate price of the pre-effective date parts and accessories 
does not exceed $200, they will not be subject to tax unless 
the aggregate price of all additions exceeds $1,000.

                             Effective Date

    The increase in the threshold for taxing after-market 
additions under the heavy truck and luxury car excise taxes is 
effective on January 1, 1998.

  2. Modify treatment of tires under the heavy highway vehicle retail 
      excise tax (sec. 1402 of the bill and sec. 4071 of the Code)

                              Present Law

    A 12-percent retail excise tax is imposed on certain heavy 
highway trucks and trailers, and on highway tractors. A 
separate manufacturers' excise tax is imposed on tires weighing 
more than 40 pounds. This tire tax is imposed as a fixed dollar 
amount which varies based on the weight of the tire. Because 
tires are taxed separately, the value of tires installed on a 
highway vehicle is excluded from the 12-percent excise tax on 
heavy highway vehicles. The determination of value is factual 
and has given rise to numerous tax audit challenges.

                           Reasons for Change

    Allowing a credit for the tire tax actually paid on truck 
tires will simplify the application of the retail truck tax.

                        Explanation of Provision

    The current exclusion of the value of tires installed on a 
taxable highway vehicle is repealed. Instead, a credit for the 
amount of manufacturers' excise tax actually paid on the tires 
is allowed.

                             Effective Date

    The provision is effective after December 31, 1997.

3. Simplification of excise taxes on distilled spirits, wine, and beer 
 (secs. 1411-1422 of the bill and secs. 5008, 5044, 5053, 5055, 5115, 
        5175, and 5207, and new secs. 5222 and 5418 of the Code)

                              Present Law

    Imported distilled spirits returned to plant.--Excise tax 
that has been paid on domestic distilled spirits is credited or 
refunded if the spirits are later returned to bonded premises. 
Tax is imposed on imported bottled spirits when they are 
withdrawn from customs custody, but the tax is not refunded or 
credited if the spirits are later returned to bonded premises.
    Cancellation of export bonds.--An exporter that withdraws 
distilled spirits from bonded warehouses for export or 
transportation to a customs bonded warehouse without the 
payment of tax must furnish a bond to cover the withdrawal. The 
required bonds are canceled ``on the submission of such 
evidence, records, and certification indicating exportation as 
the Secretary may by regulations prescribe.''
    Location of records of distilled spirits plant.--
Proprietors of distilled spirits plants are required to 
maintain records and reports relating to their production, 
storage, denaturation, and processing activities on the 
premises where the operations covered by the record are carried 
on.
    Transfers from brewery to distilled spirits plant.--A 
distilled spirits plant may receive on its bonded premises beer 
to be used in the production of distilled spirits only if the 
beer is produced on contiguous brewery premises.
    Sign not required for wholesale dealers.--Wholesale liquor 
dealers are required to post a sign identifying the firm as 
such. Failure to do so is subject to a penalty.
    Refund on returns of merchantable wine.--Excise tax paid on 
domestic wine that is returned to bond as unmerchantable is 
refunded or credited, and the wine is once again treated as 
wine in bond on the premises of a bonded wine cellar.
    Increased sugar limits for certain wine.--Natural wines may 
be sweetened to correct high acid content. For most wines, 
however, sugar cannot constitute more than 35 percent (by 
volume) of the combined sugar and juice used to produce the 
wine. Up to 60 percent sugar may be used in wine made from 
loganberries, currants, and gooseberries. If the amount of 
sugar used exceeds the applicable limitation, the wine must be 
labeled ``substandard.''
    Beer withdrawn for embassy use.--Imported beer to be used 
for the family and official use of representatives of foreign 
governments or public international organizations may be 
withdrawn from customs bonded warehouses without payment of 
excise tax. No similar exemption applies to domestic beer 
withdrawn from a brewery or entered into a bonded customs 
warehouse for the same authorized use.
    Beer withdrawn for destruction.--Removals of beer from a 
brewery are exempt from tax if the removal is for export, 
because the beer is unfit for beverage use, for laboratory 
analysis, research, development and testing, for the brewer's 
personal or family use, or as supplies for certain vessels and 
aircraft.
    Drawback on exported beer.--A domestic producer that 
exports beer may recover the tax (receive a ``drawback'') found 
to have been paid on the exported beer upon the ``submission of 
such evidence, records and certificates indicating 
exportation'' required by regulations.
    Imported beer transferred in bulk to brewery and imported 
wine transferred in bulk to wineries.--Imported beer and wine 
are subject to tax when removed from customs custody.

                           Reasons for Change

    Until 1980, the method of collecting alcohol excise taxes 
required the regular presence of Treasury Department inspectors 
at alcohol production facilities. In 1980, the method of 
collecting tax was changed to a bonded premises system under 
which examinations and collection procedures are similar to 
those used in connection with other Federal excise taxes.
    A number of reporting and recordkeeping requirements need 
to be modified to conform to the current collection system. 
Appropriate modification will allow the Bureau of Alcohol, 
Tobacco, and Firearms to administer alcohol excise taxes more 
efficiently and relieve taxpayers of unnecessary paperwork 
burdens.
    The current rules under which the Code permits tax-free 
removals of alcoholic beverages (or allows a credit or refund 
of tax on a return to bonded premises) result in inappropriate 
disparities in the treatment of different types of alcoholic 
beverages. In addition, these rules unduly limit available 
options for complying with environmental and other laws that 
regulate the destruction and disposition of alcoholic 
beverages. Under the bonded premises system, these rules can be 
liberalized without jeopardizing the collection of tax 
revenues.
    Other provisions of current law (i.e., the sign requirement 
and the sugar limits for certain wine) are outdated and should 
be repealed or revised.

                       Explanation of Provisions

    Imported distilled spirits returned to plant.--Refunds or 
credits of the tax are available for imported bottled spirits 
that are returned to distilled spirits plants.
    Cancellation of export bonds.--The certification 
requirement is relaxed to allow the bonds to be canceled if 
there is such proof of exportation as the Secretary may 
require.
    Location of records of distilled spirits plant.--Records 
and reports are permitted to be maintained elsewhere other than 
on the plant premises.
    Transfers from brewery to distilled spirits plant.--Beer 
may be brought from any brewery for use in the production of 
spirits. Such beer is exempt from excise tax, subject to 
Treasury regulations.
    Sign not required for wholesale dealers.--The requirement 
that a sign be posted is repealed.
    Refund on returns of merchantable wine.--A refund or credit 
is available in the case of all domestic wine returned to bond, 
whether or not unmerchantable.
    Increased sugar limits for certain wine.--Up to 60 percent 
sugar is permitted in any wine made from juice, such as 
cranberry or plum juice, with an acid content of 20 or more 
parts per thousand.
    Beer withdrawn for embassy use.--Subject to Treasury's 
regulatory authority, an exemption similar to that currently 
available for imported beer is provided for domestic beer.
    Beer withdrawn for destruction.--An exemption from tax is 
added for removals for destruction, subject to Treasury 
regulations.
    Drawback on exported beer.--The certification requirement 
is relaxed to allow a drawback of tax paid if there is such 
proof of exportation as the Secretary may by regulations 
require.
    Imported beer transferred in bulk to brewery and imported 
wine transferred in bulk to wineries.--Subject to Treasury 
regulations, beer imported in bulk may be withdrawn from 
customs custody and transferred in bulk to a brewery without 
payment of tax. The proprietor of the brewery to which the beer 
is transferred or of the winery to which the wine is 
transferred will be liable for the tax imposed on the 
withdrawal from customs custody and the importer will be 
relieved of liability.

                             Effective Date

    The provision to repeal the requirement that wholesale 
liquor dealers post a sign outside their place of business 
takes effect on the date of enactment. The other provisions 
take effect on the first day of the calendar quarter that 
begins at least 90 days after the date of enactment.

  4. Authority for Internal Revenue Service to grant exemptions from 
 excise tax registration requirements (sec. 1431 of the bill and sec. 
                           4222 of the Code)

                              Present Law

    The Code exempts certain types of sales (e.g., sales for 
use in further manufacture, sales for export, and sales for use 
by a State or local government or a nonprofit educational 
organization) from excise taxes imposed on manufacturers and 
retailers. These exemptions generally apply only if the seller, 
the purchaser, and any person to whom the article is resold by 
the purchaser (the second purchaser) are registered with the 
Internal Revenue Service. The IRS can waive the registration 
requirement for the purchaser and second purchaser in some but 
not all cases.

                           Reasons for Change

    Allowing the IRS to waive the registration requirement for 
purchasers and second purchasers in all cases will permit more 
efficient administration of the exemptions and reduce paperwork 
burdens on taxpayers.

                        Explanation of Provision

    The IRS is authorized to waive the registration requirement 
for purchasers and second purchasers in all cases.

                             Effective Date

    The provision applies to sales made pursuant to waivers 
issued after the date of enactment.

5. Repeal of excise tax deadwood provisions (sec. 1432 of the bill and 
           secs. 4051, 4495-4498, and 4681-4682 of the Code)

                              Present Law

    The Code includes a provision relating to a temporary 
reduction in the tax on piggyback trailers sold before July 18, 
1985, and provisions relating to the tax on the removal of hard 
minerals from the deep seabed before June 28, 1990.
    An excise tax is imposed on the sale or use by the 
manufacturer or importer of certain ozone-depleting chemicals 
(sec. 4681). The amount of the 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 was $5.80 per pound in 1996 and 
will increase by 45 cents per pound per year thereafter. The 
Code contains provisions for special rates of tax applicable to 
years before 1996 (e.g., sec. 4282(g)(1), (2), (3), and (5)).

                           Reasons for Change

    The elimination of out-of-date, ``deadwood'' provisions 
will simplify the Code by removing unneeded Code sections.

                        Explanation of Provision

    These provisions are repealed, as ``deadwood''.

                             Effective Date

    The provisions are effective on the date of enactment.

                     B. Tax-Exempt Bond Provisions

Overview

    Interest on State and local government bonds generally is 
excluded from gross income for purposes of the regular 
individual and corporate income taxes if the proceeds of the 
bonds are used to finance direct activities of these 
governmental units (Code sec. 103).
    Unlike the interest on governmental bonds, described above, 
interest on private activity bonds generally is taxable. A 
private activity bond is a bond issued by a State or local 
governmental unit acting as a conduit to provide financing for 
private parties in a manner violating either (1) a private 
business use and payment test or (2) a private loan 
restriction. However, interest on private activity bonds is not 
taxable if (1) the financed activity is specified in the Code 
and (2) at least 95 percent of the net proceeds of the bond 
issue is used to finance the specified activity.
    Issuers of State and local government bonds must satisfy 
numerous other requirements, including arbitrage restrictions 
(for all such bonds) and annual State volume limitations (for 
most private activity bonds) for the interest on these bonds to 
be excluded from gross income.

   1. Repeal of $100,000 limitation on unspent proceeds under 1-year 
   exception from rebate (sec. 1441 of the bill and sec. 148 of Code)

                              Present Law

    Subject to limited exceptions, arbitrage profits from 
investing bond proceeds in investments unrelated to the 
governmental purpose of the borrowing must be rebated to the 
Federal Government. No rebate is required if the gross proceeds 
of an issue are spent for the governmental purpose of the 
borrowing within six months after issuance.
    This six-month exception is deemed to be satisfied by 
issuers of governmental bonds (other than tax and revenue 
anticipation notes) and qualified 501(c)(3) bonds if (1) all 
proceeds other than an amount not exceeding the lesser of five 
percent or $100,000 are so spent within six months and (2) the 
remaining proceeds are spent within one year after the bonds 
are issued.

                           Reasons for Change

    Exemption of interest paid on State and local bonds from 
Federal income tax provides an implicit subsidy to State and 
local governments for their borrowing costs. The principal 
Federal policy concern underlying the arbitrage rebate 
requirement is to discourage the earlier and larger than 
necessary issuance of tax-exempt bonds to take advantage of the 
opportunity to profit by investing funds borrowed at low-cost 
tax-exempt rates in higher yielding taxable investments. If at 
least 95 percent of the proceeds of an issue is spent within 
six months, and the remainder is spent within one year, 
opportunities for such arbitrage profit are significantly 
limited.

                        Explanation of Provision

    The $100,000 limit on proceeds that may remain unspent 
after six months for certain governmental and qualified 
501(c)(3) bonds otherwise exempt from the rebate requirement is 
deleted. Thus, if at least 95 percent of the proceeds of these 
bonds is spent within six months after their issuance, and the 
remainder is spent within one year, the six-month exception is 
deemed to be satisfied.

                             Effective Date

    The provision applies to bonds issued after the date of 
enactment.

 2. Exception from rebate for earnings on bona fide debt service fund 
 under construction bond rules (sec. 1442 of the bill and sec. 148 of 
                               the Code)

                              Present Law

    In general, arbitrage profits from investing bond proceeds 
in investments unrelated to the governmental purpose of the 
borrowing must be rebated to the Federal Government. An 
exception is provided for certain construction bond issues if 
the bonds are governmental bonds, qualified 501(c)(3) bonds, or 
exempt-facility private activity bonds for governmentally-owned 
property.
    This exception is satisfied only if the available 
construction proceeds of the issue are spent at minimum 
specified rates during the 24-month period after the bonds are 
issued. The exception does not apply to bond proceeds invested 
after the 24-month expenditure period as part of a reasonably 
required reserve or replacement fund, a bona fide debt service 
fund, or to certain other investments (e.g., sinking funds). 
Issuers of these construction bonds also may elect to comply 
with a penalty regime in lieu of rebating arbitrage profits if 
they fail to satisfy the exception's spending requirements.

                           Reasons for Change

    Bond proceeds invested in a bona fide debt service fund 
generally must be spent at least annually for current debt 
service. The short-term nature of investments in such funds 
results in only limited potential for generating arbitrage 
profits. If the spending requirements of the 24-month rebate 
exception are satisfied, the administrative complexity of 
calculating rebate on these proceeds outweighs the other 
Federal policy concerns addressed by the rebate requirement.

                        Explanation of Provision

    The bill exempts earnings on bond proceeds invested in bona 
fide debt service funds from the arbitrage rebate requirement 
and the penalty requirement of the 24-month exception if the 
spending requirements of that exception are otherwise 
satisfied.

                             Effective Date

    The provision applies to bonds issued after the date of 
enactment.

  3. Repeal of debt service-based limitation on investment in certain 
nonpurpose investments (sec. 1443 of the bill and sec. 148 of the Code)

                              Present Law

    Issuers of all tax-exempt bonds generally are subject to 
two sets of restrictions on investment of their bond proceeds 
to limit arbitrage profits. The first set requires that tax-
exempt bond proceeds be invested at a yield that is not 
materially higher (generally defined as 0.125 percentage 
points) than the bond yield (``yield restrictions''). 
Exceptions are provided to this restriction for investments 
during any of several ``temporary periods'' pending use of the 
proceeds and, throughout the term of the issue, for proceeds 
invested as part of a reasonably required reserve or 
replacement fund or a ``minor'' portion of the issue proceeds.
    Except for temporary periods and amounts held pending use 
to pay current debt service, present law also limits the amount 
of the proceeds of private activity bonds (other than qualified 
501(c)(3) bonds) that may be invested at materially higher 
yields at any time during a bond year to 150 percent of the 
debt service for that bond year. This restriction affects 
primarily investments in reasonably required reserve or 
replacement funds. Present law further restricts the amount of 
proceeds from the sale of bonds that may be invested in these 
reserve funds to ten percent of such proceeds.
    The second set of restrictions requires generally that all 
arbitrage profits earned on investments unrelated to the 
governmental purpose of the borrowing be rebated to the Federal 
Government (``arbitrage rebate''). Arbitrage profits include 
all earnings (in excess of bond yield) derived from the 
investment of bond proceeds (and subsequent earnings on any 
such earnings).

                           Reasons for Change

    The 150-percent of debt service limit was enacted before 
enactment of the arbitrage rebate requirement and the ten-
percent limit on the size of reasonably required reserve or 
replacement funds. It was intended to eliminate arbitrage-
motivated activities available from investment of such reserve 
funds. Provided that comprehensive yield restriction and 
arbitrage rebate requirements and the present-law overall size 
limit on reserve funds are maintained, the 150-percent of debt 
service yield restriction limit is duplicative.

                        Explanation of Provision

    The bill repeals the 150-percent of debt service yield 
restriction.

                             Effective Date

    The provision applies to bonds issued after the date of 
enactment.

