[House Report 105-220]
[From the U.S. Government Publishing Office]




   105th Congress                                       Report
     1st Session        HOUSE OF REPRESENTATIVES       105-220
_______________________________________________________________________

                                    



 
                      TAXPAYER RELIEF ACT OF 1997

                               ----------                              

                           CONFERENCE REPORT

                              to accompany

                               H.R. 2014






                 July 30, 1997.--Ordered to be printed




105th Congress                                         Report
  1st Session             HOUSE OF REPRESENTATIVES     105-220
_______________________________________________________________________

                                    



                      TAXPAYER RELIEF ACT OF 1997

                               ----------                              

                           CONFERENCE REPORT

                              to accompany

                               H.R. 2014






                 July 30, 1997.--Ordered to be printed

                               ----------                              

                    U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 1997



                            C O N T E N T S

                               ----------                              
                                                                   Page
I. CHILD AND DEPENDENT CARE TAX CREDIT; HEALTH CARE FOR CHILDREN.   330
    A. Child Tax Credit (sec. 101 (a), (c), and (d) of the House 
      bill and sec. 101 of the Senate amendment).................   330
    B. Expand Definition of High-Risk Individuals With Respect to 
      Tax-Exempt State-Sponsored Organizations Providing Health 
      Coverage (sec. 101(b) of the House bill)...................   334
    C. Indexing of the Dependent Care Credit; Phase Out for High-
      Income Taxpayers (sec. 102 of the House bill)..............   335
    D. Tax Credit for Employer Expenses for Child Care Facilities 
      (sec. 103 of the Senate amendment).........................   336
    E. Expansion of Coordinated Enforcement Efforts Between the 
      Internal Revenue Service and the Health and Human Services 
      Office of Child Support Enforcement (sec. 104 of the Senate 
      amendment).................................................   337
    F. Penalty-Free Withdrawals From IRAs for Adoption Expenses 
      (sec. 105 of the Senate amendment).........................   338
II. EDUCATION TAX INCENTIVES.....................................   339
    A. Tax Benefits Relating to Education Expenses...............   339
        1. HOPE tax credit and Lifetime Learning tax credit for 
          higher education tuition expenses (sec. 201 of the 
          House bill)............................................   339
        2. Tax treatment of qualified State tuition programs and 
          education IRAs; exclusion for certain distributions 
          from education IRAs used to pay qualified higher 
          education expenses (secs. 202 (a), (b), and (d) and 
          211-212 of the House bill and secs. 211-213 of the 
          Senate amendment)......................................   348
        3. Phase out qualified tuition reduction exclusion (sec. 
          202(c) of the House bill)..............................   365
        4. Deduction for student loan interest (sec. 202 of the 
          Senate amendment)......................................   366
        5. Penalty-free withdrawals from IRAs for higher 
          education expenses (sec. 203 of the House bill and sec. 
          203 of the Senate amendment)...........................   368
        6. Tax credit for expenses for education which 
          supplements elementary and secondary education (sec. 
          204 of the House bill).................................   369
        7. Certain teacher education expenses not subject to 2-
          percent floor on miscellaneous itemized deductions 
          (sec. 224 of the Senate amendment).....................   370
    B. Other Education-Related Tax Provisions....................   371
        1. Extension of exclusion for employer-provided 
          educational assistance (sec. 221 of the House bill and 
          sec. 221 of the Senate amendment)......................   371
        2. Modification of $150 million limit on qualified 
          501(c)(3) bonds other than hospital bonds (sec. 222 of 
          the House bill and sec. 222 of the Senate amendment)...   372
        3. Enhanced deduction for corporate contributions of 
          computer technology and equipment (sec. 223 of the 
          House bill)............................................   373
        4. Expansion of arbitrage rebate exception for certain 
          bonds (sec. 223 of the Senate amendment)...............   374
        5. Treatment of cancellation of certain student loans 
          (sec. 224 of the House bill and sec. 225 of the Senate 
          amendment).............................................   375
        6. Tax credit for holders of qualified zone academy bonds   376
III. SAVINGS AND INVESTMENT TAX INCENTIVES.......................   378
    A. Individual Retirement Arrangements........................   378
        1. Increase deductible IRA phase-out range and modify 
          active participant rule (sec. 301 of the Senate 
          amendment).............................................   378
        2. Tax-free nondeductible IRAs (sec. 301 of the House 
          bill and sec. 302 of the Senate amendment).............   379
        3. Modifications to early withdrawal tax (sec. 301 of the 
          House bill and sec. 303 of the Senate amendment).......   381
        4. IRA investments in coins and bullion (sec. 304 of the 
          Senate amendment)......................................   381
    B. Capital Gains Provisions..................................   382
        1. Maximum rate of tax on net capital gains of 
          individuals (sec. 311 of the House bill and sec. 311 of 
          the Senate amendment)..................................   382
        2. Small business stock (sec. 311 of the House bill and 
          secs. 312-313 of the Senate amendment).................   383
        3. Indexing of certain assets for purposes of determining 
          gain (sec. 312 of the House bill)......................   385
        4. Exclusion of gain from sale of principal residence 
          (sec. 313 of the House bill and sec. 314 of the Senate 
          amendment).............................................   386
        5. Corporate capital gains (sec. 321 of the House bill)..   387
IV. ALTERNATIVE MINIMUM TAX PROVISIONS...........................   389
    A. Increase Exemption Amount Applicable to Individual 
      Alternative Minimum Tax (sec. 401 of the House bill and 
      sec. 102 of the Senate amendment)..........................   389
    B. Repeal Alternative Minimum Tax for Small Businesses and 
      Repeal the Depreciation Adjustment (secs. 402-403 of the 
      House bill and secs. 55-56 of the Senate amendment)........   390
    C. Repeal AMT Installment Method Adjustment for Famers (sec. 
      404 of the House bill and sec. 732 of the Senate amendment)   391
V. ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS..........   393
    A. Estate and Gift Tax Provisions............................   393
        1. Increase in estate and gift tax unified credit (sec. 
          501(a) of the House bill and sec. 401(a) of the Senate 
          amendment).............................................   393
        2. Indexing of certain other estate and gift tax 
          provisions (sec. 501(b)-(e) of the House bill and sec. 
          401(b)-(e) of the Senate amendment)....................   394
        3. Estate tax exclusion for qualified family-owned 
          businesses (sec. 402 of the Senate amendment)..........   395
        4. Reduction in estate tax for certain land subject to 
          permanent conservation easement (sec. 403 of the Senate 
          amendment).............................................   401
        5. Installment payments of estate tax attributable to 
          closely held businesses (secs. 502-503 of the House 
          bill and (secs. 404-405 of the Senate amendment).......   403
        6. Estate tax recapture from cash leases of specially-
          valued property (sec. 504 of the House bill and sec. 
          406 of the Senate amendment)...........................   405
        7. Clarify eligibility for extension of time for payment 
          of estate tax (sec. 505 of the House bill).............   406
        8. Gifts may not be revalued for estate tax purposes 
          after expiration of statute of limitations (sec. 506 of 
          the House bill)........................................   407
        9. Repeal of throwback rules applicable to domestic 
          trusts (sec. 507 of the House bill)....................   408
        10. Unified credit of decedent increased by unified 
          credit of spouse used on split gift included in 
          decedent's gross estate (sec. 508 of the House bill)...   410
        11. Reformation of defective bequests to spouse of 
          decedent (sec. 509 of the House bill)..................   411
    B. Generation-Skipping Tax Provisions........................   412
        1. Severing of trusts holding property having an 
          inclusion ratio of greater than zero (sec. 511 of the 
          House bill)............................................   412
        2. Modification of generation-skipping transfer tax for 
          transfers to individuals with deceased parents (sec. 
          512 of the House bill and sec. 407 of the Senate 
          amendment).............................................   413
VI. EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS.................   415
    A. Research Tax Credit (sec. 601 of the House bill and sec. 
      501 of the Senate amendment)...............................   415
    B. Contributions of Stock to Private Foundations (sec. 602 of 
      the House bill and sec. 502 of the Senate amendment).......   419
    C. Work Opportunity Tax Credit (sec. 603 of the House bill 
      and sec. 503 of the Senate amendment)......................   421
    D. Orphan Drug Tax Credit (sec. 604 of the House bill and 
      sec. 504 of the Senate amendment)..........................   425
VII. DISTRICT OF COLUMBIA TAX INCENTIVES (secs. 701-702 of the 
  House bill and sec. 601 of the Senate amendment)...............   426
VIII. WELFARE-TO-WORK TAX CREDIT (sec. 801 of the House bill)....   440
IX. MISCELLANEOUS PROVISIONS.....................................   442
    A. Excise Tax Provisions.....................................   442
        1. Repeal excise tax on diesel fuel used in recreational 
          motorboats (sec. 901 of the House bill and sec. 701 of 
          the Senate amendment)..................................   442
        2. Continued application of tax on imported recycled 
          Halon-1211 (sec. 902 of the House bill)................   442
        3. Transfer of General Fund highway fuels tax revenues to 
          the Highway Trust Fund (sec. 704 of the Senate 
          amendment).............................................   443
        4. Tax certain alternative fuels based on energy 
          equivalency to gasoline (sec. 705 of the Senate 
          amendment).............................................   444
        5. Extend and modify tax benefits for ethanol (sec. 605 
          of the House bill and sec. 707 of the Senate amendment)   445
        6. Treat certain gasoline ``chain retailers'' as 
          wholesale distributors under the gasoline excise tax 
          refunds rules (sec. 904 of the House bill).............   445
        7. Exemption of electric and other clean-fuel motor 
          vehicles from luxury automobile classification (sec. 
          905 of the House bill).................................   446
        8. Reduce rate of alcohol excise tax on certain hard 
          ciders (sec. 703 of the Senate amendment)..............   447
        9. Study feasibility of moving collection point for 
          distilled spirits excise tax (sec. 706 of the Senate 
          amendment).............................................   448
        10. Codify Treasury Department regulations regulating 
          wine labels (sec. 708 of the Senate amendment).........   449
        11. Uniform rate of excise tax on vaccines (sec. 903 of 
          the House bill and sec. 844 of the Senate amendment)...   449
    B. Disaster Relief Provisions................................   451
        1. Authority to postpone certain tax-related deadlines by 
          reason of Presidentially declared disaster (sec. 921 of 
          the House bill)........................................   451
        2. Use of certain appraisals to establish amount of 
          disaster loss (sec. 922 of the House bill).............   451
        3. Treatment of livestock sold on account of weather-
          related conditions (sec. 923 of the House bill and sec. 
          721 of the Senate amendment)...........................   452
        4. Mortgage bond financing for residences located in 
          Presidentially declared disaster areas (sec. 924 of the 
          House bill and sec. 723 of the Senate amendment).......   453
        5. Rules relating to denial of earned income credit on 
          basis of disqualified income (sec. 722 of the Senate 
          amendment).............................................   454
        6. Penalty-free withdrawals from IRAs for disaster-
          related expenses (sec. 724 of the Senate amendment)....   454
        7. Elimination of 10-percent floor for casualty losses 
          resulting from Presidentially declared disaster (sec. 
          725 of the Senate amendment)...........................   455
        8. Requirement to abate interest by reason of 
          Presidentially declared disaster (sec. 726 of the 
          Senate amendment)......................................   456
    C. Provisions Relating to Employment Taxes...................   456
        1. Employment tax status of distributors of bakery 
          products (sec. 931 of the House bill...................   456
        2. Clarification of standard to be used in determining 
          tax status of retail securities brokers (sec. 932 of 
          the House bill and sec. 779 of the Senate amendment)...   457
        3. Clarification of exemption from self-employment tax 
          for certain termination payments received by former 
          insurance salesmen (sec. 933 of the House bill)........   457
        4. Safe harbor for independent contractors (sec. 934 of 
          the House bill)........................................   459
        5. Combined employment tax reporting demonstration 
          project (sec. 769 of the Senate amendment).............   460
    D. Provisions Relating to Small Businesses...................   461
        1. Delay imposition of penalties for failure to make 
          payments electronically through EFTPS (sec. 941 of the 
          House bill and sec. 731 of the Senate amendment).......   461
        2. Home office deduction: clarification of definition of 
          principal place of business (sec. 942 of the House 
          bill)..................................................   463
        3. Increase deduction for health insurance costs of self-
          employed individuals (sec. 733 of the Senate amendment)   465
    E. Other Provisions..........................................   466
        1. Shrinkage estimates for inventory accounting (sec. 951 
          of the House bill and sec. 1013 of the Senate 
          amendment).............................................   466
        2. Treatment of workmen's compensation lability under 
          rules for certain personal injury liability assignments 
          (sec. 952 of the House bill)...........................   468
        3. Tax-exempt status for certain state workmen's 
          compensation act companies (sec. 953 of the House bill 
          and sec. 761 of the Senate amendments).................   469
        4. Election for 1987 partnerships to continue exception 
          from treatment of publicly traded partnerships as 
          corporations (sec. 954 of the House bill and sec. 762 
          of the Senate amendment)...............................   471
        5. Exclusion from UBIT for certain corporate sponsorship 
          payments (sec. 955 of the House bill and sec. 763 of 
          the Senate amendment)..................................   473
        6. Timeshare associations (sec. 956 of the House bill and 
          sec. 764 of the Senate amendments).....................   476
        7. Deferral of gain on certain sales of farm product 
          refiners and processors (sec. 958 of the House bill)...   478
        8. Exception from real estate reporting requirements for 
          sales of principal residences (sec. 959 of the House 
          bill and secs. 314(c) and 601(d) of the Senate 
          amendment).............................................   479
        9. Increased deduction for business meals while operating 
          under Department of Transportation hours of service 
          limitations (sec. 960 of the House bill and sec. 765 of 
          the Senate amendment)..................................   480
        10. Deductibility of meals provided for the convenience 
          of the employer and provided by remote seafood 
          processors (secs. 765 and 778 of the Senate amendment).   481
        11. Deduction of traveling expenses while working away 
          from home on qualified construction projects (sec. 775 
          of the Senate amendment)...............................   483
        12. Provide above-the-line-deduction for certain business 
          expenses (sec. 766 of the Senate amendment)............   484
        13. Increase in standard mileage rate for purposes of 
          computing charitable deduction (sec. 767 of the Senate 
          amendment).............................................   484
        14. Expensing of environmental remediation costs 
          (``brownfields'') (sec. 768 of the Senate amendment)...   485
        15. Treatment of consolidation of certain mutual savings 
          bank life insurance departments (sec. 962 of the House 
          bill)..................................................   488
        16. Offset of past-due, legally enforceable State tax 
          obligations against Federal overpayments (sec. 963 of 
          the House bill)........................................   490
        17. Modify limits on depreciation of luxury automobiles 
          for certain clean-burning fuel and electric vehicles 
          (sec. 964 of the House bill)...........................   491
        18. Survivor benefits of public safety officers killed in 
          the line of duty (sec. 965 of the House bill and sec. 
          784 of the Senate amendment)...........................   492
        19. Temporary suspension of income limitations on 
          percentage depletion for production from marginal wells 
          (sec. 966 of the House bill and sec. 772 of the Senate 
          amendment).............................................   493
        20. Extend production credit for electricity produced 
          from wind and ``closed loop'' biomass (sec. 771 of the 
          Senate amendment)......................................   494
        21. Modification of advance refunding rules for certain 
          tax-exempt bonds issued by the Virgin Islands (sec. 957 
          of the House bill).....................................   494
        22. Qualified small-issue bonds (sec. 770 of the Senate 
          amendment).............................................   495
        23. Treatment of bonds issued by the Federal Home Loan 
          Bank Board under the Federal guarantee rules (sec. 774 
          of the Senate amendment)...............................   496
        24. Current refundings of certain bonds issued by Indian 
          Tribal governments (sec. 789 of the Senate amendment)..   496
        25. Purchasing of receivables by tax-exempt hospital 
          cooperative service organizations (sec. 773 of the 
          Senate amendment)......................................   497
        26. Charitable contribution deduction for certain 
          expenses incurred in support of Native Alaskan 
          subsistence whaling (sec. 776 of the Senate amendment).   498
        27. Designation of additional empowerment zones; 
          modification of empowerment zone and enterprise 
          community criteria (sec. 777 of the Senate amendment)..   499
        28. Conducting of certain qualified games of chance not 
          treated as unrelated trade or business (sec. 783 of the 
          Senate amendment)......................................   505
        29. Exclusion from income of certain severance payments 
          (sec. 788(a) of the Senate amendment)..................   507
        30. Special rule for thrift institutions that became 
          large banks (sec. 790 of the Senate amendment).........   507
        31. Income averaging for farmers (sec. 792 of the Senate 
          amendment).............................................   508
        32. Intercity Passenger Rail Fund; elective carryback of 
          existing net operating losses of the National Railroad 
          Passenger Corporation (Amtrak) (sec. 702 of the Senate 
          amendment).............................................   509
X. REVENUE-INCREASE PROVISIONS...................................   512
    A. Financial Products........................................   512
        1. Require recognition of gain on certain appreciated 
          positions in personal property (sec. 1001(a) of the 
          House bill and sec. 801(a) of the Senate amendment)....   512
        2. Election of mark-to-market for securities traders and 
          for traders and dealers in commodities (sec. 1001(b) of 
          the House bill and sec. 801(b) of the Senate amendment)   515
        3. Limitation on exception for investment companies under 
          section 351 (sec. 1002 of the House bill and sec. 802 
          of the Senate amendment)...............................   516
        4. Disallowance of interest on indebtedness allocable to 
          tax-exempt obligations (sec. 1003 of the House bill)...   517
        5. Gains and losses from certain terminations with 
          respect to property (sec. 1004 of the House bill and 
          sec. 803 of the Senate amendment)......................   520
        6. Determination of original issue discount where pooled 
          debt obligations subject to acceleration (sec. 1005 of 
          the House bill)........................................   522
        7. Deny interest deduction on certain debt instruments 
          (sec. 1006 of the House bill)..........................   523
    B. Corporate Organizations and Reorganizations...............   524
        1. Require gain recognition for certain extraordinary 
          dividends (sec. 1011 of the House bill and sec. 811 of 
          the Senate amendment)..................................   524
        2. Require gain recognition on certain distributions of 
          controlled corporation stock (sec. 1012 of the House 
          bill and sec. 812 of the Senate amendment).............   527
        3. Reform tax treatment of certain corporate stock 
          transfers (sec. 1013 of the House bill and sec. 813 of 
          the Senate amendment)..................................   537
        4. Modify holding period for dividends-received deduction 
          (sec. 1014 of the House bill and sec. 814 of the Senate 
          amendment).............................................   538
    C. Other Corporate Provisions................................   539
        1. Registration of confidential corporate tax shelters 
          and substantial understatement penalty (sec. 1021 of 
          the House bill and sec. 821 of the Senate amendment)...   539
        2. Treat certain preferred stock as ``boot'' (sec. 1022 
          of the House bill and sec. 822 of the Senate amendment)   543
    D. Administrative Provisions.................................   545
        1. Reporting of certain payments made to attorneys (sec. 
          1031 of the House bill)................................   545
        2. Information reporting on persons receiving contract 
          payments from certain Federal agencies (sec. 1032 of 
          the House bill and sec. 831 of the Senate amendment)...   547
        3. Disclosure of tax return information for 
          administration of certain veterans programs (sec. 1033 
          of the House bill and sec. 832 of the Senate amendment)   548
        4. Establish IRS continuous levy and improve debt 
          collection.............................................   549
            A. Continuous levy (sec. 1034 of the House bill and 
              sec. 834 of the Senate amendment)..................   549
            B. Modifications of levy exemptions (secs. 1035-1036 
              of the House bill and secs. 835-836 of the Senate 
              amendment).........................................   550
        5. Consistency rule for beneficiaries of trusts and 
          estates (sec. 1037 of the House bill and sec. 833 of 
          the Senate amendment)..................................   551
    E. Excise Tax Provisions.....................................   551
        1. Extension and modification of Airport and Airway Trust 
          Fund excise taxes (sec. 1041 of the House bill and sec. 
          841 of the Senate amendment)...........................   551
        2. Extend diesel fuel excise tax rules to kerosene (sec. 
          1042 of the House bill)................................   556
        3. Reinstate Leaking Underground Storage Tank Trust Fund 
          excise tax (sec. 1043 of the House bill and sec. 842 of 
          the Senate amendment)..................................   557
        4. Application of communications excise tax to prepaid 
          telephone cards (sec. 1044 of the House bill and sec. 
          843 of the Senate amendment)...........................   557
        5. Modify treatment of tires under the heavy vehicle 
          retail excise tax on trucks (sec. 1402 of the House 
          bill and sec. 845 of the Senate amendment).............   559
        6. Increase tobacco excise taxes (sec. 846 of the Senate 
          amendment).............................................   560
    F. Provisions Relating to Tax-Exempt Organizations...........   561
        1. Extend UBIT rules to second-tier subsidiaries and 
          amend control test (sec. 1051 of the House bill and 
          sec. 851 of the Senate amendment)......................   561
        2. Limitation on increase in basis of property resulting 
          from sale by tax-exempt entity to related person (sec. 
          1052 of the House bill and sec. 852 of the Senate 
          amendment).............................................   563
        3. Reporting and proxy tax requirements for political and 
          lobbying expenditures of certain tax-exempt 
          organizations (sec. 1053 of the House bill)............   564
        4. Repeal grandfather rule with respect to pension 
          business of certain insurers (sec. 1054 of the House 
          bill and sec. 853 of the Senate amendment).............   565
    G. Foreign Provisions........................................   567
        1. Inclusion of income from notional principal contracts 
          and stock lending transactions under Subpart F (sec. 
          1171 of the House bill and sec. 861 of the Senate 
          amendment).............................................   567
        2. Restrict like-kind exchange rules for certain personal 
          property (sec 1172 of the House bill and sec. 862 of 
          the Senate amendment)..................................   568
        3. Impose holding period requirement for claiming foreign 
          tax credits with respect to dividends (sec. 1173 of the 
          House bill and sec. 863 of the Senate amendment).......   569
        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 House 
          bill)..................................................   570
        5. Limitation on treaty benefits for payments to hybrid 
          entities (sec. 1175 of the House bill and sec. 742 of 
          the Senate amendment)..................................   572
        6. Interest on underpayments that are reduced by foreign 
          tax credit carrybacks (sec. 1176 of the House bill and 
          sec. 865 of the Senate amendment)......................   575
        7. Determination of period of limitations relating to 
          foreign tax credits (sec. 1177 of the House bill and 
          sec. 866 of the Senate amendment)......................   576
        8. Treatment of income from certain sales of inventory as 
          U.S. source (sec. 864 of the Senate amendment).........   577
        9. Modify foreign tax credit carryover rules (sec. 867 of 
          the Senate amendment)..................................   578
        10. Repeal special exception to foreign tax credit 
          limitation for alternative minimum tax purposes (sec. 
          868 of the Senate amendment)...........................   578
    H. Pension and Employee Benefit Provisions...................   579
        1. Cashout of certain accrued benefits (sec. 917 of the 
          House bill and sec. 879 of the Senate amendment).......   579
        2. Election to receive taxable cash compensation in lieu 
          of nontaxable parking benefits (sec. 880 of the Senate 
          amendment).............................................   580
        3. Repeal of excess distribution and excess retirement 
          accumulation taxes (sec. 882 of the Senate amendment)..   581
        4. Tax on prohibited transactions (sec. 884 of the Senate 
          amendment).............................................   581
        5. Basis recovery rules (sec. 885 of the Senate 
          amendment).............................................   582
    I. Other Revenue-Increase Provisions.........................   583
        1. Phase out suspense accounts for certain large farm 
          corporations (sec. 1061 of the House bill and sec. 871 
          of the Senate amendment)...............................   583
        2. Modify net operating loss carryback and carryforward 
          rules (sec. 1062 of the House bill and sec. 872 of the 
          Senate amendment)......................................   584
        3. Expand the limitations on deductibility of interest 
          and premiums with respect to life insurance, endowment, 
          and annuity contracts (sec. 1063 of the House bill and 
          sec. 873 of the Senate amendment)......................   585
        4. Allocation of basis of properties distributed to a 
          partner by a partnership (sec. 1064 of the House bill 
          and sec. 874 of the Senate amendment)..................   591
        5. Treatment of inventory items of a partnership (sec. 
          1065 of the House bill and sec. 875 of the Senate 
          amendment).............................................   593
        6. Treatment of appreciated property contributed to a 
          partnership (sec. 1066 of the House bill)..............   594
        7. Earned income credit compliance provisions (sec. 1067 
          of the House bill and sec. 5851 of the Senate amendment 
          to H.R. 2015)..........................................   596
            a. Deny EIC eligibility for prior acts of 
              recklessness or fraud..............................   597
            b. Recertification required when taxpayer found to be 
              ineligible for EIC in past.........................   598
            c. Due diligence requirements for paid preparers.....   599
            d. Modify the definition of AGI used to phase out the 
              EIC................................................   600
        8. Eligibility for income forecast method (sec. 1068 of 
          the House bill and sec. 876 of the Senate amendment)...   601
        9. Require taxpayers to include rental value of residence 
          in income without regard to period of rental (sec. 1069 
          of the House bill).....................................   602
        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 
          House bill and sec. 877 of the Senate amendment).......   603
        11. Repeal of exception for certain sales by 
          manufacturers to dealers (sec. 1071 of the House bill 
          and sec. 878 of the Senate amendment)..................   603
        12. Extension of Federal unemployment surtax (sec. 881 of 
          the Senate amendment)..................................   604
        13. Treatment of charitable remainder trusts (sec. 883 of 
          the Senate amendment)..................................   605
        14. Modify general business credit carryback and 
          carryforward rules (sec. 788(b) of the Senate 
          amendment).............................................   608
        15. Using Federal case registry of child support orders 
          for tax enforcement purposes...........................   609
        16. Expanded SSA records for tax enforcement.............   609
        17. Treatment of amounts received under the work 
          requirements of the Personal Responsibility and Work 
          Opportunity Act of 1996................................   610
XI. FOREIGN TAX PROVISIONS.......................................   612
    A. General Provisions........................................   612
        1. Simplify foreign tax credit limitation for individuals 
          (sec. 1103 of the House bill and sec. 901 of the Senate 
          amendment).............................................   612
        2. Simplify translation of foreign taxes (sec. 1104 of 
          the House bill and sec. 902 of the Senate amendment)...   613
        3. Election to use simplified foreign tax credit 
          limitation for alternative minimum tax purposes (sec. 
          1105 of the House bill and sec. 903 of the Senate 
          amendment).............................................   615
        4. Simplify treatment of personal transactions in foreign 
          currency (sec. 1106 of the House bill and sec. 904 of 
          the Senate amendment)..................................   616
        5. Simplify foreign tax credit limitation for dividends 
          from 10/50 companies (sec. 1107 of the House bill).....   617
    B. General Provisions Affecting Treatment of Controlled 
      Foreign Corporations (secs. 1111-1113 of the House bill and 
      secs. 911-913 of the Senate amendment).....................   618
    C. Modification of Passive Foreign Investment Company 
      Provisions to Eliminate Overlap With Subpart F, to Allow 
      Mark-to-Market Election, and to Require Measurement Based 
      on Value for PFIC Asset Test (secs. 1121-1123 of the House 
      bill and secs. 751-753 of the Senate amendment)............   623
    D. Simplify Formation and Operation of International Joint 
      Ventures (secs. 1131, 1141-1145, and 1151 of the House bill 
      and secs. 921, 931-935, and 941 of the Senate amendment)...   628
    E. Modification of Reporting Threshold for Stock Ownership of 
      a Foreign Corporation (sec. 1146 of the House bill and sec. 
      936 of the Senate amendment)...............................   632
    F. Other Foreign Simplification Provisions...................   633
        1. Transition rules for certain trusts (sec. 1161 of the 
          House bill and sec. 951 of the Senate amendment).......   633
         2. Simplify stock and securities trading safe harbor 
          (sec. 1162 of the House bill and sec. 952 of the Senate 
          amendment).............................................   633
        3. Clarification of determination of foreign taxes deemed 
          paid (sec. 1178(a) of the House bill and sec. 953(a) of 
          the Senate amendment)..................................   633
        4. Clarification of foreign tax credit limitation for 
          financial services income (sec. 1178(b) of the House 
          bill and sec. 953(b) of the Senate amendment)..........   635
    G. Other Foreign Provisions..................................   636
        1. Eligibility of licenses of computer software for 
          foreign sales corporation benefits (sec. 1101 of the 
          House bill and sec. 741 of the Senate amendment).......   636
        2. Increase dollar limitation on section 911 exclusion 
          (sec. 1102 of the House bill)..........................   637
        3. Treatment of certain securities positions under the 
          subpart F investment in U.S. property rules (sec. 743 
          of the Senate amendment)...............................   638
        4. Exception from foreign personal holding company income 
          under subpart F for active financing income (sec. 744 
          of the Senate amendment)...............................   639
        5. Treat service income of nonresident alien individuals 
          earned on foreign ships as foreign source income and 
          disregard the U.S. presence of such individuals (sec. 
          745 of the Senate amendment)...........................   645
XII. SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND 
  BUSINESSES.....................................................   647
    A. Provisions Relating to Individuals........................   647
        1. Modifications to standard deduction of dependents; AMT 
          treatment of certain minor children (sec. 1201 of the 
          House bill and sec. 1001 of the Senate amendment)......   647
        2. Increase de minimis threshold for estimated tax to 
          $1,000 for individuals (sec. 1202 of the House bill and 
          sec. 1002 of the Senate amendment).....................   648
        3. Optional methods for computing SECA tax combined (sec. 
          1203 of the House bill)................................   649
        4. Treatment of certain reimbursed expenses of rural 
          letter carrier's vehicles (sec. 1204 of the House bill 
          and sec. 1003 of the Senate amendment).................   650
        5. Travel expenses of Federal employees participating in 
          a Federal criminal investigation (sec. 1205 of the 
          House bill and sec. 1004 of the Senate amendment)......   651
        6. Payment of taxes by commercially acceptable means 
          (sec. 1206 of the House bill)..........................   652
    B. Provisions Relating to Businesses Generally...............   655
        1. Modifications to look-back method for long-term 
          contracts (sec. 1211 of the House bill and sec. 1011 of 
          the Senate amendment)..................................   655
        2. Minimum tax treatment of certain property and casualty 
          insurance companies (sec. 1212 of the House bill and 
          sec. 1012 of the Senate amendment).....................   657
        3. Treatment of construction allowances provided to 
          lessees (sec. 961 of the House bill and sec. 1014 of 
          the Senate amendment)..................................   657
    C. Partnership Simplification Provisions.....................   659
        1. General provisions....................................   659
            a. Simplified flow-through for electing large 
              partnerships (sec. 1221 of the House bill and sec. 
              1021 of the Senate amendment)......................   659
            b. Simplified audit procedures for electing large 
              partnerships (sec. 1222 of the House bill and sec. 
              1022 of the Senate amendment)......................   670
            c. Due date for furnishing information to partners of 
              electing large partnerships (sec. 1223 of the House 
              bill and sec. 1023 of the Senate amendment)........   674
            d. Partnership returns required on magnetic media 
              (sec. 1224 of the House bill and sec. 1024 of the 
              Senate amendment)..................................   675
            e. Treatment of partnership items of individual 
              retirement arrangements (sec. 1225 of the House 
              bill and sec. 1025 of the Senate amendment)........   676
        2. Other partnership audit rules.........................   677
            a. Treatment of partnership items in deficiency 
              proceedings (sec. 1231 of the House bill and sec. 
              1031 of the Senate amendment)......................   677
            b. Partnership return to be determinative of audit 
              procedures to be followed (sec. 1232 of the House 
              bill and sec. 1032 of the Senate amendment)........   679
            c. Provisions relating to statute of limitations 
              (sec. 1233 of the House bill and sec. 1033 of the 
              Senate amendment)..................................   679
            d. Expansion of small partnership exception (sec. 
              1234 of the House bill and sec. 1034 of the Senate 
              amendment).........................................   682
            e. Exclusion of partial settlements from 1-year 
              limitation on assessment (sec. 1235 of the House 
              bill and sec. 1035 of the Senate amendment)........   682
            f. Extension of time for filing a request for 
              administrative adjustment (sec. 1236 of the House 
              bill and sec. 1036 of the Senate amendment)........   683
            g. Availability of innocent spouse relief in context 
              of partnership proceedings (sec. 1237 of the House 
              bill and sec. 1037 of the Senate amendment)........   684
            h. Determination of penalties at partnership level 
              (sec. 1238 of the House bill and sec. 1038 of the 
              Senate amendment)..................................   685
            i. Provisions relating to Tax Court jurisdiction 
              (sec. 1239 of the House bill and sec. 1039 of the 
              Senate amendment)..................................   685
            j. Treatment of premature petitions filed by notice 
              partners or 5-percent groups (sec. 1240 of the 
              House bill and sec. 1040 of the Senate amendment)..   686
            k. Bonds in case of appeals from certain proceedings 
              (sec. 1241 of the House bill and sec. 1041 of the 
              Senate amendment)..................................   686
            l. Suspension of interest where delay in 
              computational adjustment resulting from certain 
              settlements (sec. 1242 of the House bill and sec. 
              1042 of the Senate amendment)......................   687
            m. Special rules for administrative adjustment 
              requests with respect to bad debts or worthless 
              securities (sec. 1243 of the House bill and sec. 
              1043 of the Senate amendment)......................   688
        3. Closing of partnership taxable year with respect to 
          deceased partner (sec. 1246 of the House bill and sec. 
          1046 of the Senate amendment)..........................   688
    D. Modifications of Rules for Real Estate Investment Trusts 
      (secs. 1251-1263 of the House bill and secs. 1051-1063 of 
      the Senate amendment)......................................   689
    E. Repeal the ``Short-Short'' Test for Regulated Investment 
      Companies (sec. 1271 of the House bill and sec. 1071 of the 
      Senate amendment)..........................................   699
    F. Taxpayer Protections......................................   700
        1. Provide reasonable cause exception for additional 
          penalties (sec. 1281 of the House bill and sec. 1081 of 
          the Senate amendment)..................................   700
        2. Clarification of period for filing claims for refunds 
          (sec. 1282 of the House bill and sec. 1082 of the 
          Senate amendment)......................................   700
        3. Repeal of authority to disclose whether a prospective 
          juror has been audited (sec. 1283 of the House bill and 
          sec. 1083 of the Senate amendment).....................   701
        4. Clarify statute of limitations for items from pass-
          through entities (sec. 1284 of the House bill and sec. 
          1084 of the Senate amendment)..........................   702
        5. Awarding of administrative costs and attorneys fees 
          (sec. 1285 of the House bill)..........................   703
        6. Prohibition on browsing (secs. 1286-1287 of the House 
          bill and secs. 1085-1086 of the Senate amendment)......   704
XIII. ESTATE, GIFT, AND TRUST SIMPLIFICATION PROVISIONS..........   706
        1. Eliminate gift tax filing requirements for gifts to 
          charities (sec. 1301 of the House bill and secs. 1101 
          of the Senate amendment)...............................   706
        2. Clarification of waiver of certain rights of recovery 
          (sec. 1302 of the House bill and sec. 1102 of the 
          Senate amendment)......................................   707
        3. Transitional rule under section 2056A (sec. 1303 of 
          the House bill and sec. 1103 of the Senate amendment)..   707
        4. Clarifications relating to disclaimers (sec. 1304 of 
          the House bill)........................................   708
        5. Amend ``5 or 5 power'' (sec. 1305 of the House bill)..   709
        6. Treatment of estate tax purposes of short-term 
          obligations held by nonresident aliens (sec. 1306 of 
          the House bill and sec. 1104 of the Senate amendment)..   710
        7. Certain revocable trusts treated as part of estate 
          (sec. 1307 of the House bill)..........................   711
        8. Distributions during first 65 days of taxable year of 
          estate (sec. 1308 of the House bill and sec. 1105 of 
          the Senate amendment)..................................   712
        9. Separate share rules available to estates (sec. 1309 
          of the House bill and sec. 1106 of the Senate 
          amendment).............................................   712
        10. Executor of estate and beneficiaries treated as 
          related persons for disallowance of losses (sec. 1310 
          of the House bill and sec. 1107 of the Senate 
          amendment).............................................   714
        11. Limitation on taxable year of estates (sec. 1311 of 
          the House bill)........................................   714
        12. Simplified taxation of earnings of pre-need funeral 
          trusts (sec. 1312 of the House bill and sec. 1108 of 
          the Senate amendment)..................................   715
        13. Adjustments for gifts within 3 years of decedent's 
          death (sec. 1313 of the House bill and sec. 1109 of the 
          Senate amendment.......................................   717
        14. Clarify relationship between community property 
          rights and retirement benefits (sec. 1314 of the House 
          bill and sec. 1110 of the Senate amendment)............   717
        15. Treatment under qualified domestic trust rules of 
          forms of ownership which are not trusts (sec. 1315 of 
          the House bill and sec. 1111 of the Senate amendment)..   719
        16. Opportunity to correct certain failures under section 
          2032A (sec. 1316 of the House bill and sec. 1112 of the 
          Senate amendment)......................................   719
        17. Authority to waive requirement of U.S. trustee for 
          qualified domestic trusts (sec. 1317 of the House bill 
          and sec. 1113 of the Senate amendment).................   720
XIV. EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS..............   722
    A. Excise Tax Simplification Provisions......................   722
        1. Increase de minimis limit for after-market 
          alternations subject to heavy truck and luxury 
          automobile excise taxes (sec. 1401 of the House bill 
          and sec. 1201 of the Senate amendment).................   722
        2. Simplification of excise taxes on distilled spirits, 
          wine, and beer (secs. 1411-1422 of the House bill and 
          secs. 1211-1222 of the Senate amendment)...............   723
        3. Authority for Internal Revenue Service to grant 
          exemptions from excise tax registration requirements 
          (sec. 1431 of the House bill and sec. 1231 of the 
          Senate amendment)......................................   725
        4. Repeal of expired excise tax provisions (sec. 1432 of 
          the House bill and sec. 1232 of the Senate amendment)..   725
        5. Modifications to the excise tax on arrows (sec. 1233 
          of the Senate amendment)...............................   726
        6. Modifications to heavy highway vehicle retail excise 
          tax (sec. 1234 of the Senate amendment)................   726
        7. Treatment of skydiving flights as noncommercial 
          aviation (sec. 1235 of the Senate amendment)...........   727
        8. Eliminate double taxation of certain aviation fuels 
          sold to producers by ``fixed base operators'' (sec. 
          1236 of the Senate amendment)..........................   728
    B. Tax-Exempt Bond Provisions................................   728
        1. Repeal of $100,000 limitation on unspent proceeds 
          under 1-year exception from rebate (sec. 1441 of the 
          House bill and sec. 1241 of the Senate amendment)......   729
        2. Exception from rebate for earnings on bona fide debt 
          service fund under construction bond rules (sec. 1442 
          of the House bill and sec. 1242 of the Senate 
          amendment).............................................   730
        3. Repeal of debt service-based limitation on investment 
          in certain nonpurpose investments (sec. 1443 of the 
          House bill and sec. 1243 of the Senate amendment)......   730
        4. Repeal of expired provisions relating to student loan 
          bonds (sec. 1444 of the House bill and sec. 1244 of the 
          Senate amendment)......................................   731
    C. Tax Court Procedures......................................   732
        1. Overpayment determinations of Tax Court (sec. 1451 of 
          the House bill and sec. 1251 of the Senate amendment)..   732
        2. Redetermination of interest pursuant to motion (sec. 
          1452 of the House bill and sec. 1252 of the Senate 
          amendment).............................................   732
        3. Application of net worth requirement for awards of 
          litigation costs (sec. 1453 of the House bill and sec. 
          1253 of the Senate amendment)..........................   733
        4. Tax Court jurisdiction for determination of employment 
          status (sec. 1454 of the House bill and sec. 1254 of 
          the Senate amendment)..................................   734
    D. Other Provisions..........................................   735
        1. Due date for first quarter estimated tax payments by 
          private foundations (sec. 1461 of the House bill and 
          sec. 1261 of the Senate amendment).....................   735
        2. Withholding of Commonwealth income taxes from wages of 
          Federal employees (sec. 1462 of the House bill and sec. 
          1262 of the Senate amendment)..........................   735
        3. Certain notices disregarded under provision increasing 
          interest rate on large corporate underpayments (sec. 
          1463 of the House bill and sec. 1263 of the Senate 
          amendment).............................................   736
XV. PENSION AND EMPLOYEE BENEFIT PROVISIONS......................   738
    A. Miscellaneous Provisions Relating to Pensions and Other 
      Benefits...................................................   738
        1. Cash or deferred arrangements for irrigation and 
          drainage entities (sec. 911 of the House bill).........   738
        2. Permanent moratorium on application of 
          nondiscrimination rules to State and local governmental 
          plans (sec. 912 of the House bill and sec. 1308 of the 
          Senate amendment)......................................   738
        3. Treatment of certain disability payments to public 
          safety employees (sec. 913 of the House bill and sec. 
          785 of the Senate amendment)...........................   740
        4. Portability of permissive service credit under 
          governmental pension plans (sec. 914 of the House bill)   740
        5. Gratuitous transfers for the benefit of employees 
          (sec. 915 of the House bill)...........................   742
        6. Treatment of certain transportation on noncommercially 
          operated aircraft as a fringe benefit (sec. 916 of the 
          House bill)............................................   743
        7. Clarification of certain rules relating to ESOPs of S 
          corporations (sec. 918 of the House bill and sec. 1309 
          of the Senate amendment)...............................   744
        8. Repeal application of UBIT to ESOPs of S corporations 
          (sec. 716 of the Senate amendment).....................   745
        9. Treatment of multiemployer plans under section 415 
          (sec. 711 of the Senate amendment).....................   746
        10. Modification of partial termination rules (sec. 712 
          of the House amendment)................................   746
        11. Increase in full funding limit (sec. 713 of the 
          Senate amendment)......................................   747
        12. Spousal consent required for distributions from 
          section 401(k) plans (sec. 714 of the Senate amendment)   748
        13. Contributions on behalf of a minister to a church 
          plan (sec. 715 of the Senate amendment)................   749
        14. Exclusion of ministers from discrimination testing of 
          certain non-church retirement plans (sec. 715 of the 
          Senate amendment)......................................   749
        15. Diversification in section 401(k) plan investments 
          (sec. 717 of the Senate amendments)....................   750
        16. Removal of dollar limitation on benefit payments from 
          a defined benefit plan for police and fire employees 
          (sec. 786 of the Senate amendment).....................   751
        17. Church plan exception to prohibition on 
          discrimination against individuals based on health 
          status.................................................   752
        18. Newborns' and mothers' health protection, mental 
          health parity..........................................   753
    B. Pension Simplification Provisions.........................   754
        1. Matching contributions of self-employed individuals 
          not treated as elective deferrals (sec. 1301 of the 
          Senate amendment)......................................   754
        2. Contributions to IRAs through payroll deductions (sec. 
          1302 of the Senate amendment)..........................   755
        3. Plans not disqualified merely by accepting rollover 
          contributions (sec. 1303 of the Senate amendment)......   756
        4. Modification of prohibition on assignment or 
          alienation (sec. 1304 of the Senate amendment).........   756
        5. Elimination of paperwork burdens on plans (sec. 1305 
          of the Senate amendment)...............................   757
        6. Modification of section 403(b) exclusion allowance to 
          conform to section 415 modifications (sec. 1306 of the 
          Senate amendment)......................................   758
        7. New technologies in retirement plans (sec. 1307 of the 
          Senate amendment)......................................   759
        8. Modification of 10-percent tax on nondeductible 
          contributions (sec. 1310 of the Senate amendment)......   760
        9. Modify funding requirements for certain plans (sec. 
          1311 of the Senate amendment)..........................   760
        10. Date for adoption of plan amendments.................   761
XVI. SENSE OF THE SENATE RESOLUTIONS.............................   763
    A. Sense of the Senate Regarding Reform of the Internal 
      Revenue Code of 1986 (sec. 780 of the Senate amendment)....   763
    B. Sense of the Senate Regarding Tax Treatment of Stock 
      options (sec. 781 of the Senate amendment).................   763
    C. Sense of the Senate Regarding Estate Taxes (sec. 782 of 
      the Senate amendments).....................................   764
    D. Sense of the Senate Regarding Who Should Benefit From Tax 
      Cuts (sec. 791 of the Senate amendment)....................   764
    E. Sense of the Senate Regarding Self-Employment Taxes of 
      Limited Partners (sec. 734 of the Senate amendment)........   765
XVII. TECHNICAL CORRECTIONS PROVISIONS...........................   766
XVIII. OTHER TAX PROVISION.......................................   768
    A. Estimated Tax Requirements of Individuals for 1997 and 
      1998 (sec. 311(d) of the House bill).......................   768
XIX. TRADE PROVISIONS............................................   769
    A. Extension of Duty-Free Treatment Under the Generalized 
      System of Preferences (sec. 971 of the House bill).........   769
    B. Temporary Suspension of Vessel Repair Duty (sec. 972 of 
      the House bill)............................................   769
    C. United States-Caribbean Basin Trade Partnership Act (secs. 
      981-988 of the House bill).................................   770
XX. LIMITED TAX BENEFITS SUBJECT TO THE LINE ITEM VETO ACT.......   771