 4. Repeal of expired provisions relating to student loan bonds (sec. 
               1444 of the bill and sec. 148 of the Code)

                              Present Law

    Present law includes two special exceptions to the 
arbitrage rebate and pooled financing temporary period rules 
for certain qualified student loan bonds. These exceptions 
applied only to bonds issued before January 1, 1989.

                        Explanation of Provision

    These special exceptions are deleted as ``deadwood.''

                             Effective Date

    The provision applies to bonds issued after the date of 
enactment. It has no effect on bonds issued prior to the date 
of enactment.

                        C. Tax Court Procedures

 1. Overpayment determinations of Tax Court (sec. 1451 of the bill and 
                         sec. 6512 of the Code)

                              Present Law

    The Tax Court may order the refund of an overpayment 
determined by the Court, plus interest, if the IRS fails to 
refund such overpayment and interest within 120 days after the 
Court's decision becomes final. Whether such an order is 
appealable is uncertain.
    In addition, it is unclear whether the Tax Court has 
jurisdiction over the validity or merits of certain credits or 
offsets (e.g., providing for collection of student loans, child 
support, etc.) made by the IRS that reduce or eliminate the 
refund to which the taxpayer was otherwise entitled.

                           Reasons for Change

    Clarification of the jurisdiction of the Tax Court and the 
ability to appeal orders of the Tax Court would provide for 
greater certainty for taxpayers and the government in 
conducting cases before the Tax Court. Clarification will also 
reduce litigation.

                        Explanation of Provision

    The bill clarifies that an order to refund an overpayment 
is appealable in the same manner as a decision of the Tax 
Court. The bill also clarifies that the Tax Court does not have 
jurisdiction over the validity or merits of the credits or 
offsets that reduce or eliminate the refund to which the 
taxpayer was otherwise entitled.

                             Effective Date

    The provision is effective on the date of enactment.

  2. Redetermination of interest pursuant to motion (sec. 1452 of the 
                    bill and sec. 7481 of the Code)

                              Present Law

    A taxpayer may seek a redetermination of interest after 
certain decisions of the Tax Court have become final by filing 
a petition with the Tax Court.

                           Reasons for Change

    It would be beneficial to taxpayers if a proceeding for a 
redetermination of interest supplemented the original 
deficiency action brought by the taxpayer to redetermine the 
deficiency determination of the IRS. A motion, rather than a 
petition, is a more appropriate pleading for relief in these 
cases.

                        Explanation of Provision

    The bill provides that a taxpayer must file a ``motion'' 
(rather than a ``petition'') to seek a redetermination of 
interest in the Tax Court.

                             Effective Date

    The provision is effective on the date of enactment.

3. Application of net worth requirement for awards of litigation costs 
           (sec. 1453 of the bill and sec. 7430 of the Code)

                              Present Law

    Any person who substantially prevails in any action brought 
by or against the United States in connection with the 
determination, collection, or refund of any tax, interest, or 
penalty may be awarded reasonable administrative costs incurred 
before the IRS and reasonable litigation costs incurred in 
connection with any court proceeding. A person who 
substantially prevails must meet certain net worth requirements 
to be eligible for an award of administrative or litigation 
costs. In general, only an individual whose net worth does not 
exceed $2,000,000 is eligible for an award, and only a 
corporation or partnership whose net worth does not exceed 
$7,000,000 is eligible for an award. (The net worth 
determination with respect to a partnership or S corporation 
applies to all actions that are in substance partnership 
actions or S corporation actions, including unified entity-
level proceedings under sections 6226 or 6228, that are 
nominally brought in the name of a partner or a shareholder.)

                           Reasons for Change

    Although the net worth requirements are explicit for 
individuals, corporations, and partnerships, it is not clear 
which net worth requirement is to apply to other potential 
litigants. It is also unclear how the individual net worth 
rules are to apply to individuals filing a joint tax return. 
Clarifying these rules will provide certainty for potential 
claimants and will decrease needless litigation over procedural 
issues.

                        Explanation of Provision

    The bill provides that the net worth limitations currently 
applicable to individuals also apply to estates and trusts. The 
bill also provides that individuals who file a joint tax return 
shall be treated as one individual for purposes of computing 
the net worth limitations. Consequently, the net worth of both 
spouses is aggregated for purposes of this computation. An 
exception to this rule is provided in the case of a spouse 
otherwise qualifying for innocent spouse relief.

                             Effective Date

    The provision applies to proceedings commenced after the 
date of enactment.

4. Tax Court jurisdiction for determination of employment status (sec. 
            1454 of the bill and new sec. 7435 of the Code)

                              Present Law

    The Tax Court is a court of limited jurisdiction, 
established under Article I of the Constitution. The Tax Court 
only has the jurisdiction that is expressly conferred on it by 
statute (sec. 7442).

                           Reasons for Change

    It will be advantageous to taxpayers to have the option of 
going to the Tax Court to resolve certain disputes regarding 
employment status.

                        Explanation of Provision

    The bill provides that, in connection with the audit of any 
person, if there is an actual controversy involving a 
determination by the IRS as part of an examination that (a) one 
or more individuals performing services for that person are 
employees of that person or (b) that person is not entitled to 
relief under section 530 of the Revenue Act of 1978, the Tax 
Court would have jurisdiction to determine whether the IRS is 
correct. For example, one way the IRS could make the required 
determination is through a mechanism similar to the employment 
tax early referral procedures.\20\
---------------------------------------------------------------------------
    \20\ See Annoucement 96-13 and Announcement 97-52.
---------------------------------------------------------------------------
    The bill provides for de novo review (rather than review of 
the administrative record). Assessment and collection of the 
tax would be suspended while the matter is pending in the Tax 
Court. Any determination by the Tax Court would have the force 
and effect of a decision of the Tax Court and would be 
reviewable as such; accordingly, it would be binding on the 
parties. Awards of costs and certain fees (pursuant to section 
7430) would be available to eligible taxpayers with respect to 
Tax Court determinations pursuant to the bill. The bill also 
provides a number of procedural rules to incorporate this new 
jurisdiction within the existing procedures applicable in the 
Tax Court.

                             Effective Date

    The provision takes effect on the date of enactment.

                          D. Other Provisions

    1. Due date for first quarter estimated tax payments by private 
     foundations (sec. 1461 of the bill and sec. 6655 of the Code)

                              Present Law

    Under section 4940, tax-exempt private foundations 
generally are required to pay an excise tax equal to two 
percent of their net investment income for the taxable year. 
Under section 6655(g)(3), private foundations are required to 
pay estimated tax with respect to their excise tax liability 
under section 4940 (as well as any unrelated business income 
tax (UBIT) liability under section 511).\21\ Section 6655(c) 
provides that this estimated tax is payable in quarterly 
installments and that, for calendar-year foundations, the first 
quarterly installment is due on April 15th. Under section 
6655(I), foundations with taxable years other than the calendar 
year must make their quarterly estimated tax payments no later 
than the dates in their fiscal years that correspond to the 
dates applicable to calendar-year foundations.
---------------------------------------------------------------------------
    \21\ Generally, the amount of the first quarter payment must be at 
least 25 percent of the lesser of (1) the preceding year's tax 
liability, as shown on he foundation's Form 990-PF, or (2) 95 percent 
of the foundation's current-year tax liability.
---------------------------------------------------------------------------

                           Reasons for Change

    Because a private foundation's estimated tax payments are 
determined, in part, by reference to the foundation's tax 
liability for the preceding year, the due date of a 
foundation's first-quarter estimated tax payment should be the 
same date for filing the foundation's annual return (Form 990-
PF) for the preceding year.

                        Explanation of Provision

    The bill amends section 6655(g)(3) to provide that a 
calendar-year foundation's first-quarter estimated tax payment 
is due on May 15th (which is the same day that its annual 
return, Form 990-PF, for the preceding year is due). As a 
result of the operation of present-law section 6655(I), fiscal-
year foundations will be required to make their first-quarter 
estimated tax payment no later than the 15th day of the fifth 
month of their taxable year.

                             Effective Date

    The provision applies to taxable years beginning after the 
date of enactment.

 2. Withholding of Commonwealth income taxes from the wages of Federal 
   employees (sec. 1462 of the bill and sec. 5517 of title 5, United 
                              States Code)

                              Present Law

    If State law provides generally for the withholding of 
State income taxes from the wages of employees in a State, the 
Secretary of the Treasury shall (upon the request of the State) 
enter into an agreement with the State providing for the 
withholding of State income taxes from the wages of Federal 
employees in the State. For this purpose, a State is a State, 
territory, or possession of the United States. The Court of 
Appeals for the Federal Circuit recently held in Romero v. 
United States (38 F.3d 1204 (1994)) that Puerto Rico was not 
encompassed within this definition; consequently, the court 
invalidated an agreement between the Secretary of the Treasury 
and Puerto Rico that provided for the withholding of Puerto 
Rico income taxes from the wages of Federal employees.

                           Reasons for Change

    The Committee believes that employees of the United States 
should be in no better or worse position than other employees 
vis-a-vis local withholding.

                        Explanation of Provision

    The bill makes any Commonwealth eligible to enter into an 
agreement with the Secretary of the Treasury that would provide 
for income tax withholding from the wages of Federal employees.

                             Effective Date

    The provision is effective January 1, 1998.

3. Certain notices disregarded under provision increasing interest rate 
 on large corporate underpayments (sec. 1463 of the bill and sec. 6621 
                              of the Code)

                              Present Law

    The interest rate on a large corporate underpayment of tax 
is the Federal short-term rate plus five percentage points. A 
large corporate underpayment is any underpayment by a 
subchapter C corporation of any tax imposed for any taxable 
period, if the amount of such underpayment for such period 
exceeds $100,000. The large corporate underpayment rate 
generally applies to periods beginning 30 days after the 
earlier of the date on which the first letter of proposed 
deficiency, a statutory notice of deficiency, or a 
nondeficiency letter or notice of assessment or proposed 
assessment is sent. For this purpose, a letter or notice is 
disregarded if the taxpayer makes a payment equal to the amount 
shown on the letter or notice within that 30 day period.

                           Reasons for Change

    The large corporate underpayment rate generally applies if 
the underpayment of tax for a taxable period exceeds $100,000, 
even if the initial letter or notice of deficiency, proposed 
deficiency, assessment, or proposed assessment is for an amount 
less than $100,000. Thus, for example, under present law, a 
nondeficiency notice relating to a relatively minor 
mathematical error by the taxpayer may result in the 
application of the large corporate underpayment rate to a 
subsequently identified income tax deficiency.

                        Explanation of Provision

    For purposes of determining the period to which the large 
corporate underpayment rate applies, any letter or notice is 
disregarded if the amount of the deficiency, proposed 
deficiency, assessment, or proposed assessment set forth in the 
letter or notice is not greater than $100,000 (determined by 
not taking into account any interest, penalties, or additions 
to tax).

                             Effective Date

    The provision is effective for purposes of determining 
interest for periods after December 31, 1997.

 TECHNICAL CORRECTIONS TO THE SMALL BUSINESS JOB PROTECTION ACT OF 1996

                  A. Small Business-Related Provisions

 1. Returns relating to purchases of fish (sec. 1501(a)(1) of the bill 
                   and sec. 6050R(c)(1) of the Code)

                              Present Law

    Every person engaged in the trade or business of purchasing 
fish for resale must file an informational return reporting its 
purchases from any person that is engaged in the trade or 
business of catching fish which are in excess of $600 for any 
calendar year. Persons filing such an informational return 
relating to the purchase of fish must furnish a statement 
showing the name and address of the person filing the return, 
as well as the amount shown on the return, to each person whose 
name is required to be disclosed on the return.

                        Explanation of Provision

    Every person filing an informational return relating to the 
purchase of fish must furnish a statement showing the phone 
number of the person filing the return, as well as such 
person's name, address and the amount shown on the return, to 
each person whose name is required to be disclosed on the 
return.

   2. Charitable remainder trusts not eligible to be electing small 
business trusts (sec. 1502(c)(1) of the bill and sec. 1361(c)(1)(B) of 
                               the Code)

                              Present Law

    Under present law, an electing small business trust may be 
a shareholder in an S corporation. In order to qualify for this 
treatment, all beneficiaries of the electing small business 
trust generally must be individuals or estates eligible to be S 
corporation shareholders. An exempt trust may not qualify as an 
electing small business trust.

                        Description of Provision

    The provision clarifies that charitable remainder annuity 
trusts and charitable remainder unitrusts may not be electing 
small business trusts.

 3. Clarify the effective date for post-termination transition period 
                provision (sec. 1501(c)(2) of the bill)

                              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.
    The Small Business Act expanded the post-termination period 
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'' was 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. The Small Business Act provision was effective for 
taxable years beginning after December 31, 1996.

                        Explanation of Provision

    The technical correction clarifies that the effective date 
for the Small Business Act provision affecting the post-
termination transition period is for determinations after 
December 31, 1996, not for determinations with respect to 
taxable years beginning after December 31, 1996. However, in no 
event will the post-termination transition period expanded by 
the Small Business Act end before the end of the 120-day period 
beginning after the date of enactment of this Act.

4. Treatment of qualified subchapter S subsidiaries (sec. 1501(c)(3) of 
               the bill and sec. 1361(b)(3) of the Code)

                              Present Law

    Pursuant to a provision of the Small Business Act, an S 
corporation is allowed to own a qualified subchapter S 
subsidiary. The term ``qualified subchapter S subsidiary'' 
means a domestic corporation that (1) 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 
100 percent of the stock of the subsidiary were held by its S 
corporation parent and (2) which the parent elects to treat as 
a qualified subchapter S subsidiary. Under the election, for 
all purposes of the Code, 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.
    The legislative history of the provision provides that if 
an election is made to treat an existing corporation as a 
qualified subchapter S subsidiary, the subsidiary will be 
deemed to have liquidated under sections 332 and 337 
immediately before the election is effective.

                        Explanation of Provision

    The technical correction provides that the Secretary of the 
Treasury may provide, by regulations, instances where the 
separate corporate existence of a qualified subchapter S 
subsidiary may be taken into account for purposes of the Code. 
Thus, if an S corporation owns 100 percent of the stock of a 
bank (as defined in sec. 581) and elects to treat the bank as a 
qualified subchapter S subsidiary, it is expected that Treasury 
regulations would treat the bank as a separate legal entity for 
purposes of those Code provisions that apply specifically to 
banks (e.g., sec. 582).
    Treasury regulations also may provide exceptions to the 
general rule that the qualified subchapter S subsidiary 
election is treated as a deemed section 332 liquidation of the 
subsidiary in appropriate cases. In addition, if the effect of 
a qualified subchapter S subsidiary election is to invalidate 
an election to join in the filing of a consolidated return for 
a group of subsidiaries that formerly joined in such filing, 
Treasury regulations may provide guidance as to the 
consolidated return effects of the S election.

                         B. Pension Provisions

 1. Salary reduction simplified employee pensions (``SARSEPS'') (sec. 
       1501(d)(1)(B) of the bill and sec. 408(k)(6) of the Code)

                              Present Law

    SARSEPs were repealed for years beginning after December 
31, 1996, unless the SARSEP was established before January 1, 
1997. Consequently, an employer was not permitted to establish 
a SARSEP after December 31, 1996. SARSEPs established before 
January 1, 1997, may continue to receive contributions under 
the rules in effect prior to January 1, 1997.

                        Explanation of Provision

    The bill amends Code section 408(k)(6) to clarify that new 
employees of an employer hired after December 31, 1996, may 
participate in a SARSEP of an employer established before 
January 1, 1997.

                       2. SIMPLE retirement plans



a. Reporting requirements for SIMPLE IRAs (sec. 1501(d)(1)(A) of the 
        bill and sec. 408(i) of the Code)

                              Present Law

    A trustee of an individual retirement account and the 
issuer of an individual retirement annuity must furnish reports 
regarding the account or annuity to the individual for whom the 
account or annuity is maintained not later than January 31 of 
the calendar year following the year to which the reports 
relate. In the case of a SIMPLE IRA, such reports are to be 
furnished within 30 days after each calendar year.

                        Explanation of Provision

    The bill conforms the time for providing reports for SIMPLE 
IRAs to that for IRA reports generally. Thus, the bill would 
provide that the report required to be furnished to the 
individual under a SIMPLE IRA would be provided within 31 days 
after each calendar year.

b. Notification requirement for SIMPLE IRAs (sec. 1501(d)(1)(C) of the 
        bill and secs. 408(l)(2) and 6693(c) of the Code)

                              Present Law

    The trustee of any SIMPLE IRA is required to provide the 
employer maintaining the arrangement a summary plan description 
containing basic information about the plan. At least once a 
year, the trustee is also required to furnish an account 
statement to each individual maintaining a SIMPLE account. In 
addition, the trustee is required to file an annual report 
withthe Secretary. A trustee who fails to provide any of such reports 
or descriptions will be subject to a penalty of $50 per day until such 
failure is corrected, unless the failure is due to reasonable cause.

                        Explanation of Provision

    The bill provides that issuers of annuities for SIMPLE IRAs 
have the same reporting requirements as SIMPLE IRA trustees.

c. Maximum dollar limitation for SIMPLE IRAs (sec. 1501(d)(1)(D) of the 
        bill and sec. 408(p) of the Code)

                              Present Law

    The Small Business Act created a simplified retirement plan 
for small business called the savings incentive match plan for 
employees (``SIMPLE'') retirement plan. A SIMPLE plan can be 
either an individual retirement arrangement (``IRA'') for each 
employee or part of a qualified cash or deferred arrangement 
(``a 401(k) plan''). A SIMPLE IRA permits employees to make 
elective contributions up to $6,000 per year to their IRA. 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, unless the employer elects a lower percentage 
matching contribution (but not less than 1 percent of each 
employee's compensation). Alternatively, an employer is 
permitted to elect, in lieu of making matching contributions, 
to make a 2 percent of compensation nonelective contribution on 
behalf of each eligible employee. The employer contribution 
amounts are contributed to the employee's IRA. The maximum 
contribution limitation to an IRA is $2,000.

                        Explanation of Provision

    The bill provides that in the case of a SIMPLE IRA, the 
$2,000 maximum limitation applicable to IRAs is increased to 
the limitations in effect for contributions made under a 
qualified salary reduction arrangement. This includes employee 
elective contributions and required employer contributions.

d. Application of exclusive plan requirement for SIMPLE IRAs to 
        noncollectively bargained employees (sec. 1501(d)(1)(E) of the 
        bill and sec. 408(p)(2)(D) of the Code)

                              Present Law

    A SIMPLE IRA will be treated as a qualified salary 
reduction arrangement provided the employer does not maintain a 
qualified plan during the same time period the SIMPLE IRA is 
maintained. Collectively bargained employees can be excluded 
from participation in the SIMPLE IRA and may be covered under a 
plan established by the employer as a result of a good faith 
bargaining agreement.

                        Explanation of Provision

    The bill provides that an employer who maintains a plan for 
collectively bargained employees is permitted to maintain a 
SIMPLE IRA for noncollectively bargained employees.

e. Application of exclusive plan requirement for SIMPLE IRAs in the 
        case of mergers and acquisitions (sec. 1501(d)(1)(F) of the 
        bill and sec. 408(p)(2) of the Code)

                              Present Law

    Only employers who employ 100 or fewer employees who 
received compensation for the preceding year of at least $5,000 
are eligible to establish a SIMPLE IRA. An eligible employer 
maintaining a SIMPLE IRA who fails to be an eligible employer 
due to an acquisition, disposition or similar transaction is 
treated as an eligible employer for the 2 years following the 
last year the employer was eligible provided rules similar to 
the special coverage rules of section 410(b)(6)(C)(i) apply. 
There is no parallel provision with respect to an employer who, 
because of an acquisition, disposition or similar transaction, 
maintains a qualified plan and a SIMPLE IRA at the same time.

                        Explanation of Provision

    The bill provides that if an employer maintains a qualified 
plan and a SIMPLE IRA in the same year due to an acquisition, 
disposition or similar transaction the SIMPLE IRA is treated as 
a qualified salary reduction arrangement for the year of the 
transaction and the following calendar year.

f. Top-heavy exemption for SIMPLE 401(k) arrangements (sec. 
        1501(d)(2)(A) of the bill and sec. 401(k)(11)(D) of the Code)

                               Present Law

    A plan meeting the SIMPLE 401(k) requirements for any year 
is not treated as a top-heavy plan under section 416 for the 
year. This rule was intended to apply only to SIMPLE 401(k)s, 
and not other plans maintained by the employer.

                        Explanation of Provision

    The bill provides that the top-heavy exemption applies to a 
plan which permits only contributions required to satisfy the 
SIMPLE 401(k) requirements.

g. Cost of living adjustments for SIMPLE 401(k) arrangements (sec. 
        1501(d)(2)(B) of the bill and sec. 401(k)(11) of the Code)

                              Present Law

    The $6,000 limit on deferrals to a SIMPLE IRA is subject to 
a cost-of-living adjustment. There is no parallel provision 
applicable to a SIMPLE 401(k) arrangement.

                        Explanation of Provision

    The bill provides that the $6,000 limit on elective 
deferrals under a SIMPLE 401(k) arrangement will be adjusted at 
the same time and in the same manner as for SIMPLE IRAs.

h. Employer deduction for SIMPLE 401(k) arrangements (sec. 
        1501(d)(2)(C) of the bill and sec. 404(a)(3) of the Code)

                              Present Law

     Contributions paid by an employer to a profit sharing or 
stock bonus plan are deductible by the employer for a taxable 
year to the extent the contributions do not exceed 15-percent 
of the compensation otherwise paid or accrued during the 
taxable year to the participants under the plan. Contributions 
paid by an employer to a profit sharing or stock bonus plan 
that are not deductible because they are in excess of the 15-
percent limitation are subject to a 10-percent excise tax 
payable by the employer making the contribution.

                        Explanation of Provision

    The bill provides that to the extent that contributions 
paid by an employer to a SIMPLE 401(k) arrangement satisfy the 
contribution requirements of section 401(k)(11)(B), such 
contributions is deductible by the employer for the taxable 
year.

i. Notification and election periods for SIMPLE 401(k) arrangements 
        (sec. 1501(d)(2)(D) of the bill and sec. 401(k)(11) of the 
        Code)

                              Present Law

    An employer maintaining a SIMPLE 401(k) arrangement is 
required to make a matching contribution for employees making 
elective deferrals of up to 3-percent of compensation (or, 
alternatively, elect to make a 2-percent of compensation 
nonelective contribution on behalf of all eligible employees). 
An employer electing to make a 2-percent nonelective 
contribution is required to notify all employees of such 
election within a reasonable period of time before the 60th day 
before the beginning of the year.
    An employer maintaining a SIMPLE IRA is required to notify 
each employee of the employee's opportunity to make or modify 
salary reduction contributions as well as the contribution 
alternative chosen by the employer within a reasonable period 
of time before the employee's election period. The employee's 
election period is 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).

                        Explanation of Provision

    The bill extends the employer notice and employee election 
requirements of SIMPLE IRAs to SIMPLE 401(k) arrangements.

                             Effective Date

    The bill is effective with respect to calendar years 
beginning after the date of enactment.

j. Treatment of Indian tribal governments under section 403(b) (sec. 
        1501(d)(5) of the bill and sec. 403(b) of the Code)

                              Present Law

    Any 403(b) annuity contract purchased in a plan year 
beginning before January 1, 1995, by an Indian tribal 
government is treated as purchased by an entity permitted to 
maintain a tax- sheltered annuity plan. Such contracts may be 
rolled over into a section 401(k) plan maintained by the Indian 
tribal government in accordance with the rollover rules of 
section 403(b)(8).

                        Explanation of Provision

    The bill clarifies that an employee participating in a 
403(b) annuity contract of the Indian tribal government would 
be permitted to roll over amounts from such contract to a 
section 401(k) plan maintained by the Indian tribal government 
whether or not the annuity contract is terminated.

                         C. Foreign Provisions

  1. Measurement of earnings of controlled foreign corporations (sec. 
  1501(e) of the bill, subtitle E of the Act, and section 956 of the 
                                 Code)

                              Present Law

    U.S. 10-percent shareholders of a controlled foreign 
corporation (CFC) are subject to current U.S. tax on their pro 
rata shares of the CFC's earnings invested in United States 
property. For this purpose, earnings include both current 
earnings and profits (not including a deficit) referred to in 
section 316(a)(1) and accumulated earnings and profits referred 
to in section 316(a)(2). It could be argued that this 
definition of earnings takes current year earnings into account 
twice.

                        Explanation of Provision

    The technical correction clarifies that accumulated 
earnings and profits of a CFC taken into account for purposes 
of determining the CFC's earnings invested in United States 
property do not include current earnings (which are taken into 
account separately). A similar technical correction to the 
definition of earnings for purposes of prior-law section 956A 
(relating to a CFC's earnings invested in excess passive 
assets) was enacted with the Small Business Job Protection Act 
of 1996 (section 1703(i)(2)).

2. Transfers to foreign trusts at fair market value (sec. 1501(i)(2) of 
       the bill, sec. 1903 of the Act, and sec. 679 of the Code)

                              Present Law

    A U.S. person who transfers property to a foreign trust 
which has U.S. beneficiaries generally is treated as the owner 
of such trust. However, this rule does not apply where the U.S. 
person transfers property to a trust in exchange for fair 
market value consideration. In determining whether the U.S. 
person receives fair market value consideration, obligations of 
certain related persons are not taken into account. For this 
purpose, related persons include the trust, any grantor or 
beneficiary of the trust, and certain persons who are related 
to any such grantor or beneficiary.

                        Explanation of Provision

    The technical correction clarifies that, for purposes of 
determining whether a U.S. person's transfer to a trust is for 
fair market value consideration, the related persons whose 
obligations are disregarded include any owner of the trust and 
certain persons who are related to any such owner.

3. Treatment of trust as U.S. person (sec. 1501(i)(3) of the bill, sec. 
      1907 of the Act, and secs. 641 and 7701(a)(30) of the Code)

                              Present Law

    A trust is considered to be a U.S. person if two criteria 
are met. First, a court within the United States must be able 
to exercise primary supervision over the administration of the 
trust. Second, one or more U.S. fiduciaries must have the 
authority to control all substantial decisions of the trust.
    These criteria regarding the treatment of a trust as a U.S. 
person are effective for taxable years beginning after December 
31, 1996. The Internal Revenue Service announced procedures 
under which a U.S. trust in existence on August 20, 1996 may 
continue to file returns as a U.S. trust for taxable years 
beginning after December 31, 1996. To qualify for such 
treatment, the trustee (1) must initiate modification of the 
trust to conform to the new criteria by the due date for filing 
the trust's return for its first taxable year beginning after 
1996, (2) must complete the modification within two years of 
such date, and (3) must attach the required statement to the 
trust returns for the taxable years beginning after 1996.\1\
---------------------------------------------------------------------------
    \1\ Notice 96-65, I.R.B. 1996-52. See Joint Committee on Taxation, 
``General Explanation of Tax Legislation Enacted in the 104th Congree'' 
(JCS-12-96), December 12, 1996, pp. 277-278.
---------------------------------------------------------------------------

                        Explanation of Provision

    The technical correction clarifies that a trust is treated 
as a U.S. person as long as one or more U.S. persons have the 
authority to control all substantial decisions of the trust 
(and a U.S. court can exercise primary supervision). 
Accordingly, the fact that a substantial decision of the trust 
is controlled by a U.S. person who is not a fiduciary would not 
cause the trust not to be treated as a U.S. person. In 
addition, the technical correction clarifies that a trust that 
is a foreign trust under these criteria is not considered to be 
present or resident in the United States at any time. Finally, 
the technical correction provides the Secretary of Treasury 
with authority to allow reasonable time for U.S. trusts in 
existence on August 20, 1996 to make modifications in order to 
comply with the new criteria for treatment of a trust as a U.S. 
person.

                        D. Excise Tax Provisions

1. Repeal ``deadwood'' provisions relating to previous allowance of 
        advance refunds of diesel fuel tax (sec. 1501(f)(2) of the bill 
        and sec. 9503 of the Code)

                              Present Law

    The Small Business Tax Act repealed a provision allowing 
purchasers of diesel-powered automobiles and light trucks to 
claim a tax credit equal to an assumed amount of diesel fuel 
tax that they would pay over the life of the vehicle. Several 
accounting provisions in the Code's Highway Trust Fund that 
relate to this repealed provision were inadvertently retained.

                        Explanation of Provision

    The bill repeals the Highway Trust Fund provisions relating 
to the diesel fuel advance refunds, as deadwood.

2. Phaseout and expiration of excise tax on luxury automobiles (sec. 
        1502(f)(3) of the bill and secs. 4001 and 4003 of the Code)

                              Present Law

    Present law imposes an excise tax on the sale of 
automobiles whose price exceeds a designated threshold, 
currently $34,000. The excise tax imposed at a rate of 8-
percent on the excess of the sales price above the designated 
threshold. The 8-percent rate declines by one percentage point 
per year until reaching three percent in 2002. The $34,000 
threshold is indexed for inflation.
    The tax generally applies only to the first retail sale 
after manufacturer, production, or importation of an 
automobile. It does not apply to subsequent sales of taxable 
automobiles. However, under section 4003 of the Code, a 10-
percent tax is imposed on the ``separate purchase of vehicle 
and parts and accessories therefor'' when the sum of the 
separate purchases exceeds the luxury tax threshold. The rate 
of tax under section 4003 is not determined by reference to 
section 4001.
    The tax under sec. 4001 applies to sales before January 1, 
2003. The tax under sec. 4003 has no termination date.

                        Explanation of Provision

    The bill clarifies that the phased reduction in luxury 
excise tax rates and the expiration date of December 31, 2002, 
enacted as part of the Small Business Act, apply both for the 
tax imposed on the purchase of new automobiles under section 
4001 and for the tax imposed for the separate purchase of 
vehicles and parts and accessories therefor under section 4003.

3. Clarify scope of aviation excise tax exemption for emergency medical 
        aircraft (sec. 1501(f)(4) of the bill and sec. 4041 of the 
        Code)

                              Present Law

    The Small Business Tax Act provided that fixed-wing 
aircraft that are equipped for and exclusively dedicated to the 
provision of emergency medical services (i.e., air ambulances) 
are exempt from the aviation excise taxes.

                        Explanation of Provision

    The bill clarifies that this exemption is applied on a 
flight-by-flight basis.

4. Clarify effective date of technical correction related to ethanol 
        refunds (sec. 1501(g)(1) of the bill and sec. 6427 of the Code)

                              Present Law

    Present law includes a 54-cents-per-gallon income tax 
credit for ethanol used as a motor fuel. This tax benefit may 
be claimed through reduced-rate gasoline sales or expedited 
refunds of gasoline tax paid when the ethanol is blended with 
gasoline. The Small Business Tax Act corrected a previous 
technical error in the expiration date of the expedited refund 
provision, but the correction inadvertently failed to include 
refunds for periods before its enactment.

                        Explanation of Provision

    The bill clarifies that the technical correction relating 
to the expedited ethanol refunds was retroactive to the 
provision's expiration after September 30, 1995. Claims for 
refunds of tax paid during the period October 1, 1995, through 
the date of enactment of the Small Business Tax Act must be 
filed before 60 days after enactment of this bill.

                          E. Other Provisions

     1. Treatment of certain reserves of thrift institutions (sec. 
     1501(f)(5) of the bill and secs. 593(e) and 1374 of the Code)

                              Present Law

    A provision of the Small Business Act repealed the 
percentage-of-taxable income method for deducting bad debts 
applicable to thrift institutions. The portion of the section 
481(a) adjustment applicable to pre-1988 reserves of an 
institution required to change its method of accounting 
generally is not restored to income unless the institution 
makes a distribution to which section 593(e) applies. Section 
593(e) provides that if a institution makes a nonliquidating 
distribution in an amount in excess of its post-1951 
accumulated earnings and profits, such excess will be treated 
as a distribution of the post-1987 reserve for bad debts, 
requiring recapture of such amount.
    Another provision of the Small Business Act allows a bank 
or a thrift institution to elect to be treated as an S 
corporation so long as the entity does not use a reserve method 
of accounting for bad debts. The earnings of an S corporation 
increase the corporation's accumulated adjustments account, but 
do not increase its accumulated earnings and profits (sec. 
1368). In addition, any net unrealized built-in gains of a C 
corporation that converts to S corporation status that are 
recognized during the 10-year period beginning with the date of 
such conversion generally are subject to corporate-level tax 
(sec. 1374). Section 481(a) adjustments taken into account 
during the 10-year period generally are subject to section 
1374.