105th Congress                                                Report
 1st Session           HOUSE OF REPRESENTATIVES               105-220
                                     
_______________________________________________________________________


                      TAXPAYER RELIEF ACT OF 1997

                                _______
                                

                 July 30, 1997.--Ordered to be printed

_______________________________________________________________________


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

                           CONFERENCE REPORT

                        [To accompany H.R. 2014]

      The committee of conference on the disagreeing votes of 
the two Houses on the amendment of the Senate to the bill (H.R. 
2014) 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, having met, after full and 
free conference, have agreed to recommend and do recommend to 
their respective Houses as follows:
      That the House recede from its disagreement to the 
amendment of the Senate and agree to the same with an amendment 
as follows:
      In lieu of the matter proposed to be inserted by the 
Senate amendment, insert the following:

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``Taxpayer 
Relief 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) Section 15 Not To Apply.--No amendment made by this Act 
shall be treated as a change in a rate of tax for purposes of 
section 15 of the Internal Revenue Code of 1986.
    (d) Waiver of Estimated Tax Penalties.--No addition to tax 
shall be made under section 6654 or 6655 of the Internal 
Revenue Code of 1986 for any period before January 1, 1998, for 
any payment the due date of which is before January 16, 1998, 
with respect to any underpayment attributable to such period to 
the extent such underpayment was created or increased by any 
provision of this Act.
    (e) Table of Contents.--The table of contents for this Act 
is as follows:

Sec. 1. Short title; etc.

                        TITLE I--CHILD TAX CREDIT

Sec. 101. Child tax credit.

                     TITLE II--EDUCATION INCENTIVES

         Subtitle A--Tax Benefits Relating to Education Expenses

Sec. 201. Hope and lifetime learning credits.
Sec. 202. Deduction for interest on education loans.
Sec. 203. Penalty-free withdrawals from individual retirement plans for 
          higher education expenses.

     Subtitle B--Expanded Education Investment Savings Opportunities

                   Part I--Qualified Tuition Programs

Sec. 211. Modifications of qualified State tuition programs.

            Part II--Education Individual Retirement Accounts

Sec. 213. Education individual retirement accounts.

                 Subtitle C--Other Education Initiatives

Sec. 221. Extension of exclusion for employer-provided educational 
          assistance.
Sec. 222. Repeal of limitation on qualified 501(c)(3) bonds other than 
          hospital bonds.
Sec. 223. Increase in arbitrage rebate exception for governmental bonds 
          used to finance education facilities.
Sec. 224. Contributions of computer technology and equipment for 
          elementary or secondary school purposes.
Sec. 225. Treatment of cancellation of certain student loans.
Sec. 226. Incentives for education zones.

              TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                     Subtitle A--Retirement Savings

Sec. 301. Restoration of IRA deduction for certain taxpayers.
Sec. 302. Establishment of nondeductible tax-free individual retirement 
          accounts.
Sec. 303. Distributions from certain plans may be used without penalty 
          to purchase first homes.
Sec. 304. Certain bullion not treated as collectibles.

                        Subtitle B--Capital Gains

Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Exemption from tax for gain on sale of principal residence.
Sec. 313. Rollover of gain from sale of qualified stock.
Sec. 314. Amount of net capital gain taken into account in computing 
          alternative tax on capital gains for corporations not to 
          exceed taxable income of the corporation.

                TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

Sec. 401. Exemption from alternative minimum tax for small corporations.
Sec. 402. Repeal of separate depreciation lives for minimum tax 
          purposes.
Sec. 403. 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. Family-owned business exclusion.
Sec. 503. Modifications to rate of interest on portion of estate tax 
          extended under section 6166.
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. Repeal of throwback rules applicable to certain domestic 
          trusts.
Sec. 508. Treatment of land subject to a qualified conservation 
          easement.

              Subtitle B--Generation-Skipping Tax Provision

Sec. 511. Expansion of exception from generation-skipping transfer tax 
          for transfers to individuals with deceased parents.

                          TITLE VI--EXTENSIONS

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.

                 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. General revenue portion of highway motor fuels taxes deposited 
          into Highway Trust Fund.
Sec. 902. Repeal of tax on diesel fuel used in recreational boats.
Sec. 903. Continued application of tax on imported recycled Halon-1211.
Sec. 904. Uniform rate of tax on vaccines.
Sec. 905. Operators of multiple gasoline retail outlets treated as 
          wholesale distributor for refund purposes.
Sec. 906. Exemption of electric and other clean-fuel motor vehicles from 
          luxury automobile classification.
Sec. 907. Rate of tax on certain special fuels determined on basis of 
          BTU equivalency with gasoline.
Sec. 908. Modification of tax treatment of hard cider.
Sec. 909. Study of feasibility of moving collection point for distilled 
          spirits excise tax.
Sec. 910. Clarification of authority to use semi-generic designations on 
          wine labels.

               Subtitle B--Revisions Relating to Disasters

Sec. 911. Authority to postpone certain tax-related deadlines by reason 
          of presidentially declared disaster.
Sec. 912. Use of certain appraisals to establish amount of disaster 
          loss.
Sec. 913. Treatment of livestock sold on account of weather-related 
          conditions.
Sec. 914. Mortgage financing for residences located in disaster areas.
Sec. 915. Abatement of interest on underpayments by taxpayers in 
          presidentially declared disaster areas.

           Subtitle C--Provisions Relating to Employment Taxes

Sec. 921. Clarification of standard to be used in determining employment 
          tax status of securities brokers.
Sec. 922. Clarification of exemption from self-employment tax for 
          certain termination payments received by former insurance 
          salesmen.

           Subtitle D--Provisions Relating to Small Businesses

Sec. 931. Waiver of penalty through June 30, 1998, on small businesses 
          failing to make electronic fund transfers of taxes.
Sec. 932. Clarification of treatment of home office use for 
          administrative and management activities.
Sec. 933. Averaging of farm income over 3 years.
Sec. 934. Increase in deduction for health insurance costs of self-
          employed individuals.
Sec. 935. Moratorium on certain regulations.

                         Subtitle E--Brownfields

Sec. 941. Expensing of environmental remediation costs.

Subtitle F--Empowerment Zones, Enterprise Communities, Brownfields, and 
              Community Development Financial Institutions

                 Chapter 1--Additional Empowerment Zones

Sec. 951. Additional empowerment zones.

                    Chapter 2--New Empowerment Zones

Sec. 952. Designation of new empowerment zones.
Sec. 953. Volume cap not to apply to enterprise zone facility bonds with 
          respect to new empowerment zones.
Sec. 954. Modification to eligibility criteria for designation of future 
          enterprise zones in Alaska or Hawaii.

  Chapter 3--Treatment Of Empowerment Zones and Enterprise Communities

Sec. 955. Modifications to enterprise zone facility bond rules for all 
          empowerment zones and enterprise communities.
Sec. 956. Modifications to enterprise zone business definition for all 
          empowerment zones and enterprise communities.

                      Subtitle G--Other Provisions

Sec. 961. Use of estimates of shrinkage for inventory accounting.
Sec. 962. Assignment of workmen's compensation liability eligible for 
          exclusion relating to personal injury liability assignments.
Sec. 963. Tax-exempt status for certain State worker's compensation act 
          companies.
Sec. 964. Election for 1987 partnerships to continue exception from 
          treatment of publicly traded partnerships as corporations.
Sec. 965. Exclusion from unrelated business taxable income for certain 
          sponsorship payments.
Sec. 966. Associations of holders of timeshare interests to be taxed 
          like other homeowners associations.
Sec. 967. Additional advance refunding of certain Virgin Island bonds.
Sec. 968. Nonrecognition of gain on sale of stock to certain farmers' 
          cooperatives.
Sec. 969. Increased deductibility of business meal expenses for 
          individuals subject to Federal hours of service.
Sec. 970. Clarification of de minimis fringe benefit rules to no-charge 
          employee meals.
Sec. 971. Exemption of the incremental cost of a clean fuel vehicle from 
          the limits on depreciation for vehicles.
Sec. 972. Temporary suspension of taxable income limit on percentage 
          depletion for marginal production.
Sec. 973. Increase in standard mileage rate expense deduction for 
          charitable use of passenger automobile.
Sec. 974. Clarification of treatment of certain receivables purchased by 
          cooperative hospital service organizations.
Sec. 975. Deduction in computing adjusted gross income for expenses in 
          connection with service performed by certain officials.
Sec. 976. Combined employment tax reporting demonstration project.
Sec. 977. Elective carryback of existing carryovers of National Railroad 
          Passenger Corporation.

Subtitle H--Extension of Duty-Free Treatment Under Generalized System of 
                               Preferences

Sec. 981. Generalized System of Preferences.

                            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. Gains and losses from certain terminations with respect to 
          property.
Sec. 1004. Determination of original issue discount where pooled debt 
          obligations subject to acceleration.
Sec. 1005. 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 in connection 
          with acquisitions and to intragroup transactions.
Sec. 1013. Tax treatment of redemptions involving related corporations.
Sec. 1014. Certain preferred stock treated as boot.
Sec. 1015. Modification of holding period applicable to dividends 
          received deduction.

                  Subtitle C--Administrative Provisions

Sec. 1021. Reporting of certain payments made to attorneys.
Sec. 1022. Decrease of threshold for reporting payments to corporations 
          performing services for Federal agencies.
Sec. 1023. Disclosure of return information for administration of 
          certain veterans programs.
Sec. 1024. Continuous levy on certain payments.
Sec. 1025. Modification of levy exemption.
Sec. 1026. Confidentiality and disclosure of returns and return 
          information.
Sec. 1027. Returns of beneficiaries of estates and trusts required to 
          file returns consistent with estate or trust return or to 
          notify Secretary of inconsistency.
Sec. 1028. Registration and other provisions relating to confidential 
          corporate tax shelters.

            Subtitle D--Excise and Employment Tax Provisions

Sec. 1031. Extension and modification of taxes funding Airport and 
          Airway Trust Fund; increased deposits into such Fund.
Sec. 1032. Kerosene taxed as diesel fuel.
Sec. 1033. Restoration of Leaking Underground Storage Tank Trust Fund 
          taxes.
Sec. 1034. Application of communications tax to prepaid telephone cards.
Sec. 1035. Extension of temporary unemployment tax.

         Subtitle E--Provisions Relating to Tax-Exempt Entities

Sec. 1041. Expansion of look-thru rule for interest, annuities, 
          royalties, and rents derived by subsidiaries of tax-exempt 
          organizations.
Sec. 1042. Termination of certain exceptions from rules relating to 
          exempt organizations which provide commercial-type insurance.

                     Subtitle F--Foreign Provisions

Sec. 1051. Definition of foreign personal holding company income.
Sec. 1052. 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. 1053. Holding period requirement for certain foreign taxes.
Sec. 1054. Denial of treaty benefits for certain payments through hybrid 
          entities.
Sec. 1055. Interest on underpayments not reduced by foreign tax credit 
          carrybacks.
Sec. 1056. Clarification of period of limitations on claim for credit or 
          refund attributable to foreign tax credit carryforward.
Sec. 1057. Repeal of exception to alternative minimum foreign tax credit 
          limit.

                   Subtitle G--Partnership Provisions

Sec. 1061. Allocation of basis among properties distributed by 
          partnership.
Sec. 1062. Repeal of requirement that inventory be substantially 
          appreciated with respect to sale or exchange of partnership 
          interest.
Sec. 1063. Extension of time for taxing precontribution gain.

                     Subtitle H--Pension Provisions

Sec. 1071. Pension accrued benefit distributable without consent 
          increased to $5,000.
Sec. 1072. Election to receive taxable cash compensation in lieu of 
          nontaxable parking benefits.
Sec. 1073. Repeal of excess distribution and excess retirement 
          accumulation tax.
Sec. 1074. Increase in tax on prohibited transactions.
Sec. 1075. Basis recovery rules for annuities over more than one life.

                  Subtitle I--Other Revenue Provisions

Sec. 1081. Termination of suspense accounts for family corporations 
          required to use accrual method of accounting.
Sec. 1082. Modification of taxable years to which net operating losses 
          may be carried.
Sec. 1083. Modifications to taxable years to which unused credits may be 
          carried.
Sec. 1084. Expansion of denial of deduction for certain amounts paid in 
          connection with insurance.
Sec. 1085. Improved enforcement of the application of the earned income 
          credit.
Sec. 1086. Limitation on property for which income forecast method may 
          be used.
Sec. 1087. Expansion of requirement that involuntarily converted 
          property be replaced with property acquired from an unrelated 
          person.
Sec. 1088. Treatment of exception from installment sales rules for sales 
          of property by a manufacturer to a dealer.
Sec. 1089. Limitations on charitable remainder trust eligibility for 
          certain trusts.
Sec. 1090. Expanded SSA records for tax enforcement.
Sec. 1091. Modification of estimated tax safe harbors.

      TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                     Subtitle A--General Provisions

Sec. 1101. Certain individuals exempt from foreign tax credit 
          limitation.
Sec. 1102. Exchange rate used in translating foreign taxes.
Sec. 1103. Election to use simplified section 904 limitation for 
          alternative minimum tax.
Sec. 1104. Treatment of personal transactions by individuals under 
          foreign currency rules.
Sec. 1105. Foreign tax credit treatment of dividends from noncontrolled 
          section 902 corporations.

        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. Valuation of assets for passive foreign investment company 
          determination.
Sec. 1124. 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 limitations 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.
Sec. 1163. Miscellaneous clarifications.

                      Subtitle H--Other Provisions

Sec. 1171. Treatment of computer software as FSC export property.
Sec. 1172. Adjustment of dollar limitation on section 911 exclusion.
Sec. 1173. United States property not to include certain assets acquired 
          by dealers in ordinary course of trade or business.
Sec. 1174. Treatment of nonresident aliens engaged in international 
          transportation services.
Sec. 1175. Exemption for active financing income.

    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. Treatment of certain reimbursed expenses of rural mail 
          carriers.
Sec. 1204. Treatment of traveling expenses of certain Federal employees 
          engaged in criminal investigations.
Sec. 1205. 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.
Sec. 1213. Qualified lessee construction allowances for short-term 
          leases.

   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 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 stock 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.

 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. Treatment for estate tax purposes of short-term obligations 
          held by nonresident aliens.
Sec. 1305. Certain revocable trusts treated as part of estate.
Sec. 1306. Distributions during first 65 days of taxable year of estate.
Sec. 1307. Separate share rules available to estates.
Sec. 1308. Executor of estate and beneficiaries treated as related 
          persons for disallowance of losses, etc.
Sec. 1309. Treatment of funeral trusts.
Sec. 1310. Adjustments for gifts within 3 years of decedent's death.
Sec. 1311. Clarification of treatment of survivor annuities under 
          qualified terminable interest rules.
Sec. 1312. Treatment under qualified domestic trust rules of forms of 
          ownership which are not trusts.
Sec. 1313. Opportunity to correct certain failures under section 2032A.
Sec. 1314. 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.
Sec. 1433. Simplification of imposition of excise tax on arrows.
Sec. 1434. Modifications to retail tax on heavy trucks.
Sec. 1435. Skydiving flights exempt from tax on transportation of 
          persons by air.
Sec. 1436. Allowance or credit of refund for tax-paid aviation fuel 
          purchased by registered producer of aviation fuel.

                 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--PENSIONS AND EMPLOYEE BENEFITS

                       Subtitle A--Simplification

Sec. 1501. Matching contributions of self-employed individuals not 
          treated as elective employer contributions.
Sec. 1502. Modification of prohibition of assignment or alienation.
Sec. 1503. Elimination of paperwork burdens on plans.
Sec. 1504. Modification of 403(b) exclusion allowance to conform to 415 
          modifications.
Sec. 1505. Extension of moratorium on application of certain 
          nondiscrimination rules to State and local governments.
Sec. 1506. Clarification of certain rules relating to employee stock 
          ownership plans of S corporations.
Sec. 1507. Modification of 10-percent tax for nondeductible 
          contributions.
Sec. 1508. Modification of funding requirements for certain plans.
Sec. 1509. Clarification of disqualification rules relating to 
          acceptance of rollover contributions.
Sec. 1510. New technologies in retirement plans.

 Subtitle B--Other Provisions Relating to Pensions and Employee Benefits

Sec. 1521. Increase in current liability funding limit.
Sec. 1522. Special rules for church plans.
Sec. 1523. Repeal of application of unrelated business income tax to 
          ESOPs.
Sec. 1524. Diversification of section 401(k) plan investments.
Sec. 1525. Section 401(k) plans for certain irrigation and drainage 
          entities.
Sec. 1526. Portability of permissive service credit under governmental 
          pension plans.
Sec. 1527. Removal of dollar limitation on benefit payments from a 
          defined benefit plan maintained for certain police and fire 
          employees.
Sec. 1528. Survivor benefits for public safety officers killed in the 
          line of duty.
Sec. 1529. Treatment of certain disability benefits received by former 
          police officers or firefighters.
Sec. 1530. Gratuitous transfers for the benefit of employees.

         Subtitle C--Provisions Relating to Certain Health Acts

Sec. 1531. Amendments to the Internal Revenue Code of 1986 to implement 
          the Newborns' and Mothers' Health Protection Act of 1996 and 
          the Mental Health Parity Act of 1996.
Sec. 1532. Special rules relating to church plans.

           Subtitle D--Provisions Relating to Plan Amendments

Sec. 1541. Provisions relating to plan amendments.

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

Sec. 1600. Coordination with other titles.
Sec. 1601. Amendments related to Small Business Job Protection Act of 
          1996.
Sec. 1602. Amendments related to Health Insurance Portability and 
          Accountability Act of 1996.
Sec. 1603. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1604. Miscellaneous provisions.

TITLE XVII--IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM 
                                  VETO

Sec. 1701. Identification of limited tax benefits subject to line item 
          veto.

                       TITLE I--CHILD TAX 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 with respect to each qualifying child of the taxpayer an 
amount equal to $500 ($400 in the case of taxable years 
beginning in 1998).
    ``(b) Limitation Based on Adjusted Gross Income.--
            ``(1) In general.--The amount of the credit 
        allowable under subsection (a) shall be reduced (but 
        not below zero) by $50 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.
    ``(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) Additional Credit for Families With 3 or More 
Children.--
            ``(1) In general.--In the case of a taxpayer with 3 
        or more qualifying children for any taxable year, the 
        amount of the credit allowed under this section shall 
        be equal to the greater of--
                    ``(A) the amount of the credit allowed 
                under this section (without regard to this 
                subsection and after application of the 
                limitation under section 26), or
                    ``(B) the alternative credit amount 
                determined under paragraph (2).
            ``(2) Alternative credit amount.--For purposes of 
        this subsection, the alternative credit amount is the 
        amount of the credit which would be allowed under this 
        section if the limitation under paragraph (3) were 
        applied in lieu of the limitation under section 26.
            ``(3) Limitation.--The limitation under this 
        paragraph for any taxable year is the limitation under 
        section 26 (without regard to this subsection)--
                    ``(A) increased by the taxpayer's social 
                security taxes for such taxable year, and
                    ``(B) reduced by the sum of--
                            ``(i) the credits allowed under 
                        this part other than under subpart C or 
                        this section, and
                            ``(ii) the credit allowed under 
                        section 32 without regard to subsection 
                        (m) thereof.
            ``(4) Unused credit to be refundable.--If the 
        amount of the credit under paragraph (1)(B) exceeds the 
        amount of the credit under paragraph (1)(A), such 
        excess shall be treated as a credit to which subpart C 
        applies. The rule of section 32(h) shall apply to such 
        excess.
            ``(5) Social security taxes.--For purposes of 
        paragraph (3)--
                    ``(A) In general.--The term `social 
                security taxes' means, with respect to any 
                taxpayer for any taxable year--
                            ``(i) the amount of the taxes 
                        imposed by sections 3101 and 3201(a) on 
                        amounts received by the taxpayer during 
                        the calendar year in which the taxable 
                        year begins,
                            ``(ii) 50 percent of the taxes 
                        imposed by section 1401 on the self-
                        employment income of the taxpayer for 
                        the taxable year, and
                            ``(iii) 50 percent of the taxes 
                        imposed by section 3211(a)(1) on 
                        amounts received by the taxpayer during 
                        the calendar year in which the taxable 
                        year begins.
                    ``(B) Coordination with special refund of 
                social security taxes.--The term `social 
                security taxes' shall not include any taxes to 
                the extent the taxpayer is entitled to a 
                special refund of such taxes under section 
                6413(c).
                    ``(C) Special rule.--Any amounts paid 
                pursuant to an agreement under section 3121(l) 
                (relating to agreements entered into by 
                American employers with respect to foreign 
                affiliates) which are equivalent to the taxes 
                referred to in subparagraph (A)(i) shall be 
                treated as taxes referred to in such 
                subparagraph.
    ``(e) Identification Requirement.--No credit shall be 
allowed under this section to a taxpayer with respect to any 
qualifying child unless the taxpayer includes the name and 
taxpayer identification number of such qualifying child on the 
return of tax for the taxable year.
    ``(f) 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.''.
    (b) Supplemental Credit.--Section 32 is amended by adding 
at the end the following new subsection:
    ``(m) Supplemental Child Credit.--
            ``(1) In general.--In the case of a taxpayer with 
        respect to whom a credit is allowed under section 24 
        for the taxable year, there shall be allowed as a 
        credit under this section an amount equal to the 
        supplemental child credit (if any) determined for such 
        taxpayer for such taxable year under paragraph (2). 
        Such credit shall be in addition to the credit allowed 
        under subsection (a).
            ``(2) Supplemental child credit.--For purposes of 
        this subsection, the supplemental child credit is an 
        amount equal to the excess (if any) of--
                    ``(A) the amount determined under section 
                24(d)(1)(A), over
                    ``(B) the amount determined under section 
                24(d)(1)(B).
        The amounts referred to in subparagraphs (A) and (B) 
        shall be determined as if section 24(d) applied to all 
        taxpayers.
            ``(3) Coordination with section 24.--The amount of 
        the credit under section 24 shall be reduced by the 
        amount of the credit allowed under this subsection.''
    (c) High Risk Pools Permitted To Cover Spouses and 
Dependents of High Risk Individuals.--Paragraph (26) of section 
501(c) is amended by adding at the end the following flush 
sentence:
        ``A spouse and any 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).''.
    (d) Conforming Amendments.--
            (1) Section 1324(b)(2) of title 31, United States 
        Code, is amended by inserting before the period at the 
        end ``, or enacted by the Taxpayer Relief Act of 
        1997''.
            (2) 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 24(e) (relating to child tax 
                credit) to be included on a return.''.
            (3) 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.''.

    (e) 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 AND LIFETIME LEARNING CREDITS.

    (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. HOPE AND LIFETIME LEARNING CREDITS.

    ``(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 the sum 
of--
            ``(1) the Hope Scholarship Credit, plus
            ``(2) the Lifetime Learning Credit.
    ``(b) Hope Scholarship Credit.--
            ``(1) Per student credit.--In the case of any 
        eligible student for whom an election is in effect 
        under this section for any taxable year, the Hope 
        Scholarship Credit is an amount equal to the sum of--
                    ``(A) 100 percent of so much of the 
                qualified tuition and related expenses paid by 
                the taxpayer during the taxable year (for 
                education furnished to the eligible student 
                during any academic period beginning in such 
                taxable year) as does not exceed $1,000, plus
                    ``(B) 50 percent of such expenses so paid 
                as exceeds $1,000 but does not exceed the 
                applicable limit.
            ``(2) Limitations applicable to hope scholarship 
        credit.--
                    ``(A) Credit allowed only for 2 taxable 
                years.--An election to have this section apply 
                with respect to any eligible student for 
                purposes of the Hope Scholarship Credit under 
                subsection (a)(1) may not be made for any 
                taxable year if such an election (by the 
                taxpayer or any other individual) is in effect 
                with respect to such student for any 2 prior 
                taxable years.
                    ``(B) Credit allowed for year only if 
                individual is at least \1/2\ time student for 
                portion of year.--The Hope Scholarship Credit 
                under subsection (a)(1) shall not be allowed 
                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.
                    ``(C) Credit allowed only for first 2 years 
                of postsecondary education.--The Hope 
                Scholarship Credit under subsection (a)(1) 
                shall not be allowed for a taxable year with 
                respect to the qualified tuition and related 
                expenses of an eligible student if the student 
                has completed (before the beginning of such 
                taxable year) the first 2 years of 
                postsecondary education at an eligible 
                educational institution.
                    ``(D) Denial of credit if student convicted 
                of a felony drug offense.--The Hope Scholarship 
                Credit under subsection (a)(1) shall not be 
                allowed 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.
            ``(3) Eligible student.--For purposes of this 
        subsection, 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) Applicable limit.--For purposes of paragraph 
        (1)(B), the applicable limit for any taxable year is an 
        amount equal to 2 times the dollar amount in effect 
        under paragraph (1)(A) for such taxable year.
    ``(c) Lifetime Learning Credit.--
            ``(1) Per taxpayer credit.--The Lifetime Learning 
        Credit for any taxpayer for any taxable year is an 
        amount equal to 20 percent of so much of the qualified 
        tuition and related expenses paid by the taxpayer 
        during the taxable year (for education furnished during 
        any academic period beginning in such taxable year) as 
        does not exceed $10,000 ($5,000 in the case of taxable 
        years beginning before January 1, 2003).
            ``(2) Special rules for determining expenses.--
                    ``(A) Coordination with hope scholarship.--
                The qualified tuition and related expenses with 
                respect to an individual who is an eligible 
                student for whom a Hope Scholarship Credit 
                under subsection (a)(1) is allowed for the 
                taxable year shall not be taken into account 
                under this subsection.
                    ``(B) Expenses eligible for lifetime 
                learning credit.--For purposes of paragraph 
                (1), qualified tuition and related expenses 
                shall include expenses described in subsection 
                (f)(1) with respect to any course of 
                instruction at an eligible educational 
                institution to acquire or improve job skills of 
                the individual.
    ``(d) 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.
    ``(e) Election To Have Section Apply.--
            ``(1) In general.--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.
            ``(2) Coordination with exclusions.--An election 
        under this subsection shall not take effect with 
        respect to an individual for any taxable year if any 
        portion of any distribution during such taxable year 
        from an education individual retirement account is 
        excluded from gross income under section 530(d)(2).
    ``(f) 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 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.
    ``(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), 
        (c), and (d)) 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) 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--
                    ``(A) no credit shall be allowed under 
                subsection (a) to such individual for such 
                individual's taxable year, and
                    ``(B) 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.
            ``(4) 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.
            ``(5) 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.
            ``(6) 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.
            ``(7) 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 2001, each of the $1,000 
                amounts under 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 2000' for 
                        `calendar year 1992' in subparagraph 
                        (B) thereof.
                    ``(B) Rounding.--If any amount as adjusted 
                under subparagraph (A) is not a multiple of 
                $1,000 such amount shall be rounded to the next 
                lowest multiple of $1,000.
            ``(2) Income limits.--
                    ``(A) In general.--In the case of a taxable 
                year beginning after 2001, the $40,000 and 
                $80,000 amounts in subsection (d)(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 2000' for 
                        `calendar year 1992' in subparagraph 
                        (B) thereof.
                    ``(B) Rounding.--If any amount as adjusted 
                under subparagraph (A) is not a multiple of 
                $1,000, such amount shall be rounded to the 
                next lowest multiple of $1,000.
    ``(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 the 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), as amended 
by section 101, 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 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 
        subparagraph (C) of subsection (b)(2).
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 part II of 
subchapter B of chapter 68 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 Dates.--
            (1) In general.--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.
            (2) Lifetime learning credit.--Section 25A(a)(2) of 
        the Internal Revenue Code of 1986 shall apply to 
        expenses paid after June 30, 1998 (in taxable years 
        ending after such date), for education furnished in 
        academic periods beginning after such dates.

SEC. 202. DEDUCTION FOR INTEREST ON EDUCATION LOANS.

    (a) In General.--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. INTEREST ON EDUCATION LOANS.

    ``(a) Allowance of Deduction.--In the case of an 
individual, there shall be allowed as a deduction for the 
taxable year an amount equal to the interest paid by the 
taxpayer during the taxable year on any qualified education 
loan.
    ``(b) Maximum Deduction.--
            ``(1) In general.--Except as provided in paragraph 
        (2), the deduction allowed by subsection (a) for the 
        taxable year shall not exceed the amount determined in 
        accordance with the following table:

    ``In the case of taxable                                  The dollar
      years beginning in:                                     amount is:
          1998..........................................         $1,000 
          1999..........................................         $1,500 
          2000..........................................         $2,000 
          2001 or thereafter............................         $2,500.

            ``(2) Limitation based on modified adjusted gross 
        income.--
                    ``(A) In general.--The amount which would 
                (but for this paragraph) be allowable as a 
                deduction under this section shall be reduced 
                (but not below zero) by the amount determined 
                under subparagraph (B).
                    ``(B) Amount of reduction.--The amount 
                determined under this subparagraph is the 
                amount which bears the same ratio to the amount 
                which would be so taken into account as--
                            ``(i) the excess of--
                                    ``(I) the taxpayer's 
                                modified adjusted gross income 
                                for such taxable year, over
                                    ``(II) $40,000 ($60,000 in 
                                the case of a joint return), 
                                bears to
                            ``(ii) $15,000.
                    ``(C) Modified adjusted gross income.--The 
                term `modified adjusted gross income' means 
                adjusted gross income determined--
                            ``(i) without regard to this 
                        section and sections 135, 137, 911, 
                        931, and 933, and
                            ``(ii) after application of 
                        sections 86, 219, and 469.
                For purposes of sections 86, 135, 137, 219, and 
                469, adjusted gross income shall be determined 
                without regard to the deduction allowed under 
                this section.
    ``(c) Dependents Not Eligible for Deduction.--No deduction 
shall be allowed by this section to an individual for the 
taxable year if a deduction under section 151 with respect to 
such individual is allowed to another taxpayer for the taxable 
year beginning in the calendar year in which such individual's 
taxable year begins.
    ``(d) Limit on Period Deduction Allowed.--A deduction shall 
be allowed under this section only with respect to interest 
paid on any qualified education loan during the first 60 months 
(whether or not consecutive) in which interest payments are 
required. For purposes of this paragraph, any loan and all 
refinancings of such loan shall be treated as 1 loan.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Qualified education loan.--The term 
        `qualified education loan' means any indebtedness 
        incurred to pay qualified higher education expenses--
                    ``(A) which are incurred on behalf of the 
                taxpayer, the taxpayer's spouse, or any 
                dependent of the taxpayer as of the time the 
                indebtedness was incurred,
                    ``(B) which are paid or incurred within a 
                reasonable period of time before or after the 
                indebtedness is incurred, and
                    ``(C) which are attributable to education 
                furnished during a period during which the 
                recipient was an eligible student.
        Such term includes indebtedness used to refinance 
        indebtedness which qualifies as a qualified education 
        loan. The term `qualified education loan' shall not 
        include any indebtedness owed to a person who is 
        related (within the meaning of section 267(b) or 
        707(b)(1)) to the taxpayer.
            ``(2) Qualified higher education expenses.--The 
        term `qualified higher education expenses' means 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 day before the date of the enactment of 
        this Act) at an eligible educational institution, 
        reduced by the sum of--
                    ``(A) the amount excluded from gross income 
                under section 127, 135, or 530 by reason of 
                such expenses, and
                    ``(B) the amount of any scholarship, 
                allowance, or payment described in section 
                25A(g)(2).
        For purposes of the preceding sentence, the term 
        `eligible educational institution' has the same meaning 
        given such term by section 25A(f)(2), except that such 
        term shall also include an institution conducting an 
        internship or residency program leading to a degree or 
        certificate awarded by an institution of higher 
        education, a hospital, or a health care facility which 
        offers postgraduate training.
            ``(3) Eligible student.--The term `eligible 
        student' has the meaning given such term by section 
        25A(b)(3).
            ``(4) Dependent.--The term `dependent' has the 
        meaning given such term by section 152.
    ``(f) Special Rules.--
            ``(1) Denial of double benefit.--No deduction shall 
        be allowed under this section for anyamount for which a 
deduction is allowable under any other provision of this chapter.
            ``(2) Married couples must file joint return.--If 
        the taxpayer is married at the close of the taxable 
        year, the deduction shall be allowed under subsection 
        (a) only if the taxpayer and the taxpayer's spouse file 
        a joint return for the taxable year.
            ``(3) Marital status.--Marital status shall be 
        determined in accordance with section 7703.
    ``(g) Inflation Adjustments.--
            ``(1) In general.--In the case of a taxable year 
        beginning after 2002, the $40,000 and $60,000 amounts 
        in subsection (b)(2) shall each 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 the 
                calendar year in which the taxable year begins, 
                determined by substituting `calendar year 2001' 
                for `calendar year 1992' in subparagraph (B) 
                thereof.
            ``(2) Rounding.--If any amount as adjusted under 
        paragraph (1) is not a multiple of $5,000, such amount 
        shall be rounded to the next lowest multiple of 
        $5,000.''.
    (b) Deduction Allowed Whether or Not Taxpayer Itemizes 
Other Deductions.--Subsection (a) of section 62 is amended by 
inserting after paragraph (16) the following new paragraph:
            ``(17) Interest on education loans.--The deduction 
        allowed by section 221.''.
    (c) Reporting Requirement.--
            (1) In general.--Section 6050S(a)(2) (relating to 
        returns relating to higher education tuition and 
        related expenses) is amended to read as follows:
            ``(2) which is engaged in a trade or business and 
        which, in the course of such trade or business--
                    ``(A) makes payments during any calendar 
                year to any individual which constitutes 
                reimbursements or refunds (or similar amounts) 
                of qualified tuition and related expenses of 
                such individual, or
                    ``(B) except as provided in regulations, 
                receives from any individual interest 
                aggregating $600 or more for any calendar year 
                on 1 or more qualified education loans,''.
            (2) Information.--Section 6050S(b)(2) is amended--
                    (A) by inserting ``or interest'' after 
                ``payments'' in subparagraph (A), and
                    (B) in subparagraph (C), by striking 
                ``and'' at the end of clause (i), by inserting 
                ``and'' at the end of clause (ii), and by 
                inserting after clause (ii) the following:
                            ``(iii) aggregate amount of 
                        interest received for the calendar year 
                        from such individual,''.
            (3) Definition.--Section 6050S(e) is amended by 
        inserting ``, and except as provided in regulations, 
        the term `qualified education loan' has the meaning 
        given such term by section 221(e)(1)'' after ``section 
        25A''.
    (d) Clerical Amendment.--The table of sections for part VII 
of subchapter B of chapter 1 is amended by striking the last 
item and inserting the following new items:

        ``Sec. 221. Interest on education loans.
        ``Sec. 222. Cross reference.''.

    (e) Effective Date.--The amendments made by this section 
shall apply to any qualified education loan (as defined in 
section 221(e)(1) of the Internal Revenue Code of 1986, as 
added by this section) incurred on, before, or after the date 
of the enactment of this Act, but only with respect to--
            (1) any loan interest payment due and paid after 
        December 31, 1997, and
            (2) the portion of the 60-month period referred to 
        in section 221(d) of the Internal Revenue Code of 1986 
        (as added by this section) after December 31, 1997.

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)) 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 (intaxable years 
ending after such date), for education furnished in academic periods 
beginning after such date.

    Subtitle B--Expanded Education Investment Savings Opportunities

                   PART I--QUALIFIED TUITION PROGRAMS

SEC. 211. MODIFICATIONS OF QUALIFIED STATE TUITION PROGRAMS.

    (a) 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 educational 
                institution.
                    ``(B) Room and board included for students 
                under guaranteed plans who are at least half-
                time.--
                            ``(i) In general.--In the case of 
                        an individual who is an eligible 
                        student (as defined in section 
                        25A(b)(3)) for any academic period, 
                        such term shall also include reasonable 
                        costs for such period (as determined 
                        under the qualified State tuition 
                        program) incurred by the designated 
                        beneficiary for room and board while 
                        attending such institution. For 
                        purposes of subsection (b)(7), a 
                        designated beneficiary shall be treated 
                        as meeting the requirements of this 
                        clause.
                            ``(ii) Limitation.--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.''
    (b) 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) 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--
                    ``(A) In general.--Any contribution to a 
                qualified tuition program on behalf of any 
                designated beneficiary--
                            ``(i) shall be treated as a 
                        completed gift to such beneficiary 
                        which is not a future interest in 
                        property, and
                            ``(ii) shall not be treated as a 
                        qualified transfer under section 
                        2503(e).
                    ``(B) Treatment of excess contributions.--
                If the aggregate amount of contributions 
                described in subparagraph (A) during the 
                calendar year by a donor exceeds the limitation 
                for such year under section 2503(b), such 
                aggregate amount shall, at the election of the 
                donor, be taken into account for purposes of 
                such section ratably over the 5-year period 
                beginning with such calendar year.''
                            (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.--Except 
                as provided in subparagraph (B), 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.
                    ``(C) Amounts includible in estate of donor 
                making excess contributions.--In the case of a 
                donor who makes the election described in 
                paragraph (2)(B) and who dies before the close 
                of the 5-year period referred to in such 
                paragraph, notwithstanding subparagraph (A), 
                the gross estate of the donor shall include the 
                portion of such contributions properly 
                allocable to periods after the date of death of 
                the donor.''
            (4) Prohibition against investment direction.--
        Section 529(b)(5) is amended by inserting ``directly or 
        indirectly'' after ``may not''.
    (c) 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 state 
                tuition program.--Such term shall include any 
                contribution to a qualified State 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 529(c)(3)(A) by 
                reason of any portion of such contributionwhich 
is not includible in gross income by reason of this subparagraph.''.
    (d) Clarification of Taxation of Distributions.--
Subparagraph (A) of section 529(c)(3) is amended by striking 
``section 72'' and inserting ``section 72(b)''.
    (e) Technical Amendments.--
            (1)(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.''.

            (2)(A) Section 529(d) is amended to read as 
        follows:
    ``(d) Reports.--Each officer or employee having control of 
the qualified State tuition program or their designee shall 
make such reports regarding such program to the Secretary and 
to designated beneficiaries with respect to contributions, 
distributions, and such other matters as the Secretary may 
require. 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 the Secretary.''.
            (B) 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 
        at the end of subparagraph (B) and inserting ``, and'', 
        and by adding at the end the following new 
        subparagraph:
                    ``(C) Section 529(d) (relating to qualified 
                State tuition programs).''.
            (C) The section heading for section 6693 is amended 
        by striking ``INDIVIDUAL RETIREMENT'' and inserting 
        ``CERTAIN TAX-FAVORED''.
            (D) 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''.
    (f) 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.--The 
        amendment made by subsection (a) shall take effect as 
        if included in the amendments made by section 1806 of 
        the Small Business Job Protection Act of 1996.
            (3) Eligible educational institution.--The 
        amendment made by subsection (b)(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.
            (4) Coordination with education savings bonds.--The 
        amendment made by subsection (c) 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.
            (6) Transition rule for pre-august 20, 1996 
        contracts.--In the case of any contract issued prior to 
        August 20, 1996, section 529(c)(3)(C) of the Internal 
        Revenue Code of 1986 shall be applied for taxable years 
        ending after August 20, 1996, without regard to the 
        requirement that a distribution be transferred to a 
        member of the family or the requirement that a change 
        in beneficiaries may be made only to a member of the 
        family.

           PART II--EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS

SEC. 213. EDUCATION INDIVIDUAL RETIREMENT 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 INDIVIDUAL RETIREMENT ACCOUNTS.

    ``(a) General Rule.--An education individual retirement 
account shall be exempt from taxation under this subtitle. 
Notwithstanding the preceding sentence, the education 
individual retirement 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 individual retirement account.--The 
        term `education individual retirement account' means a 
        trust created or organized in the United States 
        exclusively for the purpose of paying the qualified 
        higher education expenses of the designated beneficiary 
        of the trust (and designated as an education individual 
        retirement account at the time created or organized), 
        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 such 
                        beneficiary attains age 18, or
                            ``(iii) except in the case of 
                        rollover contributions, if such 
                        contribution would result in aggregate 
                        contributions for the taxable year 
                        exceeding $500.
                    ``(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 or who 
                has so demonstrated with respect to any 
                individual retirement plan.
                    ``(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) Upon the death of the designated 
                beneficiary, any balance to the credit of the 
                beneficiary shall be distributed within 30 days 
                after the date of death to the estate of such 
                beneficiary.
            ``(2) Qualified higher education expenses.--
                    ``(A) In general.--The term `qualified 
                higher education expenses' has the meaning 
                given such term by section 529(e)(3), reduced 
                as provided in section 25A(g)(2).
                    ``(B) Qualified state 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 State tuition 
                program (as defined in section 529(b)) for the 
                benefit of the beneficiary of the account.
            ``(3) Eligible educational institution.--The term 
        `eligible educational institution' has the meaning 
        given such term by section 529(e)(5).
    ``(c) Reduction in Permitted Contributions Based on 
Adjusted Gross Income.--
            ``(1) In general.--The maximum amount which a 
        contributor could otherwise make to an account under 
        this section shall be reduced by an amount which bears 
        the same ratio to such maximum amount as--
                    ``(A) the excess of--
                            ``(i) the contributor's modified 
                        adjusted gross income for such taxable 
                        year, over
                            ``(ii) $95,000 ($150,000 in the 
                        case of a joint return), bears to
                    ``(B) $15,000 ($10,000 in the case of a 
                joint return).
            ``(2) Modified adjusted gross income.--For purposes 
        of paragraph (1), 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) Tax Treatment of Distributions.--
            ``(1) In general.--Any distribution shall be 
        includible in the gross income of the distributee in 
        the manner as provided in section 72(b).
            ``(2) Distributions for qualified higher education 
        expenses.--
                    ``(A) In general.--No amount shall be 
                includible in gross income under paragraph (1) 
                if the qualified higher education expenses of 
                the designated beneficiary during the taxable 
                year are not less than the aggregate 
                distributions during the taxable year.
                    ``(B) Distributions in excess of 
                expenses.--If such aggregate distributions 
                exceed such expenses during the taxable year, 
                the amount otherwise includible in gross income 
                under paragraph (1) shall be reduced by the 
                amount which bears the same ratio to the amount 
                which would be includible in gross income under 
                paragraph (1) (without regard to this 
                subparagraph) as the qualified higher education 
                expenses bear to such aggregate distributions.
                    ``(C) Election to waive exclusion.--A 
                taxpayer may elect to waive the application of 
                this paragraph for any taxable year.
            ``(3) 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.
            ``(4) Additional tax for distributions not used for 
        educational expenses.--
                    ``(A) In general.--The tax imposed by this 
                chapter for any taxable year on any taxpayer 
                who receives a payment or distribution from an 
                education individual retirement account which 
                is includible in gross income shall be 
                increased by 10 percent of the amount which is 
                so includible.
                    ``(B) Exceptions.--Subparagraph (A) shall 
                not apply if the payment or distribution is--
                            ``(i) made to a beneficiary (or to 
                        the estate of the designated 
                        beneficiary) on or after the death of 
                        the designated beneficiary,
                            ``(ii) attributable to the 
                        designated beneficiary's being disabled 
                        (within the meaning of section 
                        72(m)(7)), or
                            ``(iii) made on account of a 
                        scholarship, allowance, or payment 
                        described in section 25A(g)(2) 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.
                    ``(C) Excess contributions returned before 
                due date of return.--Subparagraph (A) shall not 
                apply to the distribution of any contribution 
                made during a taxable year on behalf of a 
                designated beneficiary to the extent that such 
                contribution exceeds $500 if--
                            ``(i) such distribution is received 
                        on or before the day prescribed by law 
                        (including extensions of time) for 
                        filing such contributor's return for 
                        such taxable year, and
                            ``(ii) such distribution is 
                        accompanied by the amount of net income 
                        attributable to such excess 
                        contribution.
                Any net income described in clause (ii) shall 
                be included in gross income for the taxable 
                year in which such excess contribution was 
                made.
            ``(5) Rollover contributions.--Paragraph (1) shall 
        not apply to any amount paid or distributed from an 
        education individual retirement account to the extent 
        that the amount received is paid into another education 
        individual retirement account for the benefit of the 
        same beneficiary or a member of the family (within the 
        meaning of section 529(e)(2)) of such beneficiary 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.
            ``(6) Change in beneficiary.--Any change in the 
        beneficiary of an education individual retirement 
        account shall not be treated as a distribution for 
        purposes of paragraph (1) if the new beneficiary is a 
        member of the family (as so defined) of the old 
        beneficiary.
            ``(7) Special rules for death and divorce.--Rules 
        similar to the rules of paragraphs (7) and (8) of 
        section 220(f) shall apply.
    ``(e) Tax Treatment of Accounts.--Rules similar to the 
rules of paragraphs (2) and (4) of section 408(e) shall apply 
to any education individual retirement account.
    ``(f) Community Property Laws.--This section shall be 
applied without regard to any community property laws.
    ``(g) 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.
    ``(h) Reports.--The trustee of an education individual 
retirement account shall make such reports regarding such 
account to the Secretary and to the beneficiary of the account 
with respect to contributions, distributions, and such other 
matters as the Secretary may require. 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.''.
    (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 individual retirement 
                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 individual 
        retirement accounts.--An individual for whose benefit 
        an education individual retirement 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 Individual 
Retirement Accounts.--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 (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) Section 530(h) (relating to education 
                individual retirement accounts).''.
    (d) Tax on Excess Contributions.--
            (1) In general.--Subsection (a) of section 4973 is 
        amended by striking ``or'' at the end of paragraph (2), 
        by adding ``or'' at the end of paragraph (3), and by 
        inserting after paragraph (3) the following new 
        paragraph:
            ``(4) an education individual retirement 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 Education Individual 
Retirement Accounts.--For purposes of this section--
            ``(1) In general.--In the case of education 
        individual retirement accounts maintained for the 
        benefit of any 1 beneficiary, the term `excess 
        contributions' means--
                    ``(A) the amount by which the amount 
                contributed for the taxable year to such 
                accounts exceeds $500, and
                    ``(B) any amount contributed to such 
                accounts for any taxable year if any amount is 
                contributed during such year to a qualified 
                State tuition program for the benefit of such 
                beneficiary.
            ``(2) 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 individual retirement 
                account in a distribution to which section 
                530(d)(4)(C) applies.
                    ``(B) Any contribution described in section 
                530(b)(2)(B) to a qualified State tuition 
                program.
                    ``(C) Any rollover contribution.''.
    (e) Technical Amendments.--
            (1) Section 26(b)(2) 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 530(d)(3) (relating to 
                additional tax on certain distributions from 
                education individual retirement accounts),''.
            (2) Subparagraph (C) of section 135(c)(2), as added 
        by the preceding section, is amended by inserting ``, 
        or to an education individual retirement account (as 
        defined in section 530) on behalf of an account 
        beneficiary,'' 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 individual retirement accounts.''.

    (f) 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 beginning after May 31, 
2000.''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1996.

SEC. 222. REPEAL OF LIMITATION ON QUALIFIED 501(C)(3) BONDS OTHER THAN 
                    HOSPITAL BONDS.

    Section 145(b) (relating to qualified 501(c)(3) bond) is 
amended by adding at the end the following new paragraph:
            ``(5) Termination of limitation.--This subsection 
        shall not apply with respect to bonds issued after the 
        date of the enactment of this paragraph as part of an 
        issue 95 percent or more of the net proceeds of which 
        are to be used to finance capital expenditures incurred 
        after such date.''.

SEC. 223. INCREASE IN ARBITRAGE REBATE EXCEPTION FOR GOVERNMENTAL BONDS 
                    USED TO FINANCE EDUCATION FACILITIES.

    (a) In General.--Section 148(f)(4)(D) (relating to 
exception for governmental units issuing $5,000,000 or less of 
bonds) is amended by adding at the end the following new 
clause:
                            ``(vii) Increase in exception for 
                        bonds financing public school capital 
                        expenditures.--Each of the $5,000,000 
                        amounts in the preceding provisions of 
                        this subparagraph shall be increased by 
                        the lesser of $5,000,000 or so much of 
                        the aggregate face amount of the bonds 
                        as are attributable to financing the 
                        construction (within the meaning of 
                        subparagraph (C)(iv)) of public school 
                        facilities.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to bonds issued after December 31, 1997.

SEC. 224. 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) the original use of the 
                        property is by the donor or the donee,
                            ``(iv) 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,
                            ``(v) the property is not 
                        transferred by the donee in exchange 
                        for money, other property, or services, 
                        except for shipping, installation and 
                        transfer costs,
                            ``(vi) the property will fit 
                        productively into the entity's 
                        education plan, and
                            ``(vii) the entity's use and 
                        disposition of the property will be in 
                        accordance with the provisions of 
                        clauses (iv) and (v).
                    ``(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 (v) 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 (iv) 
                                through (vii) 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).
                    ``(F) Termination.--This paragraph shall 
                not apply to any contribution made during any 
                taxable year beginning after December 31, 
                1999.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 225. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS.

    (a) 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.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to discharges of indebtedness after the date of the 
enactment of this Act.

SEC. 226. INCENTIVES FOR EDUCATION ZONES.

    (a) In General.--Subchapter U of chapter 1 (relating to 
additional incentives for empowerment zones) is amended by 
redesignating part IV as part V, by redesignating section 1397E 
as section 1397F, and by inserting after part III the following 
new part:

               ``PART IV--INCENTIVES FOR EDUCATION ZONES

        ``Sec. 1397E. Credit to holders of qualified zone academy 
                  bonds.''

``SEC. 1397E. CREDIT TO HOLDERS OF QUALIFIED ZONE ACADEMY BONDS.

    ``(a) Allowance of Credit.--In the case of an eligible 
taxpayer who holds a qualified zone academy bond on the credit 
allowance date of such bond which occurs during the taxable 
year, there shall be allowed as a credit against the tax 
imposed by this chapter for such taxable year the amount 
determined under subsection (b).
    ``(b) Amount of Credit.--
            ``(1) In general.--The amount of the credit 
        determined under this subsection with respect to any 
        qualified zone academy bond is the amount equal to the 
        product of--
                    ``(A) the credit rate determined by the 
                Secretary under paragraph (2) for the month in 
                which such bond was issued, multiplied by
                    ``(B) the face amount of the bond held by 
                the taxpayer on the credit allowance date.
            ``(2) Determination.--During each calendar month, 
        the Secretary shall determine a credit rate which shall 
        apply to bonds issued during the following calendar 
        month. The credit rate for any month is the percentage 
        which the Secretary estimates will permit the issuance 
        of qualified zone academy bonds without discount and 
        without interest cost to the issuer.
    ``(c) Limitation Based on Amount of Tax.--The credit 
allowed under subsection (a) for any taxable year shall not 
exceed the excess of--
            ``(1) the sum of the regular tax liability (as 
        defined in section 26(b)) plus the tax imposed by 
        section 55, over
            ``(2) the sum of the credits allowable under part 
        IV of subchapter A (other than subpart C thereof, 
        relating to refundable credits).
    ``(d) Qualified Zone Academy Bond.--For purposes of this 
section--
            ``(1) In general.--The term `qualified zone academy 
        bond' means any bond issued as part of an issue if--
                    ``(A) 95 percent or more of the proceeds of 
                such issue are to be used for a qualified 
                purpose with respect to a qualified zone 
                academy established by an eligible local 
                education agency,
                    ``(B) the bond is issued by a State or 
                local government within the jurisdiction of 
                which such academy is located,
                    ``(C) the issuer--
                            ``(i) designates such bond for 
                        purposes of this section,
                            ``(ii) certifies that it has 
                        written assurances that the private 
                        business contribution requirement of 
                        paragraph (2) will be met with respect 
                        to such academy, and
                            ``(iii) certifies that it has the 
                        written approval of the eligible local 
                        education agency for such bond 
                        issuance, and
                    ``(D) the term of each bond which is part 
                of such issue does not exceed the maximum term 
                permitted under paragraph (3).
            ``(2) Private business contribution requirement.--
                    ``(A) In general.--For purposes of 
                paragraph (1), the private business 
                contribution requirement of this paragraph is 
                met with respect to any issue if the eligible 
                local education agency that established the 
                qualified zone academy has written commitments 
                from private entities to make qualified 
                contributions having a present value (as of the 
                date of issuance of the issue) of not less than 
                10 percent of the proceeds of the issue.
                    ``(B) Qualified contributions.--For 
                purposes of subparagraph (A), the term 
                `qualified contribution' means any contribution 
                (of a type and quality acceptable to the 
                eligible local education agency) of--
                            ``(i) equipment for use in the 
                        qualified zone academy (including 
                        state-of-the-art technology and 
                        vocational equipment),
                            ``(ii) technical assistance in 
                        developing curriculum or in training 
                        teachers in order to promote 
                        appropriate market driven technology in 
                        the classroom,
                            ``(iii) services of employees as 
                        volunteer mentors,
                            ``(iv) internships, field trips, or 
                        other educational opportunities outside 
                        the academy for students, or
                            ``(v) any other property or service 
                        specified by the eligible local 
                        education agency.
            ``(3) Term requirement.--During each calendar 
        month, the Secretary shall determine the maximum term 
        permitted under this paragraph for bonds issued during 
        the following calendar month. Such maximum term shall 
        be the term which the Secretary estimates will result 
        in the present value of the obligation to repay the 
        principal on the bond being equal to 50 percent of the 
        face amount of the bond. Such present value shall be 
        determined using as a discount rate the average annual 
        interest rate of tax-exempt obligations having a term 
        of 10 years or more which are issued during the month. 
        If the term as so determined is not a multiple of a 
        whole year, such term shall be rounded to the next 
        highest whole year.
            ``(4) Qualified zone academy.--
                    ``(A) In general.--The term `qualified zone 
                academy' means any public school (or academic 
                program within a public school) which is 
                established by and operated under the 
                supervision of an eligible local education 
                agency to provide education or training below 
                the postsecondary level if--
                            ``(i) such public school or program 
                        (as the case may be) is designed in 
                        cooperation with business to enhance 
                        the academic curriculum, increase 
                        graduation and employment rates, and 
                        better prepare students for the rigors 
                        of college and the increasingly complex 
                        workforce,
                            ``(ii) students in such public 
                        school or program (as the case may be) 
                        will be subject to the same academic 
                        standards and assessments as other 
                        students educated by the eligible local 
                        education agency,
                            ``(iii) the comprehensive education 
                        plan of such public school or program 
                        is approved by the eligible local 
                        education agency, and
                            ``(iv)(I) such public school is 
                        located in an empowerment zone or 
                        enterprise community (including any 
                        such zone or community designated after 
                        the date of the enactment of this 
                        section), or
                            ``(II) there is a reasonable 
                        expectation (as of the date of issuance 
                        of the bonds) that at least 35 percent 
                        of the students attending such school 
                        or participating in such program (as 
                        the case may be) will be eligible for 
                        free or reduced-cost lunches under the 
                        school lunch program established under 
                        the National School Lunch Act.
                    ``(B) Eligible local education agency.--The 
                term `eligible local education agency' means 
                any local education agency as defined in 
                section 14101 of the Elementary and Secondary 
                Education Act of 1965.
            ``(5) Qualified purpose.--The term `qualified 
        purpose' means, with respect to any qualified zone 
        academy--
                    ``(A) rehabilitating or repairing the 
                public school facility in which the academy is 
                established,
                    ``(B) providing equipment for use at such 
                academy,
                    ``(C) developing course materials for 
                education to be provided at such academy, and
                    ``(D) training teachers and other school 
                personnel in such academy.
            ``(6) Eligible taxpayer.--The term `eligible 
        taxpayer' means--
                    ``(A) a bank (within the meaning of section 
                581),
                    ``(B) an insurance company to which 
                subchapter L applies, and
                    ``(C) a corporation actively engaged in the 
                business of lending money.
    ``(e) Limitation on Amount of Bonds Designated.--
            ``(1) National limitation.--There is a national 
        zone academy bond limitation for each calendar year. 
        Such limitation is $400,000,000 for 1998 and 1999, and, 
        except as provided in paragraph (4), zero thereafter.
            ``(2) Allocation of limitation.--The national zone 
        academy bond limitation for a calendar year shall be 
        allocated by the Secretary among the States on the 
        basis of their respective populations of individuals 
        below the poverty line (as defined by the Office of 
        Management and Budget). The limitation amount allocated 
        to a State under the preceding sentence shall be 
        allocated by the State education agency to qualified 
        zone academies within such State.
            ``(3) Designation subject to limitation amount.--
        The maximum aggregate face amount of bonds issued 
        during any calendar year which may be designated under 
        subsection (d)(1) with respect to any qualified zone 
        academy shall not exceed the limitation amount 
        allocated to such academy under paragraph (2) for such 
        calendar year.
            ``(4) Carryover of unused limitation.--If for any 
        calendar year--
                    ``(A) the limitation amount for any State, 
                exceeds
                    ``(B) the amount of bonds issued during 
                such year which are designated under subsection 
                (d)(1) with respect to qualified zone academies 
                within such State,
        the limitation amount for such State for the following 
        calendar year shall be increased by the amount of such 
        excess.
    ``(f) Other Definitions.--For purposes of this section--
            ``(1) Credit allowance date.--The term `credit 
        allowance date' means, with respect to any issue, the 
        last day of the 1-year period beginning on the date of 
        issuance of such issue and the last day of each 
        successive 1-year period thereafter.
            ``(2) Bond.--The term `bond' includes any 
        obligation.
            ``(3) State.--The term `State' includes the 
        District of Columbia and any possession of the United 
        States.
    ``(g) Credit Included in Gross Income.--Gross income 
includes the amount of the credit allowed to the taxpayer under 
this section.''
    (b) Conforming Amendments.--
            (1) The table of parts for subchapter U of chapter 
        1 is amended by striking the last item and inserting 
        the following:

        ``Part IV. Incentives for education zones.
        ``Part V. Regulations.''

            (2) The table of sections for part V, as so 
        redesignated, is amended to read as follows:

        ``Sec. 1397F. Regulations.''

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

              TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                     Subtitle A--Retirement Savings

SEC. 301. RESTORATION OF IRA DEDUCTION FOR CERTAIN TAXPAYERS.

    (a) Increase in Income Limits Applicable to Active 
Participants.--
            (1) In general.--Subparagraph (B) of section 
        219(g)(3) (relating to applicable dollar amount) is 
        amended to read as follows:
                    ``(B) Applicable dollar amount.--The term 
                `applicable dollar amount' means the following:
                            ``(i) In the case of a taxpayer 
                        filing a joint return:

    ``For taxable years be-                               The applicable
      ginning in:                                      dollar amount is:
    1998......................................................  $50,000 
    1999......................................................  $51,000 
    2000......................................................  $52,000 
    2001......................................................  $53,000 
    2002......................................................  $54,000 
    2003......................................................  $60,000 
    2004......................................................  $65,000 
    2005......................................................  $70,000 
    2006......................................................  $75,000 
    2007 and thereafter.......................................  $80,000.

                            ``(ii) In the case of any other 
                        taxpayer (other than a married 
                        individual filing a separate return):

    ``For taxable years be-                               The applicable
      ginning in:                                      dollar amount is:
    1998......................................................  $30,000 
    1999......................................................  $31,000 
    2000......................................................  $32,000 
    2001......................................................  $33,000 
    2002......................................................  $34,000 
    2003......................................................  $40,000 
    2004......................................................  $45,000 
    2005 and thereafter.......................................  $50,000.

                            ``(iii) In the case of a married 
                        individual filing a separate return, 
                        zero.''.
            (2) Increase in phase-out range for joint 
        returns.--Clause (ii) of section 219(g)(2)(A) is 
        amended by inserting ``($20,000 in the case of a joint 
        return for a taxable year beginning after December 31, 
        2006)''.
    (b) Limitations for Active Participation Not Based on 
Spouse's Participation.--Section 219(g) (relating to limitation 
on deduction for active participants in certain pension plans) 
is amended--
            (1) by striking ``or the individual's spouse'' in 
        paragraph (1), and
            (2) by adding at the end the following new 
        paragraph:
            ``(7) Special rule for certain spouses.--In the 
        case of an individual who is an active participant at 
        no time during any plan year ending with or within the 
        taxable year but whose spouse is an active participant 
        for any part of any such plan year--
                    ``(A) the applicable dollar amount under 
                paragraph (3)(B)(i) with respect to the 
                taxpayer shall be $150,000, and
                    ``(B) the amount applicable under paragraph 
                (2)(A)(ii) shall be $10,000.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 302. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE INDIVIDUAL RETIREMENT 
                    ACCOUNTS.

    (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. ROTH IRAS.

    ``(a) General Rule.--Except as provided in this section, a 
Roth IRA shall be treated for purposes of this title in the 
same manner as an individual retirement plan.
    ``(b) Roth IRA.--For purposes of this title, the term `Roth 
IRA' means an individual retirement plan (as defined in section 
7701(a)(37)) which is designated (in such manner as the 
Secretary may prescribe) at the time of establishment of the 
plan as a Roth 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 a Roth 
        IRA.
            ``(2) Contribution limit.--The aggregate amount of 
        contributions for any taxable year to all Roth IRAs 
        maintained for the benefit of an individual shall not 
        exceed the excess (if any) of--
                    ``(A) the maximum amount allowable as a 
                deduction under section 219 with respect to 
                such individual for such taxable year (computed 
                without regard to subsection (d)(1) or (g) of 
                such section), over
                    ``(B) the aggregate amount of contributions 
                for such taxable year to all other individual 
                retirement plans (other than Roth IRAs) 
                maintained for the benefit of the individual.
            ``(3) Limits based on modified adjusted gross 
        income.--
                    ``(A) Dollar limit.--The amount determined 
                under paragraph (2) for any taxable year shall 
                be reduced (but not below zero) by the amount 
                which bears the same ratio to such amount as--
                            ``(i) the excess of--
                                    ``(I) the taxpayer's 
                                adjusted gross income for such 
                                taxable year, over
                                    ``(II) the applicable 
                                dollar amount, bears to
                            ``(ii) $15,000 ($10,000 in the case 
                        of a joint return).
                The rules of subparagraphs (B) and (C) of 
                section 219(g)(2) shall apply to any reduction 
                under this subparagraph.
                    ``(B) Rollover from ira.--A taxpayer shall 
                not be allowed to make a qualified rollover 
                contribution to a Roth IRA from an individual 
                retirement plan other than a Roth IRA during 
                any taxable year if--
                            ``(i) the taxpayer's adjusted gross 
                        income for such taxable year exceeds 
                        $100,000, or
                            ``(ii) the taxpayer is a married 
                        individual filing a separate return.
                    ``(C) Definitions.--For purposes of this 
                paragraph--
                            ``(i) adjusted gross income shall 
                        be determined in the same manner as 
                        under section 219(g)(3), except that 
                        any amount included in gross income 
                        under subsection (d)(3) shall not be 
                        taken into account and the deduction 
                        under section 219 shall be taken into 
                        account, and
                            ``(ii) the applicable dollar amount 
                        is--
                                    ``(I) in the case of a 
                                taxpayer filing a joint return, 
                                $150,000,
                                    ``(II) in the case of any 
                                other taxpayer (other than a 
                                married individual filing a 
                                separate return), $95,000, and
                                    ``(III) in the case of a 
                                married individual filing a 
                                separate return, zero.
                    ``(D) Marital status.--Section 219(g)(4) 
                shall apply for purposes of this paragraph.
            ``(4) Contributions permitted after age 70\1/2\.--
        Contributions to a Roth IRA may be made even after the 
        individual for whom the account is maintained has 
        attained age 70\1/2\.
            ``(5) Mandatory distribution rules not to apply 
        before death.--Notwithstanding subsections (a)(6) and 
        (b)(3) of section 408 (relating torequired 
distributions), the following provisions shall not apply to any Roth 
IRA:
                    ``(A) Section 401(a)(9)(A).
                    ``(B) The incidental death benefit 
                requirements of section 401(a).
            ``(6) Rollover contributions.--
                    ``(A) In general.--No rollover contribution 
                may be made to a Roth 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).
            ``(7) 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 a Roth IRA shall 
                not be includible in gross income.
                    ``(B) Nonqualified distributions.--In 
                applying section 72 to any distribution from a 
                Roth IRA which is not a qualified distribution, 
                such distribution shall be treated as made from 
                contributions to the Roth IRA to the extent 
                that such distribution, when added to all 
                previous distributions from the Roth IRA, does 
                not exceed the aggregate amount of 
                contributions to the Roth 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 special 
                        purpose distribution.
                    ``(B) Certain distributions within 5 
                years.--A payment or distribution shall not be 
                treated as a qualified distribution under 
                subparagraph (A) 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 a 
                        Roth IRA (or such individual's spouse 
                        made a contribution to a Roth 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 from an individual 
                        retirement plan other than a Roth IRA 
                        (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.
            ``(3) Rollovers from an ira other than a roth 
        ira.--
                    ``(A) In general.--Notwithstanding section 
                408(d)(3), in the case of any distribution to 
                which this paragraph applies--
                            ``(i) there shall be included in 
                        gross income any amount which would be 
                        includible were it not part of a 
                        qualified rollover contribution,
                            ``(ii) section 72(t) shall not 
                        apply, and
                            ``(iii) in the case of a 
                        distribution before January 1, 1999, 
                        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 payment or distribution is 
                        made.
                    ``(B) Distributions to which paragraph 
                applies.--This paragraph shall apply to a 
                distribution from an individual retirement plan 
                (other than a Roth IRA) maintained for the 
                benefit of an individual which is contributed 
                to a Roth IRA maintained for the benefit of 
                such individual in a qualified rollover 
                contribution.
                    ``(C) Conversions.--The conversion of an 
                individual retirement plan (other than a Roth 
                IRA) to a Roth IRA shall be treated for 
                purposes of this paragraph as a distribution to 
                which this paragraph applies.
                    ``(D) Conversion of excess contributions.--
                If, no later than the due date for filing the 
                return of tax for any taxable year (without 
                regard to extensions), an individual transfers, 
                from an individual retirement plan (other than 
                a Roth IRA), contributions for such taxable 
                year (and any earnings allocable thereto) to a 
                Roth IRA, no such amount shall be includible in 
                gross income to the extent no deduction was 
                allowed with respect to such amount.
                    ``(E) Additional reporting requirements.--
                Trustees of Roth IRAs, trustees of individual 
                retirement plans, or both, whichever is 
                appropriate, shall include such additional 
                information in reports required under section 
                408(i) as the Secretary may require to ensure 
                that amounts required to be included in gross 
                income under subparagraph (A) are so included.
            ``(4) Coordination with individual retirement 
        accounts.--Section 408(d)(2) shall be applied 
        separately with respect to Roth IRAs and other 
        individual retirement plans.
            ``(5) Qualified special purpose distribution.--For 
        purposes of this section, the term `qualified special 
        purpose distribution' means any distribution to which 
        subparagraph (F) of section 72(t)(2) applies.
    ``(e) Qualified Rollover Contribution.--For purposes of 
this section, the term `qualified rollover contribution' means 
a rollover contribution to a Roth IRAfrom another such account, 
or from an individual retirement plan, but only if such rollover 
contribution meets the requirements of section 408(d)(3). For purposes 
of section 408(d)(3)(B), there shall be disregarded any qualified 
rollover contribution from an individual retirement plan (other than a 
Roth IRA) to a Roth IRA.''.
    (b) Excess Contributions.--Section 4973(b), as amended by 
title II, is amended by adding at the end the following new 
subsection:
    ``(f) Excess Contributions to Roth IRAs.--For purposes of 
this section, in the case of contributions to a Roth IRA 
(within the meaning of section 408A(b)), the term `excess 
contributions' means the sum of--
            ``(1) the excess (if any) of--
                    ``(A) the amount contributed for the 
                taxable year to such accounts (other than a 
                qualified rollover contribution described in 
                section 408A(e)), over
                    ``(B) the amount allowable as a 
                contribution under sections 408A (c)(2) and 
                (c)(3), and
            ``(2) the amount determined under this subsection 
        for the preceding taxable year, reduced by the sum of--
                    ``(A) the distributions out of the accounts 
                for the taxable year, and
                    ``(B) the excess (if any) of the maximum 
                amount allowable as a contribution under 
                sections 408A (c)(2) and (c)(3) for the taxable 
                year over the amount contributed to the 
                accounts for the taxable year.
For purposes of this subsection, any contribution which is 
distributed from a Roth IRA in a distribution described in 
section 408(d)(4) shall be treated as an amount not 
contributed.''
    (c) Spousal IRA.--Clause (ii) of section 219(c)(1)(B) is 
amended to read as follows:
                            ``(ii) the compensation includible 
                        in the gross income of such 
                        individual's spouse for the taxable 
                        year reduced by--
                                    ``(I) the amount allowed as 
                                a deduction under subsection 
                                (a) to such spouse for such 
                                taxable year, and
                                    ``(II) the amount of any 
                                contribution on behalf of such 
                                spouse to a Roth IRA under 
                                section 408A for such taxable 
                                year.''.
    (d) Authority To Prescribe Necessary Reporting.--Section 
408(i) is amended--
            (1) by striking ``under regulations'', and
            (2) by striking ``in such regulations'' each place 
        it appears.
    (e) Conforming 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. Roth IRAs.''.

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

SEC. 303. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED WITHOUT PENALTY 
                    TO PURCHASE FIRST HOMES.

    (a) In General.--Paragraph (2) of section 72(t) (relating 
to exceptions to 10-percent additional tax on early 
distributions from qualified retirement plans), as amended by 
section 203, is amended by adding at the end the following new 
subparagraph:
                    ``(F) Distributions from certain plans for 
                first home purchases.--Distributions to an 
                individual from an individual retirement plan 
                which are qualified first-time homebuyer 
                distributions (as defined in paragraph (8)). 
                Distributions shall not be taken into account 
                under the preceding sentence if such 
                distributions are described in subparagraph 
                (A),(C), (D), or (E) or to the extent paragraph 
(1) does not apply to such distributions by reason of subparagraph 
(B).''.
    (b) Definitions.--Section 72(t), as amended by section 203, 
is amended by adding at the end the following new paragraphs:
            ``(8) Qualified first-time homebuyer 
        distributions.--For purposes of paragraph (2)(F)--
                    ``(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 120th 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 
                                paragraph) 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 
                individualretirement 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)(B) applies to 
                        any other amount.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to payments and distributions in taxable years 
beginning after December 31, 1997.

SEC. 304. CERTAIN BULLION NOT TREATED AS COLLECTIBLES.