                        Explanation of Provision

    The bill provides rules to clarify the section 593(e) 
treatment of pre-1988 bad debt reserves of thrift and former 
thrift institutions that become S corporations. The technical 
corrections provide that (1) the accumulated adjustments 
account of an S corporation would be treated the same as post-
1951 earnings and profits for purposes of section 593(e) and 
(2) section 593(e) would apply irrespective of section 1374 
(e.g., distributions that trigger section 593(e) would be 
subject to corporate-level recapture even if such distributions 
occur after the 10-year period of section 1374).

  2. ``FASIT'' technical corrections (sec. 1501(f)(6) of the bill and 
                         sec. 860L of the Code)

                              Present Law

In general

    A ``financial asset securitization investment trust'' 
(``FASIT'') is designed to facilitate the securitization of 
debt obligations such as credit card receivables, home equity 
loans, and auto loans. A FASIT generally is not taxable; the 
FASIT's taxable income or net loss flows through to the owner 
of the FASIT.
    The ownership interest of a FASIT generally is required to 
be entirely held by a single domestic C corporation. In 
addition, a FASIT generally must hold only qualified debt 
obligations, and certain other specified assets, and is subject 
to certain restrictions on its activities. An entity that 
qualifies as a FASIT can issue instruments (called ``regular 
interests'') that meet certain specified requirements and treat 
those instruments as debt for Federal income tax purposes. In 
general, those requirements must be met ``after the startup 
date.'' Instruments bearing yields to maturity over 5 
percentage points above the yield to maturity on specified 
United States government obligations (i.e., ``high-yield 
interests'') may be held only by domestic C corporations that 
are not exempt from income tax.

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) \2\; (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.
---------------------------------------------------------------------------
    \2\ 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 real estate mortgage investment conduit (``REMIC'') 
in section 860F(a)(4).
---------------------------------------------------------------------------

Definition of ``FASIT''

    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; (6) a regular interest in another FASIT; and (7) a 
regular interest in a REMIC. 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.

                        Explanation of Provision

Definition of regular interest

    The bill provides that the requirement of a ``regular 
interest'' must be met ``on or after the startup date,'' 
instead of just ``after the startup date.''

Correction of cross reference

    The bill corrects an incorrect cross reference in section 
860L(d) from section 860L(c)(2) to section 860L(b)(2).

Tax on prohibited transactions

    The bill provides that the tax on prohibited transactions 
would not apply to dispositions of foreclosure property or 
hedges using the similar exception applicable to REMICs.

3. Qualified State tuition plans (sec. 1501(h)(1) of the bill and sec. 
                            529 of the Code)

                              Present Law

    Section 529 provides tax-exempt status to certain qualified 
State tuition programs and provides rules for the tax treatment 
of distributions from such programs. Section 529 was effective 
on the date of enactment of the Small Business Job Protection 
Act of 1996, but a special transition rule provides 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 Small Business Act 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).

                        Explanation of Provision

     The provision clarifies that, if a State program under 
which persons may purchase tuition credits comes into 
compliance with the requirements of a ``qualified State tuition 
program'' as defined in section 529 within a specified time 
period, then such program will be treated as a qualified State 
tuition program with respect to any contributions (and earnings 
allocable thereto) made pursuant to a contract entered into 
under the program before the date on which the program comes 
into compliance with the present-law requirements of a 
qualified State tuition program under section 529.

4. Adoption credit (sec. 1501(h)(2) of the bill, sec. 1807 of the Small 
                 Business Act, and sec. 23 of the Code)

                              Present Law

    Taxpayers are allowed a maximum nonrefundable tax credit 
against income tax liability of $5,000 per child for qualified 
adoption expenses ($6,000 in the case of certain domestic 
adoptions) paid or incurred by the taxpayer. Qualified adoption 
expenses are reasonable and necessary adoption fees, court 
costs, attorneys' fees, and other expenses that are directly 
related to the legal adoption of an eligible child.
    Otherwise qualified adoption expenses paid or incurred in 
one taxable year are not taken into account for purposes of the 
credit until the next taxable year unless the expenses are paid 
or incurred in the year the adoption becomes final.

                        Explanation of Provision

    The technical correction conforms the treatment of 
otherwise qualified adoption expenses paid or incurred in years 
after the year the adoption becomes final to the treatment of 
expenses paid or incurred in the year the adoption becomes 
final. Another technical correction repeals as ``deadwood'' an 
ordering rule inadvertently included in the credit.

 5. Phaseout of adoption assistance exclusion (sec. 1501(h)(2) of the 
  bill, sec. 1807 of the Small Business Act, and sec. 137 of the Code)

                              Present Law

    The adoption tax credit and the exclusion for employer 
provided adoption assistance are generally phased out ratably 
for taxpayers with modified adjusted gross income (AGI) above 
$75,000, and are fully phased out at $115,000 of modified AGI. 
For these purposes modified AGI is computed by increasing the 
taxpayer's AGI by the amount otherwise excluded from gross 
income under Code sections 911, 931, or 933 (relating to the 
exclusion of income of U.S. citizens or residents living 
abroad; residents of Guam, American Samoa, and the Northern 
Mariana Islands, and residents of Puerto Rico, respectively).

                        Explanation of Provision

    The technical correction conforms the phaseout range of the 
adoption assistance exclusion to the phaseout range of the 
credit for qualified adoption expenses.

      HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

 1. Medical savings accounts (sec. 1502(a) of the bill and sec. 220 of 
                               the Code)

a. Additional tax on distributions not used for medical purposes

                              Present Law

    Under present law, distributions from a medical savings 
account (``MSA'') that are not used for medical expenses are 
includible in gross income and subject to a 15-percent 
additional tax unless the distribution is after age 65 or death 
or on account of disability. A similar additional 10-percent 
tax is imposed on early withdrawals from individual retirement 
arrangements and qualified pension plans. The 10-percent 
additional tax on early withdrawals is not treated as tax 
liability for purposes of the minimum tax. No such rule applies 
to the 15-percent additional tax applicable to MSAs.

                        Explanation of Provision

    The bill provides that the 15-percent tax on nonmedical 
withdrawals from an MSA is not treated as tax liability for 
purposes of the minimum tax.

b. Definition of permitted coverage

                              Present Law

    Under present law, in order to be eligible to have an MSA 
an individual must be covered under a high deductible health 
plan and no other health plan, except for plans that provide 
certain permitted coverage. Medicare supplemental plans are one 
of the types of permitted coverage, even though an individual 
covered by Medicare is not eligible to have an MSA.

                        Explanation of Provision

    Under the bill, Medicare supplemental plans would be 
deleted from the types of permitted coverage an individual may 
have and still qualify for an MSA.

c. Taxation of distributions

                              Present Law

    Under present law, in order to be eligible to have a 
medical savings account (``MSA'') an individual must be covered 
under a high deductible health plan and no other health plan, 
except for plans that provide certain permitted coverage and 
must be either (1) a self-employed individual, or (2) employed 
by a small employer. Distributions from an MSA for the medical 
expenses of the MSA account holder and his or her spouse or 
dependents are generally excludable from income. However, in 
any year for which a contribution is made to an MSA, 
withdrawals from the MSA are excludable from income only if the 
individual for whom the expenses were incurred was an eligible 
individual for the month in which the expenses were incurred. 
This rule is designed to ensure that MSAs are used in 
conjunction with a high deductible plan and that they are not 
primarily used by other individuals who have health plans that 
are not high deductible plans.

                        Explanation of Provision

    The bill would clarify that, in any year for which a 
contribution is made to an MSA, withdrawals from the MSA are 
excludable from income only if the individual for whom the 
expenses were incurred was covered under a high deductible 
health plan (and no other health plan except for plans that 
provide certain permitted coverage) in the month in which the 
expenses were incurred. That is, the individual for whom the 
expenses were incurred does not have to be self employed or 
employed by a small employer in order for a withdrawal for 
medical expenses to be excludible.

d. Penalty for failure to provide required reports

                              Present Law

    Trustees of an MSA are required to provide such reports to 
the Secretary and the account holder as the Secretary may 
require. A penalty of $50 applies with respect to each failure 
to provide a required report. Under present law, separate 
penalties apply to information returns required by the Code.

                        Explanation of Provision

    The bill provides that the $50 penalty does not apply to 
information returns.

2. Definition of chronically ill individual under a qualified long-term 
care insurance contract (sec. 1502(b) of the bill and sec. 7702B(c)(2) 
                              of the Code)

                              Present Law

    Under the long-term care insurance rules, a chronically ill 
individual is one who has been certified within the previous 12 
months by a licensed health care practitioner as (1) being 
unable to perform (without substantial assistance) at least 2 
activities of daily living for at least 90 days due to a loss 
of functional capacity, (2) having a level of disability 
similar (as determined under regulations prescribed by the 
Secretary in consultation with the Secretary of Health and 
Human Services) to the level of disability described above, or 
(3) requiring substantial supervision to protect the individual 
from threats to health and safety due to severe cognitive 
impairment. A contract is not treated as a qualified long-term 
care insurance contract unless the determination of whether an 
individual is a chronically ill individual takes into account 
at least 5 of such activities.

                        Explanation of Provision

    The technical correction clarifies that the five-activity 
requirement--i.e., that the number of activities of daily 
living that are taken into account not be less than five--
applies only for purposes of the first of three alternative 
definitions of a chronically ill individual (Code sec. 
7702B(c)(2)(A)(i)), that is, by reason of the individual being 
unable to perform (without substantial assistance) at least 2 
activities of daily living for at least 90 days due to a loss 
of functional capacity. Thus, the requirement does not apply to 
the determination of whether an individual is a chronically ill 
individual either (1) by virtue of severe cognitive impairment, 
or (2) if the insured satisfies a standard (if any) that is not 
based upon activities of daily living, as determined under 
regulations.

3. Deduction for long-term care insurance of self-employed individuals 
       (sec. 1502(c) of the bill and sec. 162(l)(2) of the Code)

                              Present Law

    Present law provides that the deduction for health 
insurance expenses of a self-employed individual is not 
available for a month for which the individual is eligible to 
participate in any subsidized health plan maintained by any 
employer of the individual or the individual's spouse. Present 
law also provides that in the case of a qualified long-term 
care insurance contract, only eligible long-term care premiums 
(as defined for purposes of the medical expense deduction) are 
taken into account in determining the deduction for health 
insurance expenses of a self-employed individual.

                        Explanation of Provision

    The technical correction applies the rules for the 
deduction for health insurance expenses of a self-employed 
individual separately with respect to (1) plans that include 
coverage for qualified long-term care services or that are 
qualified long-term care insurance contracts, and (2) plans 
that do not include such coverage and are not such contracts. 
Thus, the provision clarifies that the fact that an individual 
is eligible for employer-subsidized health insurance does not 
affect the ability of such an individual to deduct long-term 
care insurance premiums, so long as the individual is not 
eligible for employer-subsidized long-term care insurance.

4. Applicability of reporting requirements of long-term care contracts 
and accelerated death benefits (sec. 1502(d) of the bill and sec. 6050Q 
                              of the Code)

                              Present Law

    Present law provides that amounts (other than policyholder 
dividends or premium refunds) received under a long-term care 
insurance contract generally are excludable as amounts received 
for personal injuries and sickness, subject to a dollar cap on 
per diem contracts only. If the aggregate amount of periodic 
payments under all qualified long-term care contracts exceeds 
the dollar cap for the period, then the amount of such excess 
payments is excludable only to the extent of the individual's 
costs (that are not otherwise compensated for by insurance or 
otherwise) for long-term care services during the period.
    Present law also provides an exclusion from gross income as 
an amount paid by reason of the death of an insured for (1) 
amounts received under a life insurance contract and (2) 
amounts received for the sale or assignment of any portion of 
the death benefit under a life insurance contract to a 
qualified viatical settlement provider, provided that the 
insured under the life insurance contract is either terminally 
ill or chronically ill (the accelerated death benefit rules).
    A payor of long-term care benefits (defined for this 
purpose to include any amount paid under a product advertised, 
marketed or offered as long-term care insurance), and a payor 
of amounts treated as subject to reporting under the 
accelerated death benefit rules, is required to report to the 
IRS the aggregate amount of such benefits paid to any 
individual during any calendar year, and the name, address and 
taxpayer identification number of such individual. A payor is 
also required to report the name, address, and taxpayer 
identification number of the chronically ill individual on 
account of whose condition the amounts are paid, and whether 
the contract under which the amount is paid is a per diem-type 
contract. A copy of the report must be provided to the payee by 
January 31 following the year of payment, showing the name of 
the payor and the aggregate amount of benefits paid to the 
individual during the calendar year. Failure to file the report 
or provide the copy to the payee is subject to the generally 
applicable penalties for failure to file similar information 
reports.

                        Explanation of Provision

    The technical correction clarifies that the reporting 
requirements include the need to report the address and phone 
number of the information contact. This conforms these 
reporting requirements to the requirements of the Taxpayer Bill 
of Rights 2.

    5. Consumer protection provisions for long-term care insurance 
  contracts (sec. 1502(e) of the bill and sec. 7702B(g)(4)(b) of the 
                                 Code)

                              Present Law

    The long-term care insurance rules of present law include 
consumer protection provisions (sec. 7702B(g)). Among these 
provisions is a requirement that the issuer of a contract offer 
to the policyholder a nonforfeiture provision that meets 
certain requirements. The requirements include a rule that the 
nonforfeiture provision shall provide for a benefit available 
in the event of a default in the payment of any premiums and 
the amount of the benefit may be adjusted subsequent to being 
initially granted only as necessary to reflect changes in 
claims, persistency, and interest as reflected in changes in 
rates for premium paying policies approved by the Secretary for 
the same contract form.

                        Explanation of Provision

    The technical correction clarifies that the nonforfeiture 
provision shall provide for a benefit available in the event of 
a default in the payment of any premiums and the amount of the 
benefit may be adjusted subsequent to being initially granted 
only as necessary to reflect changes in claims, persistency, 
and interest as reflected in changes in rates for premium 
paying policies approved by the appropriate State regulatory 
authority (not by the Secretary) for the same contract form.

6. Insurable interests under the COLI provision (sec. 1502(f)(1) of the 
                  bill and sec. 264(a)(4) of the Code)

                              Present Law

    No deduction is allowed for interest paid or accrued on any 
indebtedness with respect to one or more life insurance 
policies or annuity or endowment contracts owned by the 
taxpayer covering any individual who is (1) an officer or 
employee of, or (2) is financially interested in, any trade or 
business carried on by the taxpayer (the COLI rule). An 
exception is provided for interest on indebtedness with respect 
to life insurance policies covering up to 20 key persons, 
subject to an interest rate cap.

                        Explanation of Provision

    The technical correction is intended to prevent unintended 
avoidance of the COLI rule by clarifying that the rule relates 
to life insurance policies or annuity or endowment contracts 
covering any individual who (1) is or was an officer or 
employee of, or (2) is or was financially interested in, any 
trade or business carried on currently or formerly by the 
taxpayer. Thus, for example, the provision would clarify the 
treatment of interest on debt with respect to contracts 
covering former employees of the taxpayer. As another example, 
the provision would clarify the treatment of interest on debt 
with respect to a business formerly conducted by the taxpayer 
and transferred to an affiliate of the taxpayer. No inference 
is intended as the interpretation of this provision under prior 
law.

 7. Applicable period for purposes of applying the interest rate for a 
  variable rate contract under the COLI rules (sec. 1502(f)(2) of the 
              bill and sec. 264(d)(2)(B)(ii) of the Code)

                              Present Law

    No deduction is allowed for interest paid or accrued on any 
indebtedness with respect to one or more life insurance 
policies or annuity or endowment contracts owned by the 
taxpayer covering any individual who is (1) an officer or 
employee of, or (2) is financially interested in, any trade or 
business carried on by the taxpayer. An exception is provided 
for interest on indebtedness with respect to life insurance 
policies covering up to 20 key persons, subject to an interest 
rate cap.
    This provision generally does not apply to interest on debt 
with respect to contracts purchased on or before June 20, 1986. 
If the policy loan interest rate under such a contract does not 
provide for a fixed rate of interest, then interest on such a 
contract paid or accrued after December 31, 1995, is allowable 
only to the extent the rate of interest for each fixed period 
selected by the taxpayer does not exceed Moody's Corporate Bond 
Yield Average--Monthly Average Corporates, for the third month 
preceding the first month of the fixed period. The fixed period 
must be 12 months or less.