    (a) In General.--Paragraph (3) of section 408(m) (relating 
to exception for certain coins) is amended to read as follows:
            ``(3) Exception for certain coins and bullion.--For 
        purposes of this subsection, the term `collectible' 
        shall not include--
                    ``(A) any coin which is--
                            ``(i) a gold coin described in 
                        paragraph (7), (8), (9), or (10) of 
                        section 5112(a) of title 31, United 
                        States Code,
                            ``(ii) a silver coin described in 
                        section 5112(e) of title 31, United 
                        States Code,
                            ``(iii) a platinum coin described 
                        in section 5112(k) of title 31, United 
                        States Code, or
                            ``(iv) a coin issued under the laws 
                        of any State, or
                    ``(B) any gold, silver, platinum, or 
                palladium bullion of a fineness equal to or 
                exceeding the minimum fineness that a contract 
                market (as described in section 7 of the 
                Commodity Exchange Act, 7 U.S.C. 7) requires 
                for metals which may be delivered in 
                satisfaction of a regulated futures contract,
        if such bullion is in the physical possession of a 
        trustee described under subsection (a) of this 
        section.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

                       Subtitle B--Capital Gains

SEC. 311. MAXIMUM CAPITAL GAINS RATES 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) 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 lesser of--
                                    ``(I) the amount of taxable 
                                income taxed at a rate below 28 
                                percent, or
                                    ``(II) taxable income 
                                reduced by the adjusted net 
                                capital gain, plus
                    ``(B) 25 percent of the excess (if any) 
                of--
                            ``(i) the unrecaptured section 1250 
                        gain (or, if less, the net capital 
                        gain), over
                            ``(ii) the excess (if any) of--
                                    ``(I) the sum of the amount 
                                on which tax is determined 
                                under subparagraph (A) plus the 
                                net capital gain, over
                                    ``(II) taxable income, plus
                    ``(C) 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 
                        subparagraphs (A) and (B), plus
                    ``(D) 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 below 28 
                        percent, over
                            ``(ii) the taxable income reduced 
                        by the adjusted net capital gain, plus
                    ``(E) 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 (D).
            ``(2) Reduced capital gain rates for qualified 5-
        year gain.--
                    ``(A) Reduction in 10-percent rate.--In the 
                case of any taxable year beginning after 
                December 31, 2000, the rate under paragraph 
                (1)(D) shall be 8 percent with respect to so 
                much of the amount to which the 10-percent rate 
                would otherwise apply as does not exceed 
                qualified 5-year gain, and 10 percent with 
                respect to the remainder of such amount.
                    ``(B) Reduction in 20-percent rate.--The 
                rate under paragraph (1)(E) shall be 18 percent 
                with respect to so much of the amount to which 
                the 20-percent rate would otherwise apply as 
                does not exceed the lesser of--
                            ``(i) the excess of qualified 5-
                        year gain over the amount of such gain 
                        taken into account under subparagraph 
                        (A) of this paragraph, or
                            ``(ii) the amount of qualified 5-
                        year gain (determined by taking into 
                        account only property the holding 
                        period for which begins after December 
                        31, 2000),
                and 20 percent with respect to the remainder of 
                such amount. For purposes of determining under 
                the preceding sentence whether the holding 
                period of property begins after December 31, 
                2000, the holding period of property acquired 
                pursuant to the exercise of an option (or other 
                right or obligation to acquire property) shall 
                include the period such option (or other right 
                or obligation) was held.
            ``(3) 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).
            ``(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) unrecaptured section 1250 gain,
                    ``(C) section 1202 gain, and
                    ``(D) mid-term gain.
            ``(5) Collectibles gain.--For purposes of this 
        subsection--
                    ``(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) 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) Unrecaptured section 1250 gain.--For purposes 
        of this subsection--
                    ``(A) In general.--The term `unrecaptured 
                section 1250 gain' means the amount of long-
                term capital gain which would be treated as 
                ordinary income if--
                            ``(i) section 1250(b)(1) included 
                        all depreciation and the applicable 
                        percentage under section 1250(a) were 
                        100 percent, and
                            ``(ii) in the case of gain properly 
                        taken into account after July 28, 1997, 
                        only gain from section 1250 property 
                        held for more than 18 months were taken 
                        into account.
                    ``(B) Limitation with respect to section 
                1231 property.--The amount of unrecaptured 
                section 1250 gain from sales, exchanges, and 
                conversions described in section 1231(a)(3)(A) 
                for any taxable year shall not exceed the 
                excess of the net section 1231 gain (as defined 
                in section 1231(c)(3)) for such year over the 
                amount treated as ordinary income under section 
                1231(c)(1) for such year.
                    ``(C) Pre-may 7, 1997, gain.--In the case 
                of a taxable year which includes May 7, 1997, 
                subparagraph (A) shall be applied by taking 
                into account only the gain properly taken into 
                account for the portion of the taxable year 
                after May 6, 1997.
            ``(7) Section 1202 gain.--For purposes of this 
        subsection, the term `section 1202 gain' means an 
        amount equal to the gain excluded from gross income 
        under section 1202(a).
            ``(8) Mid-term gain.--For purposes of this 
        subsection, the term `mid-term gain' means the amount 
        which would be adjusted net capital gain for the 
        taxable year if--
                    ``(A) adjusted net capital gain were 
                determined by taking into account only the gain 
                or loss properly taken into account after July 
                28, 1997, from property held for more than 1 
                year but not more than 18 months, and
                    ``(B) paragraph (3) and section 1212 did 
                not apply.
            ``(9) Qualified 5-year gain.--For purposes of this 
        subsection, the term `qualified 5-year gain' means the 
        amount of long-term capital gain which would be 
        computed for the taxable year if only gains from the 
        sale or exchange of property held by the taxpayer for 
        more than 5 years were taken into account. The 
        determination under the preceding sentence shall be 
        made without regard to collectibles gain, unrecaptured 
        section 1250 gain (determinedwithout regard to 
subparagraph (B) of paragraph (6)), section 1202 gain, or mid-term 
gain.
            ``(10) Pre-effective date gain.--
                    ``(A) In general.--In the case of a taxable 
                year which includes May 7, 1997, gains and 
                losses properly taken into account for the 
                portion of the taxable year before May 7, 1997, 
                shall be taken into account in determining mid-
                term gain as if such gains and losses were 
                described in paragraph (8)(A).
                    ``(B) 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.
                    ``(C) Pass-thru entity defined.--For 
                purposes of subparagraph (B), 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.
            ``(11) Treatment of pass-thru entities.--The 
        Secretary may prescribe such regulations as are 
        appropriate (including regulations requiring reporting) 
        to apply this subsection in the case of sales and 
        exchanges by pass-thru entities (as defined in 
        paragraph (10)(C)) and of interests in such 
        entities.''.
    (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 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 
                lesser of--
                            ``(i) the net capital gain, or
                            ``(ii) the sum of--
                                    ``(I) the adjusted net 
                                capital gain, plus
                                    ``(II) the unrecaptured 
                                section 1250 gain, plus
                    ``(B) 25 percent of the lesser of--
                            ``(i) the unrecaptured section 1250 
                        gain, or
                            ``(ii) the amount of taxable excess 
                        in excess of the sum of--
                                    ``(I) the adjusted net 
                                capital gain, plus
                                    ``(II) the amount on which 
                                a tax is determined under 
                                subparagraph (A), plus
                    ``(C) 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)(D), plus
                    ``(D) 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 (C).
        In the case of taxable years beginning after December 
        31, 2000, rules similar to the rules of section 1(h)(2) 
        shall apply for purposes of subparagraphs (C) and (D). 
        Terms used in this paragraph which are also used in 
        section 1(h) shall have the respective meanings given 
        such terms by section 1(h).''.
            (2) Conforming amendments.--
                    (A) Clause (ii) of section 55(b)(1)(A) is 
                amended by striking ``clause (i)'' and 
                inserting ``this subsection''.
                    (B) Paragraph (7) of section 57(a) is 
                amended by striking ``one-half'' and inserting 
                ``42 percent''.
    (c) Other Conforming Amendments.--
            (1) Paragraph (1) of section 1445(e) is amended by 
        striking ``28 percent'' and inserting ``20 percent''.
            (2) 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''.
            (3) Paragraph (2) of section 904(b) is amended by 
        adding at the end the following new subparagraph:
                    ``(C) Coordination with capital gains 
                rates.--The Secretary may by regulations modify 
                the application of this paragraph and paragraph 
                (3) to the extent necessary to properly reflect 
                any capital gain rate differential under 
                section 1(h) or 1201(a) and the computation of 
                net capital gain.''.
    (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)(1) shall apply only to amounts paid after the date 
        of the enactment of this Act.
    (e) 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 a 
                capital 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 capital asset or property 
                used in the trade or business (as defined in 
                section 1231(b) of the Internal Revenue Code of 
                1986) 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. 312. 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) In general.--The amount of gain excluded from 
        gross income under subsection (a) with respect to any 
        sale or exchange shall not exceed $250,000.
            ``(2) $500,000 limitation for certain joint 
        returns.--Paragraph (1) shall be applied by 
        substituting `$500,000' for `$250,000' if--
                    ``(A) a husband and wife make a joint 
                return for the taxable year of the sale or 
                exchange of the property,
                    ``(B) either spouse meets the ownership 
                requirements of subsection (a) with respect to 
                such property,
                    ``(C) both spouses meet the use 
                requirements of subsection (a) with respect to 
                such property, and
                    ``(D) neither spouse is ineligible for the 
                benefits of subsection (a) with respect to such 
                property by reason of paragraph (3).
            ``(3) 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 to which 
                subsection (a) applied.
                    ``(B) 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)(3) shall not apply; but 
        the amount of gain excluded from gross income under 
        subsection (a) with respect to such sale or exchange 
        shall not exceed--
                    ``(A) the amount which bears the same ratio 
                to the amount which would be so excluded under 
                this section 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 to which subsection (a) 
                        appliedand 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)(3), and
                    ``(B) such sale or exchange is by reason of 
                a change in place of employment, health, or, to 
                the extent provided in regulations, unforeseen 
                circumstances.
    ``(d) Special Rules.--
            ``(1) Joint returns.--If a husband and wife make a 
        joint return for the taxable year of the sale or 
        exchange of the property, subsections (a) and (c) shall 
        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 and used such property shall include 
        the period such deceased spouse owned and used such 
        property before death.
            ``(3) Property owned by spouse or former spouse.--
        For purposes of this section--
                    ``(A) Property transferred to individual 
                from spouse or former spouse.--In the case of 
                an individual holding property transferred to 
                such individual in a transaction described in 
                section 1041(a), the period such individual 
                owns such property shall include the period the 
                transferor owned the property.
                    ``(B) Property used by former spouse 
                pursuant to divorce decree, etc.--Solely for 
                purposes of this section, an individual shall 
                be treated as using property as such 
                individual's principal residence during any 
                period of ownership while such individual's 
                spouse or former spouse is granted use of the 
                property under a divorce or separation 
                instrument (as defined in section 71(b)(2)).
            ``(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 of the 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) Sales of remainder interests.--For purposes 
        of this section--
                    ``(A) In general.--At the election of the 
                taxpayer, 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 remainder interest in such residence, 
                but this section shall not apply to any other 
                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 section) 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) Exception From Reporting.--Subsection (e) of section 
6045 (relating to return required in the caseof 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) 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) if the Secretary requires 
                        the inclusion on the return under 
                        subsection (a) of information as to 
                        whether there is federally subsidized 
                        mortgage financing assistance with 
                        respect to the mortgage on residences, 
                        that there is no such assistance with 
                        respect to the mortgage on such 
                        residence, and
                            ``(iii) the full amount of the gain 
                        on such sale or exchange is excludable 
                        from gross income under section 121.
                If such assurance includes an assurance that 
                the seller is married, the preceding sentence 
                shall be applied by substituting `$500,000' for 
                `$250,000'.
        The Secretary may by regulation increase the dollar 
        amounts under this subparagraph if the Secretary 
        determines that such an increase will not materially 
        reduce revenues to the Treasury.
                    ``(B) Seller.--For purposes of this 
                paragraph, the term `seller' includes the 
                person relinquishing the residence in an 
                exchange.''.
    (d) 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 Taxpayer Relief 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 Taxpayer Relief 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 Taxpayer Relief 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 Taxpayer Relief Act of 1997)'' 
        after ``1034''.
            (10)(A) Subsection (d) of section 1250 is amended 
        by striking paragraph (7) and by redesignating 
        paragraphs (9) and (10) as paragraphs (7) and (8), 
        respectively.
            (B) Subsection (e) of section 1250 is amended by 
        striking paragraph (3).
            (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 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) Certain sales within 2 years after date of 
        enactment.--Section 121 of the Internal Revenue Code of 
        1986 (as amended by this section) shall be applied 
        without regard to subsection (c)(2)(B) thereof in the 
        case of any sale or exchange of property during the 2-
        year period beginning on the date of the enactment of 
        this Act if the taxpayer held such property on the date 
        of the enactment of this Act and fails to meet the 
        ownership and use requirements of subsection (a) 
        thereof with respect to such property.
            (4) 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 enactmentof 
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.

SEC. 313. ROLLOVER OF GAIN FROM SALE OF QUALIFIED STOCK.

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

``SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL BUSINESS STOCK TO 
                    ANOTHER QUALIFIED SMALL BUSINESS STOCK.

    ``(a) Nonrecognition of Gain.--In the case of any sale of 
qualified small business stock held by an individual for more 
than 6 months and with respect to which such individual elects 
the application of this section, gain from such sale shall be 
recognized only to the extent that the amount realized on such 
sale exceeds--
            ``(1) the cost of any qualified small business 
        stock purchased by the taxpayer during the 60-day 
        period beginning on the date of such sale, reduced by
            ``(2) any portion of such cost previously taken 
        into account under this section.
This section shall not apply to any gain which is treated as 
ordinary income for purposes of this title.
    ``(b) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Qualified small business stock.--The term 
        `qualified small business stock' has the meaning given 
        such term by section 1202(c).
            ``(2) Purchase.--A taxpayer shall be treated as 
        having purchased any property if, but for paragraph 
        (3), the unadjusted basis of such property in the hands 
        of the taxpayer would be its cost (within the meaning 
        of section 1012).
            ``(3) Basis adjustments.--If gain from any sale is 
        not recognized by reason of subsection (a), such gain 
        shall be applied to reduce (in the order acquired) the 
        basis for determining gain or loss of any qualified 
        small business stock which is purchased by the taxpayer 
        during the 60-day period described in subsection (a).
            ``(4) Holding period.--For purposes of determining 
        whether the nonrecognition of gain under subsection (a) 
        applies to stock which is sold--
                    ``(A) the taxpayer's holding period for 
                such stock and the stock referred to in 
                subsection (a)(1) shall be determined without 
                regard to section 1223, and
                    ``(B) only the first 6 months of the 
                taxpayer's holding period for the stock 
                referred to in subsection (a)(1) shall be taken 
                into account for purposes of applying section 
                1202(c)(2).''.
    (b) Conforming Amendments.--
            (1) Section 1016(a)(23) is amended--
                    (A) by striking ``or 1044'' and inserting 
                ``, 1044, or 1045'', and
                    (B) by striking ``or 1044(d)'' and 
                inserting ``, 1044(d), or 1045(b)(4)''.
            (2) Section 1223 is amended by redesignating 
        paragraph (15) as paragraph (16) and by inserting after 
        paragraph (14) the following new paragraph:
            ``(15) In determining the period for which the 
        taxpayer has held property the acquisition of which 
        resulted under section 1045 in the nonrecognition of 
        any part of the gain realized on the sale of other 
        property, there shall be included the period for which 
        such other property has been held as of the date of 
        such sale.''.
            (3) The table of sections for part III of 
        subchapter O of chapter 1 is amended by adding at the 
        end the following new item:

        ``Sec. 1045. Rollover of gain from qualified small business 
                  stock to another qualified small business stock.''.

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

SEC. 314. AMOUNT OF NET CAPITAL GAIN TAKEN INTO ACCOUNT IN COMPUTING 
                    ALTERNATIVE TAX ON CAPITAL GAINS FOR CORPORATIONS 
                    NOT TO EXCEED TAXABLE INCOME OF THE CORPORATION.

    (a) In General.--Paragraph (2) of section 1201(a) is 
amended by inserting before the period ``(or, if less, taxable 
income)''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years ending after December 31, 1997.

                TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

SEC. 401. 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 its 
                first 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 such first taxable year 
                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 with 
        the following modifications:
                    ``(A) Section 56(a)(1) (relating to 
                depreciation) and section 56(a)(5) (relating to 
                pollution control facilities) shall apply only 
                to property placed in service on or after the 
                change date.
                    ``(B) Section 56(a)(2) (relating to mining 
                exploration and development costs) shall apply 
                only to costs paid or incurred on or after the 
                change date.
                    ``(C) Section 56(a)(3) (relating to 
                treatment of long-term contracts) shall apply 
                only to contracts entered into on or after the 
                change date.
                    ``(D) Section 56(a)(4) (relating to 
                alternative net operating loss deduction) shall 
                apply in the same manner as if, in section 
                56(d)(2), the change date were substituted for 
                `January 1, 1987' and the day before the change 
                date were substituted for `December 31, 1986' 
                each place it appears.
                    ``(E) Section 56(g)(2)(B) (relating to 
                limitation on allowance of negative adjustments 
                based on adjusted current earnings) shall apply 
                only to prior taxable years beginning on or 
                after the change date.
                    ``(F) Section 56(g)(4)(A) (relating to 
                adjustment for depreciation to adjusted current 
                earnings) shall not apply.
                    ``(G) Subparagraphs (D) and (F) of section 
                56(g)(4) (relating to other earnings and 
                profits adjustments and depletion) shall apply 
                in the same manner as if the day before the 
                change date were substituted for `December 31, 
                1989' each place it appears therein.
            ``(3) Exception.--The modifications in paragraph 
        (2) shall not apply to--
                    ``(A) any item acquired by the corporation 
                in a transaction to which section 381 applies, 
                and
                    ``(B) any property the basis of which in 
                the hands of the corporation is determined by 
                reference to the basis of the property in the 
                hands of the transferor,
        if such item or property was subject to any provision 
        referred to in paragraph (2) while held by the 
        transferor.
            ``(4) Change date.--For purposes of paragraph (2), 
        the change date is the first day of the first taxable 
        year for which the taxpayer ceases to be described in 
        paragraph (1).
            ``(5) 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), section 53(c) shall be applied 
        for such year by reducing the amount otherwise taken 
        into account under section 53(c)(1) by 25 percent of so 
        much of such amount 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. 402. REPEAL OF SEPARATE DEPRECIATION LIVES FOR MINIMUM TAX 
                    PURPOSES.

    (a) In General.--Clause (i) of section 56(a)(1)(A) is 
amended by adding at the end the following new sentence: ``In 
the case of property placed in service after December 31, 1998, 
the preceding sentence shall not apply but clause (ii) shall 
continue to apply.''
    (b) Pollution Control Facilities.--Paragraph (5) of section 
56(a) is amended by adding at the end the following new 
sentence: ``In the case of such a facility placed in service 
after December 31, 1998, such deduction shall be determined 
under section 168 using the straight line method.''.

SEC. 403. MINIMUM TAX NOT TO APPLY TO FARMERS' INSTALLMENT SALES.

    (a) In General.--Subsection (a) of section 56 is amended by 
striking paragraph (6) (relating to treatment of installment 
sales) and by redesignating paragraphs (7) and (8) as 
paragraphs (6) and (7), respectively.
    (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, 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 dying,                                     The applicable
  and gifts made,                                              exclusion
  during:                                                     amount is:
          1998..........................................      $ 625,000 
          1999..........................................      $ 650,000 
          2000 and 2001.................................      $ 675,000 
          2002 and 2003.................................      $ 700,000 
          2004..........................................      $ 850,000 
          2005..........................................      $ 950,000 
          2006 or thereafter............................   $1,000,000.''

                    (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. FAMILY-OWNED BUSINESS EXCLUSION.

    (a) In General.--Part III of subchapter A of chapter 11 
(relating to gross estate) is amended by inserting after 
section 2033 the following new section:

``SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.

    ``(a) In General.--In the case of an estate of a decedent 
to which this section applies, the value of the gross estate 
shall not include the lesser of--
            ``(1) the adjusted value of the qualified family-
        owned business interests of the decedent otherwise 
        includible in the estate, or
            ``(2) the excess of $1,300,000 over the applicable 
        exclusion amount under section 2010(c) with respect to 
        such estate.
    ``(b) Estates to Which Section Applies.--
            ``(1) In general.--This section shall apply to an 
        estate if--
                    ``(A) the decedent was (at the date of the 
                decedent's death) a citizen or resident of the 
                United States,
                    ``(B) the executor elects the application 
                of this section and files the agreement 
                referred to in subsection (h),
                    ``(C) the sum of--
                            ``(i) the adjusted value of the 
                        qualified family-owned business 
                        interests described in paragraph (2), 
                        plus
                            ``(ii) the amount of the gifts of 
                        such interests determined under 
                        paragraph (3),
                exceeds 50 percent of the adjusted gross 
                estate, and
                    ``(D) during the 8-year period ending on 
                the date of the decedent's death there have 
                been periods aggregating 5 years or more during 
                which--
                            ``(i) such interests were owned by 
                        the decedent or a member of the 
                        decedent's family, and
                            ``(ii) there was material 
                        participation (within the meaning of 
                        section 2032A(e)(6)) by the decedent or 
                        a member of the decedent's family in 
                        the operation of the business to which 
                        such interests relate.
            ``(2) Includible qualified family-owned business 
        interests.--The qualified family-owned business 
        interests described in this paragraph are the interests 
        which--
                    ``(A) are included in determining the value 
                of the gross estate (without regard to this 
                section), and
                    ``(B) are acquired by any qualified heir 
                from, or passed to any qualified heir from, the 
                decedent (within the meaning of section 
                2032A(e)(9)).
            ``(3) Includible gifts of interests.--The amount of 
        the gifts of qualified family-owned business interests 
        determined under this paragraph is the excess of--
                    ``(A) the sum of--
                            ``(i) the amount of such gifts from 
                        the decedent to members of the 
                        decedent's family taken into account 
                        under subsection 2001(b)(1)(B), plus
                            ``(ii) the amount of such gifts 
                        otherwise excluded under section 
                        2503(b),
                to the extent such interests are continuously 
                held by members of such family (other than the 
                decedent's spouse) between the date of the gift 
                and the date of the decedent's death, over
                    ``(B) the amount of such gifts from the 
                decedent to members of the decedent's family 
                otherwise included in the gross estate.
    ``(c) Adjusted Gross Estate.--For purposes of this section, 
the term `adjusted gross estate' means the value of the gross 
estate (determined without regard to this section)--
            ``(1) reduced by any amount deductible under 
        paragraph (3) or (4) of section 2053(a), and
            ``(2) increased by the excess of--
                    ``(A) the sum of--
                            ``(i) the amount of gifts 
                        determined under subsection (b)(3), 
                        plus
                            ``(ii) the amount (if more than de 
                        minimis) of other transfers from the 
                        decedent to the decedent's spouse (at 
                        the time of the transfer) within 10 
                        years of the date of the decedent's 
                        death, plus
                            ``(iii) the amount of other gifts 
                        (not included under clause (i) or (ii)) 
                        from the decedent within 3 years of 
                        such date, other than gifts to members 
                        of the decedent's family otherwise 
                        excluded under section 2503(b), over
                    ``(B) the sum of the amounts described in 
                clauses (i), (ii), and (iii) of subparagraph 
                (A) which are otherwise includible in the gross 
                estate.
For purposes of the preceding sentence, the Secretary may 
provide that de minimis gifts to persons other than members of 
the decedent's family shall not be taken into account.
    ``(d) Adjusted Value of the Qualified Family-Owned Business 
Interests.--For purposes of this section, the adjusted value of 
any qualified family-owned business interest is the value of 
such interest for purposes of this chapter (determined without 
regard to this section), reduced by the excess of--
            ``(1) any amount deductible under paragraph (3) or 
        (4) of section 2053(a), over
            ``(2) the sum of--
                    ``(A) any indebtedness on any qualified 
                residence of the decedent the interest on which 
                is deductible under section 163(h)(3), plus
                    ``(B) any indebtedness to the extent the 
                taxpayer establishes that the proceeds of such 
                indebtedness were used for the payment of 
                educational and medical expenses of the 
                decedent, the decedent's spouse, or the 
                decedent's dependents (within the meaning of 
                section 152), plus
                    ``(C) any indebtedness not described in 
                subparagraph (A) or (B), to the extent such 
                indebtedness does not exceed $10,000.
    ``(e) Qualified Family-Owned Business Interest.--
            ``(1) In general.--For purposes of this section, 
        the term `qualified family-owned business interest' 
        means--
                    ``(A) an interest as a proprietor in a 
                trade or business carried on as a 
                proprietorship, or
                    ``(B) an interest in an entity carrying on 
                a trade or business, if--
                            ``(i) at least--
                                    ``(I) 50 percent of such 
                                entity is owned (directly or 
                                indirectly) by the decedent and 
                                members of the decedent's 
                                family,
                                    ``(II) 70 percent of such 
                                entity is so owned by members 
                                of 2 families, or
                                    ``(III) 90 percent of such 
                                entity is so owned by members 
                                of 3 families, and
                            ``(ii) for purposes of subclause 
                        (II) or (III) of clause (i), at least 
                        30 percent of such entity is so owned 
                        by the decedent and members of the 
                        decedent's family.
            ``(2) Limitation.--Such term shall not include--
                    ``(A) any interest in a trade or business 
                the principal place of business of which is not 
                located in the United States,
                    ``(B) any interest in an entity, if the 
                stock or debt of such entity or a controlled 
                group (as defined in section 267(f)(1)) of 
                which such entity was a member was readily 
                tradable on an established securities market or 
                secondary market (as defined by the Secretary) 
                at any time within 3 years of the date of the 
                decedent's death,
                    ``(C) any interest in a trade or business 
                not described in section 542(c)(2), if more 
                than 35 percent of the adjusted ordinary gross 
                income of such trade or business for the 
                taxable year which includes the date of the 
                decedent's death would qualify as personal 
                holding company income (as defined in section 
                543(a)),
                    ``(D) that portion of an interest in a 
                trade or business that is attributable to--
                            ``(i) cash or marketable 
                        securities, or both, in excess of the 
                        reasonably expected day-to-day working 
                        capital needs of such trade or 
                        business, and
                            ``(ii) any other assets of the 
                        trade or business (other than assets 
                        used in the active conduct of a trade 
                        or business described in section 
                        542(c)(2)), which produce, or are held 
                        for the production of, income of which 
                        is described in section 543(a) or in 
                        section 954(c)(1) (determined without 
                        regard to subparagraph (A) thereof and 
                        by substituting `trade or business' for 
                        `controlled foreign corporation').
            ``(3) Rules regarding ownership.--
                    ``(A) Ownership of entities.--For purposes 
                of paragraph (1)(B)--
                            ``(i) Corporations.--Ownership of a 
                        corporation shall be determined by the 
                        holding of stock possessing the 
                        appropriate percentage of the total 
                        combined voting power of all classes of 
                        stock entitled to vote and the 
                        appropriate percentage of the total 
                        value of shares of all classes of 
                        stock.
                            ``(ii) Partnerships.--Ownership of 
                        a partnership shall be determined by 
                        the owning of the appropriate 
                        percentage of the capital interest in 
                        such partnership.
                    ``(B) Ownership of tiered entities.--For 
                purposes of this section, if by reason of 
                holding an interest in a trade or business, a 
                decedent, any member of the decedent's family, 
                any qualified heir, or any member of any 
                qualified heir's family is treated as holding 
                an interest in any other trade or business--
                            ``(i) such ownership interest in 
                        the other trade or business shall be 
                        disregarded in determining if the 
                        ownership interest in the first trade 
                        or business is aqualified family-owned 
business interest, and
                            ``(ii) this section shall be 
                        applied separately in determining if 
                        such interest in any other trade or 
                        business is a qualified family-owned 
                        business interest.
                    ``(C) Individual ownership rules.--For 
                purposes of this section, an interest owned, 
                directly or indirectly, by or for an entity 
                described in paragraph (1)(B) shall be 
                considered as being owned proportionately by or 
                for the entity's shareholders, partners, or 
                beneficiaries. A person shall be treated as a 
                beneficiary of any trust only if such person 
                has a present interest in such trust.
    ``(f) Tax Treatment of Failure To Materially Participate in 
Business or Dispositions of Interests.--
            ``(1) In general.--There is imposed an additional 
        estate tax if, within 10 years after the date of the 
        decedent's death and before the date of the qualified 
        heir's death--
                    ``(A) the material participation 
                requirements described in section 
                2032A(c)(6)(B) are not met with respect to the 
                qualified family-owned business interest which 
                was acquired (or passed) from the decedent,
                    ``(B) the qualified heir disposes of any 
                portion of a qualified family-owned business 
                interest (other than by a disposition to a 
                member of the qualified heir's family or 
                through a qualified conservation contribution 
                under section 170(h)),
                    ``(C) the qualified heir loses United 
                States citizenship (within the meaning of 
                section 877) or with respect to whom an event 
                described in subparagraph (A) or (B) of section 
                877(e)(1) occurs, and such heir does not comply 
                with the requirements of subsection (g), or
                    ``(D) the principal place of business of a 
                trade or business of the qualified family-owned 
                business interest ceases to be located in the 
                United States.
            ``(2) Additional estate tax.--
                    ``(A) In general.--The amount of the 
                additional estate tax imposed by paragraph (1) 
                shall be equal to--
                            ``(i) the applicable percentage of 
                        the adjusted tax difference 
                        attributable to the qualified family-
                        owned business interest(as determined 
under rules similar to the rules of section 2032A(c)(2)(B)), plus
                            ``(ii) interest on the amount 
                        determined under clause (i) at the 
                        underpayment rate established under 
                        section 6621 for the period beginning 
                        on the date the estate tax liability 
                        was due under this chapter and ending 
                        on the date such additional estate tax 
                        is due.
                    ``(B) Applicable percentage.--For purposes 
                of this paragraph, the applicable percentage 
                shall be determined under the following table:

    ``If the event described in
      paragraph (1) occurs in
      the following year of                               The applicable
      material participation:                             percentage is:
    1 through 6...............................................      100 
    7.........................................................       80 
    8.........................................................       60 
    9.........................................................       40 
    10........................................................       20.

    ``(g) Security Requirements for Noncitizen Qualified 
Heirs.--
            ``(1) In general.--Except upon the application of 
        subparagraph (F) or (M) of subsection (i)(3), if a 
        qualified heir is not a citizen of the United States, 
        any interest under this section passing to or acquired 
        by such heir (including any interest held by such heir 
        at a time described in subsection (f)(1)(C)) shall be 
        treated as a qualified family-owned business interest 
        only if the interest passes or is acquired (or is held) 
        in a qualified trust.
            ``(2) Qualified trust.--The term `qualified trust' 
        means a trust--
                    ``(A) which is organized under, and 
                governed by, the laws of the United States or a 
                State, and
                    ``(B) except as otherwise provided in 
                regulations, with respect to which the trust 
                instrument requires that at least 1 trustee of 
                the trust be an individual citizen of the 
                United States or a domestic corporation.
    ``(h) Agreement.--The agreement referred to in this 
subsection is a written agreement signed by each person in 
being who has an interest (whether or not in possession) in any 
property designated in such agreement consenting to the 
application of subsection (f) with respect to such property.
    ``(i) Other Definitions and Applicable Rules.--For purposes 
of this section--
            ``(1) Qualified heir.--The term `qualified heir'--
                    ``(A) has the meaning given to such term by 
                section 2032A(e)(1), and
                    ``(B) includes any active employee of the 
                trade or business to which the qualified 
                family-owned business interest relates if such 
                employee has been employed by such trade or 
                business for a period of at least 10 years 
                before the date of the decedent's death.
            ``(2) Member of the family.--The term `member of 
        the family' has the meaning given to such term by 
        section 2032A(e)(2).
            ``(3) Applicable rules.--Rules similar to the 
        following rules shall apply:
                    ``(A) Section 2032A(b)(4) (relating to 
                decedents who are retired or disabled).
                    ``(B) Section 2032A(b)(5) (relating to 
                special rules for surviving spouses).
                    ``(C) Section 2032A(c)(2)(D) (relating to 
                partial dispositions).
                    ``(D) Section 2032A(c)(3) (relating to only 
                1 additional tax imposed with respect to any 1 
                portion).
                    ``(E) Section 2032A(c)(4) (relating to due 
                date).
                    ``(F) Section 2032A(c)(5) (relating to 
                liability for tax; furnishing of bond).
                    ``(G) Section 2032A(c)(7) (relating to no 
                tax if use begins within 2 years; active 
                management by eligible qualified heir treated 
                as material participation).
                    ``(H) Paragraphs (1) and (3) of section 
                2032A(d) (relating to election; agreement).
                    ``(I) Section 2032A(e)(10) (relating to 
                community property).
                    ``(J) Section 2032A(e)(14) (relating to 
                treatment of replacement property acquired in 
                section 1031 or 1033 transactions).
                    ``(K) Section 2032A(f) (relating to statute 
                of limitations).
                    ``(L) Section 6166(b)(3) (relating to 
                farmhouses and certain other structures taken 
                into account).
                    ``(M) Subparagraphs (B), (C), and (D) of 
                section 6166(g)(1) (relating to acceleration of 
                payment).
                    ``(N) Section 6324B (relating to special 
                lien for additional estate tax).''.
    (b) Clerical Amendment.--The table of sections for part III 
of subchapter A of chapter 11 is amended by inserting after the 
item relating to section 2033 the following new item:

        ``Sec. 2033A. Family-owned business exclusion.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying after December 31, 
1997.

SEC. 503. MODIFICATIONS TO RATE OF INTEREST ON PORTION OF ESTATE TAX 
                    EXTENDED UNDER SECTION 6166.

    (a) 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) 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) interest on the 2-percent portion of 
                such amount shall be paid at the rate of 2 
                percent, and
                    ``(B) interest on so much of such amount as 
                exceeds the 2-percent 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) 2-percent portion.--For purposes of this 
        subsection, the term `2-percent 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.''.
    (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.--
                    (A) Section 163 is amended by redesignating 
                subsection (k) as subsection (l) and by 
                inserting after subsection (j) the following 
                new subsection:
    ``(k) 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.''.
                    (B) Subparagraph (E) of section 163(h)(2) 
                is amended by striking ``or 6166'' and all that 
                follows and inserting a period.
    (c) Conforming Amendments.--
            (1) Paragraphs (7)(A)(iii) and (8)(A)(iii) of 
        section 6166(b) are amended by striking ``4-percent'' 
        each place it appears (including the heading) and 
        inserting ``2-percent''.
            (2) Paragraph (4) of section 6601(j), as 
        redesignated by section 501(e), is amended by striking 
        ``4-percent'' each place it appears and inserting ``2-
        percent''.
            (3) The subsection heading for section 6601(j) is 
        amended by striking ``4-Percent'' and inserting ``2-
        Percent''.
    (d) Effective Date.--
            (1) In general.--The amendments made by this 
        section shall apply to estates of decedents dying after 
        December 31, 1997.
            (2) Election.--In the case of the estate of any 
        decedent dying before January 1, 1998, with respect to 
        which there is an election under section 6166 of the 
        Internal Revenue Code of 1986, the executor of the 
        estate may elect to have the amendments made by this 
        section apply with respect to installments due after 
        the effective date of the election; except that the 2-
        percent portion of such installments shall be equal to 
        the amount which would be the 4-percent portion of such 
        installments without regard to such election. Such an 
        election shall be made before January 1, 1999 in the 
        manner prescribed by the Secretary of the Treasury and, 
        once made, is irrevocable.

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 or whether such extension has ceased to apply. 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 respect to 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.''.

1    (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 proceedingunless 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. REPEAL OF THROWBACK RULES APPLICABLE TO CERTAIN DOMESTIC 
                    TRUSTS.

    (a) Accumulation Distributions.--
            (1) In general.--Section 665 is amended by 
        inserting after subsection (b) the following new 
        subsection:
    ``(c) Exception for Accumulation Distributions From Certain 
Domestic Trusts.--For purposes of this subpart--
            ``(1) In general.--In the case of a qualified 
        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) Qualified trust.--For purposes of this 
        subsection, the term `qualified trust' means any trust 
        other than--
                    ``(A) a foreign trust (or, except as 
                provided in regulations, a domestic trust which 
                at any time was a foreign trust), or
                    ``(B) a trust created before March 1, 1984, 
                unless it is established that the trust would 
                not be aggregated with other trusts under 
                section 643(f) if such section applied to such 
                trust.''.
            (2) Conforming amendments.--Subsection (b) of 
        section 665 is amended by inserting ``except as 
        provided in subsection (c),'' after ``subpart,''.
    (b) Repeal of Tax on Transfers to Trusts at Less Than Fair 
Market Value.--
            (1) Subpart A of part I of subchapter J of chapter 
        1 is amended by striking section 644 and by 
        redesignating section 645 as section 644.
            (2) Paragraph (5) of section 706(b) is amended by 
        striking ``section 645'' and inserting ``section 644''.
            (3) The table of sections for such subpart is 
        amended by striking the last 2 items and inserting the 
        following new item:

        ``Sec. 644. Taxable year of trusts.''

    (c) Effective Dates.--
            (1) Accumulation distributions.--The amendments 
        made by subsection (a) 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. TREATMENT OF LAND SUBJECT TO A QUALIFIED CONSERVATION 
                    EASEMENT.

    (a) Estate Tax With Respect to Land Subject to a Qualified 
Conservation Easement.--Section 2031 (relating to the 
definition of gross estate) is amended by redesignating 
subsection (c) as subsection (d) and by inserting after 
subsection (b) the following new subsection:
    ``(c) Estate Tax With Respect to Land Subject to a 
Qualified Conservation Easement.--
            ``(1) In general.--If the executor makes the 
        election described in paragraph (6), then, except as 
        otherwise provided in this subsection, there shall be 
        excluded from the gross estate the lesser of--
                    ``(A) the applicable percentage of the 
                value of land subject to a qualified 
                conservation easement, reduced by the amount of 
                any deduction under section 2055(f) with 
                respect to such land, or
                    ``(B) the exclusion limitation.
            ``(2) Applicable percentage.--For purposes of 
        paragraph (1), the term `applicable percentage' means 
        40 percent reduced (but not below zero) by 2 percentage 
        points for each percentage point (or fraction thereof) 
        by which the value of the qualified conservation 
        easement is less than 30 percent of the value of the 
        land (determined without regard to the value of such 
        easement and reduced by the value of any retained 
        development right (as defined in paragraph (5)).
            ``(3) Exclusion limitation.--For purposes of 
        paragraph (1), the exclusion limitation is the 
        limitation determined in accordance with the following 
        table:

    ``In the case of estates of                            The exclusion
      decedents dying during:                             limitation is:
          1998..........................................       $100,000 
          1999..........................................       $200,000 
          2000..........................................       $300,000 
          2001..........................................       $400,000 
          2002 or thereafter............................       $500,000.