                        Explanation of Provision

    The technical correction provides that an election of an 
applicable period for purposes of applying the interest rate 
for a variable rate contract can be made no later than the 90th 
date after the date of enactment of the proposal, and applies 
to the taxpayer's first taxable year ending on or after October 
13, 1995. If no election is made, the applicable period is the 
policy year. The policy year is the 12-month period beginning 
on the anniversary date of the policy.

8. Definition of 20-percent owner for purposes of key person exception 
under COLI rule (sec. 1502(f)(3) of the bill and sec. 264(d)(4) of the 
                                 Code)

                              Present Law

    No deduction is allowed for interest paid or accrued on any 
indebtedness with respect to one or more life insurance 
policies or annuity or endowment contracts owned by the 
taxpayer covering any individual who is (1) an officer or 
employee of, or (2) is financially interested in, any trade or 
business carried on by the taxpayer. An exception is provided 
for interest on indebtedness with respect to life insurance 
policies covering up to 20 key persons, subject to an interest 
rate cap.
    A key person is an individual who is either an officer or a 
20-percent owner of the taxpayer. The number of individuals 
that can be treated as key persons may not exceed the greater 
of (1) 5 individuals, or (2) the lesser of 5 percent of the 
total number of officers and employees of the taxpayer, or 20 
individuals. Employees are to be full-time employees, for this 
purpose. A 20-percent owner is an individual who directly owns 
20 percent or more of the total combined voting power of the 
corporation. If the taxpayer is not a corporation, the statute 
states that a 20-percent owner is an individual who directly 
owns 20 percent or more of the capital or profits interest of 
the employer.

                        Explanation of Provision

    The technical correction clarifies that, in determining a 
key person, if the taxpayer is not a corporation, a 20-percent 
owner is an individual who directly owns 20 percent or more of 
the capital or profits interest of the taxpayer.

  9. Effective date of interest rate cap on key persons and pre-1986 
  contracts under the COLI rule (sec. 1502(f)(4) of the bill and sec. 
                            501(c) of HIPA)

                              Present Law

    No deduction is allowed for interest paid or accrued on any 
indebtedness with respect to one or more life insurance 
policies or annuity or endowment contracts owned by the 
taxpayer covering any individual who is (1) an officer or 
employee of, or (2) is financially interested in, any trade or 
business carried on by the taxpayer. An exception is provided 
for interest on indebtedness with respect to life insurance 
policies covering up to 20 key persons, subject to an interest 
rate cap.
    This provision generally does not apply to interest on debt 
with respect to contracts purchased on or before June 20, 1986. 
If the policy loan interest rate under such a contract does not 
provide for a fixed rate of interest, then interest on such a 
contract paid or accrued after December 31, 1995, is allowable 
only to the extent the rate of interest for each fixed period 
selected by the taxpayer does not exceed Moody's Corporate Bond 
Yield Average--Monthly Average Corporates, for the third month 
preceding the first month of the fixed period. The fixed period 
must be 12 months or less.
    The interest rate cap on key persons and pre-1986 contracts 
is effective with respect to interest paid or accrued for any 
month beginning after December 31, 1995. Another part of the 
provision provides that the interest rate cap on key employees 
and pre-1986 contracts applies to interest paid or accrued 
after October 13, 1995.

                        Explanation of Provision

    The technical correction clarifies that, under the COLI 
rule, the interest rate cap on key persons and pre-1986 
contracts applies to interest paid or accrued for any month 
beginning after December 31, 1995. This technical correction 
eliminates the discrepancy between the October and the December 
dates in the grandfather rule for pre-1986 contracts.

10. Clarification of contract lapses under effective date provisions of 
 the COLI rule (sec. 1502(f)(5) of the bill and sec. 501(d)(2) of HIPA)

                              Present Law

    No deduction is allowed for interest paid or accrued on any 
indebtedness with respect to one or more life insurance 
policies or annuity or endowment contracts owned by the 
taxpayer covering any individual who is (1) an officer or 
employee of, or (2) is financially interested in, any trade or 
business carried on by the taxpayer. An exception is provided 
for interest on indebtedness with respect to life insurance 
policies covering up to 20 key persons, subject to an interest 
rate cap.
    Additional limitations are imposed on the deductibility of 
interest with respect to single premium contracts, and interest 
on debt incurred or continued to purchase or carry a life 
insurance, endowment, or annuity contract pursuant to a plan of 
purchase that contemplates the systematic direct or indirect 
borrowing of part or all of the increases in the cash value of 
the contract. An exception to the latter rule is provided, 
permitting deductibility of interest on bona fide debt that is 
part of such a plan, if no part of 4 of the annual premiums due 
during the first 7 years is paid by means of debt (the ``4-out-
of-7'' rule).
    Present law provides that the COLI rule is phased in. In 
connection with the phase-in rule, a transition rule provides 
that any amount included in income during 1996, 1997, or 1998, 
that is received under a contract described in the provision on 
the complete surrender, redemption or maturity of the contract 
or in full discharge of the obligation under the contract that 
is in the nature of a refund of the consideration paid for the 
contract, is includable ratably over the first 4 taxable years 
beginning with the taxable year the amount would otherwise have 
been includable. The lapse of a contract after October 13, 
1995, due to nonpayment of premiums does not cause interest 
paid or accrued prior to January 1, 1999, to be nondeductible 
solely by reason of (1) failure to meet the 4-out-of-7 rule of 
present law, or (2) causing the contract to be treated as a 
single premium contract within the meaning of section 
264(b)(1). This lapse provision states that the relief is 
provided in the following case: solely by reason of no 
additional premiums being received by reason of a lapse.

                        Explanation of Provision

    The technical correction clarifies that, under the 
transition relief provided under the COLI rule, the 4-out-of-7 
rule and the single premium rule of present law are not to 
apply solely by reason of a lapse occurring by reason of no 
additional premiums being received under the contract after 
October 13, 1995.

11. Requirement of gain recognition on certain exchanges (sec. 1502(g) 
(1) and (2) of the bill, sec. 511 of the Act, and sec. 877(d)(2) of the 
                                 Code)

                              Present Law

    Under the expatriation tax provisions in section 877, 
special tax treatment applies to certain former U.S. citizens 
and former long-term U.S. residents for 10 years following the 
date of loss of U.S. citizenship or U.S. residency status. Gain 
recognition is required on certain exchanges of property 
following loss of U.S. citizenship or U.S. residency status, 
unless a gain recognition agreement is entered into. In 
addition, regulatory authority is granted to apply this rule to 
the 15-year period beginning 5 years before the loss of U.S. 
citizenship or U.S. residency status.

                        Explanation of Provision

    The technical correction clarifies that the period to which 
the general rule requiring gain recognition on certain 
exchanges applies is the 10-year period that begins on the date 
of loss of U.S. citizenship or U.S. residency status. In 
addition, the technical correction clarifies that in the case 
of an exchange occurring during the 5-year period before the 
loss of U.S. citizenship or U.S. residency status, any gain 
required to be recognized under regulations is to be recognized 
immediately after the date of such loss of U.S. citizenship.

 12. Suspension of 10-year period in case of substantial diminution of 
  risk of loss (sec. 1502(g)(3) of the bill, sec. 511 of the Act, and 
                      sec. 877(d)(3) of the Code)

                              Present Law

    Under the expatriation tax provisions in section 877, 
special tax treatment applies to certain former U.S. citizens 
and former long-term U.S. residents for 10 years following the 
date of loss of U.S. citizenship or U.S. residency status. The 
running of this period with respect to gain on the sale or 
exchange of any property is suspended for any period during 
which the individual's risk of loss with respect to the 
property is substantially diminished.

                        Explanation of Provision

    The technical correction clarifies that the period to which 
the rule suspending such period in the case of a substantial 
diminution of risk of loss applies is the 10-year period that 
begins on the date of loss of U. S. citizenship or U.S. 
residency status.

 13. Treatment of property contributed to certain foreign corporations 
 (sec. 1502(g)(4) of the bill, sec. 511 of the Act, and sec. 877(d)(4) 
                              of the Code)

                              Present Law

    Under the expatriation tax provisions in section 877, 
special tax treatment applies to certain former U.S. citizens 
and former long-term U.S. residents for 10 years following the 
date of loss of U.S. citizenship or U.S. residency status. 
Special rules apply in the case of certain contributions of 
U.S. property by such an individual to a foreign corporation 
during such period.

                        Explanation of Provision

    The technical correction clarifies that the period to which 
the rule regarding certain contributions to foreign 
corporations applies is the 10-year period that begins on the 
date of loss of U.S. citizenship or U.S. residency status. The 
technical correction also clarifies that the rule applies in 
the case of property the income from which, immediately before 
the contribution, was from U.S. sources.

 14. Credit for foreign estate tax (sec. 1502(g)(6) of the bill, sec. 
             511 of the Act, and sec. 2107(c) of the Code)

                              Present Law

    Under the expatriation tax provisions in section 2107, 
special estate tax treatment applies to certain former U.S. 
citizens and former long-term U.S. residents who die within 10 
years following the date of loss of U.S. citizenship or U.S. 
residency status. Special rules provide a credit against the 
U.S. estate tax for foreign estate taxes paid with respect to 
property that is includible in the decedent's U.S. estate 
solely by reason of the expatriation estate tax provisions.

                        Explanation of Provision

    The technical correction clarifies the formula for 
determining the amount of the foreign tax credit allowable 
against U.S. estate taxes on property includible in the 
decedent's U.S. estate solely by reason of the expatriation 
estate tax provisions. The credit for the estate taxes paid to 
any foreign country generally is limited to the lesser of (1) 
the foreign estate taxes attributable to the property 
includible in the decedent's U.S. estate solely by reason of 
the expatriation estate tax provisions or (2) the U.S. estate 
tax attributable to property that is subject to estate tax in 
such foreign country and is includible in the decedent's U.S. 
estate solely by reason of the expatriation tax provisions. The 
amount of taxes attributable to such property is determined on 
a pro rata basis.

         TECHNICAL CORRECTIONS TO THE TAXPAYER BILL OF RIGHTS 2

  1. Reasonable cause abatement for first-tier intermediate sanctions 
   excise tax (sec. 1503(a) of the bill and section 4962 of the Code)

                              Present Law

    Section 4958 imposes penalty excise taxes as an 
intermediate sanction in cases where organizations exempt from 
tax under sections 501(c)(3) or 501(c)(4) (other than private 
foundations) engage in an ``excess benefit transaction.'' The 
excise tax may be imposed on certain disqualified persons 
(i.e., insiders) who improperly benefit from an excess benefit 
transaction and on organization managers who participate in 
such a transaction knowing that it is improper.
    A disqualified person who benefits from an excess benefit 
transaction is subject to a first-tier penalty tax equal to 25 
percent of the amount of the excess benefit. Organization 
managers who participate in an excess benefit transaction 
knowing that it is improper are subject to a first-tier penalty 
tax of 10 percent of the amount of the excess benefit. 
Additional second-tier taxes equal to 200 percent of the amount 
of the excess benefit may be imposed on a disqualified person 
if there is no correction of the transaction within a specified 
time period.
    Under section 4962, the IRS has the authority to abate 
certain first-tier taxes if the taxable event was due to 
reasonable cause and not to willful neglect and the event was 
corrected within the applicable correction period. First-tier 
taxes which may be abated include, among others, the taxes 
imposed under sections 4941 (on acts of self-dealing between 
private foundations and disqualified persons), 4942 (for 
failure by private foundations to distribute a minimum amount 
of income), and 4943 (on private foundations with excess 
business holdings).
    In enacting the new excise taxes on excess benefit 
transactions, Congress explicitly intended to provide the IRS 
with abatement authority under section 4962.\3\ However, the 
abatement rules of section 4962 apply only to qualified first-
tier taxes imposed by subchapter A or C of Chapter 42. The 
section 4958 excise tax is located in subchapter D of Chapter 
42. The failure to cross reference subchapter D in section 4962 
means that IRS does not have such abatement authority with 
respect to the section 4958 excise taxes.
---------------------------------------------------------------------------
    \3\ See Ways and Means Committee Report 104-506 accompanying H.R. 
2377, p. 59.
---------------------------------------------------------------------------

                        Explanation of Provision

    The bill amends section 4962(b) to include a cross-
reference to first-tier taxes imposed by subchapter D (i.e., 
the section 4958 excise taxes on excess benefit transactions). 
Thus, the IRS has authority to abate the first-tier excise 
taxes on excess benefit transactions in cases where it is 
established that the violation was due to reasonable cause and 
not due to willful neglect and the transaction at issue was 
corrected within the specified period.

2. Reporting by public charities with respect to intermediate sanctions 
 and certain other excise tax penalties (sec. 1503(b) of the bill and 
                         sec. 6033 of the Code)

                              Present Law

    Section 4958 imposes penalty excise taxes as an 
intermediate sanction in cases where organizations exempt from 
tax under sections 501(c)(3) or 501(c)(4) (other than private 
foundations) engage in an ``excess benefit transaction.'' The 
excise tax may be imposed on certain disqualified persons 
(i.e., insiders) who improperly benefit from an excess benefit 
transaction and on organization managers who participate in 
such a transaction knowing that it is improper. No tax is 
imposed on the organization itself with respect under section 
4958.
    Section 4911 imposes an excise tax penalty on excess 
lobbying expenditures made by public charities. The tax is 
imposed on the organization itself. Section 4912 imposes a 
penalty excise tax on certain public charities that make 
disqualifying lobbying expenditures and section 4955 imposes a 
penalty excise tax on political expenditures of section 
501(c)(3) organizations. Both of these penalty taxes are 
imposed not only on the affected organization, but also on 
organization managers who agree to an expenditure knowing that 
it is improper.
    Under section 4962, the IRS has the authority to abate 
certain first-tier taxes if the taxable event was due to 
reasonable cause and not to willful neglect and the event was 
corrected within the applicable correction period. First-tier 
taxes which may be abated include, among others, the taxes 
imposed under section 4955.\4\
---------------------------------------------------------------------------
    \4\ A separate provision in the bill makes a technical correction 
to section 4962(b) to permit the abatement of first-tier penalty excise 
taxes imposed under section 4958.
---------------------------------------------------------------------------
    Under section 6033(b)(10), 501(c)(3) organizations are 
required to report annually on Form 990 any amounts paid by the 
organization under section 4911, 4912, and 4955. Thus, although 
sections 4912 and 4955 impose excise taxes on organization 
managers, organizations technically are not required to report 
any such excise taxes paid by such managers.
    In addition, under section 6033(b)(11), an organization 
exempt from tax under section 501(c)(3) must report on Form 990 
any amount of excise tax on excess benefit transactions paid by 
the organization, or any disqualified person with respect to 
such organization, during the taxable year. The Code does not 
explicitly require the reporting of any excess benefit excise 
taxes paid by an organization manager solely in his or her 
capacity as such (i.e., an organization manager might also be a 
disqualified person with respect to an excess benefit 
transaction, in which case any tax paid would be reported).

                        Explanation of Provision

    The bill makes the reporting requirements of section 
6033(b)(10) and (11) consistent with the excise tax penalty 
provisions to which they relate. Thus, section 6033(b)(10) is 
amended to require 501(c)(3) organizations to report any 
amounts of tax imposed under sections 4911, 4912, and 4955 on 
the organization or any organization manager of the 
organization. In addition, the bill requires reporting with 
respect to any reimbursements paid by an organization with 
respect to taxes imposed under sections 4912 or 4955 on any 
organization manager of the organization. Section 6033(b)(11) 
is amended to require 501(c)(3) organizations to report any 
amounts of tax imposed under section 4958 on any organization 
manager or any disqualified person, as well as any 
reimbursements of section 4958 excise tax liability paid by the 
organization to such organization managers or disqualified 
persons.
    In addition, the bill clarifies that no reporting is 
required under sections 6033(b)(10) or (11) in the event a 
first-tier penalty excise tax imposed under section 4955 or 
section 4958 is abated by the IRS pursuant to its authority 
under section 4962.