            ``(4) Treatment of certain indebtedness.--
                    ``(A) In general.--The exclusion provided 
                in paragraph (1) shall not apply to the extent 
                that the land is debt-financed property.
                    ``(B) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Debt-financed property.--The 
                        term `debt-financed property' means any 
                        property with respect to which there is 
                        an acquisition indebtedness (as defined 
                        in clause (ii)) on the date of the 
                        decedent's death.
                            ``(ii) Acquisition indebtedness.--
                        The term `acquisition indebtedness' 
                        means, with respect to debt-financed 
                        property, the unpaid amount of--
                                    ``(I) the indebtedness 
                                incurred by the donor in 
                                acquiring such property,
                                    ``(II) the indebtedness 
                                incurred before the acquisition 
                                of such property if such 
                                indebtedness would not have 
                                been incurred but for such 
                                acquisition,
                                    ``(III) the indebtedness 
                                incurred after the acquisition 
                                of such property if such 
                                indebtedness would not have 
                                been incurred but for such 
                                acquisition and the incurrence 
                                of such indebtedness was 
                                reasonably foreseeable at the 
                                time of such acquisition, and
                                    ``(IV) the extension, 
                                renewal, or refinancing of an 
                                acquisition indebtedness.
            ``(5) Treatment of retained development right.--
                    ``(A) In general.--Paragraph (1) shall not 
                apply to the value of any development right 
                retained by the donor in the conveyance of a 
                qualified conservation easement.
                    ``(B) Termination of retained development 
                right.--If every person in being who has an 
                interest (whether or not in possession) in the 
                land executes an agreement to extinguish 
                permanently some or all of any development 
                rights (as defined in subparagraph (D)) 
                retained by the donor on or before the date for 
                filing the return of the tax imposed by section 
                2001, then any tax imposed by section 2001 
                shall be reduced accordingly. Such agreement 
                shall be filed with the return of the tax 
                imposed by section 2001. The agreement shall be 
                in such form as the Secretary shall prescribe.
                    ``(C) Additional tax.--Any failure to 
                implement the agreement described in 
                subparagraph (B) not later than the earlier 
                of--
                            ``(i) the date which is 2 years 
                        after the date of the decedent's death, 
                        or
                            ``(ii) the date of the sale of such 
                        land subject to the qualified 
                        conservation easement,
                shall result in the imposition of an additional 
                tax in the amount of the tax which would 
havebeen due on the retained development rights subject to such 
agreement. Such additional tax shall be due and payable on the last day 
of the 6th month following such date.
                    ``(D) Development right defined.--For 
                purposes of this paragraph, the term 
                `development right' means any right to use the 
                land subject to the qualified conservation 
                easement in which such right is retained for 
                any commercial purpose which is not subordinate 
                to and directly supportive of the use of such 
                land as a farm for farming purposes (within the 
                meaning of section 2032A(e)(5)).
            ``(6) Election.--The election under this subsection 
        shall be made on the return of the tax imposed by 
        section 2001. Such an election, once made, shall be 
        irrevocable.
            ``(7) Calculation of estate tax due.--An executor 
        making the election described in paragraph (6) shall, 
        for purposes of calculating the amount of tax imposed 
        by section 2001, include the value of any development 
        right (as defined in paragraph (5)) retained by the 
        donor in the conveyance of such qualified conservation 
        easement. The computation of tax on any retained 
        development right prescribed in this paragraph shall be 
        done in such manner and on such forms as the Secretary 
        shall prescribe.
            ``(8) Definitions.--For purposes of this 
        subsection--
                    ``(A) Land subject to a qualified 
                conservation easement.--The term `land subject 
                to a qualified conservation easement' means 
                land--
                            ``(i) which is located--
                                    ``(I) in or within 25 miles 
                                of an area which, on the date 
                                of the decedent's death, is a 
                                metropolitan area (as defined 
                                by the Office of Management and 
                                Budget),
                                    ``(II) in or within 25 
                                miles of an area which, on the 
                                date of the decedent's death, 
                                is a national park or 
                                wilderness area designated as 
                                part of the National Wilderness 
                                Preservation System (unless it 
                                is determined by the Secretary 
                                that land in or within 25 miles 
                                of such a park or wilderness 
                                area is not under significant 
                                development pressure), or
                                    ``(III) in or within 10 
                                miles of an area which, on the 
                                date of the decedent's death, 
                                is an Urban National Forest (as 
                                designated by the Forest 
                                Service),
                            ``(ii) which was owned by the 
                        decedent or a member of the decedent's 
                        family at all times during the 3-year 
                        period ending on the date of the 
                        decedent's death, and
                            ``(iii) with respect to which a 
                        qualified conservation easement has 
                        been made by an individual described in 
                        subparagraph (C), as of the date of the 
                        election described in paragraph (6).
                    ``(B) Qualified conservation easement.--The 
                term `qualified conservation easement' means a 
                qualified conservation contribution (as defined 
                in section 170(h)(1)) of a qualified real 
                property interest (as defined in section 
                170(h)(2)(C)), except that clause (iv) of 
                section 170(h)(4)(A) shall not apply, and the 
                restriction on the use of such interest 
                described in section 170(h)(2)(C) shall include 
                a prohibition on more than a de minimis use for 
                a commercial recreational activity.
                    ``(C) Individual described.--An individual 
                is described in this subparagraph if such 
                individual is--
                            ``(i) the decedent,
                            ``(ii) a member of the decedent's 
                        family,
                            ``(iii) the executor of the 
                        decedent's estate, or
                            ``(iv) the trustee of a trust the 
                        corpus of which includes the land to be 
                        subject to the qualified conservation 
                        easement.
                    ``(D) Member of family.--The term `member 
                of the decedent's family' means any member of 
                the family (as defined in section 2032A(e)(2)) 
                of the decedent.
            ``(9) Application of this section to interests in 
        partnerships, corporations, and trusts.--This section 
        shall apply to an interest in a partnership, 
        corporation, or trust if at least 30 percent of the 
        entity is owned (directly or indirectly) by the 
        decedent, as determined under the rules described in 
        section 2033A(e)(3).''.
    (b) Carryover Basis.--Section 1014(a) (relating to basis of 
property acquired from a decedent) is amended by striking 
``or'' at the end of paragraphs (1) and (2), by striking the 
period at the end of paragraph (3) and inserting ``, or'' and 
by adding at the end the following new paragraph:
            ``(4) to the extent of the applicability of the 
        exclusion described in section 2031(c), the basis in 
        the hands of the decedent.''.
    (c) Qualified Conservation Contribution Is Not a 
Disposition.--Subsection (c) of section 2032A (relating to 
alternative valuation method) is amended by adding at the end 
the following new paragraph:
            ``(8) Qualified conservation contribution is not a 
        disposition.--A qualified conservation contribution (as 
        defined in section 170(h)) by gift or otherwise shall 
        not be deemed a disposition under subsection 
        (c)(1)(A).''.
    (d) Qualified Conservation Contribution Where Surface and 
Mineral Rights are Separated.--Section 170(h)(5)(B)(ii) 
(relating to special rule) is amended to read as follows:
            ``(ii) Special rule.--With respect to any 
        contribution of property in which the ownership of the 
        surface estate and mineral interests has been and 
        remains separated, subparagraph (A) shall be treated as 
        met if the probability of surface mining occurring on 
        such property is so remote as to be negligible.''.
    (e) Effective Dates.--
            (1) Enclusion.--The amendments made by subsections 
        (a) and (b) shall apply to estates of decedents dying 
        after December 31, 1997.
            (2) Easements.--The amendments made by subsections 
        (c) and (d) shall apply to easements granted after 
        December 31, 1997.

             Subtitle B--Generation-Skipping Tax Provision

SEC. 511. 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 who is 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 
        ``June 30, 1998'', and
            (2) by striking in the last sentence ``during the 
        first 11 months of such taxable year.'' and inserting 
        ``during the 24-month period beginning with the first 
        month of such year. The 24 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 ``June 30, 
        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 ``June 30, 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.--Subparagraph (B) of section 51(c)(4) 
(relating to termination) is amended by striking ``September 
30, 1997'' and inserting ``June 30, 1998''.
    (b) 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.''.
    (c) Qualified SSI Recipients Treated as Members of Targeted 
Groups.--
            (1) In general.--Section 51(d)(1) (relating to 
        members of targeted groups) 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) a qualified SSI recipient.''.
            (2) Qualified ssi recipients.--Section 51(d) is 
        amended by redesignating paragraphs (9), (10), and (11) 
        as paragraphs (10), (11), and (12), respectively, and 
        by inserting after paragraph (8) the following new 
        paragraph:
            ``(9) Qualified ssi recipient.--The term `qualified 
        SSI recipient' means any individual who is certified by 
        the designated local agency as receiving supplemental 
        security income benefits under title XVI of the Social 
        Security Act (including supplemental security income 
        benefits of the type described in section 1616 of such 
        Act or section 212 of Public Law 93-66) for any month 
        ending within the 60-day period ending on the hiring 
        date.''.
    (d) 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 service.--In 
                the case of an individual who has performed at 
                least 120 hours, but less than 400 hours, of 
                service 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 service.--No 
                wages shall be taken into account under 
                subsection (a) with respect to any individual 
                unless such individual has performed at least 
                120 hours of service for the employer.''.
    (e) Effective date.--The amendments made by this section 
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. Zero percent capital gains rate.
        ``Sec. 1400C. First-time homebuyer credit for District of 
                  Columbia.

``SEC. 1400. ESTABLISHMENT OF DC ZONE.

    ``(a) In General.--For purposes of this title--
            ``(1) the applicable DC area is hereby designated 
        as the District of Columbia Enterprise Zone, and
            ``(2) 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 than 20 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 Rules for Application of Employment Credit.--
            ``(1) Employees whose principal place of abode is 
        in district of columbia.--With respect to the DC Zone, 
        section 1396(d)(1)(B) (relating to empowerment zone 
        employment credit) shall be applied by substituting 
        `the District of Columbia' for `such empowerment zone'.
            ``(2) No decrease of percentage in 2002.--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) Special Rule for Application of Enterprise Zone 
Business Definition.--For purposes of this subchapter and for 
purposes of applying subchapter U with respect to the DC Zone, 
section 1397B shall be applied without regard to subsections 
(b)(6) and (c)(5) thereof.
    ``(f) 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 under 
        subchapter U of the census tracts referred to in 
        subsection (b)(1) as an enterprise community 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, 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) 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. 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--
            ``(1) after the application of section 1400(e),
            ``(2) by substituting ``80 percent'' for ``50 
        percent'' in subsections (b)(2) and (c)(1) of section 
        1397B, and
            ``(3) by treating no area other than the DC Zone as 
        an empowerment zone or enterprise community.
    ``(d) Treatment of Zone as Including Census Tracts With 10 
Percent Poverty Rate.--For purposes of applying this section 
(and for purposes of applying this subchapter and subchapter U 
with respect to this section), the DC Zone shall be treated as 
including all census tracts--
            ``(1) which are located in the District of 
        Columbia, and
            ``(2) for which the poverty rate is not less than 
        10 percent.
    ``(e) 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 not qualified.--The term 
        `qualified capital gain' shall not include any gain 
        which would be treated as ordinary income under section 
        1245 or 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).
    ``(f) 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.
    ``(g) 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. 1400C. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF COLUMBIA.

    ``(a) Allowance of Credit.--In the case of an individual 
who is a first-time homebuyer of a principal residence in the 
District of Columbia during any taxable year, there shall be 
allowed as a credit against the tax imposed by this chapter for 
the taxable year an amount equal to so much of the purchase 
price of the residence as does not exceed $5,000.
    ``(b) Limitation Based on Modified Adjusted Gross Income.--
            ``(1) In general.--The amount allowable as a credit 
        under subsection (a) (determined without regard to this 
        subsection) for the taxable year shall be reduced (but 
        not below zero) by the amount which bears the same 
        ratio to the credit so allowable as--
                    ``(A) the excess (if any) of--
                            ``(i) the taxpayer's modified 
                        adjusted gross income for such taxable 
                        year, over
                            ``(ii) $70,000 ($110,000 in the 
                        case of a joint return), bears to
                    ``(B) $20,000.
            ``(2) Modified adjusted gross income.--For purposes 
        of paragraph (1), 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.
    ``(c) First-Time Homebuyer.--For purposes of this section--
            ``(1) In general.--The term `first-time homebuyer' 
        has the same meaning as when used in section 
        72(t)(8)(D)(i), except that `principal residence in the 
        District of Columbia during the 1-year period' shall be 
        substituted for `principal residence during the 2-year 
        period' in subclause (I) thereof.
            ``(2) One-time only.--If an individual is treated 
        as a first-time homebuyer with respect to any principal 
        residence, such individual may not be treated as a 
        first-time homebuyer with respect to any other 
        principal residence.
            ``(3) Principal residence.--The term `principal 
        residence' has the same meaning as when used in section 
        121.
    ``(d) Carryover of Credit.--If the credit allowable under 
subsection (a) exceeds the limitation imposed by section 26(a) 
for such taxable year reduced by the sum of the credits 
allowable under subpart A of part IV of subchapter A (other 
than this section), such excess shall be carried to the 
succeeding taxable year and added to the credit allowable under 
subsection (a) for such taxable year.
    ``(e) Special Rules.--For purposes of this section--
            ``(1) Allocation of dollar limitation.--
                    ``(A) Married individuals filing 
                separately.--In the case of a married 
                individual filing a separate return, subsection 
                (a) shall be applied by substituting `$2,500' 
                for `$5,000'.
                    ``(B) Other taxpayers.--If 2 or more 
                individuals who are not married purchase a 
                principal residence, the amount of the credit 
                allowed under subsection (a) shall be allocated 
                among such individuals in such manner as the 
                Secretary may prescribe, except that the total 
                amount of the credits allowed to all such 
                individuals shall not exceed $5,000.
            ``(2) Purchase.--
                    ``(A) In general.--The term `purchase' 
                means any acquisition, but only if--
                            ``(i) the property is not acquired 
                        from a person whose relationship to the 
                        person acquiring it would result in the 
                        disallowance of losses under section 
                        267 or 707(b) (but, in applying section 
                        267 (b) and (c) for purposes of this 
                        section, paragraph (4) of section 
                        267(c) shall be treated as providing 
                        that the family of an individual shall 
                        include only his spouse, ancestors, and 
                        lineal descendants), and
                            ``(ii) the basis of the property in 
                        the hands of the person acquiring it is 
                        not determined--
                                    ``(I) in whole or in part 
                                by reference to the adjusted 
                                basis of such property in the 
                                hands of the person from whom 
                                acquired, or
                                    ``(II) under section 
                                1014(a) (relating to property 
                                acquired from a decedent).
                    ``(B) Construction.--A residence which is 
                constructed by the taxpayer shall be treated as 
                purchased by the taxpayer.
            ``(3) Purchase price.--The term `purchase price' 
        means the adjusted basis of the principal residence on 
        the date of acquisition (within the meaning of section 
        72(t)(8)(D)(iii)).
    ``(f) Reporting.--If the Secretary requires information 
reporting under section 6045 by a person described in 
subsection (e)(2) thereof to verify the eligibility of 
taxpayers for the credit allowable by this section, the 
exception provided by section 6045(e)(5) shall not apply.
    ``(g) Credit Treated as Nonrefundable Personal Credit.--For 
purposes of this title, the credit allowed by this section 
shall be treated as a credit allowable under subpart A of part 
IV of subchapter A of this chapter.
    ``(h) Basis Adjustment.--For purposes of this subtitle, if 
a credit is allowed under this section with respect to the 
purchase of any residence, the basis of such residence shall be 
reduced by the amount of the credit so allowed.
    ``(i) Termination.--This section shall not apply to any 
property purchased after December 31, 2000.''
    (b) Conforming Amendments.--
            (1) 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 credits allowable under subchapter U by reason of 
        section 1400 may be carried back to a taxable year 
        ending before the date of the enactment of section 
        1400.''
            (2) Subsection (a) of section 1016 is amended by 
        striking ``and'' at the end of paragraph (25), by 
        striking the period at the end of paragraph (26) and 
        inserting ``, and'', and by adding at the end thereof 
        the following new paragraph:
            ``(27) in the case of a residence with respect to 
        which a credit was allowed under section 1400C, to the 
        extent provided in section 1400C(h).''
    (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.--Except as provided in subsection (c), 
the amendments made by this section shall take effect on the 
date of the enactment of this Act.

                 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 
therules 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 Taxpayer Relief 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. GENERAL REVENUE PORTION OF HIGHWAY MOTOR FUELS TAXES 
                    DEPOSITED INTO HIGHWAY TRUST FUND.

    (a) In General.--Paragraph (4) of section 9503(b) (relating 
to certain additional taxes not transferred to Highway Trust 
Fund) is amended to read as follows:
            ``(4) Certain taxes not transferred to highway 
        trust fund.--For purposes of paragraphs (1) and (2), 
        there shall not be taken into account the taxes imposed 
        by--
                    ``(A) section 4041(d),
                    ``(B) section 4081 to the extent 
                attributable to the rate specified in section 
                4081(a)(2)(B),
                    ``(C) section 4041 or 4081 to the extent 
                attributable to fuel used in a train,
                    ``(D) in the case of fuels used as 
                described in paragraph (4)(D), (5)(B), or 
                (6)(D) of subsection (c), section 4041 or 
                4081--
                            ``(i) with respect to so much of 
                        the rate of tax on gasoline or special 
                        motor fuels as exceeds 11.5 cents per 
                        gallon, and
                            ``(ii) with respect to so much of 
                        the rate of tax on diesel fuel or 
                        kerosene as exceeds 17.5 cents per 
                        gallon,
                    ``(E) in the case of fuels described in 
                section 4041(b)(2)(A), 4041(k), or 4081(c), 
                section 4041 or 4081 before October 1, 1999, 
                with respect to a rate equal to 2.5 cents per 
                gallon, or
                    ``(F) in the case of fuels described in 
                section 4081(c)(2), such section before October 
                1, 1999, with respect to a rate equal to 2.8 
                cents per gallon.''.
    (b) Mass Transit Portion.--Section 9503(e)(2) (relating to 
transfers to Mass Transit Account) is amended by striking ``2 
cents'' and inserting ``2.85 cents''.
    (c) Limitation on Expenditures.--Subsection (c) of section 
9503 is amended by adding at the end the following new 
paragraph:
            ``(7) Limitation on expenditures.--Notwithstanding 
        any other provision of law, in calculating amounts 
        under section 157(a) of title 23, United States Code, 
        and sections 1013(c), 1015(a), and 1015(b) of the 
        Intermodal Surface Transportation Efficiency Act of 
        1991 (Public Law 102-240; 105 Stat. 1914), deposits in 
        the Highway Trust Fund resulting from the amendments 
        made by the Taxpayer Relief Act of 1997 shall not be 
        taken into account.''.
    (d) Technical Amendments.--
            (1) Section 9503 is amended by striking subsection 
        (f).
            (2) The last sentence of subparagraph (A) of 
        section 9503(c)(2) is amended by striking ``by taking 
        into account only the Highway Trust Fund financing rate 
        applicable to any fuel'' and inserting ``by taking into 
        account only the portion of the taxes which are 
        deposited into the Highway Trust Fund''.
            (3) Paragraphs (4)(D), (5)(B), and (6)(D) of 
        section 9503(c) are each amended by striking 
        ``attributable to the Highway Trust Fund financing 
        rate'' and inserting ``deposited into the Highway Trust 
        Fund''.
    (e) Delayed Deposits of Highway Motor Fuel Tax Revenues.--
Notwithstanding section 6302 of the Internal Revenue Code of 
1986, in the case of deposits of taxes imposed by sections 4041 
and 4081 (other than subsection (a)(2)(A)(ii)) of the Internal 
Revenue Code of1986, the due date for any deposit which would 
(but for this subsection) be required to be made after July 31, 1998, 
and before October 1, 1998, shall be October 5, 1998.
    (f) Effective Date.--The amendments made by this section 
shall apply to taxes received in the Treasury after September 
30, 1997.

SEC. 902. 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 (3) of section 4083(a) is amended by 
        striking ``, a diesel-powered train, or a diesel-
        powered boat'' and inserting ``or a diesel-powered 
        train''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 1998.

SEC. 903. 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. 904. 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 75 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), (4), and (5) and by 
redesignating paragraphs (6) through (8) as paragraphs (2) 
through (4), respectively.
    (d) Effective Date.--The amendments made by this section 
shall take effect on the day after the date of the enactment of 
this Act.
    (e) Limitation on Certain Credits or Refunds.--For purposes 
of applying section 4132(b) of the Internal Revenue Code of 
1986 with respect to any claim for credit or refund filed 
before January 1, 1999, the amount of tax taken into account 
shall not exceed the tax computed under the rate in effect on 
the day after the date of the enactment of this Act.

SEC. 905. OPERATORS OF MULTIPLE GASOLINE RETAIL OUTLETS TREATED AS 
                    WHOLESALE DISTRIBUTOR FOR REFUND PURPOSES.

    (a) In General.--Subparagraph (B) of section 6416(a)(4) 
(defining wholesale 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 apply to sales after the date of the enactment of this 
Act.

SEC. 906. 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 and 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) the dollar amount in effect 
                        under subparagraph (A), 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 the dollar amount in effect 
                        under subparagraph (A).
                            ``(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 by striking ``and 
        section 4003(a)''.
            (2) Subsection (f) of section 4001 (relating to 
        phasedown) is amended by striking ``subsection (a)'' 
        and inserting ``subsection (a)(1)''.
            (3) Subparagraph (A) of section 4003(a)(1) is 
        amended by inserting ``(other than property described 
        in section 4001(a)(2)(B))'' after ``part or 
        accessory''.
            (4) 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 after the date 
of the enactment of this Act.

SEC. 907. RATE OF TAX ON CERTAIN SPECIAL FUELS DETERMINED ON BASIS OF 
                    BTU EQUIVALENCY WITH GASOLINE.

    (a) Special Motor Fuels.--
            (1) In general.--Paragraph (2) of section 4041(a) 
        (relating to special motor fuels) is amended to read as 
        follows:
            ``(2) Special motor fuels.--
                    ``(A) In general.--There is hereby imposed 
                a tax on any liquid (other than kerosene, gas 
                oil, fuel oil, or any product taxable under 
                section 4081)--
                            ``(i) sold by any person to an 
                        owner, lessee, or other operator of a 
                        motor vehicle or motorboat for use as a 
                        fuel in such motor vehicle or 
                        motorboat, or
                            ``(ii) used by any person as a fuel 
                        in a motor vehicle or motorboat unless 
                        there was a taxable sale of such liquid 
                        under clause (i).
                    ``(B) Rate of tax.--The rate of the tax 
                imposed by this paragraph shall be--
                            ``(i) except as otherwise provided 
                        in this subparagraph, the rate of tax 
                        specified in section 4081(a)(2)(A)(i) 
                        which is in effect at the time of such 
                        sale or use,
                            ``(ii) 13.6 cents per gallon in the 
                        case of liquefied petroleum gas, and
                            ``(iii) 11.9 cents per gallon in 
                        the case of liquefied natural gas.
                In the case of any sale or use after September 
                30, 1999, clause (ii) shall be applied by 
                substituting `3.2 cents' for `13.6 cents', and 
                clause (iii) shall be applied by substituting 
                `2.8 cents' for `11.9 cents'.''.
            (2) Conforming amendment.--Paragraph (1) of section 
        4041(d) is amended by inserting ``and other than 
        liquefied natural gas'' after ``liquefied petroleum 
        gas''.
    (b) Methanol Fuel Produced From Natural Gas.--Subparagraph 
(A) of section 4041(m)(1) is amended to read as follows:
                    ``(A) the rate of the tax imposed by 
                subsection (a)(2) shall be--
                            ``(i) after September 30, 1997, and 
                        before October 1, 1999--
                                    ``(I) in the case of fuel 
                                none of the alcohol in which 
                                consists of ethanol, 9.15 cents 
                                per gallon, and
                                    ``(II) in any other case, 
                                11.3 cents per gallon, and
                            ``(ii) after September 30, 1999--
                                    ``(I) in the case of fuel 
                                none of the alcohol in which 
                                consists of ethanol, 2.15 cents 
                                per gallon, and
                                    ``(II) in any other case, 
                                4.3 cents per gallon, and''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on October 1, 1997.

SEC. 908. MODIFICATION OF TAX TREATMENT OF HARD CIDER.

    (a) Hard Cider Containing Less Than 7 Percent Alcohol Taxed 
as Wine.--Subsection (b) of section 5041 (relating to 
imposition and rate of tax) 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 
the following new paragraph:
            ``(6) On hard cider derived primarily from apples 
        or apple concentrate and water, containing no other 
        fruit product, and containing at least one-half of 1 
        percent and less than 7 percent alcohol by volume, 22.6 
        cents per wine gallon.''.
    (b) Application of Small Producer Credit.--Paragraph (1) of 
section 5041(c) (relating to credit for small domestic 
producers) is amended by adding at the end the following new 
sentence: ``In the case of wine described in subsection (b)(6), 
the preceding sentence shall be applied by substituting `5.6 
cents' for `90 cents'.''
    (c) Effective Date.--The amendments made by this section 
shall take effect on October 1, 1997.

SEC. 909. STUDY OF FEASIBILITY OF MOVING COLLECTION POINT FOR DISTILLED 
                    SPIRITS EXCISE TAX.

    (a) In General.--The Secretary of the Treasury or his 
delegate shall conduct a study of options for changing the 
event on which the tax imposed by section 5001 of the Internal 
Revenue Code of 1986 is determined. One such option which shall 
be studied is determining such tax on removal from registered 
wholesale warehouses. In studying each such option, such 
Secretary shall focus on administrative issues including--
            (1) tax compliance,
            (2) the number of taxpayers required to pay the 
        tax,
            (3) the types of financial responsibility 
        requirements that might be required, and
            (4) special requirements regarding segregation of 
        non-tax-paid distilled spirits from other products.
Such study shall review the effects of each such option on the 
Department of the Treasury (including staffing and other 
demands on budgetary resources) and the change in the period 
between the time such tax is currently paid and the time such 
tax would be paid under each such option.
    (b) Report.--The report of such study shall be submitted to 
the Committee on Finance of the Senate and the Committee on 
Ways and Means of the House of Representatives not later than 
March 31, 1998.

SEC. 910. CLARIFICATION OF AUTHORITY TO USE SEMI-GENERIC DESIGNATIONS 
                    ON WINE LABELS.

    (a) In General.--Section 5388 (relating to designation of 
wines) is amended by adding at the end the following new 
subsection:
    ``(c) Use of Semi-Generic Designations.--
            ``(1) In general.--Semi-generic designations may be 
        used to designate wines of an origin other than that 
        indicated by such name only if--
                    ``(A) there appears in direct conjunction 
                therewith an appropriate appellation of origin 
                disclosing the true place of origin of the 
                wine, and
                    ``(B) the wine so designated conforms to 
                the standard of identity, if any, for such wine 
                contained in the regulations under this section 
                or, if there is no such standard, to the trade 
                understanding of such class or type.
            ``(2) Determination of whether name is semi-
        generic.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), a name of geographic 
                significance, which is also the designation of 
                a class or type of wine, shall be deemed to 
                have become semi-generic only if so found by 
                the Secretary.
                    ``(B) Certain names treated as semi-
                generic.--The following names shall be treated 
                as semi-generic: Angelica, Burgundy, Claret, 
                Chablis, Champagne, Chianti, Malaga, Marsala, 
                Madeira, Moselle, Port, Rhine Wine or Hock, 
                Sauterne, Haut Sauterne, Sherry, Tokay.''.
    (b) Effective Date.--The amendment made by this section 
shall take effect on the date of the enactment of this Act.

              Subtitle B--Revisions Relating to Disasters

SEC. 911. 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 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. 912. 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. 913. 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. 914. 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 Robert 
        T. Stafford Disaster Relief and Emergency Assistance 
        Act (as in effect on the date of the enactment of the 
        Taxpayer Relief Act of 1997), this section shall be 
        applied with the following modifications to financing 
        provided with respect to such residence within 2 years 
        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, 1999.''.

SEC. 915. ABATEMENT OF INTEREST ON UNDERPAYMENTS BY TAXPAYERS IN 
                    PRESIDENTIALLY DECLARED DISASTER AREAS.

    (a) In General.--If the Secretary of the Treasury extends 
for any period the time for filing income tax returns under 
section 6081 of the Internal Revenue Code of 1986 and the time 
for paying income tax with respect to such returns under 
section 6161 of such Code (and waives any penalties relating to 
the failure to so file or so pay) for any individual located in 
a Presidentially declared disaster area, the Secretary shall, 
notwithstanding section 7508A(b) of such Code, abate for such 
period the assessment of any interest prescribed under section 
6601 of such Code on such income tax.
    (b) Presidentially Declared Disaster Area.--For purposes of 
subsection (a), the term ``Presidentially declared disaster 
area'' means, with respect to any individual, any area which 
the President has determined during 1997 warrants assistance by 
the Federal Government under the Robert T. Stafford Disaster 
Relief and Emergency Assistance Act.
    (c) Individual.--For purposes of this section, the term 
``individual'' shall not include any estate or trust.
    (d) Effective Date.--This section shall apply to disasters 
declared after December 31, 1996.

          Subtitle C--Provisions Relating to Employment Taxes

SEC. 921. 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. 922. 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 primarily on policies sold by 
                or credited to the account of such individual 
                during the last year of such agreement or the 
                extent to which such policies remain in force 
                for some period after such termination, or 
                both, and
                    ``(B) does not depend to any extent on 
                length of service or overall earnings from 
                services performed for such company (without 
                regard to whether eligibility for payment 
                depends on length of service).''.
    (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 primarily on policies sold by 
                or credited to the account of such individual 
                during the last year of such agreement or the 
                extent to which such policies remain in force 
                for some period after such termination, or 
                both, and
                    ``(B) does not depend to any extent on 
                length of service or overall earnings from 
                services performed for such company (without 
                regard to whether eligibility for payment 
                depends on length of service).''.
    (c) Effective Date.--The amendments made by this section 
shall apply to payments after December 31, 1997.

          Subtitle D--Provisions Relating to Small Businesses

SEC. 931. WAIVER OF PENALTY THROUGH JUNE 30, 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 July 1, 1998.

SEC. 932. 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, 1998.

SEC. 933. AVERAGING OF FARM INCOME OVER 3 YEARS.

    (a) In General.--Subchapter Q of chapter 1 (relating to 
readjustment of tax between years and special limitations) is 
amended by adding the following new part:

                       ``PART I--INCOME AVERAGING

        ``Sec. 1301. Averaging of farm income.

``SEC. 1301. AVERAGING OF FARM INCOME.

    ``(a) In General.--At the election of an individual engaged 
in a farming business, the tax imposed by section 1 for such 
taxable year shall be equal to the sum of--
            ``(1) a tax computed under such section on taxable 
        income reduced by elected farm income, plus
            ``(2) the increase in tax imposed by section 1 
        which would result if taxable income for each of the 3 
        prior taxable years were increased by an amount equal 
        to one-third of the elected farm income.
Any adjustment under this section for any taxable year shall be 
taken into account in applying this section for any subsequent 
taxable year.
    ``(b) Definitions.--In this section--
            ``(1) Elected farm income.--
                    ``(A) In general.--The term `elected farm 
                income' means so much of the taxable income for 
                the taxable year--
                            ``(i) which is attributable to any 
                        farming business; and
                            ``(ii) which is specified in the 
                        election under subsection (a).
                    ``(B) Treatment of gains.--For purposes of 
                subparagraph (A), gain from the sale or other 
                disposition of property (other than land) 
                regularly used by the taxpayer in such a 
                farming business for a substantial period shall 
                be treated as attributable to such a farming 
                business.
            ``(2) Individual.--The term `individual' shall not 
        include any estate or trust.
            ``(3) Farming business.--The term `farming 
        business' has the meaning given such term by section 
        263A(e)(4).
    ``(c) Regulations.--The Secretary shall prescribe such 
regulations as may be appropriate to carry out the purposes of 
this section, including regulations regarding--
            ``(1) the order and manner in which items of 
        income, gain, deduction, or loss, or limitations on 
        tax, shall be taken into account in computing the tax 
        imposed by this chapter on the income of any taxpayer 
        to whom this section applies for any taxable year, and
            ``(2) the treatment of any short taxable year.''.
    (b) Clerical Amendment.--The table of parts for such 
subchapter Q is amended by inserting before the item relating 
to part II the following new item:

        ``Part I. Income averaging.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997, 
and before January 1, 2001.

SEC. 934. INCREASE IN DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
                    EMPLOYED INDIVIDUALS.

    (a) In General.--The table contained in section 
162(l)(1)(B) is amended to read as follows:

    ``For taxable years be-                               The applicable
      ginning in calendar year--                         percentage is--
    1997......................................................       40 
    1998 and 1999.............................................       45 
    2000 and 2001.............................................       50 
    2002......................................................       60 
    2003 through 2005.........................................       80 
    2006......................................................       90 
    2007 and thereafter.......................................   100.''.

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

SEC. 935. MORATORIUM ON CERTAIN REGULATIONS.

    No temporary or final regulation with respect to the 
definition of a limited partner under section 1402(a)(13) of 
the Internal Revenue Code of 1986 may be issued or made 
effective before July 1, 1998.

                        Subtitle E--Brownfields

SEC. 941. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

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

``SEC. 198. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

    ``(a) In General.--A taxpayer may elect to treat any 
qualified environmental remediation expenditure which is paid 
or incurred by the taxpayer as an expense which is not 
chargeable to capital account. Any expenditure which is so 
treated shall be allowed as a deduction for the taxable year in 
which it is paid or incurred.
    ``(b) Qualified Environmental Remediation Expenditure.--For 
purposes of this section--
            ``(1) In general.--The term `qualified 
        environmental remediation expenditure' means any 
        expenditure--
                    ``(A) which is otherwise chargeable to 
                capital account, and
                    ``(B) which is paid or incurred in 
                connection with the abatement or control of 
                hazardous substances at a qualified 
                contaminated site.
            ``(2) Special rule for expenditures for depreciable 
        property.--Such term shall not include any expenditure 
        for the acquisition of property of a character subject 
        to the allowance for depreciation which is used in 
        connection with the abatement or control of hazardous 
        substances at a qualified contaminated site; except 
        that the portion of the allowance under section 167 for 
        such property which is otherwise allocated to such site 
        shall be treated as a qualified environmental 
        remediation expenditure.
    ``(c) Qualified Contaminated Site.--For purposes of this 
section--
            ``(1) Qualified contaminated site.--
                    ``(A) In general.--The term `qualified 
                contaminated site' means any area--
                            ``(i) which is held by the taxpayer 
                        for use in a trade or business or for 
                        the production of income, or which is 
                        property described in section 1221(1) 
                        in the hands of the taxpayer,
                            ``(ii) which is within a targeted 
                        area, and
                            ``(iii) at or on which there has 
                        been a release (or threat of release) 
                        or disposal of any hazardous substance.
                    ``(B) Taxpayer must receive statement from 
                state environmental agency.--An area shall be 
                treated as a qualified contaminated site with 
                respect to expenditures paid or incurred during 
                any taxable year only if the taxpayer receives 
                a statement from the appropriate agency of the 
                State in which such area is located that such 
                area meets the requirements of clauses (ii) and 
                (iii) of subparagraph (A).
                    ``(C) Appropriate state agency.--For 
                purposes of subparagraph (B), the chief 
                executive officer of each State may, in 
                consultation with the Administrator of the 
                Environmental Protection Agency, designate the 
                appropriate State environmental agency within 
                60 days of the date of the enactment of this 
                section. If the chief executive officer of a 
                State has not designated an appropriate State 
                environmental agency within such 60-day period, 
                the appropriate environmental agency for such 
                State shall be designated by the Administrator 
                of the Environmental Protection Agency.
            ``(2) Targeted area.--
                    ``(A) In general.--The term `targeted area' 
                means--
                            ``(i) any population census tract 
                        with a poverty rate of not less than 20 
                        percent,
                            ``(ii) a population census tract 
                        with a population of less than 2,000 
                        if--
                                    ``(I) more than 75 percent 
                                of such tract is zoned for 
                                commercial or industrial use, 
                                and
                                    ``(II) such tract is 
                                contiguous to 1 or more other 
                                population census tracts which 
                                meet the requirement of clause 
                                (i) without regard to this 
                                clause,
                            ``(iii) any empowerment zone or 
                        enterprise community (and any 
                        supplemental zone designated on 
                        December 21, 1994), and
                            ``(iv) any site announced before 
                        February 1, 1997, as being included as 
                        a brownfields pilot project of the 
                        Environmental Protection Agency.
                    ``(B) National priorities listed sites not 
                included.--Such term shall not include any site 
                which is on, or proposed for, the national 
                priorities list under section 105(a)(8)(B) of 
                the Comprehensive Environmental Response, 
                Compensation, and Liability Act of 1980 (as in 
                effect on the date of the enactment of this 
                section).
                    ``(C) Certain rules to apply.--For purposes 
                of this paragraph the rules of sections 
                1392(b)(4) and 1393(a)(9) shall apply.
    ``(d) Hazardous Substance.--For purposes of this section--
            ``(1) In general.--The term `hazardous substance' 
        means--
                    ``(A) any substance which is a hazardous 
                substance as defined in section 101(14) of the 
                Comprehensive Environmental Response, 
                Compensation, and Liability Act of 1980, and
                    ``(B) any substance which is designated as 
                a hazardous substance under section 102 of such 
                Act.
            ``(2) Exception.--Such term shall not include any 
        substance with respect to which a removal or remedial 
        action is not permitted under section 104 of such Act 
        by reason of subsection (a)(3) thereof.
    ``(e) Deduction Recaptured as Ordinary Income on Sale, 
Etc.--Solely for purposes of section 1245, in the case of 
property to which a qualified environmental remediation 
expenditure would have been capitalized but for this section--
            ``(1) the deduction allowed by this section for 
        such expenditure shall be treated as a deduction for 
        depreciation, and
            ``(2) such property (if not otherwise section 1245 
        property) shall be treated as section 1245 property 
        solely for purposes of applying section 1245 to such 
        deduction.
    ``(f) Coordination With Other Provisions.--Sections 280B 
and 468 shall not apply to amounts which are treated as 
expenses under this section.
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.
    ``(h) Termination.--This section shall not apply to 
expenditures paid or incurred after December 31, 2000.''.
    (b) Clerical Amendment.--The table of sections for part VI 
of subchapter B of chapter 1 is amended by adding at the end 
the following new item:

        ``Sec. 198. Expensing of environmental remediation costs.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to expenditures paid or incurred after the date of 
the enactment of this Act, in taxable years ending after such 
date.

Subtitle F--Empowerment Zones, Enterprise Communities, Brownfields, and 
              Community Development Financial Institutions

                CHAPTER 1--ADDITIONAL EMPOWERMENT ZONES

SEC. 951. ADDITIONAL EMPOWERMENT ZONES.

    (a) In General.--Paragraph (2) of section 1391(b) (relating 
to designations of empowerment zones and enterprise 
communities) is amended--
            (1) by striking ``9'' and inserting ``11'',
            (2) by striking ``6'' and inserting ``8'', and
            (3) by striking ``750,000'' and inserting 
        ``1,000,000''.
    (b) Special Rules for Application of Employment Credit.--
Subsection (b) of section 1396 (relating to empowerment zone 
employment credit) is amended--
            (1) by striking so much of the subsection as 
        precedes the table and inserting the following:
    ``(b) Applicable Percentage.--For purposes of this 
section--
            ``(1) In general.--Except as provided in paragraph 
        (2), the term `applicable percentage' means the 
        percentage determined in accordance with the following 
        table:'', and
            (2) by adding at the end the following new 
        paragraph:
            ``(2) Special rule.--With respect to each 
        empowerment zone designated pursuant to the amendments 
        made by the Taxpayer Relief Act of 1997 to section 
        1391(b)(2), the following table shall apply in lieu of 
        the table in paragraph (1):

    ``In the case of wages
      paid or incurred during                             The applicable
      calendar year--                                     percentage is:
    2000 through 2004.........................................       20 
    2005......................................................       15 
    2006......................................................       10 
    2007......................................................      5.''

    (c) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act, 
except that designations of new empowerment zones made pursuant 
to such amendments shall be made during the 180-day period 
beginning on the date of the enactment of this Act. No 
designation pursuant to such amendments shall take effect 
before January 1, 2000.

                    CHAPTER 2--NEW EMPOWERMENT ZONES

SEC. 952. DESIGNATION OF NEW EMPOWERMENT ZONES.

    (a) In General.--Section 1391 (relating to designation 
procedure for empowerment zones and enterprise communities) is 
amended by adding at the end the following new subsection:
    ``(g) Additional Designations Permitted.--
            ``(1) In general.--In addition to the areas 
        designated under subsection (a), the appropriate 
        Secretaries may designate in the aggregate an 
        additional 20 nominated areas as empowerment zones 
        under this section, subject to the availability of 
        eligible nominated areas. Of that number, not more than 
        15 may be designated in urban areas and not more than 5 
        may be designated in rural areas.
            ``(2) Period designations may be made and take 
        effect.--A designation may be made under this 
        subsection after the date of the enactment of this 
        subsection and before January 1, 1999.
            ``(3) Modifications to eligibility criteria, etc.--
                    ``(A) Poverty rate requirement.--
                            ``(i) In general.--A nominated area 
                        shall be eligible for designation under 
                        this subsection only if the poverty 
                        rate for each population census tract 
                        within the nominated area is not less 
                        than 20 percent and the poverty rate 
                        for at least 90 percent of the 
                        population census tracts within the 
                        nominated area is not less than 25 
                        percent.
                            ``(ii) Treatment of census tracts 
                        with small populations.--A population 
                        census tract with a population of less 
                        than 2,000 shall be treated as having a 
                        poverty rate of not less than 25 
                        percent if--
                                    ``(I) more than 75 percent 
                                of such tract is zoned for 
                                commercial or industrial use, 
                                and
                                    ``(II) such tract is 
                                contiguous to 1 or more other 
                                population census tracts which 
                                have a poverty rate of not less 
                                than 25 percent (determined 
                                without regard to this clause).
                            ``(iii) Exception for developable 
                        sites.--Clause (i) shall not apply to 
                        up to 3 noncontiguous parcels in a 
                        nominated area which may be developed 
                        for commercial or industrial purposes. 
                        The aggregate area of noncontiguous 
                        parcels to which the preceding sentence 
                        applies with respect to any nominated 
                        area shall not exceed 2,000 acres.
                            ``(iv) Certain provisions not to 
                        apply.--Section 1392(a)(4) (and so much 
                        of paragraphs (1) and (2) of section 
                        1392(b) as relate to section 
                        1392(a)(4)) shall not apply to an area 
                        nominated for designation under this 
                        subsection.
                            ``(v) Special rule for rural 
                        empowerment zone.--The Secretary of 
                        Agriculture may designate not more than 
                        1 empowerment zone in a rural area 
                        without regard to clause (i) if such 
                        area satisfies emigration criteria 
                        specified by the Secretary of 
                        Agriculture.
                    ``(B) Size limitation.--
                            ``(i) In general.--The parcels 
                        described in subparagraph (A)(iii) 
                        shall not be taken into account in 
                        determining whether the requirement of 
                        subparagraph (A) or (B) of section 
                        1392(a)(3) is met.
                            ``(ii) Special rule for rural 
                        areas.--If a population census tract 
                        (or equivalent division under section 
                        1392(b)(4)) in a rural area exceeds 
                        1,000 square miles or includes a 
                        substantial amount of land owned by the 
                        Federal, State, or local government, 
                        the nominated area may exclude such 
                        excess square mileage or governmentally 
                        owned land and the exclusion of that 
                        area will not be treated as violating 
                        the continuous boundary requirement of 
                        section 1392(a)(3)(B).
                    ``(C) Aggregate population limitation.--The 
                aggregate population limitation under the last 
                sentence of subsection (b)(2) shall not apply 
                to a designation under paragraph (1)(B).
                    ``(D) Previously designated enterprise 
                communities may be included.--Subsection (e)(5) 
                shall not apply to any enterprise community 
                designated under subsection (a) that is also 
                nominated for designation under this 
                subsection.
                    ``(E) Indian reservations may be 
                nominated.--
                            ``(i) In general.--Section 
                        1393(a)(4) shall not apply to an area 
                        nominated for designation under this 
                        subsection.
                            ``(ii) Special rule.--An area in an 
                        Indian reservation shall be treated as 
                        nominated by a State and a local 
                        government if it is nominated by the 
                        reservation governing body (as 
                        determined by the Secretary of 
                        Interior).''
    (b) Employment Credit Not To Apply to New Empowerment 
Zones.--Section 1396 (relating to empowerment zone employment 
credit) is amended by adding at the end the following new 
subsection:
    ``(e) Credit Not To Apply to Empowerment Zones Designated 
Under Section 1391(g).--This section shall be applied without 
regard to any empowerment zone designated under section 
1391(g).''
    (c) Increased Expensing Under Section 179 Not To Apply in 
Developable Sites.--Section 1397A (relating to increase in 
expensing under section 179) is amended by adding at the end 
the following new subsection:
    ``(c) Limitation.--For purposes of this section, qualified 
zone property shall not include any property substantially all 
of the use of which is in any parcel described in section 
1391(g)(3)(A)(iii).''
    (d) Conforming Amendments.--
            (1) Subsections (e) and (f) of section 1391 are 
        each amended by striking ``subsection (a)'' and 
        inserting ``this section''.
            (2) Section 1391(c) is amended by striking ``this 
        section'' and inserting ``subsection (a)''.

SEC. 953. VOLUME CAP NOT TO APPLY TO ENTERPRISE ZONE FACILITY BONDS 
                    WITH RESPECT TO NEW EMPOWERMENT ZONES.

    (a) In General.--Section 1394 (relating to tax-exempt 
enterprise zone facility bonds) is amended by adding at the end 
the following new subsection:
    ``(f) Bonds for Empowerment Zones Designated Under Section 
1391(g).--
            ``(1) In general.--In the case of a new empowerment 
        zone facility bond--
                    ``(A) such bond shall not be treated as a 
                private activity bond for purposes of section 
                146, and
                    ``(B) subsection (c) of this section shall 
                not apply.
            ``(2) Limitation on amount of bonds.--
                    ``(A) In general.--Paragraph (1) shall 
                apply to a new empowerment zone facility bond 
                only if such bond is designated for purposes of 
                this subsection by the local government which 
                nominated the area to which such bond relates.
                    ``(B) Limitation on bonds designated.--The 
                aggregate face amount of bonds which may be 
                designated under subparagraph (A) with respect 
                to any empowerment zone shall not exceed--
                            ``(i) $60,000,000 if such zone is 
                        in a rural area,
                            ``(ii) $130,000,000 if such zone is 
                        in an urban area and the zone has a 
                        population of less than 100,000, and
                            ``(iii) $230,000,000 if such zone 
                        is in an urban area and the zone has a 
                        population of at least 100,000.
                    ``(C) Special rules.--
                            ``(i) Coordination with limitation 
                        in subsection (c).--Bonds to which 
                        paragraph (1) applies shall not be 
                        taken into account in applying the 
                        limitation of subsection (c) to other 
                        bonds.
                            ``(ii) Current refunding not taken 
                        into account.--In the case of a 
                        refunding (or series of refundings) of 
                        a bond designated under this paragraph, 
                        the refunding obligation shall be 
                        treated as designated under this 
                        paragraph (and shall not be taken into 
                        account in applying subparagraph (B)) 
                        if--
                                    ``(I) the amount of the 
                                refunding bond does not exceed 
                                the outstanding amount of the 
                                refunded bond, and
                                    ``(II) the refunded bond is 
                                redeemed not later than 90 days 
                                after the date of issuance of 
                                the refunding bond.
            ``(3) New empowerment zone facility bond.--For 
        purposes of this subsection, the term `new empowerment 
        zone facility bond' means any bond which would be 
        described in subsection (a) if only empowerment zones 
        designated under section 1391(g) were taken into 
        account under sections 1397B and 1397C.''
    (b) Effective Date.--The amendment made by this section 
shall apply to obligations issued after the date of the 
enactment of this Act.

SEC. 954. MODIFICATION TO ELIGIBILITY CRITERIA FOR DESIGNATION OF 
                    FUTURE ENTERPRISE ZONES IN ALASKA OR HAWAII.

    Section 1392 (relating to eligibility criteria) is amended 
by adding at the end the following new subsection:
    ``(d) Special Eligibility for Nominated Areas Located in 
Alaska or Hawaii.--A nominated area in Alaska or Hawaii shall 
be treated as meeting the requirements of paragraphs (2), (3), 
and (4) of subsection (a) if for each census tract or block 
group within such area 20 percent or more of the families have 
income which is 50 percent or less of the statewide median 
family income (as determined under section 143).''.

  CHAPTER 3--TREATMENT OF EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES

SEC. 955. MODIFICATIONS TO ENTERPRISE ZONE FACILITY BOND RULES FOR ALL 
                    EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES.

    (a) Modifications Relating to Enterprise Zone Business.--
Paragraph (3) of section 1394(b) (defining enterprise zone 
business) is amended to read as follows:
            ``(3) Enterprise zone business.--
                    ``(A) In general.--Except as modified in 
                this paragraph, the term `enterprise zone 
                business' has the meaning given such term by 
                section 1397B.
                    ``(B) Modifications.--In applying section 
                1397B for purposes of this section--
                            ``(i) Businesses in enterprise 
                        communities eligible.--References in 
                        section 1397B to empowerment zones 
                        shall be treated as including 
                        references to enterprise communities.
                            ``(ii) Waiver of requirements 
                        during startup period.--A business 
                        shall not fail to be treated as an 
                        enterprise zone business during the 
                        startup period if--
                                    ``(I) as of the beginning 
                                of the startup period, it is 
                                reasonably expected that such 
                                business will be an enterprise 
                                zone business (as defined in 
                                section 1397B as modified by 
                                this paragraph) at the end of 
                                such period, and
                                    ``(II) such business makes 
                                bona fide efforts to be such a 
                                business.
                            ``(iii) Reduced requirements after 
                        testing period.--A business shall not 
                        fail to be treated as an enterprise 
                        zone business for any taxable year 
                        beginning after the testing period by 
                        reason of failing to meet any 
                        requirement of subsection (b) or (c) of 
                        section 1397B if at least 35 percent of 
                        the employees of such business for such 
                        year are residents of an empowerment 
                        zone or an enterprise community. The 
                        preceding sentence shall not apply to 
                        any business which is not a qualified 
                        business by reason of paragraph (1), 
                        (4), or (5) of section 1397B(d).
                    ``(C) Definitions relating to subparagraph 
                (b).--For purposes of subparagraph (B)--
                            ``(i) Startup period.--The term 
                        `startup period' means, with respect to 
                        any property being provided for any 
                        business, the period before the first 
                        taxable year beginning more than 2 
                        years after the later of--
                                    ``(I) the date of issuance 
                                of the issue providing such 
                                property, or
                                    ``(II) the date such 
                                property is first placed in 
                                service after such issuance 
                                (or, if earlier, the date which 
                                is 3 years after the date 
                                described in subclause (I)).
                            ``(ii) Testing period.--The term 
                        `testing period' means the first 3 
                        taxable years beginning after the 
                        startup period.
                    ``(D) Portions of business may be 
                enterprise zone business.--The term `enterprise 
                zone business' includes any trades or 
                businesses which would qualify as an enterprise 
                zone business (determined after the 
                modifications of subparagraph (B)) if such 
                trades or businesses were separately 
                incorporated.''
    (b) Modifications Relating to Qualified Zone Property.--
Paragraph (2) of section 1394(b) (defining qualified zone 
property) is amended to read as follows:
            ``(2) Qualified zone property.--The term `qualified 
        zone property' has the meaning given such term by 
        section 1397C; except that--
                    ``(A) the references to empowerment zones 
                shall be treated as including references to 
                enterprise communities, and
                    ``(B) section 1397C(a)(2) shall be applied 
                by substituting `an amount equal to 15 percent 
                of the adjusted basis' for `an amount equal to 
                the adjusted basis'.''
    (c) Effective Date.--The amendments made by this section 
shall apply to obligations issued after the date of the 
enactment of this Act.

SEC. 956. MODIFICATIONS TO ENTERPRISE ZONE BUSINESS DEFINITION FOR ALL 
                    EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES.

    (a) In General.--Section 1397B (defining enterprise zone 
business) is amended--
            (1) by striking ``80 percent'' in subsections 
        (b)(2) and (c)(1) and inserting ``50 percent'',
            (2) by striking ``substantially all'' each place it 
        appears in subsections (b) and (c) and inserting ``a 
        substantial portion'',
            (3) by striking ``, and exclusively related to,'' 
        in subsections (b)(4) and (c)(3),
            (4) by adding at the end of subsection (d)(2) the 
        following new flush sentence:
        ``For purposes of subparagraph (B), the lessor of the 
        property may rely on a lessee's certification that such 
        lessee is an enterprise zone business.'',
            (5) by striking ``substantially all'' in subsection 
        (d)(3) and inserting ``at least 50 percent'', and
            (6) by adding at the end the following new 
        subsection:
    ``(f) Treatment of Businesses Straddling Census Tract 
Lines.--For purposes of this section, if--
            ``(1) a business entity or proprietorship uses real 
        property located within an empowerment zone,
            ``(2) the business entity or proprietorship also 
        uses real property located outside the empowerment 
        zone,
            ``(3) the amount of real property described in 
        paragraph (1) is substantial compared to the amount of 
        real property described in paragraph (2), and
            ``(4) the real property described in paragraph (2) 
        is contiguous to part or all of the real property 
        described in paragraph (1),
then all the services performed by employees, all business 
activities, all tangible property, and all intangible property 
of the business entity or proprietorship that occur in or is 
located on the real property described in paragraphs (1) and 
(2) shall be treated as occurring or situated in an empowerment 
zone.''
    (b) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to taxable years beginning on or 
        after the date of the enactment of this Act.
            (2) Special rule for enterprise zone facility 
        bonds.--For purposes of section 1394(b) of the Internal 
        Revenue Code of 1986, the amendments made by this 
        section shall apply to obligations issued after the 
        date of the enactment of this Act.

                      Subtitle G--Other Provisions

SEC. 961. 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 treated as failing 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 of the 
                Treasury, and
                    (C) the period for taking into account the 
                adjustments under section 481 by reason of such 
                change shall be 4 years.

SEC. 962. 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. 963. 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 the initial 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 or State law does not permit the 
                dissolution of such organization, 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) 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. 964. ELECTION FOR 1987 PARTNERSHIPS TO CONTINUE EXCEPTION FROM 
                    TREATMENT OF PUBLICLY TRADED PARTNERSHIPS AS 
                    CORPORATIONS.

    (a) In General.--Section 7704 is amended by adding at the 
end the following new subsection:
    ``(g) Exception for Electing 1987 Partnerships.--
            ``(1) In general.--Subsection (a) shall not apply 
        to an electing 1987 partnership.
            ``(2) Electing 1987 partnership.--For purposes of 
        this subsection, the term `electing 1987 partnership' 
        means any publicly traded partnership if--
                    ``(A) such partnership is an existing 
                partnership (as defined in section 10211(c)(2) 
                of the Revenue Reconciliation Act of 1987),
                    ``(B) subsection (a) has not applied (and 
                without regard to subsection (c)(1) would not 
                have applied) to such partnership for all prior 
                taxable years beginning after December 31, 
                1987, and before January 1, 1998, and
                    ``(C) such partnership elects the 
                application of this subsection, and consents to 
                the application of the tax imposed by paragraph 
                (3), for its first taxable year beginning after 
                December 31, 1997.
        A partnership which, but for this sentence, would be 
        treated as an electing 1987 partnership shall cease to 
        be so treated (and the election under subparagraph (C) 
        shall cease to be in effect) as of the 1st day after 
        December 31, 1997, on which there has been an addition 
        of a substantial new line of business with respect to 
        such partnership.
            ``(3) Additional tax on electing partnerships.--
                    ``(A) Imposition of tax.--There is hereby 
                imposed for each taxable year on the income of 
                each electing 1987 partnership a tax equal to 
                3.5 percent of such partnership's gross income 
                for the taxable year from the active conduct of 
                trades and businesses by the partnership.
                    ``(B) Adjustments in the case of tiered 
                partnerships.--For purposes of this paragraph, 
                in the case of a partnership which is a partner 
                in another partnership, the gross income 
                referred to in subparagraph (A) shall include 
                the partnership's distributive share of the 
                gross income of such other partnership from the 
                active conduct of trades and businesses of such 
                other partnership. A similar rule shall apply 
                in the case of lower-tiered partnerships.
                    ``(C) 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. 965. 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) Safe harbor does not apply 
                        to periodicals and qualified convention 
                        and trade show activities.--The term 
                        `qualified sponsorship payment' does 
                        not include--
                                    ``(I) any payment which 
                                entitles the payor to the use 
                                or acknowledgement of the name 
                                or logo (or product lines) of 
                                the payor's trade or business 
                                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, or
                                    ``(II) any payment made in 
                                connection with any qualified 
                                convention or trade show 
                                activity (as defined in 
                                subsection (d)(3)(B)).
            ``(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. 966. 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) Association Property.--Paragraph (5) of section 528(c), 
as redesignated by subsection (a)(2), is amended by adding at 
the end the following new flush sentence:
        ``In the case of a timeshare association, such term 
        includes property in which the timeshare association, 
        or members of the association, have rights arising out 
        of recorded easements, covenants, or other recorded 
        instruments to use property related to the timeshare 
        project.''.
    (d) 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)''.
    (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996.

SEC. 967. 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. 968. 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, during the 1-year period 
                ending on the date of the sale, purchases 
morethan 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, or
                            ``(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 and 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. 969. 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 be-                                   The applicable
  ginning 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. 970. CLARIFICATION OF DE MINIMIS FRINGE BENEFIT RULES TO NO-CHARGE 
                    EMPLOYEE MEALS.

    (a) In General.--Paragraph (2) of section 132(e) (defining 
de minimis fringe) is amended by adding at the end the 
following new sentence: ``For purposes of subparagraph (B), an 
employee entitled under section 119 to exclude the value of a 
meal provided at such facility shall be treated as having paid 
an amount for such meal equal to the direct operating costs of 
the facility attributable to such meal.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 971. 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 and 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.
                            ``(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 after the date of 
enactment of this Act and before January 1, 2005.

SEC. 972. TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT ON PERCENTAGE 
                    DEPLETION FOR MARGINAL PRODUCTION.

    (a) In General.--Paragraph (6) of section 613A(c) is 
amended by adding at the end the following new subparagraph:
                    ``(H) Temporary suspension of taxable 
                income limit with respect to marginal 
                production.--The second sentence of subsection 
                (a) of section 613 shall not apply to so much 
                of the allowance for depletion as is determined 
                under subparagraph (A) for any taxable year 
                beginning after December 31, 1997, and before 
                January 1, 2000.''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

SEC. 973. INCREASE IN STANDARD MILEAGE RATE EXPENSE DEDUCTION FOR 
                    CHARITABLE USE OF PASSENGER AUTOMOBILE.

    (a) In General.--Section 170(i) (relating to standard 
mileage rate for use of passenger automobile) is amended to 
read as follows:
    ``(i) Standard Mileage Rate for Use of Passenger 
Automobile.--For purposes of computing the deduction under this 
section for use of a passenger automobile, the standard mileage 
rate shall be 14 cents per mile.''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997.

SEC. 974. CLARIFICATION OF TREATMENT OF CERTAIN RECEIVABLES PURCHASED 
                    BY COOPERATIVE HOSPITAL SERVICE ORGANIZATIONS.

    (a) In General.--Subparagraph (A) of section 501(e)(1) is 
amended by inserting ``(including the purchase of patron 
accounts receivable on a recourse basis)'' after ``billing and 
collection''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1996.

SEC. 975. DEDUCTION IN COMPUTING ADJUSTED GROSS INCOME FOR EXPENSES IN 
                    CONNECTION WITH SERVICE PERFORMED BY CERTAIN 
                    OFFICIALS.

    (a) In General.--Paragraph (2) of section 62(a) (defining 
adjusted gross income) is amended by adding at the end the 
following new subparagraph:
                    ``(C) Certain expenses of officials.--The 
                deductions allowed by section 162 which consist 
                of expenses paid or incurred with respect to 
                services performed by an official as an 
                employee of a State or a political subdivision 
                thereof in a position compensated in whole or 
                in part on a fee basis.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to expenses paid or incurred in taxable years 
beginning after December 31, 1986.

SEC. 976. COMBINED EMPLOYMENT TAX REPORTING DEMONSTRATION PROJECT.

    (a) In General.--The Secretary of the Treasury shall 
provide for a demonstration project to assess the feasibility 
and desirability of expanding combined Federal and State tax 
reporting.
    (b) Description of Demonstration Project.--The 
demonstration project under subsection (a) shall be--
            (1) carried out between the Internal Revenue 
        Service and the State of Montana for a period ending 
        with the date which is 5 years after the date of the 
        enactment of this Act,
            (2) limited to the reporting of employment taxes, 
        and
            (3) limited to the disclosure of the taxpayer 
        identity (as defined in section 6103(b)(6) of such 
        Code) and the signature of the taxpayer.
    (c) Conforming Amendment.--Section 6103(d) is amended by 
adding at the end the following new paragraph:
            ``(5) Disclosure for certain combined reporting 
        project.--The Secretary shall disclose taxpayer 
        identities and signatures for purposes of the 
        demonstration project described in section 967 of the 
        Taxpayer Relief Act of 1997.''.

SEC. 977. ELECTIVE CARRYBACK OF EXISTING CARRYOVERS OF NATIONAL 
                    RAILROAD PASSENGER CORPORATION.

    (a) Elective Carryback.--
            (1) In general.--If the National Railroad Passenger 
        Corporation (in this section referred to as the 
        ``Corporation'')--
                    (A) makes an election under this section 
                for its first taxable year ending after 
                September 30, 1997, and
                    (B) agrees to the conditions specified in 
                paragraph (2),
        then the Corporation shall be treated as having made a 
        payment of the tax imposed by chapter 1 of the Internal 
        Revenue Code of 1986 for such first taxable year and 
        the succeeding taxable year in an amount (for each such 
        taxable year) equal to 50 percent of the amount 
        determined under paragraph (3). Each such payment shall 
        be treated as having been made by the Corporation on 
        the last day prescribed by law (without regard to 
        extensions) for filing its return of tax under chapter 
        1 of such Code for the taxable year to which such 
        payment relates.
            (2) Conditions.--
                    (A) In general.--This section shall only 
                apply to the Corporation if it agrees (in such 
                manner as the Secretary of the Treasury or his 
                delegate may prescribe) to--
                            (i) except as provided in clause 
                        (ii), use any refund of the payment 
                        described in paragraph (1) (and any 
                        interest thereon) solely to finance 
                        qualified expenses of the Corporation, 
                        and
                            (ii) make the payments to non-
                        Amtrak States as described in 
                        subsection (c).
                    (B) Repayment.--
                            (i) In general.--The Corporation 
                        shall repay to the United States any 
                        amount not used in accordance with this 
                        paragraph and any amount remaining 
                        unused as of January 1, 2010.
                            (ii) Special rules.--For purposes 
                        of clause (i)--
                                    (I) no amount shall be 
                                treated as remaining unused as 
                                of January 1, 2010, if it is 
                                obligated as of such date for a 
                                qualified expense, and
                                    (II) the Corporation shall 
                                not be treated as failing to 
                                meet the requirements of clause 
                                (i) by reason of investing any 
                                amount for a temporary period.
            (3) Amount.--For purposes of paragraph (1)--
                    (A) In general.--The amount determined 
                under this paragraph shall be the lesser of--
                            (i) 35 percent of the Corporation's 
                        existing qualified carryovers, or
                            (ii) the Corporation's net tax 
                        liability for the carryback period.
                    (B) Dollar limit.--Such amount shall not 
                exceed $2,323,000,000.
    (b) Existing Qualified Carryovers; Net Tax Liability.--For 
purposes of this section--
            (1) Existing qualified carryovers.--The term 
        ``existing qualified carryovers'' means the aggregate 
        of the amounts which are net operating loss carryovers 
        under section 172(b) of the Internal Revenue Code of 
        1986 to the Corporation's first taxable year ending 
        after September 30, 1997.
            (2) Net tax liability for carryback period.--
                    (A) In general.--The Corporation's net tax 
                liability for the carryback period is the 
                aggregate of the net tax liability of the 
                Corporation's railroad predecessors for taxable 
                years in the carryback period.
                    (B) Net tax liability.--The term ``net tax 
                liability'' means, with respect to any taxable 
                year, the amount of the tax imposed by chapter 
                1 of the Internal Revenue Code of 1986 (or any 
                corresponding provision of prior law) for such 
                taxable year, reduced by the sum of the credits 
                allowable against such tax under such Code (or 
                any corresponding provision of prior law).
                    (C) Carryback period.--The term ``carryback 
                period'' means the period--
                            (i) which begins with the first 
                        taxable year of any railroad 
                        predecessor beginning before January 1, 
                        1971, for which there is a net tax 
                        liability, and
                            (ii) which ends with the last 
                        taxable year of any railroad 
                        predecessor beginning before January 1, 
                        1971.
            (3) Railroad predecessor.--
                    (A) In general.--The term ``railroad 
                predecessor'' means--
                            (i) any railroad which entered into 
                        a contract under section 401 or 404(a) 
                        of the Rail Passenger Service Act of 
                        1970 relieving the railroad of its 
                        entire responsibility for the provision 
                        of intercity rail passenger service, 
                        and
                            (ii) any predecessor thereof.
                    (B) Consolidated returns.--If any railroad 
                described in subparagraph (A) was a member of 
                an affiliated group which filed a consolidated 
                return for any taxable year in the carryback 
                period, each member of such group shall be 
                treated as a railroad predecessor for such 
                year.
    (c) Payments to Non-Amtrak States.--
            (1) In general.--Within 30 days after receipt of 
        any refund of any payment described in subsection 
        (a)(1), the Corporation shall pay to each non-Amtrak 
        State an amount equal to 1 percent of the amount of 
        such refund.
            (2) Use of payment.--Each non-Amtrak State shall 
        use the payment described in paragraph (1) (and any 
        interest thereon) solely to finance qualified expenses 
        of the State.
            (3) Repayment.--A non-Amtrak State shall pay to the 
        United States--
                    (A) any portion of the payment received by 
                the State under paragraph (1) (and any interest 
                thereon) which is used for a purpose other than 
                to finance qualified expenses of the State or 
                which remains unused as of January 1, 2010, or
                    (B) if such State ceases to be a non-Amtrak 
                State, the portion of such payment (and any 
                interest thereon) remaining as of the date of 
                the cessation.
        Rules similar to the rules of subsection (a)(2)(B) 
        shall apply for purposes of this paragraph.
    (d) Tax Consequences.--
            (1) Reduction in carryovers.--If the Corporation 
        elects the application of this section, the 
        Corporation's existing qualified carryovers shall be 
        reduced by an amount equal to the amount determined 
        under subsection (a)(3) divided by 0.35.
            (2) Reduction in tax paid by railroad 
        predecessors.--
                    (A) In general.--The Secretary of the 
                Treasury or his delegate shall appropriately 
                adjust the tax account of each railroad 
                predecessor to reduce the net tax liability of 
                such predecessor for taxable years beginning in 
                the carryback period which is offset by reason 
                of the application of this section.
                    (B) FIFO ordering rule.--The Secretary 
                shall make the adjustments under subparagraph 
                (A) first for the earliest year in the 
                carryback period and then for each subsequent 
                year in such period.
                    (C) No effect on other taxpayers.--In no 
                event shall any taxpayer other than the 
                Corporation be allowed a refund or credit by 
                reason of this section.
                    (D) Waiver of limitations.--If the 
                adjustment under subparagraph (A) is barred by 
                the operation of any law or rule of law, such 
                law or rule of law shall be waived solely for 
                purposes of making such adjustment.
            (3) Tax treatment of expenditures.--With respect to 
        any payment by the Corporation of qualified expenses 
        described in subsection (e)(1)(A) during any taxable 
        year from the amount of any refund of the payment 
        described in subsection (a)(1)--
                    (A) no deduction shall be allowed to the 
                Corporation with respect to any amount paid or 
                incurred which is attributable to such amount, 
                and
                    (B) the basis of any property shall be 
                reduced by the portion of the cost of such 
                property which is attributable to such amount.
            (4) Payments to a non-amtrak state.--No deduction 
        shall be allowed to the Corporation under chapter 1 of 
        the Internal Revenue Code of 1986 for any payment to a 
        non-Amtrak State required under subsection 
        (a)(2)(A)(ii).
    (e) Definitions.--For purposes of this section--
            (1) Qualified expenses.--The term ``qualified 
        expenses'' means expenses incurred for--
                    (A) in the case of the Corporation--
                            (i) the acquisition of equipment, 
                        rolling stock, and other capital 
                        improvements, the upgrading of 
                        maintenance facilities, and the 
                        maintenance of existing equipment, in 
                        intercity passenger rail service, and
                            (ii) the payment of interest and 
                        principal on obligations incurred for 
                        such acquisition, upgrading, and 
                        maintenance, and
                    (B) in the case of a non-Amtrak State--
                            (i) the acquisition of equipment, 
                        rolling stock, and other capital 
                        improvements, the upgrading of 
                        maintenance facilities, and the 
                        maintenance of existing equipment, in 
                        intercity passenger rail service,
                            (ii) the acquisition of equipment, 
                        rolling stock, and other capital 
                        improvements, the upgrading of 
                        maintenance facilities, and the 
                        maintenance of existing equipment, in 
                        intercity bus service,
                            (iii) the purchase of intercity 
                        passenger rail services from the 
                        Corporation, and
                            (iv) the payment of interest and 
                        principal on obligations incurred for 
                        such acquisition, upgrading, 
                        maintenance, and purchase.
        In the case of a non-Amtrak State which provides its 
        own intercity passenger rail service on the date of the 
        enactment of this paragraph, subparagraph (B) shall be 
        applied by only taking into account clauses (i) and 
        (iv).
            (2) Non-amtrak state.--The term ``non-Amtrak 
        State'' means, with respect to any payment, any State 
        which does not receive intercity passenger rail service 
        from the Corporation at any time during the period 
        beginning on the date of the enactment of this Act and 
        ending on the date of the payment.
    (f) Authorizing Reform Required.--
            (1) In general.--The Secretary of the Treasury 
        shall not make payment of any refund of any payment 
        described in subsection (a)(1) earlier than the date of 
        the enactment of Federal legislation, other than 
        legislation included in this section, which is enacted 
        after July 29, 1997, and which authorizes reforms of 
        the National Railroad Passenger Corporation.
            (2) No interest.--Notwithstanding any other 
        provision of law, if the payment of any refund is 
        delayed by reason of paragraph (1), no interest shall 
        accrue with respect to such payment prior to the 45th 
        day following the date of the enactment of Federal 
        legislation described in paragraph (1).
            (3) Estimate of revenue.--For purposes of 
        estimating revenues under budget reconciliation, the 
        impact of this section on Federal revenues shall be 
        determined without regard to this subsection.

 Subtitle H--Extension of Duty-Free Treatment Under Generalized System 
                             of Preferences

SEC. 981. 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 ``June 30, 1998''.
    (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.

                           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 debt 
                if--
                            ``(i) the debt unconditionally 
                        entitles the holder to receive a 
                        specified principal amount,
                            ``(ii) the interest payments (or 
                        other similar amounts) with respect to 
                        such debt meet the requirements of 
                        clause (i) of section 860G(a)(1)(B), 
                        and
                            ``(iii) such debt is not 
                        convertible (directly or indirectly) 
                        into stock of the issuer or any related 
                        person, 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.--
                    ``(A) In general.--In applying this 
                section, there shall be disregarded any 
                transaction (which would otherwise be treated 
                as a constructive sale) during the taxable year 
                if--
                            ``(i) such transaction is closed 
                        before the end of the 30th day after 
                        the close of such taxable year,
                            ``(ii) the taxpayer holds the 
                        appreciated financial position 
                        throughout the 60-day period beginning 
                        on the date such transaction is closed, 
                        and
                            ``(iii) 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.
                    ``(B) Treatment of positions which are 
                reestablished.--If--
                            ``(i) a transaction, which would 
                        otherwise be treated as a constructive 
                        sale of an appreciated financial 
                        position, is closed during the taxable 
                        year or during the 30 days thereafter, 
                        and
                            ``(ii) another substantially 
                        similar transaction is entered into 
                        during the 60-day period beginning on 
                        the date the transaction referred to in 
                        clause (i) is closed--
                                    ``(I) which also would 
                                otherwise be treated as a 
                                constructive sale of such 
                                position,
                                    ``(II) which is closed 
                                before the 30th day after the 
                                close of the taxable year in 
which the transaction referred to in clause (i) occurs, and
                                    ``(III) which meets the 
                                requirements of clauses (ii) 
                                and (iii) of subparagraph (A),
                the transaction referred to in clause (ii) 
                shall be disregarded for purposes of 
                determining whether the requirements of 
                subparagraph (A)(iii) are met with respect to 
                the transaction described in clause (i).
            ``(4) Related person.--A person is related to 
        another person with respect to a transaction if--
                    ``(A) the relationship is described in 
                section 267(b) 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 unless 
        substantially all (by value) of the property held by 
        the trust is debt described in subsection (b)(2)(A).
            ``(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 Dealers in Commodities 
and for Traders in Securities or Commodities.--Section 475 
(relating to mark to market accounting method for dealers in 
securities) is amended by redesignating subsection (e) as 
subsection (g) and by inserting after subsection (d) the 
following new subsections:
    ``(e) Election of Mark to Market for Dealers in 
Commodities.--
            ``(1) In general.--In the case of a dealer in 
        commodities who elects the application of this 
        subsection, this section shall apply to commodities 
        held by such dealer in the same manner as this section 
        applies to securities held by a dealer in securities.
            ``(2) Commodity.--For purposes of this subsection 
        and subsection (f), the term `commodity' means--
                    ``(A) any commodity which is actively 
                traded (within the meaning of section 
                1092(d)(1));
                    ``(B) any notional principal contract with 
                respect to any commodity described in 
                subparagraph (A);
                    ``(C) any evidence of an interest in, or a 
                derivative instrument in, any commodity 
                described in subparagraph (A) or (B), including 
                any option, forward contract, futures contract, 
                short position, and any similar instrument in 
                such a commodity; and
                    ``(D) any position which--
                            ``(i) is not a commodity described 
                        in subparagraph (A), (B), or (C),
                            ``(ii) is a hedge with respect to 
                        such a commodity, and
                            ``(iii) is clearly identified in 
                        the taxpayer's records as being 
                        described in this subparagraph before 
                        the close of the day on which it was 
                        acquired or entered into (or such other 
                        time as the Secretary may by 
                        regulations prescribe).
            ``(3) Election.--An election under this subsection 
        may be made 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.
    ``(f) Election of Mark to Market for Traders in Securities 
or Commodities.--
            ``(1) Traders in securities.--
                    ``(A) In general.--In the case of a person 
                who is engaged in a trade or business as a 
                trader in securities and who elects to have 
                this paragraph apply to such trade or 
                business--
                            ``(i) such person shall recognize 
                        gain or loss on any security held in 
                        connection with such trade or business 
                        at the close of any taxable year as if 
                        such security were sold for its fair 
                        market value on the last business day 
                        of such taxable year, and
                            ``(ii) any gain or loss shall be 
                        taken into account for such taxable 
                        year.
                Proper adjustment shall be made in the amount 
                of any gain or loss subsequently realized for 
                gain or loss taken into account under the 
                preceding sentence. The Secretary may provide 
                by regulations for the application of this 
                subparagraph at times other than the times 
                provided in this subparagraph.
                    ``(B) Exception.--Subparagraph (A) shall 
                not apply to any security--
                            ``(i) which is established to the 
                        satisfaction of the Secretary as having 
                        no connection to the activities of such 
                        person as a trader, and
                            ``(ii) which is clearly identified 
                        in such person's records as being 
                        described in clause (i) before the 
                        close of the day on which it was 
                        acquired, originated, or entered into 
                        (or such other time as the Secretary 
                        may by regulations prescribe).
                If a security ceases to be described in clause 
                (i) at any time after it was identified as such 
                under clause (ii), subparagraph (A) shall apply 
                to any changes in value of the security 
                occurring after the cessation.
                    ``(C) Coordination with section 1259.--Any 
                security to which subparagraph (A) applies and 
                which was acquired in the normal course of the 
                taxpayer's activities as a trader in securities 
                shall not be taken into account in applying 
                section 1259 to any position to which 
                subparagraph (A) does not apply.
                    ``(D) Other rules to apply.--Rules similar 
                to the rules of subsections (b)(4) and (d) 
                shall apply to securities held by a person in 
                any trade or business with respect to which an 
                election under this paragraph is in effect.
            ``(2) Traders in commodities.--In the case of a 
        person who is engaged in a trade or business as a 
        trader in commodities and who elects to have this 
        paragraph apply to such trade or business, paragraph 
        (1) shall apply to commodities held by such trader in 
        connection with such trade or business in the same 
        manner as paragraph (1) applies to securities held by a 
        trader in securities.
            ``(3) Election.--The elections under paragraphs (1) 
        and (2) 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.--If--
                    (A) before June 9, 1997, the taxpayer 
                entered into any transaction which is a 
                constructive sale of any appreciated financial 
                position, and
                    (B) before the close of the 30-day period 
                beginning on the date of the enactment of this 
                Act or before such later date as may be 
                specified by the Secretary of the Treasury, 
                such transaction and position are clearly 
                identified in the taxpayer's records as 
                offsetting,
        such transaction and position shall not be taken into 
        account in determining whether any other constructive 
        sale after June 8, 1997, has occurred. The preceding 
        sentence shall cease to apply as of the date such 
        transaction is closed or the taxpayer ceases to hold 
        such position.
            (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)--
                            (i) for not less than 2 years after 
                        the date of such transaction (whether 
                        such period is before or after June 8, 
                        1997), and
                            (ii) at any time during the 3-year 
                        period ending on the date of the 
                        decedent's death, 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 the 
        transaction resulting in such constructive sale) shall 
        be treated as property constituting rights to receive 
        an item of income in respect of a decedent under 
        section 691 of such Code. Section 1014(c) of such Code 
        shall not apply to so much of such position's or 
        property's value (as included in the decedent's estate 
        for purposes of chapter 11 of such Code) as exceeds its 
        fair market value as of the date such transaction is 
        closed.
            (4) Election of mark to market by securities 
        traders and traders and dealers in commodities.--
                    (A) In general.--The amendments 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 subsection 
                (e) or (f) of section 475 of the Internal 
                Revenue Code of 1986 (as added by this section) 
                to change its method of accounting for the 
                taxable year which includes the date of the 
                enactment of this Act--
                            (i) any identification required 
                        under such subsection with respect to 
                        securities and commodities held on the 
                        date of the enactment of this Act shall 
                        be treated as timely made if made on or 
                        before the 30th day after such date of 
                        enactment, and
                            (ii) the net amount of the 
                        adjustments required to be taken into 
                        account by the taxpayer under section 
                        481 of such Code 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, and
                    ``(B) by treating as stock and securities--
                            ``(i) money,
                            ``(ii) stocks and other equity 
                        interests in a corporation, evidences 
                        of indebtedness, options, forward or 
                        futures contracts, notional principal 
                        contracts and derivatives,
                            ``(iii) any foreign currency,
                            ``(iv) any interest in a real 
                        estate investment trust, a common trust 
                        fund, a regulated investment company, a 
                        publicly-traded partnership (as defined 
                        in section 7704(b)) or any other equity 
                        interest (other than in a corporation) 
                        which pursuant to its terms or any 
                        other arrangement is readily 
                        convertible into, or exchangeable for, 
                        any asset described in any preceding 
                        clause, this clause or clause (v) or 
                        (viii),
                            ``(v) except to the extent provided 
                        in regulations prescribed by the 
                        Secretary, any interest in a precious 
                        metal, unless such metal is used or 
                        held in the active conduct of a trade 
                        or business after the contribution,
                            ``(vi) except as otherwise provided 
                        in regulations prescribed by the 
                        Secretary, interests in any entity if 
                        substantially all of the assets of such 
                        entity consist (directly or indirectly) 
                        of any assets described in any 
                        preceding clause or clause (viii),
                            ``(vii) to the extent provided in 
                        regulations prescribed by the 
                        Secretary, any interest in any entity 
                        not described in clause (vi), but only 
                        to the extent of the value of such 
                        interest that is attributable to assets 
                        listed in clauses (i) through (v) or 
                        clause (viii), or
                            ``(viii) any other asset specified 
                        in regulations prescribed by the 
                        Secretary.
        The Secretary may prescribe regulations that, under 
        appropriate circumstances, treat any asset described in 
        clauses (i) through (v) as not so listed.''.
    (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, and at all times thereafter before such transfer 
        if such contract provides for the transfer of a fixed 
        amount of property.