                  TECHNICAL CORRECTIONS TO OTHER ACTS

  1. Correction of GATT interest and mortality rate provisions in the 
Retirement Protection Act (sec. 1504(b)(3) of the bill and sec. 1449(a) 
                       of the Small Business Act)

                              Present Law

    The Retirement Protection Act of 1994, enacted as part of 
the implementing legislation for the General Agreements on 
Tariffs and Trade (``GATT''), modified the actuarial 
assumptions that must be used in adjusting benefits and 
limitations under section 415. 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 by the 
plan. Under GATT, 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 was generally effective as of 
the first day of the limitation year beginning in 1995.
    The Small Business Act conformed the effective date of 
these changes to the effective date of similar changes by 
providing generally that, in the case of a plan that was 
adopted and in effect before December, 8, 1994, the GATT change 
is not effective with respect to benefits accrued before the 
earlier of (1) the later of the date a plan amendment applying 
the amendments is adopted or made effective or (2) the first 
day of the first limitation year beginning after December 31, 
1999. The Small Business Act provides that ``Determinations 
under section 415(b)(2)(E) before such earlier date are to 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).''

                        Explanation of Provision

    The provision in the Small Business Act was intended to 
permit plans to apply pre-GATT law under section 415(b)(2)(E) 
for a transition period. The bill conforms the statute to this 
intent by providing that determinations under section 
415(b)(2)(E) before such earlier date are to be made with 
respect to such benefits on the basis of such section as in 
effect on December 7, 1994 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).

  2. Clarify definition of Indian reservation under section 168(j)(6) 
        (sec. 1504(c) of the bill and sec 168(j)(6) of the Code)

                              Present Law

    Section 168(j)(6) provides for accelerated depreciation for 
certain property located on Indian reservations. For this 
purpose, provides that the term ``Indian reservation'' means 
areservation as defined in either (a) section 3(d) of the Indian 
Financing Act of 1974 (25 U.S.C. 1452(d)), or (b) section 4(10) of the 
Indian Child Welfare Act of 1978 (25 U.S.C. 1903(10)). In addition, 
section 45A (which provides for an incremental Indian employment 
credit) incorporates by reference the same definition of ``Indian 
reservation'' contained in section 168(j)(6). Section 3(d) of the 
Indian Financing Act of 1974 includes not only officially designated 
Indian reservations and public domain Indian allotments, but also all 
``former Indian reservations in Oklahoma,'' which covers most of the 
State of Oklahoma even though parts of such ``former Indian 
reservations'' may no longer have a significant nexus to an Indian 
tribe.

                        Explanation of Provision

    For purposes of the section 168(j)(6) definition of 
``Indian reservation,'' the term ``former reservations in 
Oklahoma'' is defined as lands that are (1) within the 
jurisdictional area of an Oklahoma Indian tribe as determined 
by the Secretary of the Interior, and (2) recognized by such 
Secretary as an area eligible for trust land status under 25 
C.F.R. Part 51.

                             Effective Date

    The provision generally is effective as if included in the 
Omnibus Budget Reconciliation Act of 1993 (i.e., the technical 
correction applies to property placed in service and wages paid 
on or after January 1, 1994). However, the provision does not 
apply to wages claimed on any original return filed prior to 
March 18, 1997, nor does it apply to property placed in service 
with a 10-year life or less (without regard to section 168(j)) 
if accelerated depreciation under section 168(j) was claimed 
with respect to such property on an original return filed prior 
to March 18, 1997.

3. Related parties determined by reference to section 267 (sec. 1504(e) 
                of the bill and sec. 267(f) of the Code)

                              Present Law

    Section 267 disallows loses arising in transactions between 
certain defined related parties. In the case of related 
corporations, such losses may be deferred. Several Code 
provisions, in defining related parties, often incorporate the 
relationships described in section 267 by cross-reference to 
such section.

                        Explanation of Provision

    Any provision of the Internal Revenue Code of 1986 that 
refers to a relationship that would result in loss disallowance 
under section 267 also refers to relationships where loss is 
deferred, where such relationship is applicable to the 
provision.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 2(l)(2)(B) of rule XI of the 
Rules of the House of Representatives, the following statements 
are made concerning the votes of the Committee on Ways and 
Means in its consideration of budget reconciliation revenue 
recommendations.

Motion to report budget reconciliation revenue recommendations

    The Committee's budget reconciliation revenue 
recommendations were ordered favorably reported on June 13, 
1997, by a rollcall vote of 22 yeas to 16 nays (with a quorum 
being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................        X   ........  .........  Mr. Rangel.......  ........        X   .........
Mr. Crane......................        X   ........  .........  Mr. Stark........  ........        X   .........
Mr. Thomas.....................        X   ........  .........  Mr. Matsui.......  ........        X   .........
Mr. Shaw.......................        X   ........  .........  Mrs. Kennelly....  ........        X   .........
Mrs. Johnson...................        X   ........  .........  Mr. Coyne........  ........        X   .........
Mr. Bunning....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Houghton...................        X   ........  .........  Mr. Cardin.......  ........        X   .........
Mr. Herger.....................        X   ........  .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................        X   ........  .........  Mr. Kleczka......  ........        X   .........
Mr. Camp.......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Ramstad....................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Jefferson....  ........        X   .........
Ms. Dunn.......................        X   ........  .........  Mr. Tanner.......  ........        X   .........
Mr. Collins....................        X   ........  .........  Mr. Becerra......  ........        X   .........
Mr. Portman....................        X   ........  .........  Mrs. Thurman.....  ........        X   .........
Mr. English....................        X   ........  .........                                                  
Mr. Ensign.....................        X   ........  .........                                                  
Mr. Christensen................        X   ........  .........                                                  
Mr. Watkins....................        X   ........  .........                                                  
Mr. Hayworth...................        X   ........  .........                                                  
Mr. Weller.....................        X   ........  .........                                                  
Mr. Hulshof....................        X   ........  .........                                                  
----------------------------------------------------------------------------------------------------------------

Votes on amendments

    An amendment by Mrs. Kennelly to Title I of the Chairman's 
Mark to strike the offset to the child credit equal to 50 
percent of the dependent care credit and strike the provision 
that would provide a special tax rate for capital gains for 
corporations was defeated by a rollcall vote of 16 yeas to 22 
nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........  ........  ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................        X   ........  .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Matsui to Title I to require that the 
child credit be taken on the tax return (i.e., ``stacked'') 
before the earned income tax credit and strike Part II of 
Subtitle B of Title III (relating to corporate capital gains) 
and impose a capital gains benefit recapture tax was defeated 
by a rollcall vote of 15 yeas to 23 nays. The vote was as 
follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........  ........  ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. McDermott to Title I to strike the 
child credit and replace it with a family credit that would be 
allowed against income taxes and social security taxes, and 
phased out for upper income taxpayers was defeated by a 
rollcall vote of 15 yeas to 23 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........  ........  ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Rangel to Title II to strike all the 
education incentive provisions and insert the Hope credit as 
proposed by the Administration with modifications was defeated 
by a rollcall vote of 15 yeas to 21 nays. The vote was as 
follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........  ........  .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........  ........  .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......  ........  ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Kleczka to Title II to extend 
permanently the exclusion for employer-provided educational 
assistance and strike the corporate capital gains tax reduction 
was defeated by a rollcall vote of 16 yeas to 23 nays. The vote 
was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Cardin to Title II to limit 
contributions to an education investment account and provide a 
tax credit for tutoring programs for grades K through 12 was 
agreed to by a rollcall vote of 22 yeas to 17 nays. The vote 
was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................        X   ........  .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................        X   ........  .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................        X   ........  .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................        X   ........  .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................        X   ........  .........                                                  
Mr. Christensen................        X   ........  .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. McDermott to Title III to provide an 
increase to 100 percent of health insurance deductibility for 
self-employed and strike the provision relating to a reduction 
of alternative capital gains tax for corporations was defeated 
by a rollcall vote of 15 yeas to 22 nays. The vote was as 
follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......  ........  ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. McDermott to Title III to increase over 
the 10 years the standard deduction for joint returns so that 
it equals twice the amount allowed for single taxpayers, and 
strike the corporate AMT provisions, corporate capital gains, 
and independent contractor ``safe harbor,'' and impose a 
capital gains tax reduction recapture tax was defeated by a 
rollcall vote of 13 yeas to 24 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........  ........        X   .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......  ........        X   .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........  ........  .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......  ........  ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Jefferson to Title III to reduce the 
real estate depreciation recapture rate to 22 percent for years 
1997 through 2002 and to 20 percent thereafter and strike the 
corporate capital gains tax rate reduction was defeated by a 
rollcall vote of 14 yeas to 23 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........  ........        X   .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........  ........  .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Mrs. Thurman to Title III to impose a 1.4 
percent ``medicare taxes'' on capital gains from the sale of 
securities and dedicate the proceeds to the Medicare Trust Fund 
was defeated by a rollcall vote of 12 yeas to 26 nays. The vote 
was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....  ........        X   .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........  ........        X   .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......  ........        X   .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X                                                              
Mr. Ensign.....................  ........        X                                                              
Mr. Christensen................  ........        X                                                              
Mr. Watkins....................  ........        X                                                              
Mr. Hayworth...................  ........        X                                                              
Mr. Weller.....................  ........        X                                                              
Mr. Hulshof....................  ........        X                                                              
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Nussle and Mr. Tanner to Title III to 
strike section 1043 of the Mark relating to the reduction of 
incentives for alcohol fuels and limit the reduction in 
corporate capital gains rates was defeated by a rollcall vote 
of 17 yeas to 21 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........  ........        X   .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....  ........        X   .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........  ........        X   .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Ramstad....................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Nussle.....................        X   ........  .........  Mr. McNulty......  ........        X   .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......  ........        X   .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................        X   ........  .........                                                  
Mr. Watkins....................        X   ........  .........                                                  
Mr. Hayworth...................        X   ........  .........                                                  
Mr. Weller.....................        X   ........  .........                                                  
Mr. Hulshof....................        X   ........  .........                                                  
----------------------------------------------------------------------------------------------------------------

    An amendment by Messrs. Matsui, Stark, and Kleczka to Title 
IX to strike section 934 of the Mark relating to an independent 
contractor ``safe harbor'' was defeated by a rollcall vote of 
15 yeas to 20 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........  ........  .........  Mr. Stark........  ........  ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................        X   ........  .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................        X   ........  .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......  ........  ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X                                                              
Mr. Ensign.....................  ........        X                                                              
Mr. Christensen................  ........        X                                                              
Mr. Watkins....................  ........        X                                                              
Mr. Hayworth...................  ........        X                                                              
Mr. Weller.....................  ........        X                                                              
Mr. Hulshof....................  ........        X                                                              
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Bunning to Title IX to modify passive 
loss limitations relating to equine activities and to limit the 
corporate capital gains reduction was defeated by a rollcall 
vote of 16 yeas to 22 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................        X   ........  .........  Mr. Rangel.......  ........        X   .........
Mr. Crane......................  ........        X   .........  Mr. Stark........  ........        X   .........
Mr. Thomas.....................        X   ........  .........  Mr. Matsui.......  ........        X   .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....  ........        X   .........
Mrs. Johnson...................        X   ........  .........  Mr. Coyne........  ........        X   .........
Mr. Bunning....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Houghton...................        X   ........  .........  Mr. Cardin.......  ........        X   .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......  ........        X   .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........  ........        X   .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........  ........        X   .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................        X   ........  .........  Mr. Jefferson....  ........        X   .........
Ms. Dunn.......................        X   ........  .........  Mr. Tanner.......  ........        X   .........
Mr. Collins....................        X   ........  .........  Mr. Becerra......  ........        X   .........
Mr. Portman....................        X   ........  .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................        X                                                                        
Mr. Ensign.....................  ........        X                                                              
Mr. Christensen................  ........        X                                                              
Mr. Watkins....................  ........        X                                                              
Mr. Hayworth...................  ........        X                                                              
Mr. Weller.....................  ........        X                                                              
Mr. Hulshof....................  ........        X                                                              
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Stark to Title X to provide a tax 
credit of up to 90 percent to subsidize the cost of private 
insurance for uninsured children and increase the tax on 
tobacco products was defeated by a rollcall vote of 13 yeas to 
25 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................        X   ........  .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......  ........        X   .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....  ........        X   .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......  ........        X   .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X                                                              
Mr. Ensign.....................  ........        X                                                              
Mr. Christensen................  ........        X                                                              
Mr. Watkins....................  ........        X                                                              
Mr. Hayworth...................  ........        X                                                              
Mr. Weller.....................  ........        X                                                              
Mr. Hulshof....................  ........        X                                                              
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Hayworth to Title X to repeal the 
treatment of Indian tribal organizations under the unrelated 
business income tax and increase the tax on international air 
arrivals and departures was agreed to by a rollcall vote of 22 
yeas to 16 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................        X   ........  .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................        X   ........  .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................        X   ........  .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................        X   ........  .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................        X   ........  .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................        X   ........                                                             
Mr. Ensign.....................  ........        X                                                              
Mr. Christensen................  ........        X                                                              
Mr. Watkins....................  ........        X                                                              
Mr. Hayworth...................        X   ........                                                             
Mr. Weller.....................  ........        X                                                              
Mr. Hulshof....................  ........        X                                                              
----------------------------------------------------------------------------------------------------------------

    An amendment, in the nature of a substitute, by Mr. Rangel 
was defeated by a rollcall vote of 15 yeas to 22 nays. The vote 
was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present    Representatives      Yea       Nay     Present 
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................  ........        X   .........  Mr. Rangel.......        X   ........  .........
Mr. Crane......................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Thomas.....................  ........        X   .........  Mr. Matsui.......        X   ........  .........
Mr. Shaw.......................  ........        X   .........  Mrs. Kennelly....        X   ........  .........
Mrs. Johnson...................  ........        X   .........  Mr. Coyne........        X   ........  .........
Mr. Bunning....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Houghton...................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Herger.....................  ........  ........  .........  Mr. McDermott....  ........  ........  .........
Mr. McCrery....................  ........        X   .........  Mr. Kleczka......        X   ........  .........
Mr. Camp.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Ramstad....................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. McNulty......        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Jefferson....        X   ........  .........
Ms. Dunn.......................  ........        X   .........  Mr. Tanner.......        X   ........  .........
Mr. Collins....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Portman....................  ........        X   .........  Mrs. Thurman.....        X   ........  .........
Mr. English....................  ........        X   .........                                                  
Mr. Ensign.....................  ........        X   .........                                                  
Mr. Christensen................  ........        X   .........                                                  
Mr. Watkins....................  ........        X   .........                                                  
Mr. Hayworth...................  ........        X   .........                                                  
Mr. Weller.....................  ........        X   .........                                                  
Mr. Hulshof....................  ........        X   .........                                                  
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL

              A. committee estimates of budgetary effects

    In compliance with clause 7(a) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the estimated budget effects of the Committee's 
revenue reconciliation provisions for fiscal years 1997-2007:


                b. budget authority and tax expenditures

Budget authority

    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the revenue reconciliation provisions 
involve no new or increased budget authority. The earned income 
compliance provisions (sec. 1067) will reduce outlays (and 
budget authority). (See the revenue table in Part IV.A., 
above).

Tax expenditures

    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the provisions relative to income tax 
reductions generally involve increased tax expenditures and 
that the provisions relating to increased income tax revenues 
generally involve reduced tax expenditures (see revenue table, 
above). Non-income tax provisions are not classified as tax 
expenditures under the Budget Act. Also, certain compliance 
simplification provisions and technical corrections provisions 
do not involve tax expenditures.

      c. cost estimate prepared by the congressional budget office

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

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 16, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the revenue 
reconciliation recommendations of the House Committee on Ways 
and Means.
    The estimate shows the budgetary effects of the committee's 
proposals over the 1998-2002 period, and attached tables show 
the effects through 2007. CBO understands that the Committee on 
the Budget will be responsible for interpreting how these 
proposals compare with the reconciliation instructions in the 
budget resolution.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephanie 
Weiner.
            Sincerely,
                                          Paul Van de Water
                                   (For June E. O'Neill, Director).
    Enclosure.

Revenue reconciliation recommendations of the House Committee on Ways 
        and Means

    Summary: The revenue reconciliation provisions recommended 
by the Committee on Ways and Means would make many changes to 
the Internal Revenue Code. A new credit for children under age 
17 would result in the largest reduction in revenue. Other 
major reductions in revenue would result from a new tax credit 
for students, back-loaded IRAs, educational investment 
accounts, and modifications to the alternative minimum tax and 
to the estate and gift tax. Lower taxation of capital gains 
realizations would raise revenue in the first five years but 
lose revenue over the first ten years. The provisions also 
include changes that would generate revenue--about three-
quarters of the extra revenue would come from extending and 
modifying aviation excise taxes.
    Estimated cost to the Federal Government: The Joint 
Committee on Taxation (JCT) provided estimates for most of the 
revenue reconciliation provisions, and CBO concurs with their 
estimates. CBO and JCT estimate that these provisions, 
including Earned Income Credit (EIC) compliance proposals, 
would reduce governmental receipts by $84.653 billion over the 
1997-2002 period. The EIC provisions also would reduce outlays 
by about $0.078 billion over the five year period. In addition 
CBO estimates that the provision to phase out the ethanol tax 
credit would increase Commodity Credit Corporation outlays by 
about $0.051 billion over the 1998-2002 period. Please refer to 
the enclosed CBO and JCT tables for a more detailed estimate of 
the provisions.