SEC. 1003. 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) Treatment of Short Sales of Property Which Becomes 
Substantially Worthless.--
            (1) In general.--Section 1233 is amended by adding 
        at the end the following new subsection:
    ``(h) Short Sales of Property Which Becomes Substantially 
Worthless.--
            ``(1) In general.--If--
                    ``(A) the taxpayer enters into a short sale 
                of property, and
                    ``(B) such property becomes substantially 
                worthless,
        the taxpayer shall recognize gain in the same manner as 
        if the short sale were closed when the property becomes 
        substantially worthless. To the extent provided in 
        regulations prescribed by the Secretary, the preceding 
        sentence also shall apply with respect to any option 
        with respect to property, any offsetting notional 
        principal contract with respect to property, any 
        futures or forward contract to deliver any property, 
        and any other similar transaction.
            ``(2) Statute of limitations.--If property becomes 
        substantially worthless during a taxable year and any 
        short sale of such property remains open at the time 
        such property becomes substantially worthless, then--
                    ``(A) the statutory period for the 
                assessment of any deficiency attributable to 
                any part of the gain on such transaction shall 
                not expire before the earlier of--
                            ``(i) the date which is 3 years 
                        after the date the Secretary is 
                        notified by the taxpayer (in such 
                        manner as the Secretary may by 
                        regulations prescribe) of the 
                        substantial worthlessness of such 
                        property, or
                            ``(ii) the date which is 6 years 
                        after the date the return for such 
                        taxable year is filed, and
                    ``(B) such deficiency may be assessed 
                before the date applicable under subparagraph 
                (A) notwithstanding the provisions of any other 
                law or rule of law which would otherwise 
                prevent such assessment.''.
            (2) Effective date.--The amendment made by 
        paragraph (1) shall apply to property which becomes 
        substantially worthless after the date of the enactment 
        of this Act.
    (c) 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 1272(d)(1)) after June 8, 1997.''.
            (2) Effective date.--The amendment made by 
        paragraph (1) shall apply to sales, exchanges, and 
        retirements after the date of enactment of this Act.

SEC. 1004. 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 (ii) the following:
                            ``(iii) any pool of debt 
                        instruments the yield on which may be 
                        affected 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 of the 
                Treasury, 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. 1005. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT INSTRUMENTS.

    (a) In General.--Section 163 (relating to deduction for 
interest), as amended by title V, is amended by redesignating 
subsection (l) as subsection (m) and by inserting after 
subsection (k) the following new subsection:
    ``(l) 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 this paragraph, 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 issuance.

        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 IN CONNECTION 
                    WITH ACQUISITIONS AND TO INTRAGROUP TRANSACTIONS.

    (a) Distributions In Connection With Acquisitions.--Section 
355 (relating to distributions of stock and securities of a 
controlled corporation) is amended by adding at the end the 
following new subsection:
    ``(e) Recognition of Gain on Certain Distributions of Stock 
or Securities in Connection With Acquisitions.--
            ``(1) General rule.--If there is a distribution to 
        which this subsection applies, 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).
            ``(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 theacquisition are not 
pursuant to a plan or series of related transactions.
                    ``(C) Certain plans disregarded.--A plan 
                (or series of related transactions) shall not 
                be treated as described in subparagraph (A)(ii) 
                if, immediately after the completion of such 
                plan or transactions, the distributing 
                corporation and all controlled corporations are 
                members of a single affiliated group (as 
                defined in section 1504 without regard to 
                subsection (b) thereof).
                    ``(D) 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 or 
                        securities 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 or securities in such 
                        distributing or controlled corporation.
                            ``(iv) The acquisition of stock in 
                        a corporation if shareholders owning 
                        directly or indirectly stock 
                        possessing--
                                    ``(I) more than 50 percent 
                                of the total combined voting 
                                power of all classes of stock 
                                entitled to vote, and
                                    ``(II) more than 50 percent 
                                of the total value of shares of 
                                all classes of stock,
                        in the distributing corporation or any 
                        controlled corporation before such 
                        acquisition own directly or indirectly 
                        stock possessing such vote and value 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 (or 
                series of related transactions) described in 
                paragraph (2)(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 
                        318(a)(2) shall apply in determining 
                        whether a person holds stock or 
                        securities in any corporation. Except 
                        as provided in regulations, section 
                        318(a)(2)(C) shall be applied without 
                        regard to the phrase `50 percent or 
                        more in value' for purposes of the 
                        preceding sentence.
                    ``(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 
                a distribution to which paragraph (1) 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 distribution 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 distribution 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) Special Rules for Certain Intragroup Transactions.--
            (1) Section 355 not to apply.--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 
Distributions.--Except as provided in regulations, this section 
(or so much of section 356 as relates to this section) shall 
not apply to the distribution of stock from 1 member of an 
affiliated group (as defined in section 1504(a)) to another 
member of such group if such distribution is part of a plan (or 
series of related transactions) described in subsection 
(e)(2)(A)(ii) (determined after the application of subsection 
(e)).''.
            (2) Adjustments to basis.--Section 358 (relating to 
        basis to distributees) is amended by adding at the end 
        the following new subsection:
    ``(g) Adjustments in Intragroup Transactions Involving 
Section 355.--In the case of a distribution to which section 
355 (or so much of section 356 as relates to section 355) 
applies and which involves the distribution of stock from 1 
member of an affiliated group (as defined in section 1504(a) 
without regard to subsection (b) thereof) to another member of 
such group, the Secretary may, notwithstanding any other 
provision of this section, provide adjustments to the adjusted 
basis of any stock which--
            ``(1) is in a corporation which is a member of such 
        group, and
            ``(2) is held by another member of such group,
to appropriately reflect the proper treatment of such 
distribution.''.
    (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.--In 
determining control for purposes of this section--
            ``(1) 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
            ``(2) 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 own 
        (immediately after the distribution) stock possessing--
                    ``(A) more than 50 percent of the total 
                combined voting power of all classes of stock 
                of such corporation entitled to vote, and
                    ``(B) more than 50 percent of the total 
                value of shares of all classes of stock of such 
                corporation.''.
            (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 own (immediately after the 
                        distribution) stock possessing--
                                    ``(I) more than 50 percent 
                                of the total combined voting 
                                power of all classes of stock 
                                of such corporation entitled to 
                                vote, and
                                    ``(II) more than 50 percent 
                                of the total value of shares of 
                                all classes of stock of such 
                                corporation.''.
    (d) Effective Dates.--
            (1) Section 355 rules.--The amendments made by 
        subsections (a) and (b) shall apply to distributions 
        after April 16, 1997, pursuant to a plan (or series of 
        related transactions) which involves an acquisition 
        described in section 355(e)(2)(A)(ii) of the Internal 
        Revenue Code of 1986 occurring after such date.
            (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 pursuant to 
        a plan (or series of related transactions)which 
involves an acquisition described in section 355(e)(2)(A)(ii) of the 
Internal Revenue Code of 1986 (or, in the case of the amendments made 
by subsection (c), any transfer) occurring after April 16, 1997, if 
such acquisition or transfer is--
                    (A) made pursuant to an 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 acquisition or 
                transfer.
        This paragraph shall not apply to any agreement, ruling 
        request, or public announcement or filing unless it 
        identifies the acquirer of the distributing corporation 
        or any controlled corporation, or the transferee, 
        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. 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.--In the case of a person who 
        transfers property to a corporation and receives 
        nonqualified preferred stock--
                    ``(A) subsection (a) shall not apply to 
                such transferor,
                    ``(B) subsection (b) shall apply to such 
                transferor, and
                    ``(C) such nonqualified preferred stock 
                shall be treated as other property for purposes 
                of applying subsection (b).
            ``(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 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 
nonqualifiedpreferred 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 transaction.

SEC. 1015. 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.--
            (1) In general.--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.
            (2) Transitional rule.--The amendments made by this 
        section shall not apply to dividends received or 
        accrued during the 2-year period beginning on the date 
        of the enactment of this Act if--
                    (A) the dividend is paid with respect to 
                stock held by the taxpayer on June 8, 1997, and 
                all times thereafter until the dividend is 
                received,
                    (B) such stock is continuously subject to a 
                position described in section 246(c)(4) of the 
                Internal Revenue Code of 1986 on June 8, 1997, 
                and all times thereafter until the dividend is 
                received, and
                    (C) such stock and position are clearly 
                identified in the taxpayer's records within 30 
                days after the date of the enactment of this 
                Act.
        Stock shall not be treated as meeting the requirement 
        of subparagraph (B) if the position is sold, closed, or 
        otherwise terminated and reestablished.

                 Subtitle C--Administrative Provisions

SEC. 1021. 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. 1022. 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. 1023. DISCLOSURE OF RETURN INFORMATION FOR ADMINISTRATION OF 
                    CERTAIN VETERANS PROGRAMS.

    (a) General Rule.--Clause (viii) of section 6103(l)(7)(D) 
(relating to disclosure of return information to Federal, 
State, and local agencies administering certain programs) is 
amended by striking ``1998'' and inserting ``2003''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall take effect on the date of the enactment of this Act.

SEC. 1024. 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.''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to levies issued after the date of the enactment of 
this Act.

SEC. 1025. 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. 1026. 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 6103(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. 1027. 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.

SEC. 1028. 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.

            Subtitle D--Excise and Employment Tax Provisions

SEC. 1031. EXTENSION AND MODIFICATION OF TAXES FUNDING AIRPORT AND 
                    AIRWAY TRUST FUND; INCREASED DEPOSITS INTO SUCH 
                    FUND.

    (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 period in 
        which the segment begins:

  In the case of segments
                                                                        
    beginning:
                                                             The tax is:
        After September 30, 1997, and before October 1, 1998..    $1.00 
        After September 30, 1998, and before October 1, 1999..    $2.00 
        After September 30, 1999, and before January 1, 2000..    $2.25 
        During 2000...........................................    $2.50 
        During 2001...........................................    $2.75 
        During 2002 or thereafter.............................    $3.00.

            ``(2) Domestic segment.--For purposes of this 
        section, the term `domestic segment' means any segment 
        consisting of 1 takeoff and 1 landing and which is 
        taxable transportation described in section 4262(a)(1).
            ``(3) Changes in segments by reason of rerouting.--
        If--
                    ``(A) transportation is purchased between 2 
                locations on specified flights, and
                    ``(B) there is a change in the route taken 
                between such 2 locations 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 
        $12.00 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 beginning or ending in Alaska or 
        Hawaii, such tax shall apply only to departures and 
        shall be at the rate of $6.''.
            (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) Segments to and from rural airports.--
                    ``(A) Exception from segment tax.--The tax 
                imposed by subsection (b)(1) shall not apply to 
                any domestic segment beginning or ending at an 
                airport which is a rural airport for the 
                calendar year in which such segment begins or 
                ends (as the case may be).
                    ``(B) Rural airport.--For purposes of this 
                paragraph, the term `rural airport' means, with 
                respect to any calendar year, any airport if--
                            ``(i) there were fewer than 100,000 
                        commercial passengers departing by air 
                        during the second preceding calendar 
                        year from such airport, and
                            ``(ii) such airport--
                                    ``(I) is not located within 
                                75 miles of another airport 
                                which is not described in 
                                clause (i), or
                                    ``(II) is receiving 
                                essential air service subsidies 
                                as of the date of the enactment 
                                of this paragraph.
                    ``(C) No phasein of reduced ticket tax.--In 
                the case of transportation beginning before 
                October 1, 1999--
                            ``(i) In general.--Paragraph (5) 
                        shall not apply to any domestic segment 
                        beginning or ending at an airport which 
                        is a rural airport for the calendar 
                        year in which such segment begins or 
                        ends (as the case may be).
                            ``(ii) Transportation involving 
                        multiple segments.--In the case of 
                        transportation involving more than 1 
                        domestic segment at least 1 of which 
                        does not begin or end at a rural 
                        airport, the 7.5 percent rate 
                        applicable by reason of clause (i) 
                        shall be applied by taking into account 
                        only an amount which bears the same 
                        ratio to the amount paid for such 
                        transportation as the number of 
                        specified miles in domestic segments 
                        which begin or end at a rural airport 
                        bears to the total number of specified 
                        miles in such transportation.
            ``(2) 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 if such 
        transportation begins and ends in the United States.
            ``(3) Amounts paid for right to award free or 
        reduced rate air transportation.--
                    ``(A) In general.--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.
                    ``(B) Controlled group.--For purposes of 
                subparagraph (A), a corporation and all wholly 
                owned subsidiaries of such corporation shall be 
                treated as 1 corporation.
                    ``(C) Regulations.--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. The Secretary may prescribe rules 
                which exclude from the tax imposed by 
                subsection (a) amounts attributable to mileage 
                awards which are used other than for 
                transportation of persons by air.
            ``(4) 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 $3.00 amount contained in 
                subsection (b) and each dollar amount contained 
                in subsection (c) 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 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 the $3.00 
                        amount contained in subsection (b), and
                            ``(ii) 1998 in the case of the 
                        dollar amounts 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.
            ``(5) Rates of ticket tax for transportation 
        beginning before october 1, 1999.--Subsection (a) shall 
        be applied by substituting for `7.5 percent'--
                    ``(A) `9 percent' in the case of 
                transportation beginning after September 30, 
                1997, and before October 1, 1998, and
                    ``(B) `8 percent' in the case of 
                transportation beginning after September 30, 
                1998, and before October 1, 1999.''.
            (3) Secondary liability of carrier for unpaid 
        tax.--Subsection (c) of section 4263 is amended by 
        striking ``subchapter--'' and all that follows and 
        inserting ``subchapter, such tax shall be paid by the 
        carrier providing the initial segment of such 
        transportation which begins or ends in the United 
        States.''.
    (d) 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),
                    (B) by striking ``to the extent 
                attributable to the Airport and Airway Trust 
                Fund financing rate'' in subparagraph (D), and
                    (C) by adding at the end the following 
                flush sentence:
``There shall not be taken into account under paragraph (1) so 
much of the taxes imposed by sections 4081 and 4091 as are 
determined at the rates specified in section 4081(a)(2)(B) or 
4091(b)(2).''.
            (2) Section 9502 is amended by striking subsection 
        (f).
    (e) 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 (3) 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 (and other benefits 
                        provided) 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)(3) 
                        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) Increased deposits into airport and airway 
        trust fund.--The amendments made by subsection (d) 
        shall apply with respect to taxes received in the 
        Treasury on and after October 1, 1997.
    (g) Delayed Deposits of Airport Trust Fund Tax Revenues.--
Notwithstanding section 6302 of the Internal Revenue Code of 
1986--
            (1) in the case of deposits of taxes imposed by 
        section 4261 of such Code, 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,
            (2) in the case of deposits of taxes imposed by 
        section 4261 of such Code, the due date for any such 
        deposit which would (but for this subsection) be 
        required to be made after August 14, 1998, and before 
        October 1, 1998, shall be October 5, 1998, and
            (3) in the case of deposits of taxes imposed by 
        sections 4081(a)(2)(A)(ii), 4091, and 4271 of such 
        Code, the due date for any such deposit which would 
        (but for this subsection) be required to be made after 
        July 31, 1998, and before October 1, 1998, shall be 
        October 5, 1998.

SEC. 1032. 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), (c), and (d) and inserting ``diesel fuel and 
        kerosene''.
            (2) Certain kerosene exempt from dyeing 
        requirement.--Section 4082 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) Additional Exceptions to Dyeing Requirements for 
Kerosene.--
            ``(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 vessel 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) Wholesale distributors.--To the extent 
        provided in regulations, subsection (a)(2) shall not 
        apply to a removal, entry, or sale of kerosene to a 
        wholesale distributor of kerosene if such distributor--
                    ``(A) is registered under section 4101 with 
                respect to the tax imposed by section 4081 on 
                kerosene, and
                    ``(B) sells kerosene exclusively to 
                ultimate vendors described in section 
                6427(l)(5)(B) with respect to kerosene.''
            (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''.
                    (E) Clause (i) of section 6427(i)(5)(A) is 
                amended by inserting ``($100 or more in the 
                case of kerosene)'' after ``$200 or more''.
    (d) Certain Approved Terminals of Registered Persons 
Required To Offer Dyed Diesel Fuel and Kerosene for Nontaxable 
Purposes.--Section 4101 is amended by adding at the end the 
following new subsection:
    ``(e) Certain Approved Terminals of Registered Persons 
Required To Offer Dyed Diesel Fuel and Kerosene for Nontaxable 
Purposes.--
            ``(1) In general.--A terminal for kerosene or 
        diesel fuel may not be an approved facility for storage 
        of non-tax-paid diesel fuel or kerosene under this 
        section unless the operator of such terminal offers 
        dyed diesel fuel and kerosene for removal for 
        nontaxable use in accordance with section 4082(a).
            ``(2) Exception.--Paragraph (1) shall not apply to 
        any terminal exclusively providing aviation-grade 
        kerosene by pipeline to an airport.''.
    (e) Conforming Amendments.--
            (1) Paragraph (2) of section 4041(a), as amended by 
        title IX, is amended by striking ``kerosene,''.
            (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''.
    (f) Effective Date.--The amendments made by this section 
shall take effect on July 1, 1998.
    (g) 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 24.4 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 
taximposed 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. 1033. 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 September 30, 1997, and before April 1, 
2005''.

SEC. 1034. APPLICATION OF COMMUNICATIONS TAX TO PREPAID TELEPHONE 
                    CARDS.

    (a) In General.--Section 4251 is amended by adding at the 
end the following new subsection:
    ``(d) Treatment of Prepaid Telephone Cards.--
            ``(1) In general.--For purposes of this subchapter, 
        in the case of communications services acquired by 
        means of a prepaid telephone card--
                    ``(A) the face amount of such card shall be 
                treated as the amount paid for such 
                communications services, and
                    ``(B) that amount shall be treated as paid 
                when the card is transferred by any 
                telecommunications carrier to any person who is 
                not such a carrier.
            ``(2) Determination of face amount in absence of 
        specified dollar amount.--In the case of any prepaid 
        telephone card which entitles the user other than to a 
        specified dollar amount of use, the face amount shall 
        be determined under regulations prescribed by the 
        Secretary.
            ``(3) Prepaid telephone card.--For purposes of this 
        subsection, the term `prepaid telephone card' means any 
        card or other similar arrangement which permits its 
        holder to obtain communications services and pay for 
        such services in advance.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to amounts paid in calendar months beginning more 
than 60 days after the date of the enactment of this Act.

SEC. 1035. EXTENSION OF TEMPORARY UNEMPLOYMENT TAX.

    Section 3301 (relating to rate of unemployment tax) is 
amended--
            (1) by striking ``1998'' in paragraph (1) and 
        inserting ``2007'', and
            (2) by striking ``1999'' in paragraph (2) and 
        inserting ``2008''.

         Subtitle E--Provisions Relating to Tax-Exempt Entities

SEC. 1041. 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) Binding contracts.--The amendments made by this 
        section shall not apply to any payment made during the 
        first 2 taxable years beginning on or after the date of 
        the enactment of this Act if such payment is made 
        pursuant to a written binding contract in effect on 
        June 8, 1997, and at all times thereafter before such 
        payment.

SEC. 1042. 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 
organization's 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 F--Foreign Provisions

SEC. 1051. 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. 1052. 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. 1053. 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 tax determined 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 
                conductin 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 carry out this paragraph, 
                including regulations to prevent the abuse of 
                the exception provided by this paragraph and to 
                treat other taxes as qualified taxes.
            ``(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) with respect to taxes 
        deemed paid under section 902 or 960 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. 1054. DENIAL OF TREATY BENEFITS FOR CERTAIN PAYMENTS THROUGH 
                    HYBRID ENTITIES.

    (a) In General.--Section 894 (relating to income affected 
by treaty) is amended by inserting after subsection (b) the 
following new subsection:
    ``(c) Denial of Treaty Benefits for Certain Payments 
Through Hybrid Entities.--
            ``(1) Application to certain payments.--A foreign 
        person shall not 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 this 
        title on an item of income derived through an entity 
        which is treated as a partnership (or is otherwise 
        treated as fiscally transparent) for purposes of this 
        title if--
                    ``(A) such item is not treated for purposes 
                of the taxation laws of such foreign country as 
                an item of income of such person,
                    ``(B) the treaty does not contain a 
                provision addressing the applicability of the 
                treaty in the case of an item of income derived 
                through a partnership, and
                    ``(C) the foreign country does not impose 
                tax on a distribution of such item of income 
                from such entity to such person.
            ``(2) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to 
        determine the extent to which a taxpayer to which 
        paragraph (1) does not apply shall not be entitled to 
        benefits under any income tax treaty of the United 
        States with respect to any payment received by, or 
        income attributable to any activities of, an entity 
        organized in any jurisdiction (including the United 
        States) that is treated as a partnership or is 
        otherwise treated as fiscally transparent for purposes 
        of this title (including a common investment trust 
        under section 584, a grantor trust, or an entity that 
        is disregarded for purposes of this title) and is 
        treated as fiscally nontransparent for purposes of the 
        tax laws of the jurisdiction of residence of the 
        taxpayer.''.
    (b) Effective Date.--The amendments made by this section 
shall apply upon the date of enactment of this Act.

SEC. 1055. 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 theperiod 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 foreign tax credit carrybacks arising in taxable 
years beginning after the date of the enactment of this Act.

SEC. 1056. 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. 1057. REPEAL OF EXCEPTION TO ALTERNATIVE MINIMUM FOREIGN TAX 
                    CREDIT LIMIT.

    (a) In General.--Section 59(a)(2) (relating to limitation 
to 90 percent of tax) is amended by striking subparagraph (C).
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

                   Subtitle G--Partnership Provisions

SEC. 1061. 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 remaining 
                after the allocation 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. 1062. REPEAL OF REQUIREMENT THAT INVENTORY BE SUBSTANTIALLY 
                    APPRECIATED WITH RESPECT TO SALE OR EXCHANGE OF 
                    PARTNERSHIP INTEREST.

    (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)(A) Paragraph (1) of section 751(b) is amended 
        by striking subparagraphs (A) and (B) and inserting the 
        following new subparagraphs:
                    ``(A) partnership property which is--
                            ``(i) unrealized receivables, or
                            ``(ii) inventory items which have 
                        appreciated substantially in value,
                in exchange for all or a part of his interest 
                in other partnership property (including 
                money), or
                    ``(B) partnership property (including 
                money) other than property described in 
                subparagraph (A)(i) or (ii) in exchange for all 
                or a part of his interest in partnership 
                property described in subparagraph (A)(i) or 
                (ii),''.
            (B) Subsection (b) of section 751 is amended by 
        adding at the end the following new paragraph:
            ``(3) Substantial appreciation.--For purposes of 
        paragraph (1)--
                    ``(A) In general.--Inventory items of the 
                partnership shall be considered to have 
                appreciated substantially in value if their 
                fair market value exceeds 120 percent of the 
                adjusted basis to the partnership of such 
                property.
                    ``(B) Certain property excluded.--For 
                purposes of subparagraph (A), there shall be 
                excluded any inventory property if a principal 
                purpose for acquiring such property was to 
                avoid the provisions of this subsection 
                relating to inventory items.''
            (2) 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).''.
            (3) 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.--
            (1) In general.--The amendments made by this 
        section shall apply to sales, exchanges, and 
        distributions after the date of the enactment of this 
        Act.
            (2) Binding contracts.--The amendments made by this 
        section shall not apply to any sale or exchange 
        pursuant to a written binding contract in effect on 
        June 8, 1997, and at all times thereafter before such 
        sale or exchange.

SEC. 1063. 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 ``7 years''.
    (b) Effective Date.--
            (1) In general.--The amendment made by subsection 
        (a) shall apply to property contributed to a 
        partnership after June 8, 1997.
            (2) Binding contracts.--The amendment made by 
        subsection (a) shall not apply to any property 
        contributed pursuant to a written binding contract in 
        effect on June 8, 1997, and at all times thereafter 
        before such contribution if such contract provides for 
        the contribution of a fixed amount of property.

                     Subtitle H--Pension Provisions

SEC. 1071. PENSION ACCRUED BENEFIT DISTRIBUTABLE WITHOUT CONSENT 
                    INCREASED TO $5,000.

    (a) Amendment to 1986 Code.--
            (1) In general.--Subparagraph (A) of section 
        411(a)(11) (relating to restrictions on certain 
        mandatory distributions) is amended by striking 
        ``$3,500'' and inserting ``$5,000''.
            (2) Conforming amendments.--
                    (A) 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 it appears (other than 
                the headings) and inserting ``the dollar limit 
                under section 411(a)(11)(A)''.
                    (B) 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 ``dollar limit''.
    (b) Amendments to ERISA.--
            (1) In general.--Section 203(e)(1) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 
        1053(e)(1)) is amended by striking ``$3,500'' and 
        inserting ``$5,000''.
            (2) Conforming amendments.--Sections 204(d)(1) and 
        205(g) (1) and (2) (29 U.S.C. 1054(d)(1) and 1055(g) 
        (1) and (2)) are each amended by striking ``$3,500'' 
        and inserting ``the dollar limit under section 
        203(e)(1)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to plan years beginning after the date of the 
enactment of this Act.

SEC. 1072. ELECTION TO RECEIVE TAXABLE CASH COMPENSATION IN LIEU OF 
                    NONTAXABLE PARKING BENEFITS.

    (a) In General.--Section 132(f)(4) (relating to benefits 
not in lieu of compensation) is amended by adding at the end 
the following new sentence: ``This paragraph shall not apply to 
any qualified parking provided in lieu of compensation which 
otherwise would have been includible in gross income of the 
employee, and no amount shall be included in the gross income 
of the employee solely because the employee may choose between 
the qualified parking and compensation.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1073. REPEAL OF EXCESS DISTRIBUTION AND EXCESS RETIREMENT 
                    ACCUMULATION TAX.

    (a) Repeal of Excess Distribution and Excess Retirement 
Accumulation Tax.--Section 4980A (relating to excess 
distributions from qualified retirement plans) is repealed.
    (b) Conforming Amendments.--
            (1) Section 691(c)(1) is amended by striking 
        subparagraph (C).
            (2) Section 2013 is amended by striking subsection 
        (g).
            (3) Section 2053(c)(1)(B) is amended by striking 
        the last sentence.
            (4) Section 6018(a) is amended by striking 
        paragraph (4).
    (c) Effective Dates.--
            (1) Excess distribution tax repeal.--Except as 
        provided in paragraph (2), the repeal made by 
        subsection (a) shall apply to excess distributions 
        received after December 31, 1996.
            (2) Excess retirement accumulation tax repeal.--The 
        repeal made by subsection (a) with respect to section 
        4980A(d) of the Internal Revenue Code of 1986 and the 
        amendments made by subsection (b) shall apply to 
        estates of decedents dying after December 31, 1996.

SEC. 1074. INCREASE IN TAX ON PROHIBITED TRANSACTIONS.

    (a) In General.--Section 4975(a) is amended by striking 
``10 percent'' and inserting ``15 percent''.
    (b) Effective Date.--The amendment made by this section 
shall apply to prohibited transactions occurring after the date 
of the enactment of this Act.

SEC. 1075. BASIS RECOVERY RULES FOR ANNUITIES OVER MORE THAN ONE LIFE.

    (a) In General.--Section 72(d)(1)(B) is amended by adding 
at the end the following new clause:
                            ``(iv) Number of anticipated 
                        payments where more than one life.--If 
                        the annuity is payable over the lives 
                        of more than 1 individual, the number 
                        of anticipated payments shall be 
                        determined as follows:

``If the combined ages                                                  
  of annuitants are:                                      The number is:
    Not more than 110.........................................      410 
    More than 110 but not more than 120.......................      360 
    More than 120 but not more than 130.......................      310 
    More than 130 but not more than 140.......................      260 
    More than 140.............................................   210.''.

    (b) Conforming Amendment.--Section 72(d)(1)(B)(iii) is 
amended--
            (1) by inserting ``If the annuity is payable over 
        the life of a single individual, the number of 
        anticipated payments shall be determined as follows:'' 
        after the heading and before the table, and
            (2) by striking ``primary'' in the table.
    (c) Effective Date.--The amendments made by this section 
shall apply with respect to annuity starting dates beginning 
after December 31, 1997.

                  Subtitle I--Other Revenue Provisions

SEC. 1081. 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 striking paragraphs (3) and (4), by redesignating 
paragraphs (5) and (6) as paragraphs (3) and (4), respectively, 
and by adding at the end the following new paragraph:
            ``(5) 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. 1082. 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 Certain Losses.--
Paragraph (1) of section 172(b) is amended by adding at the end 
the following new subparagraph:
                    ``(F) Retention of 3-year carryback in 
                certain cases.--
                            ``(i) In general.--Subparagraph 
                        (A)(i) shall be applied by substituting 
                        `3 years' for `2 years' with respect to 
                        the portion of the net operating loss 
                        for the taxable year which is an 
                        eligible loss with respect to the 
                        taxpayer.
                            ``(ii) Eligible loss.--For purposes 
                        of clause (i), the term `eligible loss' 
                        means--
                                    ``(I) in the case of an 
                                individual, losses of property 
                                arising from fire, storm, 
                                shipwreck, or other casualty, 
                                or from theft,
                                    ``(II) in the case of a 
                                taxpayer which is a small 
                                business, net operating losses 
                                attributable to Presidentially 
                                declared disasters (as defined 
                                in section 1033(h)(3)), and
                                    ``(III) in the case of a 
                                taxpayer engaged in the trade 
                                or business of farming (as 
                                defined in section 263A(e)(4)), 
                                net operating losses 
                                attributable to such 
                                Presidentially declared 
                                disasters.
                            ``(iii) Small business.--For 
                        purposes of this subparagraph, the term 
                        `small business' means a corporation or 
                        partnership which meets the gross 
                        receipts test of section 448(c) for the 
                        taxable year in which the loss arose 
                        (or, in the case of a sole 
                        proprietorship, which would meet such 
                        test if such proprietorship were a 
                        corporation).''.
    (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. 1083. MODIFICATIONS TO TAXABLE YEARS TO WHICH UNUSED CREDITS MAY 
                    BE CARRIED.

    (a) In General.--Section 39(a) (relating to unused credits) 
is amended--
            (1) in paragraph (1), by striking ``3'' each place 
        it appears and inserting ``1'' and by striking ``15'' 
        each place it appears and inserting ``20''; and
            (2) in paragraph (2), by striking ``18'' each place 
        it appears and inserting ``22'' and by striking ``17'' 
        each place it appears and inserting ``21''.
    (b) Effective Date.--The amendments made by this section 
shall apply to credits arising in taxable years beginning after 
December 31, 1997.

SEC. 1084. EXPANSION OF DENIAL OF DEDUCTION FOR CERTAIN AMOUNTS PAID IN 
                    CONNECTION WITH INSURANCE.

    (a) Denial of Deduction for Premiums.--
            (1) In general.--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.''.
            (2) Exceptions.--Section 264 is amended by 
        redesignating subsections (b), (c), and (d) as 
        subsections (c), (d), and (e), respectively, and by 
        inserting after subsection (a) the following new 
        subsection:
    ``(b) Exceptions to Subsection (a)(1).--Subsection (a)(1) 
shall not apply to--
            ``(1) any annuity contract described in section 
        72(s)(5), and
            ``(2) any annuity contract to which section 72(u) 
        applies.''.
    (b) Interest on Policy Loans.--
            (1) In general.--Paragraph (4) of section 264(a) is 
        amended by striking ``individual, who'' and all that 
        follows and inserting ``individual.''.
            (2) Coordination with transfers for value.--
        Paragraph (2) of section 101(a) is amended by adding at 
        the end the following new flush sentence:
        ``The term `other amounts' in the first sentence of 
        this paragraph includes interest paid or accrued by the 
        transferee on indebtedness with respect to such 
        contract or any interest therein if such interest paid 
        or accrued is not allowable as a deduction by reason of 
        section 264(a)(4).''.
    (c) Pro Rata Allocation of Interest Expense to Policy Cash 
Values.--Section 264 is amended by adding at the end the 
following new subsection:
    ``(f) 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 sum of--
                            ``(i) in the case of assets of the 
                        taxpayer which are life insurance 
                        policies or annuity or endowment 
                        contracts, the average unborrowed 
                        policy cash values of such policies and 
                        contracts, and
                            ``(ii) in the case of assets of the 
                        taxpayer not described in clause (i), 
                        the average adjusted bases (within the 
                        meaning of section 1016) of such 
                        assets.
            ``(3) Unborrowed policy cash value.--For purposes 
        of this subsection, 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 with respect 
                to such policy or contract.
            ``(4) Exception for certain policies and 
        contracts.--
                    ``(A) Policies and contracts covering 20-
                percent owners, officers, directors, and 
                employees.--Paragraph (1) shall not apply to 
                any policy or contract owned by an entity 
                engaged in a trade or business if such policy 
                or contract covers only 1 individual and if 
such individual is (at the time first covered by the policy or 
contract)--
                            ``(i) a 20-percent owner of such 
                        entity, or
                            ``(ii) an individual (not described 
                        in clause (i)) who is an officer, 
                        director, or employee of such trade or 
                        business.
                A policy or contract covering a 20-percent 
                owner of such entity shall not be treated as 
                failing to meet the requirements of the 
                preceding sentence by reason of covering the 
                joint lives of such owner and such owner's 
                spouse.
                    ``(B) Contracts subject to current income 
                inclusion.--Paragraph (1) shall not apply to 
                any annuity contract to which section 72(u) 
                applies.
                    ``(C) Coordination with paragraph (2).--Any 
                policy or contract to which paragraph (1) does 
                not apply by reason of this paragraph shall not 
                be taken into account under paragraph (2).
                    ``(D) 20-percent owner.--For purposes of 
                subparagraph (A), the term `20-percent owner' 
                has the meaning given such term by subsection 
                (e)(4).
            ``(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, 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 directly 
                                or indirectly 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) the amount otherwise taken 
                        into account under paragraph (2)(B) 
                        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 subject to tax under subchapter L, and 
                subparagraph (A) shall be applied without 
                regard to any member of an affiliated group 
                which is an insurance company.''.
    (b) Treatment of Insurance Companies.--
            (1)(A) 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 subparagraph (F)) of life insurance policies and 
        annuity and endowment contracts to which section 264(f) 
        applies,'' after ``tax-exempt interest''.
            (B) 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 subparagraph (F)) of life insurance policies 
        and annuity and endowment contracts to which section 
        264(f) applies, and''.
            (C) Paragraph (4) of section 805(a) is amended by 
        adding at the end the following new subparagraph:
                    ``(F) Increase in policy cash values.--For 
                purposes of subparagraphs (C) and (D)--
                            ``(i) In general.--The increase in 
                        the policy cash value for any taxable 
                        year with respect to policy or contract 
                        is the amount of the increase in the 
                        adjusted cash value during such taxable 
                        year determined without regard to--
                                    ``(I) gross premiums paid 
                                during such taxable year, and
                                    ``(II) distributions (other 
                                than amounts includible in the 
                                policyholder's gross income) 
                                during such taxable year to 
                                which section 72(e) applies.
                            ``(ii) Adjusted cash value.--For 
                        purposes of clause (i), the term 
                        `adjusted cash value' means the cash 
                        surrender value of the policy or 
                        contract increased by the sum of--
                                    ``(I) commissions payable 
                                with respect to such policy or 
                                contract for the taxable year, 
                                and
                                    ``(II) asset management 
                                fees, surrender charges, 
                                mortality and expense charges, 
                                and any other fees or charges 
                                specified in regulations 
                                prescribed by the Secretary 
                                which are imposed (or which 
                                would be imposed were the 
                                policy or contract canceled) 
with respect to such policy or contract for the taxable year.''.
            (2)(A) 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 of section 805(a)(4)(F)) of 
        life insurance policies and annuity and endowment 
        contracts to which section 264(f) applies,''.
            (B) 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 805(a)(4)(F)) of 
        life insurance policies and annuity and endowment 
        contracts to which section 264(f) applies,''.
            (3) 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 805(a)(4)(F)) of life insurance 
                policies and annuity and endowment contracts to 
                which section 264(f) applies.''.
            (4) 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 
                        805(a)(4)(F)) of life insurance 
                        policies and annuity and endowment 
                        contracts to which section 264(f) 
                        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. 1085. IMPROVED ENFORCEMENT OF THE APPLICATION OF THE EARNED INCOME 
                    CREDIT.