   ESTIMATED BUDGETARY IMPACT OF THE REVENUE RECONCILIATION RECOMMENDATIONS OF THE HOUSE COMMITTEE ON WAYS AND  
                                                      MEANS                                                     
----------------------------------------------------------------------------------------------------------------
                                                          By fiscal year in billions of dollars--               
                                         -----------------------------------------------------------------------
                                             1997        1998        1999        2000        2001        2002   
----------------------------------------------------------------------------------------------------------------
                                                    REVENUES                                                    
                                                                                                                
Projected Revenues Under Current Law \1\   1,554.894   1,609.184   1,675.264   1,750.097   1,827.964   1,910.260
Proposed Changes: \2\                                                                                           
    On Budget...........................       0.007       7.218     -17.084     -26.586     -27.623     -20.320
    Off Budget \3\......................       0.000      -0.116      -0.048      -0.040      -0.034      -0.026
Projected Revenues Under the                                                                                    
 Recommendations........................   1,554.901   1,616.288   1,658.133   1,723.471   1,800.301   1,889.914
                                                                                                                
                                                     OUTLAYS                                                    
                                                                                                                
Projected Commodity Credit Corporation                                                                          
 Outlays Under Current Law..............       5.331       7,093       6.830       6.298       5.140       4.826
Proposed Changes........................       (\4\)       (\4\)       (\4\)       (\4\)       0.002       0.049
Projected Commodity Credit Corporation                                                                          
 Outlay Under the Recommendations.......       5.331       7.093       6.830       6.298       5.142       4.875
Projected EIC Outlays \1\ Under Current                                                                         
 Law....................................      20.822      21.685      22.495      23.333      23.965      24.732
Proposed Changes........................       (\4\)      -0.016      -0.022      -0.021      -0.019      -0.019
Projected EIC Outlays Under the                                                                                 
 Recommendations........................      20.822      21.669      22.473      23.312      23.946      24.713
----------------------------------------------------------------------------------------------------------------
\1\ Projections consistent with the FY 1998 Budget Resolution.                                                  
\2\ Includes the revenue effect of EIC compliance proposals.                                                    
\3\ The following five provisions would affect social security revenues, which are off budget: employer provided
  education assistance, phase out the exclusion for qualified tuition reduction, independent contract for bakery
  drivers, safe harbor for independent contractors, and optional methods for computing SECA combined.           
\4\ Less than $500,000.                                                                                         

    The outlay effects of this legislation fall within budget 
functions 350 (agriculture) and 600 (income security)
    Intergovernmental and private-sector impact: In accordance 
with the requirements of Public Law 104-4, the Unfunded 
Mandates Reform Act of 1995, JCT has determined that the bill 
contains several private sector mandates. Please refer to the 
enclosed letter for a more detailed account of these 
provisions. These provisions would impose direct cost on the 
private sector of more than $100 million in each year from 
1996-2000. The JCT estimates the direct mandate cost of tax 
increases in the bill would total $8,990 billion in 1998, and 
$47.064 billion over the 1998-2002 period, as shown below:

   ESTIMATED FEDERAL PRIVATE SECTOR MANDATE IMPACT OF THE REVENUE RECONCILIATION RECOMMENDATIONS OF THE HOUSE   
                                           COMMITTEE ON WAYS AND MEANS                                          
----------------------------------------------------------------------------------------------------------------
                                                                 By fiscal years, in billions of dollars--      
                                                          ------------------------------------------------------
                                                              1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
Private Sector Mandates..................................      8.990      8.302      9.095      9.994     10.683
----------------------------------------------------------------------------------------------------------------

    In addition, JCT has determined that the provision to 
extend and modify the Airport and Airway Trust Fund excise 
taxes and the provision to modify the vaccine excise tax may 
impose an intergovernmental mandate on State, local, and tribal 
governments. JCT estimates that the direct cost of complying 
with these intergovernmental mandates will not exceed $50 
million in either the first fiscal year or in any of the 4 
fiscal years following the first fiscal year.
    Estimate prepared by: Stephanie Weiner (226-2720).
    Estimate approved by: Rick Kasten, Deputy Assistant 
Director for Tax Analysis.

                   ESTIMATED BUDGETARY EFFECTS OF THE REVENUE RECONCILIATION RECOMMENDATIONS OF THE HOUSE COMMITTEE ON WAYS AND MEANS                   
                                                        [In billions of dollars, by fiscal years]                                                       
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              1998-2007 
                                  1998       1999       2000       2001       2002       2003       2004       2005       2006       2007       total   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   CHANGES IN REVENUES                                                                  
                                                                                                                                                        
On Budget Revenues \1\.......      7.218    -17.084    -26.586    -27.623    -20.320    -26.575    -29.231    -31.470    -35.647    -40.421     -247.739
Off Budget Revenues..........     -0.116     -0.048     -0.040     -0.034     -0.026     -0.020     -0.021     -0.021     -0.021     -0.021       -0.368
                              --------------------------------------------------------------------------------------------------------------------------
      Total..................      7.102    -17.132    -26.626    -27.657    -20.346    -26.595    -29.252    -31.491    -35.668    -40.442     -248.107
                              ==========================================================================================================================
                                                               CHANGES IN DIRECT SPENDING                                                               
                                                                                                                                                        
Commodity Credit Corporation                                                                                                                            
 Outlays.....................      (\2\)      (\2\)      (\2\)      0.002      0.049      0.059      0.045      0.032      0.022      0.018        0.227
Earned Income Credit Outlays.      (\2\)     -0.016     -0.022     -0.021     -0.019     -0.019     -0.019     -0.018     -0.018     -0.018       -0.170
                              --------------------------------------------------------------------------------------------------------------------------
      Total..................      (\2\)     -0.016     -0.022     -0.019      0.030      0.040      0.026      0.014      0.004      0.000        0.057
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Includes the revenue effects of the Earned Income Credit compliance proposals.                                                                      
\2\ Less than $500,000.                                                                                                                                 


  COMMITTEE ON WAYS AND MEANS ESTIMATED BUDGET EFFECTS OF CHAIRMAN'S MARK RELATING TO EARNED INCOME CREDIT COMPLIANCE PROPOSALS; FISCAL YEARS 1998-2007 
                                                                [In millions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
           Provision                  Effective        1998    1999    2000    2001    2002    2003    2004    2005    2006    2007    1998-02   1998-07
--------------------------------------------------------------------------------------------------------------------------------------------------------
Earned Income Credit Compliance  tyba 12/31/96         \1\ 9      18      25      24      21      21      21      21      21      21        88        88
 (``EIC'') Proposals: (a) deny                                                                                                                          
 eligibility for prior acts of                                                                                                                          
 recklessness; (b)                                                                                                                                      
 recertification required when                                                                                                                          
 EIC denied in past; and (c)                                                                                                                            
 due diligence requirement for                                                                                                                          
 paid preparers.                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Gains of less than $500,000.                                                                                                                        
                                                                                                                                                        
Note. Details may not add to totals due to rounding.                                                                                                    
                                                                                                                                                        
Legend for ``Effective'' column: tyba=taxable years beginning after.                                                                                    
                                                                                                                                                        
Source: Joint Committee on Taxation.                                                                                                                    

                     Congress of the United States,
                               Joint Committee on Taxation,
                                     Washington, DC, June 14, 1997.
Mrs. June O'Neill,
Director, Congressional Budget Office, U.S. Congress, Washington, DC.
    Dear Mrs. O'Neill: The Staff of the Joint Committee on 
Taxation has reviewed the revenue reconciliation provisions 
ordered to be reported by the House Committee on Ways and Means 
on June 14, 1997. In accordance with requirements of Public Law 
104-4, the Unfunded Mandates Reform Act of 1995 (the ``Unfunded 
Mandates Act''), we have determined that the following 
provisions contain Federal private sector mandates:
          Phase out the exclusion for qualified tuition 
        reduction (sec. 117(d));
          Modify excise tax on imported halons;
          Constructive sales treatment for appreciated 
        financial positions;
          Disallowance of interest on indebtedness allocable to 
        tax-exempt obligations;
          Gains or losses from certain terminations with 
        respect to property;
          Determination of original issue discount where pooled 
        debt obligations subject to acceleration;
          Tax treatment of extraordinary dividends;
          Recognition of gain in certain section 355 
        transactions;
          Tax treatment of redemptions involving related 
        corporations;
          Modify holding period for dividends received 
        deduction;
          Registration and other provisions relating to 
        confidential corporate tax shelters;
          Certain preferred stock treated as ``boot'';
          Reporting of certain payments made to attorneys;
          Consistency requirement for returns of beneficiaries 
        of estates and trusts;
          Extend and modify Airport and Airway Trust Fund 
        excise taxes;
          Tax kerosene in the same manner as diesel fuel;
          Reduce ethanol tax credit and excise tax exemptions;
          Modify control test and include attribution rules to 
        determine UBIT consequences of certain payments from 
        subsidiaries to tax-exempt organizations;
          Carryover basis on sale of property by tax-exempt 
        related party;
          Extend reporting and proxy tax requirements for 
        political and lobbying expenditures to all section 
        501(c) organizations except charitable organizations;
          Repeal 1986 Act grandfather rules for pension 
        business of certain insurers;
          Termination of suspense accounts for family farm 
        corporations;
          2-year carryback and 20-year carryforward of net 
        operating losses;
          Modification of treatment of company-owned life 
        insurance;
          Modify the basis allocation rules for distributee 
        partners;
          Eliminate the substantial appreciation requirement 
        for inventory of a partnership;
          Extend the 5-year time limit for taxing pre-
        contribution gain to 10 years;
          Restrict income forecast method;
          Repeal 14-day rule on rental of vacation properties;
          Expansion of requirement that involuntarily converted 
        property be replaced with property acquired from an 
        unrelated person;
          Repeal installment sales grandfather rules of 1986 
        Act;
          Inclusion of income from notional principal contracts 
        and stock lending transactions under Subpart F;
          Further restrict like-kind exchanges involving 
        foreign personal property;
          Impose holding period requirement for claiming 
        foreign tax credits with respect to dividends;
          Penalties for failure to file disclosure of exemption 
        for income from the international operation of ships or 
        aircraft by foreign persons;
          Limitation on treaty benefits for payments to hybrid 
        entities;
          Interest on underpayment reduced by foreign tax 
        credit carryback;
          Determination of period of limitations relating to 
        foreign tax credits;
          Optional methods for computing SECA combined;
          Simplified reporting for partners of partnerships;
          Simplified audit procedure for large partnerships;
          Treatment of funeral trusts;
          Replace truck excise tax deduction for tire value 
        with tax credit for excise tax paid on tires;
          Reinstate LUST excise tax and extend through 9/30/02;
          Modify vaccine excise tax;
          Impose telephone excise tax on prepaid telephone 
        cards; and
          Earned income credit compliance provisions.
    The attached revenue table (items highlighted in bold) 
generally reflects amounts that are no greater than the 
aggregate estimated amounts that the private sector will be 
required to spend in order to comply with these Federal private 
sector mandates.
    There are two provisions that may impose a Federal 
intergovernmental mandate on State, local, and tribal 
governments. These provisions are the following:
          Extend and modify the Airport and Airway Trust Fund 
        excise taxes; and
          Modify vaccine excise tax.
    The staff of the Joint Committee on Taxation estimates that 
the direct costs of complying with these Federal 
intergovernmental mandates will not exceed $50,000,000 in 
either the first fiscal year or in any of the 4 fiscal years 
following the first fiscal year.
    If you would like to discuss this information in further 
detail, please feel free to contact me. Thank you for your 
cooperation in this matter.
            Sincerely,
                                           Kenneth J. Kies.
                                                    Chief of Staff.

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

          a. committee oversight findings and recommendations

    With respect to subdivision (A) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that it was the 
result of the Committee's oversight review concerning tax 
burdens of families, expanded educational tax benefits, savings 
and investment incentives, estate and gift tax burdens on 
families and closely-held businesses, extension of certain 
expiring tax provisions, District of Columbia tax incentives, 
welfare-to-work tax credit, various miscellaneous tax 
provisions, revenue-offset provisions (including a 10-year 
extension of financing of the Airport and Airway Trust Fund and 
corporate and other tax reforms), numerous tax simplification 
provisions (most of which have been previously approved by the 
Committee and the Congress in the Balanced Budget Act of 1995 
in the 104th Congress, but not enacted), needed technical 
corrections to recently-passed tax legislation, and an increase 
in the public debt limit as projected under the Balanced Budget 
Agreement and the Fiscal Year 1998 Budget Resolution, that the 
Committee concluded that it is appropriate and timely to enact 
the revenue reconciliation provisions included in the 
Committee's budget reconciliation recommendations.

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

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

                 c. constitutional authority statement

    With respect to clause 2(l)(4) of rule XI of the Rules of 
the House of Representatives (relating to Constitutional 
authority), the Committee states that the Committee's action in 
reporting these revenue reconciliation provisions is derived 
from Article I of the Constitution, Section 7 (``All bills for 
raising revenue shall originate in the House of 
Representatives'') and Section 8 (``The Congress shall have 
power to lay and collect taxes, duties, imposts and excises, to 
pay the debts... of the United States''), and from the 16th 
Amendment to the Constitution.

              d. information relating to unfunded mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee has determined that the following provisions 
of the bill contain Federal mandates on the private sector:
          Phase out the exclusion for qualified tuition 
        reduction (sec. 117(d));
          Modify excise tax on imported halons;
          Constructive sales treatment for appreciated 
        financial positions;
          Disallowance of interest on indebtedness allocable to 
        tax-exempt obligations;
          Gains or losses from certain terminations with 
        respect to property;
           Determination of original issue discount where 
        pooled debt obligations subject to acceleration;
          Tax treatment of extraordinary dividends;
          Recognition of gain in certain section 355 
        transactions;
          Tax treatment of redemptions involving related 
        corporations;
          Modify holding period for dividends received 
        deduction;
          Registration and other provisions relating to 
        confidential corporate tax shelters;
          Certain preferred stock treated as ``boot'';
          Reporting of certain payments made to attorneys;
          Consistency requirement for returns of beneficiaries 
        of estates and trusts;
          Extend and modify Airport and Airway Trust fund 
        excise taxes;
          Tax kerosene in the same manner as diesel fuel;
          Reduce ethanol tax credit and excise tax exemptions;
          Modify control test and include attribution rules to 
        determine UBIT consequences of certain payments from 
        subsidiaries to tax-exempt organizations;
          Carryover basis on sale of property by tax-exempt 
        related party;
          Extend reporting and proxy tax requirements for 
        political and lobbying expenditures to all section 
        501(c) organizations except charitable organizations;
          Repeal 1986 Act grandfather rules for pension 
        business of certain insurers;
          Termination of suspense accounts for family farm 
        corporations;
          2-year carryback and 20-year carryforward of net 
        operating losses;
          Modification of treatment of company-owned life 
        insurance;
          Modify the basis allocation rules for distributee 
        partners;
          Eliminate the substantial appreciation requirement 
        for inventory of a partnership;
          Extend the 5-year time limit for taxing pre-
        contribution gain to 10 years;
          Restrict income forecast method;
          Repeal 14-day rule on rental of vacation properties;
          Expansion of requirement that involuntarily converted 
        property be replaced with property acquired from an 
        unrelated person;
          Repeal installment sales grandfather rules of 1986 
        Act;
          Inclusion of income from notional principal contracts 
        and stock lending transactions under Subpart F;
          Further restrict like-kind exchanges involving 
        foreign personal property;
          Impose holding period requirement for claiming 
        foreign tax credits with respect to dividends;
          Penalties for failure to file disclosure of exemption 
        for income from the international operation of ships or 
        aircraft by foreign persons;
          Limitation on treaty benefits for payments to hybrid 
        entities;
          Interest on underpayment reduced by foreign tax 
        credit carryback;
          Determination of period of limitations relating to 
        foreign tax credits;
          Optional methods for computing SECA combined;
          Simplified reporting for partners of partnerships;
          Simplified audit procedure for large partnerships;
          Treatment of funeral trusts;
          Replace truck excise tax deduction for tire value 
        with tax credit for excise tax paid on tires;
          Reinstate LUST excise tax and extend through 9/30/02;
          Modify vaccine excise tax;
          Impose telephone excise tax on prepaid telephone 
        cards; and
          Earned income credit compliance provisions.
    The costs required to comply with each Federal private 
sector mandate generally are no greater than the estimated 
budget effects of the provision. Benefits from the provisions 
include improved administration of the Federal income tax laws 
and a more accurate measurement of income for Federal income 
tax purposes. In addition, the extension and modification of 
the Airport and Airway Trust Fund excise taxes are designed to 
fund Federal administration of the airways and other important 
air services. The Committee believes the benefits of the bill 
are greater than the costs required to comply with the Federal 
private sector mandates contained in the bill.
    The revenue-raising provisions of the bill are used to 
offset partially the costs of a child credit for certain low- 
and middle-income taxpayers, tax incentives for higher 
education (including the Administration's HOPE credit), capital 
gains tax relief, reduced estate and gift taxes, alternative 
minimum tax relief, and other important tax incentives. These 
provisions are generally designed to ease the burdens of 
Federal income and estate taxation on individuals and small 
business and the revenue-raising provisions of the bill are 
critical to achieving these goals.
    The provision to extend the Airport and Airway Trust Fund 
taxes, the provision relating to State and local tax refund 
offsets, and the modifications to the vaccine excise tax impose 
Federal intergovernmental mandates. The staff of the Joint 
Committee on Taxation estimates that the direct costs of 
complying with these Federal intergovernmental mandates will 
not exceed $50,000,000 in either the first fiscal year or in 
any one of the 4 fiscal years following the first fiscal year. 
The Committee intends that the Federal intergovernmental 
mandates be unfunded because, in the case of the Airport and 
Airway Trust Fund taxes, the mandates fund the maintenance of 
U.S. airports and airways and the Committee believes that it is 
appropriate for State, local, and tribal governments to bear 
their allocable share of the responsibility for such funding. 
In the case of the vaccine excise tax, the Committee believes 
it appropriate for all purchasers of vaccines to pay the excise 
tax, which is used to compensate victims for injuries suffered 
from vaccines. In the case of the other Federal 
intergovernmental mandates, the Committee believes that these 
provisions are necessary to assure the effective administration 
of the Federal tax laws.
    The revenue provisions of the bill generally affect 
activities that are only engaged in by the private sector. The 
provision extending the Airport and Airway Trust Fund excise 
taxes and the modifications to the vaccine excise tax are 
imposed both on the private sector and on State, local, and 
tribal governments and, thus, do not affect the competitive 
balance between such governments and the private sector.

                 e. applicability of house rule xx15(c)

    Rule XXI5(c) of the Rules of the House of Representatives 
provides that no bill or joint resolution, amendment, or 
conference report carrying a Federal income tax rate increase 
shall be considered as passed or agreed to unless so determined 
by a vote of not less than three-fifths of the Members voting. 
Rule XXI5(d) of the Rules of the House of Representatives 
prohibits retroactive Federal income tax rate increases. These 
rules apply only to existing specific statutory Federal income 
tax rates in section 1 (a)-(e), section 11(b) or section 55(b) 
of the Internal Revenue Code of 1986, or adding new income tax 
rates to the highest of such specific income tax rates. The 
Committee has carefully reviewed the provisions of the bill to 
determine whether any of these provisions constitute a Federal 
income tax rate increase within the meaning of the House rules. 
It is the opinion of the Committee that there is no provision 
in the bill that constitutes a Federal income tax rate increase 
within the meaning of House rule XXI5 (c) or (d).

                MISCELLANEOUS HOUSE REPORT REQUIREMENTS

                  Congressional Budget Office Estimate

    Section 403 of the Congressional Budget Act and clause 
2(l)(3)(B) of rule XI require reports to include a timely 
submitted cost estimate by the Congressional Budget Office 
(CBO). CBO provided an estimate of the legislation submitted by 
the Committee on Ways and Means which is included under the 
appropriate title.

                   Constitutional Authority Statement

    Clause 2(l)(4) of rule XI, as amended by section 13 of H. 
Res. 5, requires each committee report on a bill or joint 
resolution of a public character to include a statement citing 
the specific powers granted to the Congress by the Constitution 
to enact the proposed law. The Committee on the Budget states 
that its action in reporting this bill is derived from Article 
I of the Constitution, Section 5 (``Each House may determine 
the Rules of its Proceedings'') and Section 8 (``The Congress 
shall have the power to make all Laws which shall be necessary 
and proper . . .'').

                  Budget Committee Oversight Findings

    Clause 2(l)(3)(A) of rule XI requires each committee report 
to contain oversight findings and recommendations required 
pursuant to clause (2)(b)(1) of rule X. The Committee on the 
Budget has examined its activities over the past year and has 
determined that there are no specific oversight findings on the 
text of the reported bill.

 Oversight Findings and Recommendations of the Committee on Government 
                          Reform and Oversight

    Clause 2(l)(3)(D) of rule XI requires each committee report 
to contain a summary of oversight findings and recommendations 
made by the Government Reform and Oversight Committee pursuant 
to clause 4(c)(2) of rule X, whenever such findings have been 
timely submitted. The Committee on the Budget has received no 
such findings or recommendations from the Committee on 
Government Reform and Oversight on the text of the reported 
bill.

                            Committee Votes

    Clause 2(l)(2)(B) of rule XI requires each committee report 
to accompany any bill or resolution of a public character, 
ordered to include the total number of votes cast for and 
against on each rollcall vote on a motion to report and any 
amendment offered to the measure or matter, together with the 
names of those voting for and against.
    On June 20, 1997, the committee met in open session, a 
quorum being present. The committee ordered reported the text 
of the Revenue Reconciliation Act of 1997 pursuant to the 
reconciliation instructions contained in the conference report 
on H.Con.Res. 84, the Concurrent Resolution on the Budget for 
Fiscal Year 1998.
    The following votes were taken by the committee:
    1. Mr. Hobson moved that the committee order reported with 
a favorable recommendation the text of the Revenue 
Reconciliation Act of 1997, pursuant to clause 1 of rule XX and 
authorize the chairman to offer a motion to go to conference. 
The motion was agreed to by a rollcall vote of 20 ayes and 12 
noes.

----------------------------------------------------------------------------------------------------------------
                                    Aye       No        Pres                          Aye       No        Pres  
----------------------------------------------------------------------------------------------------------------
Mr. Kasich, Chairman...........        X   ........  .........  Mr. Spratt,        ........        X   .........
                                                                 Ranking.                                       
Mr. Hobson.....................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Shays......................        X   ........  .........  Mr. Mollohan.....  ........  ........  .........
Mr. Herger.....................        X   ........  .........  Mr. Costello.....  ........        X   .........
Mr. Bunning....................  ........  ........  .........  Mrs. Mink........  ........        X   .........
Mr. Smith of Texas.............  ........  ........  .........  Mr. Pomeroy......  ........  ........  .........
Mr. Miller.....................        X   ........  .........  Ms. Woolsey......  ........        X   .........
Mr. Franks.....................        X   ........  .........  Ms. Roybal-Allard  ........  ........  .........
Mr. Smith of Michigan..........        X   ........  .........  Ms. Rivers.......  ........        X   .........
Mr. Inglis.....................  ........  ........  .........  Mr. Doggett......  ........        X   .........
Ms. Molinari...................        X   ........  .........  Mr. Thompson.....  ........  ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. Cardin.......  ........        X   .........
Mr. Hoekstra...................        X   ........  .........  Mr. Minge........  ........        X   .........
Mr. Shadegg....................        X   ........  .........  Mr. Baesler......  ........  ........  .........
Mr. Radanovich.................        X   ........  .........  Mr. Bentsen......  ........        X   .........
Mr. Bass.......................        X   ........  .........  Mr. Davis........  ........        X   .........
Mr. Neumann....................        X   ........  .........  Mr. Sherman......  ........  ........  .........
Mr. Parker.....................        X   ........  .........  Mr. Weygand......  ........  ........  .........
Mr. Ehrlich....................        X   ........  .........  Mrs. Clayton.....  ........  ........  .........
Mr. Gutknecht..................        X                                                                        
Mr. Hilleary...................        X                                                                        
Ms. Granger....................        X                                                                        
Mr. Sununu.....................        X                                                                        
Mr. Pitts......................        X                                                                        
----------------------------------------------------------------------------------------------------------------

    2. Mr. McDermott moved that the Committee on the Budget 
direct its Chairman to request, on behalf of the committee, 
that the rule for the floor consideration of the second 
(revenue) reconciliation bill make in order an amendment to 
insert correction of the marriage penalty and to strike tax 
provisions that explode in cost and to strike certain corporate 
tax cuts. The motion failed by a rollcall vote of 11 ayes and 
21 noes.

----------------------------------------------------------------------------------------------------------------
                                    Aye       No        Pres                          Aye       No        Pres  
----------------------------------------------------------------------------------------------------------------
Mr. Kasich, Chairman...........  ........        X   .........  Mr. Spratt,              X   ........  .........
                                                                 Ranking.                                       
Mr. Hobson.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. Shays......................  ........        X   .........  Mr. Mollohan.....  ........  ........  .........
Mr. Herger.....................  ........        X   .........  Mr. Costello.....        X   ........  .........
Mr. Bunning....................  ........  ........  .........  Mrs. Mink........        X   ........  .........
Mr. Smith of Texas.............  ........  ........  .........  Mr. Pomeroy......  ........  ........  .........
Mr. Miller.....................  ........        X   .........  Ms. Woolsey......        X   ........  .........
Mr. Franks.....................  ........        X   .........  Ms. Roybal-Allard  ........  ........  .........
Mr. Smith of Michigan..........  ........        X   .........  Ms. Rivers.......        X   ........  .........
Mr. Inglis.....................  ........  ........  .........  Mr. Doggett......        X   ........  .........
Ms. Molinari...................  ........        X   .........  Mr. Thompson.....  ........  ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Hoekstra...................  ........        X   .........  Mr. Minge........        X   ........  .........
Mr. Shadegg....................  ........        X   .........  Mr. Baesler......  ........  ........  .........
Mr. Radanovich.................  ........        X   .........  Mr. Bentsen......        X   ........  .........
Mr. Bass.......................  ........        X   .........  Mr. Davis........        X   ........  .........
Mr. Neumann....................  ........        X   .........  Mr. Sherman......  ........  ........  .........
Mr. Parker.....................  ........        X   .........  Mr. Weygand......  ........  ........  .........
Mr. Ehrlich....................  ........        X   .........  Mrs. Clayton.....  ........  ........  .........
Mr. Gutknecht..................  ........        X                                                              
Mr. Hilleary...................  ........        X                                                              
Ms. Granger....................  ........        X                                                              
Mr. Sununu.....................  ........        X                                                              
Mr. Pitts......................  ........        X                                                              
----------------------------------------------------------------------------------------------------------------

    3. Mr. Cardin moved that the Committee on the Budget direct 
its Chairman request, on behalf of the committee, that the rule 
for floor consideration of the second (revenue) reconciliation 
bill shall make in order an amendment to provide that the 
children's tax credit be available to families before any 
benefit for which the family is eligible under the Earned 
Income Tax Credit is calculated, and to provide that the 
dependent tax credit shall not cause any reduction in the 
children's tax credit. The motion failed by a rollcall vote of 
11 ayes and 21 noes.

----------------------------------------------------------------------------------------------------------------
                                    Aye       No        Pres                          Aye       No        Pres  
----------------------------------------------------------------------------------------------------------------
Mr. Kasich, Chairman...........  ........        X   .........  Mr. Spratt,              X   ........  .........
                                                                 Ranking.                                       
Mr. Hobson.....................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. Shays......................  ........        X   .........  Mr. Mollohan.....  ........  ........  .........
Mr. Herger.....................  ........        X   .........  Mr. Costello.....        X   ........  .........
Mr. Bunning....................  ........  ........  .........  Mrs. Mink........        X   ........  .........
Mr. Smith of Texas.............  ........  ........  .........  Mr. Pomeroy......  ........  ........  .........
Mr. Miller.....................  ........        X   .........  Ms. Woolsey......        X   ........  .........
Mr. Franks.....................  ........        X   .........  Ms. Roybal-Allard  ........  ........  .........
Mr. Smith of Michigan..........  ........        X   .........  Ms. Rivers.......        X   ........  .........
Mr. Inglis.....................  ........  ........  .........  Mr. Doggett......        X   ........  .........
Ms. Molinari...................  ........        X   .........  Mr. Thompson.....  ........  ........  .........
Mr. Nussle.....................  ........        X   .........  Mr. Cardin.......        X   ........  .........
Mr. Hoekstra...................  ........        X   .........  Mr. Minge........        X   ........  .........
Mr. Shadegg....................  ........        X   .........  Mr. Baesler......  ........  ........  .........
Mr. Radanovich.................  ........        X   .........  Mr. Bentsen......        X   ........  .........
Mr. Bass.......................  ........        X   .........  Mr. Davis........        X   ........  .........
Mr. Neumann....................  ........        X   .........  Mr. Sherman......  ........  ........  .........
Mr. Parker.....................  ........        X   .........  Mr. Weygand......  ........  ........  .........
Mr. Ehrlich....................  ........        X   .........  Mrs. Clayton.....  ........  ........  .........
Mr. Gutknecht..................  ........        X                                                              
Mr. Hilleary...................  ........        X                                                              
Ms. Granger....................  ........        X                                                              
Mr. Sununu.....................  ........        X                                                              
Mr. Pitts......................  ........        X                                                              
----------------------------------------------------------------------------------------------------------------

    4. Mr. Minge moved that the Committee on the Budget direct 
its Chairman to request, on behalf of the committee, that the 
rule for the floor consideration of the second (revenue) 
reconciliation bill permit a floor amendment offered by Mr. 
Minge, or his designee, regarding balanced budget enforcement 
procedures which apply to spending revenues. The motion failed 
by voice vote.
    5. Mr. Minge moved that the Committee on the Budget direct 
its Chairman to request, on behalf of the committee, that the 
rule for the floor consideration of the second (revenue) 
reconciliation bill permit a floor amendment offered by Mr. 
Minge, or his designee, to strike Section 1043 reducing the 
ethanol tax credit and replace lost revenues through a one-year 
delay in the phase out of the alternative minimum tax 
applicable to business activities. The motion was withdrawn.
    6. Mr. Davis moved that the Committee on the Budget direct 
its Chairman to request, on behalf of the committee, that the 
rule for the floor consideration of the second (revenue) 
reconciliation bill should make in order an amendment to 
replace the provisions in the bill providing tax relief for 
higher education expenses with the proposals initiated by 
President Clinton, as included in the Ways and Means Democrats' 
alternative. The motion failed by voice vote.
    7. Mr. Spratt moved that the Committee on the Budget direct 
its Chairman to request, on behalf of the committee, that the 
rule for the floor consideration of the second (revenue) 
reconciliation bill strike the proposal providing special 
tariff and quota protection for products such as textiles, 
apparels, footwear, tuna, petroleum and petroleum products 
coming from the Caribbean Basin Initiative beneficiary nations. 
The motion failed by voice vote.

                        Changes in Existing Law

    Clause 3 of rule XIII provides that reports include the 
text of statutes that are proposed to be repealed and a 
comparative print of that part of the bill proposed to be 
amended whenever the bill repeals or amends any statute. The 
required matter is included in the report language for the 
legislative recommendations submitted by the Committee on Ways 
and Means and reported to the House by the Committee on the 
Budget.

                       Unfunded Mandate Statement

    Section 423 of the Congressional Budget and Impoundment 
Control Act of 1974 requires a statement of whether the 
provisions of the reported bill include unfunded mandates. The 
committee received a letter regarding unfunded mandates from 
the Director of the Congressional Budget Office. [See the 
Congressional Budget Office Cost Estimate.]

     Views of the Members of Committees Submitting Reconciliation 
                            Recommendations

    The views following are from members of committees that 
have submitted reconciliation recommendations pursuant to H. 
Con. Res. 84. Although not technically required under rule XI, 
these views include those submitted by the authorizing 
committees that submitted the reconciliation recommendations 
that comprise the text of the bill.




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