    (a) Restrictions on Availability of Earned Income Credit 
for Taxpayers who Improperly Claimed Credit in Prior Year.--
            (1) 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.''.
            (2) 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 return 
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.''.
            (3) 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).''.
    (b) Increase in Net Loss Disregarded for Modified Adjusted 
Gross Income.--Section 32(c)(5)(B)(iv) is amended by striking 
``50 percent'' and inserting ``75 percent''.
    (c) Workfare Payments Not Included in Earned Income.--
Section 32(c)(2)(B) is amended by striking ``and'' at the end 
of clause (iii), by striking the period at the end of clause 
(iv) and inserting ``, and'', and by adding at the end the 
following new clause:
                            ``(v) no amount described in 
                        subparagraph (A) received for service 
                        performed in work activities as defined 
                        in section 407(d) of the Social 
                        Security Act to which the taxpayer is 
                        assigned under any State program under 
                        part A of title IV of such Act, but 
                        only to the extent such amount is 
                        subsidized under such State program.''.
    (d) Certain Nontaxable Income Included in Modified Adjusted 
Gross Income.--Section 32(c)(5)(B) is amended--
            (1) by striking ``and'' at the end of clause (iii),
            (2) by striking the period at the end of clause 
        (iv)(III),
            (3) by inserting after clause (iv)(III) the 
        following new clauses:
                            ``(v) interest received or accrued 
                        during the taxable year which is exempt 
                        from tax imposed by this chapter, and
                            ``(vi) amounts received as a 
                        pension or annuity, and any 
                        distributions or payments received from 
                        an individual retirement plan, by the 
                        taxpayer during the taxableyear to the 
extent not included in gross income.'', and
            (4) by adding at the end the following new 
        sentence: ``Clause (vi) shall not include any amount 
        which is not includible in gross income by reason of 
        section 402(c), 403(a)(4), 403(b), 408(d) (3), (4), or 
        (5), or 457(e)(10).''.
    (e) Effective Dates.--
            (1) The amendments made by subsection (a) shall 
        apply to taxable years beginning after December 31, 
        1996.
            (2) The amendments made by subsections (b), (c), 
        and (d) shall apply to taxable years beginning after 
        December 31, 1997.

SEC. 1086. 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 for personal use.
                    ``(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 (or 
                        decreasing where no payment is less 
                        than 40 percent of the largest 
                        payment), 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 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. 1087. 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. 1088. 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 more than 1 year 
        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 of the 
                Treasury, 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.

SEC. 1089. LIMITATIONS ON CHARITABLE REMAINDER TRUST ELIGIBILITY FOR 
                    CERTAIN TRUSTS.

    (a) Limitation on Noncharitable Distributions.--
            (1) In general.--Paragraphs (1)(A) and (2)(A) of 
        section 664(d) (relating to charitable remainder 
        trusts) are each amended by inserting ``nor more than 
        50 percent'' after ``not less than 5 percent''.
            (2) Effective date.--The amendment made by 
        paragraph (1) shall apply to transfers in trust after 
        June 18, 1997.
    (b) Minimum Charitable Benefit.--
            (1) Charitable remainder annuity trusts.--Paragraph 
        (1) of section 664(d) is amended by striking ``and'' at 
        the end of subparagraph (B), by striking the period at 
        the end of subparagraph (C), and by adding at the end 
        the following new subparagraph:
                    ``(D) the value (determined under section 
                7520) of such remainder interest is at least 10 
                percent of the initial net fair market value of 
                all property placed in the trust.''
            (2) Charitable remainder unitrusts.--Paragraph (2) 
        of section 664(d) is amended by striking ``and'' at the 
        end of subparagraph (B), by striking the period at the 
        end of subparagraph (C), and by adding at the end the 
        following new subparagraph:
                    ``(D) with respect to each contribution of 
                property to the trust, the value (determined 
                under section 7520) of such remainder interest 
                in such property is at least 10 percent of the 
                net fair market value of such property as of 
                the date such property is contributed to the 
                trust.''.
            (3) Void or reformed trust.--Paragraph (3) of 
        section 2055(e) is amended by adding at the end the 
        following new subparagraph:
                    ``(J) Void or reformed trust in cases of 
                insufficient remainder interests.--In the case 
                of a trust that would qualify (or could be 
                reformed to qualify pursuant to subparagraph 
                (B)) but for failure to satisfy the requirement 
                of paragraph (1)(D) or (2)(D) of section 
                664(d), such trust may be--
                            ``(i) declared null and void ab 
                        initio, or
                            ``(ii) changed by reformation, 
                        amendment, or otherwise to meet such 
                        requirement by reducing the payout rate 
                        or the duration (or both) of any 
                        noncharitable beneficiary's interest to 
                        the extent necessary to satisfy such 
                        requirement,
                pursuant to a proceeding that is commenced 
                within the period required in subparagraph 
                (C)(iii). In a case described in clause (i), no 
                deduction shall be allowed under this title for 
                any transfer to the trust and any transactions 
                entered into by the trust prior to being 
                declared void shall be treated as entered into 
                by the transferor.''
                    (4) Severance of certain additional 
                contributions.--Subsection (d) of section 664 
                is amended by adding at the end the following 
                new paragraph:
            ``(4) Severance of certain additional 
        contributions.--If--
                    ``(A) any contribution is made to a trust 
                which before the contribution is a charitable 
                remainder unitrust, and
                    ``(B) such contribution would (but for this 
                paragraph) result in such trust ceasing to be a 
                charitable unitrust by reason of paragraph 
                (2)(D), such contribution shall be treated as a 
transfer to a separate trust under regulations prescribed by the 
Secretary.''
            (5) Conforming amendment.--Section 2055(e)(3)(G) is 
        amended by inserting ``(or other proceeding pursuant to 
        subparagraph (J)'' after ``reformation''.
            (6) Effective dates.--
                    (A) In general.--Except as otherwise 
                provided in this paragraph, the amendments made 
                by this subsection shall apply to transfers in 
                trust after July 28, 1997.
                    (B) Special rule for certain decedents.--
                The amendments made by this subsection shall 
                not apply to transfers in trust under the terms 
                of a will (or other testamentary instrument) 
                executed on or before July 28, 1997, if the 
                decedent--
                            (i) dies before January 1, 1999, 
                        without having republished the will (or 
                        amended such instrument) by codicil or 
                        otherwise, or
                            (ii) was on July 28, 1997, under a 
                        mental disability to change the 
                        disposition of his property and did not 
                        regain his competence to dispose of 
                        such property before the date of his 
                        death.

SEC. 1090. EXPANDED SSA RECORDS FOR TAX ENFORCEMENT.

    (a) Expansion of Coordinated Enforcement Efforts of IRS and 
HHS Office of Child Support Enforcement.--
            (1) State reporting of ssn of child.--Section 
        454A(e)(4)(D) of the Social Security Act (42 U.S.C. 
        654a(e)(4)(D)) is amended by striking ``the birth date 
        of any child'' and inserting ``the birth date and, 
        beginning not later than October 1, 1999, the social 
        security number, of any child''.
            (2) Federal case registry of child support 
        orders.--Section 453(h) of such Act (42 U.S.C. 653(h)) 
        is amended--
                    (A) in paragraph (2), by adding at the end 
                the following: ``Beginning not later than 
                October 1, 1999, the information referred to in 
                paragraph (1) shall include the names and 
                social security numbers of the children of such 
                individuals.''; and
                    (B) by adding at the end the following:
            ``(3) Administration of federal tax laws.--The 
        Secretary of the Treasury shall have access to the 
        information described in paragraph (2) for the purpose 
        of administering those sections of the Internal Revenue 
        Code of 1986 which grant tax benefits based on support 
        or residence of children.''.
            (3) Coordination between secretaries.--The 
        Secretary of the Treasury and the Secretary of Health 
        and Human Services shall consult regarding the 
        implementation issues resulting from the amendments 
        made by this subsection, including interim deadlines 
        for States that may be able before October 1, 1999, to 
        provide the data required by such amendments. The 
        Secretaries shall report to Congress on the results of 
        such consultation.
            (4) Effective date.--The amendments made by this 
        subsection shall take effect on October 1, 1998.
    (b) Required Submission of SSN's on Applications.--
            (1) In general.--Section 205(c)(2) of the Social 
        Security Act (42 U.S.C. 405(c)(2)) is amended--
                    (A) in subparagraph (B)(ii), by adding at 
                the end the following new sentence: ``With 
                respect to an application for a social security 
                account number for an individual who has not 
                attainedthe age of 18 before such application, 
such evidence shall include the information described in subparagraph 
(C)(ii).'',
                    (B) in the second sentence of subparagraph 
                (C)(ii), insert ``the Commissioner of Social 
                Security and'' after ``available to'', and
                    (C) by adding at the end the following new 
                subparagraph:
    ``(H) The Commissioner of Social Security shall share with 
the Secretary of the Treasury the information obtained by the 
Commissioner pursuant to the second sentence of subparagraph 
(B)(ii) and to subparagraph (C)(ii) for the purpose of 
administering those sections of the Internal Revenue Code of 
1986 which grant tax benefits based on support or residence of 
children.''.
            (2) Effective dates.--
                    (A) The amendment made by paragraph (1)(A) 
                shall apply to applications made after the date 
                which is 180 days after the date of the 
                enactment of this Act.
                    (B) The amendments made by subparagraphs 
                (B) and (C) of paragraph (1) shall apply to 
                information obtained on, before, or after the 
                date of the enactment of this Act.

SEC. 1091. MODIFICATION OF ESTIMATED TAX SAFE HARBORS.

    (a) In General.--Clause (i) of section 6654(d)(1)(C) 
(relating to limitation on use of preceding year's tax) is 
amended to read as follows:
                            ``(i) In general.--If the adjusted 
                        gross income shown on the return of the 
                        individual for the preceding taxable 
                        year beginning in any calendar year 
                        exceeds $150,000, clause (ii) of 
                        subparagraph (B) shall be applied by 
                        substituting the applicable percentage 
                        for `100 percent'. For purposes of the 
                        preceding sentence, the applicable 
                        percentage shall be determined in 
                        accordance with the following table:

    ``If the preceding tax-                               The applicable
      able year begins in:                                percentage is:
    1998, 1999, or 2000.......................................      105 
    2001......................................................      112 
    2002 or thereafter........................................      110.

                        This clause shall not apply in the case 
                        of a preceding taxable year beginning 
                        in calendar year 1997.''.
    (b) Effective Date.--The amendment made by this section 
shall apply with respect to any installment payment for taxable 
years beginning after December 31, 1997.

     TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                     Subtitle A--General Provisions

SEC. 1101. 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 taxable year 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. 1102. 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 determiningto 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 
        the pools of post-1986 foreign income taxes and the 
        pools of post-1986 undistributed earnings 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 
datereferred to in subparagraph (B) of paragraph (1).
                    ``(B) Taxes subsequently paid.--Any such 
                taxes if subsequently paid--
                            ``(i) shall be taken into account--
                                    ``(I) in the case of taxes 
                                deemed paid under section 902 
                                or section 960, for the taxable 
                                year in which paid (and no 
                                redetermination shall be made 
                                under this section by reason of 
                                such payment), and
                                    ``(II) in any other case, 
                                for the taxable year to which 
                                such taxes relate, and
                            ``(ii) shall be 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. 1103. 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. 1104. 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--
                    ``(A) section 162 (other than traveling 
                expenses described in subsection (a)(2) 
                thereof), or
                    ``(B) section 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. 1105. FOREIGN TAX CREDIT TREATMENT OF DIVIDENDS FROM NONCONTROLLED 
                    SECTION 902 CORPORATIONS.

    (a) Separate Basket Only To Apply to Pre-2003 Earnings.--
            (1) In general.--Subparagraph (E) of section 
        904(d)(1) is amended to read as follows:
                    ``(E) in the case of a corporation, 
                dividends from noncontrolled section 902 
                corporations out of earnings and profits 
                accumulated in taxable years beginning before 
                January 1, 2003,''.
            (2) Aggregation of non-pfics.--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-pfics 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).''.
            (3) Conforming amendments.--Subparagraphs 
        (C)(iii)(II) and (D) of section 904(d)(2) are each 
        amended by inserting ``out of earnings and profits 
        accumulated in taxable years beginning before January 
        1, 2003'' after ``corporation''.
    (b) Application of Look-Thru Rules to Dividends of 
Noncontrolled Section 902 Corporations Attributable to Post-
2002 Earnings.--Section 904(d) is amended by redesignating 
paragraphs (4) and (5) as paragraphs (5) and (6), respectively, 
and by inserting after paragraph (3) the following new 
paragraph:
            ``(4) Look-thru applies to dividends from 
        noncontrolled section 902 corporations.--
                    ``(A) In general.--For purposes of this 
                subsection, any applicable dividend shall be 
                treated as income in a separate category in 
                proportion to the ratio of--
                            ``(i) the portion of the earnings 
                        and profits described in subparagraph 
                        (B)(ii) attributable to income in such 
                        category, to
                            ``(ii) the total amount of such 
                        earnings and profits.
                    ``(B) Applicable dividend.--For purposes of 
                subparagraph (A), the term `applicable 
                dividend' means any dividend--
                            ``(i) from a noncontrolled section 
                        902 corporation with respect to the 
                        taxpayer, and
                            ``(ii) paid out of earnings and 
                        profits accumulated in taxable years 
                        beginning after December 31, 2002.
                    ``(C) Special rules.--
                            ``(i) In general.--Rules similar to 
                        the rules of paragraph (3)(F) shall 
                        apply for purposes of this paragraph.
                            ``(ii) Earnings and profits.--For 
                        purposes of this paragraph and 
                        paragraph (1)(E)--
                                    ``(I) In general.--The 
                                rules of section 316 shall 
                                apply.
                                    ``(II) Regulations.--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.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2002.

        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 corporationsfor 
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 section 902 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 
foreigninvestment 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 towhich 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 anystock 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 istreated 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 
toeach 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 year shall 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. VALUATION OF ASSETS FOR PASSIVE FOREIGN INVESTMENT COMPANY 
                    DETERMINATION.

    (a) In General.--Section 1297, as redesignated by section 
1122, is amended by adding at the end the following new 
subsection:
    ``(e) Methods for Measuring Assets.--
            ``(1) Determination using value.--The determination 
        under subsection (a)(2) shall be made on the basis of 
        the value of the assets of a foreign corporation if--
                    ``(A) such corporation is a publicly traded 
                corporation for the taxable year, or
                    ``(B) paragraph (2) does not apply to such 
                corporation for the taxable year.
            ``(2) Determination using adjusted bases.--The 
        determination under subsection (a)(2) shall be based on 
        the adjusted bases (as determined for the purposes of 
        computing earnings and profits) of the assets of a 
        foreign corporation if such corporation is not 
        described in paragraph (1)(A) and such corporation--
                    ``(A) is a controlled foreign corporation, 
                or
                    ``(B) elects the application of this 
                paragraph.
        An election under subparagraph (B), once made, may be 
        revoked only with the consent of the Secretary.
            ``(3) Publicly traded corporation.--For purposes of 
        this subsection, a foreign corporation shall be treated 
        as a publicly traded corporation if the stock in the 
        corporation is regularly traded on--
                    ``(A) 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
                    ``(B) any exchange or other market which 
                the Secretary determines has rules adequate to 
                carry out the purposes of this subsection.''
    (b) Conforming Amendments.--Section 1297(a), as 
redesignated by section 1122, is amended--
            (1) by striking ``(by value)'' and inserting ``(as 
        determined in accordance with subsection (e))'', and
            (2) by striking the last two sentences.

SEC. 1124. 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.--Except as provided in regulations, 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 to the extent 
that any person is treated as the owner of such trust under 
section 671.
    ``(c) Treatment of Trusts Which Become Foreign Trusts.--If 
a trust which is not a foreign trust becomes a foreign trust, 
such trust shall be treated for purposes of this section as 
having transferred, immediately before becoming a foreign 
trust, all of its assets to a foreign trust.''.
    (b) 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 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.''.
            (3) Certain transfers to partnerships.--Section 721 
        is amended by adding at the end the following new 
        subsection:
    ``(c) Regulations Relating to Certain Transfers to 
Partnerships.--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).''.

    (c) 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.''.

    (d) 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.
                    ``(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 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-percent 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.--
            (1) In general.--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).''.
            (2) Limit on penalty.--Section 6038B(b) is amended 
        by adding at the end the following new paragraph:
            ``(3) Limit on penalty.--The penalty under 
        paragraph (1) with respect to any exchange shall not 
        exceed $100,000 unless the failure with respect to such 
        exchange was due to intentional disregard.''.
    (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 all 
        applicable reporting requirements under section 6038B 
        of such Code (as amended by this section) are 
        satisfied. The Secretary of the Treasury or his 
        delegate may prescribe simplified reporting 
        requirements under the preceding sentence.

SEC. 1145. EXTENSION OF STATUTE OF LIMITATIONS 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 Secretary provides otherwise by 
regulations''.
    (b) Effective Date.--Any regulations issued with respect to 
the amendment made by subsection (a) shall apply to 
partnerships created or organized after the date determined 
under section 7805(b) of the Internal Revenue Code of 1986 
(without regard to paragraph (2) thereof) with respect to such 
regulations.

              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.

SEC. 1163. 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.

                      Subtitle H--Other Provisions

SEC. 1171. 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.

SEC. 1172. 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)):

                                                           The exclusion
``For calendar year--                                        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. 1173. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS 
                    ACQUIRED BY DEALERS IN ORDINARY COURSE OF TRADE OR 
                    BUSINESS.

    (a) In General.--Section 956(c)(2) is amended by striking 
``and'' at the end of subparagraph (H), by striking the period 
at the end of subparagraph (I) and inserting a semicolon, and 
by adding at the end the following new subparagraphs:
                    ``(J) deposits of cash or securities made 
                or received on commercial terms in the ordinary 
                course of a United States or foreign person's 
                business as a dealer in securities or in 
                commodities, but only to the extent such 
                deposits are made or received as collateral or 
                margin for (i) a securities loan, notional 
                principal contract, options contract, forward 
                contract, or futures contract, or (ii) any 
                other financial transaction in which the 
                Secretary determines that it is customary to 
                post collateral or margin; and
                    ``(K) an obligation of a United States 
                person to the extent the principal amount of 
                the obligation does not exceed the fair market 
                value of readily marketable securities sold or 
                purchased pursuant to a sale and repurchase 
                agreement or otherwise posted or received as 
                collateral for the obligation in the ordinary 
                course of its business by a United States or 
                foreign person which is a dealer in securities 
                or commodities.
        For purposes of subparagraphs (J) and (K), the term 
        `dealer in securities' has the meaning given such term 
        by section 475(c)(1), and the term `dealer in 
        commodities' has the meaning given such term by section 
        475(e), except that such term shall include a futures 
        commission merchant.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years of foreign corporations beginning 
after December 31, 1997, and to taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.

SEC. 1174. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN INTERNATIONAL 
                    TRANSPORTATION SERVICES.

    (a) Sourcing Rules.--
            (1) In general.--Section 861(a)(3) is amended by 
        adding at the end the following new flush sentence:
        ``In addition, except for purposes of sections 79 and 
        105 and subchapter D, compensation for labor or 
        services performed in the United States shall not be 
        deemed to be income from sources within the 
UnitedStates if the labor or services are performed by a nonresident 
alien individual in connection with the individual's temporary presence 
in the United States as a regular member of the crew of a foreign 
vessel engaged in transportation between the United States and a 
foreign country or a possession of the United States.''.
            (2) Transportation income.--Subparagraph (B) of 
        section 863(c)(2) is amended by adding at the end the 
        following flush sentence:
                ``In the case of transportation income derived 
                from, or in connection with, a vessel, this 
                subparagraph shall only apply if the taxpayer 
                is a citizen or resident alien.''.
    (b) Presence in United States.--
            (1) In general.--Paragraph (7) of section 7701(b) 
        is amended by adding at the end the following new 
        subparagraph:
                    ``(D) Crew members temporarily present.--An 
                individual who is temporarily present in the 
                United States on any day as a regular member of 
                the crew of a foreign vessel engaged in 
                transportation between the United States and a 
                foreign country or a possession of the United 
                States shall not be treated as present in the 
                United States on such day unless such 
                individual otherwise engages in any trade or 
                business in the United States on such day.''.
            (2) Conforming amendment.--Subparagraph (A) of 
        section 7701(b)(7) is amended by striking ``or (C)'' 
        and inserting ``, (C), or (D)''.
    (c) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to remuneration for services 
        performed in taxable years beginning after December 31, 
        1997.
            (2) Presence.--The amendment made by subsection (b) 
        shall apply to taxable years beginning after December 
        31, 1997.

SEC. 1175. EXEMPTION FOR ACTIVE FINANCING INCOME.

    (a) Exemption From Foreign Personal Holding Company 
Income.--Section 954 is amended by adding at the end the 
following new subsection:
    ``(h) Special Rule for Income Derived in the Active Conduct 
of Banking, Financing, or Similar Businesses.--
            ``(1) In general.--For purposes of subsection 
        (c)(1), foreign personal holding company income shall 
        not include income which is--
                    ``(A) derived in the active conduct by a 
                controlled foreign corporation of a banking, 
                financing, or similar business, but only if the 
                corporation is predominantly engaged in the 
                active conduct of such business,
                    ``(B) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from the 
                investments made by a qualifying insurance 
                company of its reserves or of 80 percent of its 
                unearned premiums (as both are determined in 
                the manner prescribed under paragraph (4)), or
                    ``(C) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from investments 
                made by a qualifying insurance company of an 
                amount of its assets equal to--
                            ``(i) in the case of contracts 
                        regulated in the country in which sold 
                        as property, casualty, or health 
                        insurance contracts, one-third of its 
                        premiums earned on such insurance 
                        contracts during the taxable year (as 
                        defined in section 832(b)(4)), and
                            ``(ii) in the case of contracts 
                        regulated in the country in which sold 
                        as life insurance or annuity contracts, 
                        the greater of--
                                    ``(I) 10 percent of the 
                                reserves described in 
                                subparagraph (B) for such 
                                contracts, or
                                    ``(II) in the case of a 
                                qualifying insurance company 
                                which is a start-up company, 
                                $10,000,000.
            ``(2) Principles for determining applicable 
        income.--
                    ``(A) Banking and financing income.--The 
                determination as to whether income is described 
                in paragraph (1)(A) shall be made--
                            ``(i) except as provided in clause 
                        (ii), in accordance with the applicable 
                        principles of section 904(d)(2)(C)(ii), 
                        except that such income shall include 
                        income from all leases entered into in 
                        the ordinary course of the active 
                        conduct of a banking, financing, or 
                        similar business, and
                            ``(ii) in the case of a corporation 
                        described in paragraph (3)(B), in 
                        accordance with the applicable 
                        principles of section 1296(b) (as in 
                        effect on the day before theenactment 
of the Taxpayer Relief Act of 1997) for determining what is not passive 
income.
                    ``(B) Insurance income.--Under rules 
                prescribed by the Secretary, for purposes of 
                paragraphs (1) (B) and (C)--
                            ``(i) in the case of contracts 
                        which are separate account-type 
                        contracts (including variable contracts 
                        not meeting the requirements of section 
                        817), only income specifically 
                        allocable to such contracts shall be 
                        taken into account, and
                            ``(ii) in the case of other 
                        contracts, income not allocable under 
                        clause (i) shall be allocated ratably 
                        among such contracts.
                    ``(C) Look-thru rules.--The Secretary shall 
                prescribe regulations consistent with the 
                principles of section 904(d)(3) which provide 
                that dividends, interest, income equivalent to 
                interest, rents, or royalties received or 
                accrued from a related person (within the 
                meaning of subsection (d)(3)) shall be subject 
                to look-thru treatment for purposes of this 
                subsection.
            ``(3) Predominantly engaged.--For purposes of 
        paragraph (1)(A), a corporation shall be deemed 
        predominantly engaged in the active conduct of a 
        banking, financing, or similar business only if--
                    ``(A) more than 70 percent of its gross 
                income is derived from such business from 
                transactions with persons which are not related 
                persons (as defined in subsection (d)(3)) and 
                which are located within the country under the 
                laws of which the controlled foreign 
                corporation is created or organized, or
                    ``(B) the corporation is--
                            ``(i) engaged in the active conduct 
                        of a banking or securities business 
                        (within the meaning of section 1296(b), 
                        as in effect before the enactment of 
                        the Taxpayer Relief Act of 1997), or
                            ``(ii) a qualified bank affiliate 
                        or a qualified securities affiliate 
                        (within the meaning of the proposed 
                        regulations under such section 
                        1296(b)).
            ``(4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (1)(B)--
                    ``(A) Property and casualty contracts.--The 
                unearned premiums and reserves of a qualifying 
                insurance company with respectto property, 
casualty, or health insurance contracts shall be determined using the 
same methods and interest rates which would be used if such company 
were subject to tax under subchapter L.
                    ``(B) Life insurance and annuity 
                contracts.--The reserves of a qualifying 
                insurance company with respect to life 
                insurance or annuity contracts shall be 
                determined under the method described in 
                paragraph (5) which such company elects to 
                apply for purposes of this paragraph. Such 
                election shall be made at such time and in such 
                manner as the Secretary may prescribe and, once 
                made, shall be irrevocable without the consent 
                of the Secretary.
                    ``(C) Limitation on reserves.--In no event 
                shall the reserve determined under this 
                paragraph for any contract as of any time 
                exceed the amount which would be taken into 
                account with respect to such contract as of 
                such time in determining foreign annual 
                statement reserves (less any catastrophe or 
                deficiency reserves).
            ``(5) Methods.--The methods described in this 
        paragraph are as follows:
                    ``(A) U.S. method.--The method which would 
                apply if the qualifying insurance company were 
                subject to tax under subchapter L, except that 
                the interest rate used shall be an interest 
                rate determined for the foreign country in 
                which such company is created or organized and 
                which is calculated in the same manner as the 
                Federal mid-term rate under section 1274(d).
                    ``(B) Foreign method.--A preliminary term 
                method, except that the interest rate used 
                shall be the interest rate determined for the 
                foreign country in which such company is 
                created or organized and which is calculated in 
                the same manner as the Federal mid-term rate 
                under section 1274(d). If a qualifying 
                insurance company uses such a preliminary term 
                method with respect to contracts insuring risks 
                located in such foreign country, such method 
                shall apply if such company elects the method 
                under this clause.
                    ``(C) Cash surrender value.--A method under 
                which reserves are equal to the net surrender 
                value (as defined in section 807(e)(1)(A)) of 
                the contract.
            ``(6) Definitions.--For purposes of this 
        subsection--
                    ``(A) Terms relating to insurance 
                companies.--
                            ``(i) Qualifying insurance 
                        company.--The term `qualifying 
                        insurance company' means any entity 
                        which--
                                    ``(I) is subject to 
                                regulation as an insurance 
                                company under the laws of its 
                                country of incorporation,
                                    ``(II) realizes at least 50 
                                percent of its net written 
                                premiums from the insurance or 
                                reinsurance of risks located 
                                within the country in which 
                                such entity is created or 
                                organized, and
                                    ``(III) is engaged in the 
                                active conduct of an insurance 
                                business and would be subject 
                                to tax under subchapter L if it 
                                were a domestic corporation.
                            ``(ii) Start-up company.--A 
                        qualifying insurance company shall be 
                        treated as a start-up company if such 
                        company (and any predecessor) has not 
                        been engaged in the active conduct of 
                        an insurance business for more than 5 
                        years as of the beginning of the 
                        taxable year of such company.
                    ``(B) Located.--For purposes of paragraph 
                (3)(A)--
                            ``(i) In general.--A person shall 
                        be treated as located--
                                    ``(I) except as provided in 
                                subclause (II), within the 
                                country in which it maintains 
                                an office or other fixed place 
                                of business through which it 
                                engages in a trade or business 
                                and by which the transaction is 
                                effected, or
                                    ``(II) in the case of a 
                                natural person, within the 
                                country in which such person is 
                                physically located when such 
                                person enters into a 
                                transaction.
                            ``(ii) Special rule for qualified 
                        business units.--Gross income derived 
                        by a corporation's qualified business 
                        unit (within the meaning of section 
                        989(a)) from transactions with persons 
                        which are not related persons (as 
                        defined in subsection (d)(3)) and which 
                        are located inthe country in which the 
qualified business unit both maintains its principal office and 
conducts substantial business activity shall be treated as derived from 
transactions with persons which are not related persons (as defined in 
subsection (d)(3)) and which are located within the country under the 
laws of which the controlled foreign corporation is created or 
organized.
            ``(7) Anti-abuse rules.--For purposes of applying 
        this subsection, there shall be disregarded any item of 
        income, gain, loss, or deduction with respect to any 
        transaction or series of transactions one of the 
        principal purposes of which is qualifying income or 
        gain for the exclusion under this section, including 
        any change in the method of computing reserves or any 
        other transaction or series of transactions a principal 
        purpose of which is the acceleration or deferral of any 
        item in order to claim the benefits of such exclusion 
        through the application of this subsection.
            ``(8) Coordination with section 953.--This 
        subsection shall not apply to investment income 
        allocable to contracts that insure related party risks 
        or risks located in a foreign country other than the 
        country in which the qualifying insurance comapny is 
        created or organized.
            ``(9) Application.--This subsection shall apply to 
        the first full taxable year of a foreign corporation 
        beginning after December 31, 1997, and before January 
        1, 1999, and to taxable years of United States 
        shareholders with or within which such taxable year of 
        such foreign corporation ends.''.
    (b) Exemption From Foreign Base Company Services Income.--
Paragraph (2) of section 954(e) 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:
                    ``(C) in the case of taxable years 
                described in subsection (h)(8), the active 
                conduct by a controlled foreign corporation of 
                a banking, financing, insurance, or similar 
                business, but only if the corporation is 
                predominantly engaged in the active conduct of 
                such business (within the meaning of subsection 
                (h)(3)) or is a qualifying insurance 
                company.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to the first full taxable year of a foreign 
corporation beginning after December 31, 1997, and before 
January 1, 1999, and to taxable years of United States 
shareholders with or within which such taxable year of such 
foreign corporation ends.

   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.--
            (1) In general.--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.''.
            (2) Conforming amendment.--Clause (iv) of section 
        6103(e)(1)(A) is amended by striking ``or 59(j)''.
    (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. 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. 1204. 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. 1205. 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. The Secretary may not pay any fee or 
        provide any other consideration under such contracts.
            ``(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 
                card account 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) 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.''.

    (c) 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)''.
    (d) 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.

SEC. 1213. 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 of the 
lessor (including for purposes of section 168(i)(8)(B)).
    ``(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.

   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 taken into 
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 any credit 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 
        the amount 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 be taken 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 periodany 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 such items 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 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.


                ``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.--
            ``(1) Suspension of period of limitations on making 
        adjustment, assessment, or collection.--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--
                    ``(A) for adjustment or assessment, 60 days 
                thereafter, and
                    ``(B) for collection, 6 months thereafter.
        A rule similar to the rule of section 6213(f)(2) shall 
        apply for purposes of section 6246.
            ``(2) Suspension of period of limitation for filing 
        for judicial review.--The running of the period 
        specified in section 6247(a) or 6252(b) shall, in a 
        case under title 11 of the United States Code, be 
        suspended during the period during which the 
        partnership is prohibited by reason of such case from 
        filing a petition under section 6247 or 6252 and for 60 
        days 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) Conforming Amendments.--
            (1) Subsection (a) of section 7421 is amended by 
        inserting ``6246(b),'' after ``6213(a),''.
            (2) Subsection (c) of section 7459 is amended by 
        striking ``or section 6228(a)'' and inserting ``, 
        6228(a), 6247, or 6252''.
            (3) Subparagraph (E) of section 7482(b)(1) is 
        amended by striking ``or 6228(a)'' and inserting ``, 
        6228(a), 6247, or 6252''.
            (4)(A) The text of section 7485(b) is amended by 
        striking ``or 6228(a)'' and inserting ``, 6228(a), 
        6247, or 6252''.
            (B) The subsection heading for section 7485(b) is 
        amended to read as follows:
    ``(b) Bond in Case of Appeal of Certain Partnership-Related 
Decisions.--''.
    (c) 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 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, the 
taxpayer 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 this section 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 
Secretarymails 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 1237, is amended by inserting 
        ``(including any liability for any penalties, additions 
        to tax, or additional amounts 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 1237, 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 1237, 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 periods under 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.''.
            (3) Subsection (a) of section 7421, as amended by 
        section 1222, is amended by inserting ``6225(b),'' 
        after ``6213(a),''.
    (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 adjustmentwere 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 STOCK OWNERSHIP.

    Section 856(d)(5) (relating to constructive ownership of 
stock) is amended by striking ``except that'' and all that 
follows and inserting ``except that--
                    ``(A) `10 percent' shall be substituted for 
                `50 percent' in subparagraph (C) of paragraphs 
                (2) and (3) of section 318(a), and
                    ``(B) section 318(a)(3)(A) shall be applied 
                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 received if 
                        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 seller 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 beginning 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 underparagraph 
(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.

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 but only if--
                    ``(A)(i) such transfer is of the donor's 
                entire interest in the property transferred, 
                and
                    ``(ii) no other interest in such property 
                is or has been transferred (for less than 
                adequate and full consideration in money or 
                money's worth) from the donor to a person, or 
                for a use, not described in subsection (a) or 
                (b) of section 2522, or
                    ``(B) such transfer is described in section 
                2522(d),''.
    (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. 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. 1305. 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. 1306. 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. 1307. 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. 1308. 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. 1309. 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. 685. 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 with respect to whom such services or 
        property are to be provided at their death under 
        contracts described in paragraph (1),
            ``(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 under 
        subpart E by the purchasers of the contracts described 
        in paragraph (1).
    ``(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 Purchaser on 
Cancellation.--No gain or loss shall be recognized to a 
purchaser of a contract described in subsection (b)(1) by 
reason of any payment from such trust to such purchaser by 
reason of cancellation of such contract. If any payment 
referred to in the preceding sentence consists of property 
other than money, the basis of such property in the hands of 
such purchaser 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. 685. Treatment of funeral trusts.''.

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

SEC. 1310. 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. 1311. 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. 1312. 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. 1313. 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. 1314. 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 180 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 180 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 180 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 180 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 180 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 180 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 180 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 180 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 180 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 180 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 180 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.''.

SEC. 1433. SIMPLIFICATION OF IMPOSITION OF EXCISE TAX ON ARROWS.

    (a) In General.--Subsection (b) of section 4161 (relating 
to imposition of tax) is amended to read as follows:
    ``(b) Bows and Arrows, Etc.--
            ``(1) Bows.--
                    ``(A) In general.--There is hereby imposed 
                on the sale by the manufacturer, producer, or 
                importer of any bow which has a draw weight of 
                10 pounds or more, a tax equal to 11 percent of 
                the price for which so sold.
                    ``(B) Parts and accessories.--There is 
                hereby imposed upon the sale by the 
                manufacturer, producer, or importer--
                            ``(i) of any part of accessory 
                        suitable for inclusion in or attachment 
                        to a bow described in subparagraph (A), 
                        and
                            ``(ii) of any quiver suitable for 
                        use with arrows described in paragraph 
                        (2),a tax equivalent to 11 percent of 
the price for which so sold.
            ``(2) Arrows.--There is hereby imposed on the sale 
        by the manufacturer, producer, or importer of any 
        shaft, point, nock, or vane of a type used in the 
        manufacture of any arrow which after its assembly--
                    ``(A) measures 18 inches overall or more in 
                length, or
                    ``(B) measures less than 18 inches overall 
                in length but is suitable for use with a bow 
                described in paragraph (1)(A),
        a tax equal to 12.4 percent of the price for which so 
        sold.
            ``(3) Coordination with subsection (a).--No tax 
        shall be imposed under this subsection with respect to 
        any article taxable under subsection (a).''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to articles sold by the manufacturer, producer, or 
importer after September 30 1997.

SEC. 1434. MODIFICATIONS TO RETAIL TAX ON HEAVY TRUCKS.

    (a) Certain Repairs and Modifications Not Treated as 
Manufacture.--Section 4052 is amended by redesignating the 
subsection defining a long-term lease as subsection (e) and by 
adding at the end the following new subsection:
    ``(f) Certain Repairs and Modifications Not Treated as 
Manufacture.--
            ``(1) In general.--An article described in section 
        4051(a)(1) shall not be treated as manufactured or 
        produced solely by reason of repairs or modifications 
        to the article (including any modification which 
        changes the transportation function of the article or 
        restores a wrecked article to a functional condition) 
        if the cost of such repairs and modifications does not 
        exceed 75 percent of the retail price of a comparable 
        new article.
            ``(2) Exception.--Paragraph (1) shall not apply if 
        the article (as repaired or modified) would, if new, be 
        taxable under section 4051 and the article when new was 
        not taxable under this section or the corresponding 
        provision of prior law.''.
    (b) Simplification of Certification Procedures With Respect 
to Sales of Taxable Articles.--
            (1) Repeal of registration requirement.--Subsection 
        (d) of section 4052 is amended by striking ``rules of--
        '' and all that follows through ``shall apply'' and 
        inserting ``rules of subsections (c)and (d) of section 
4216 (relating to partial payments) shall apply''.
            (2) Requirement to modify regulations.--Section 
        4052 is amended by adding at the end the following new 
        subsection:
    ``(g) Regulations.--The Secretary shall prescribe 
regulations which permit, in lieu of any other certification, 
persons who are purchasing articles taxable under this 
subchapter for resale or leasing in a long-term lease to 
execute a statement (made under penalties of perjury) on the 
sale invoice that such sale is for resale. The Secretary shall 
not impose any registration requirement as a condition of using 
such procedure.''.
    (c) Effective Date.--The amendments made by this section 
shall take effect on January 1, 1998.

SEC. 1435. SKYDIVING FLIGHTS EXEMPT FROM TAX ON TRANSPORTATION OF 
                    PERSONS BY AIR.

    (a) In General.--Section 4261 (relating to imposition of 
tax on transportation of persons by air), as previously amended 
by this Act, is amended by redesignating subsection (h) as 
subsection (i) and by inserting after subsection (g) the 
following new subsection:
    ``(h) Exemption for Skydiving Uses.--No tax shall be 
imposed by this section or section 4271 on any air 
transportation exclusively for the purpose of skydiving.''.
    (b) Transportation Treated as Noncommercial Aviation.--The 
last sentence of section 4041(c)(2) is amended by inserting 
before the period ``or by reason of section 4261(h)''.
    (c) Effective Dates.--
            (1) Subsection (a).--The amendment made by 
        subsection (a) shall apply to amounts paid after 
        September 30, 1997.
            (2) Subsection (b).--The amendment made by 
        subsection (b) shall take effect on October 1, 1997.

SEC. 1436. ALLOWANCE OR CREDIT OF REFUND FOR TAX-PAID AVIATION FUEL 
                    PURCHASED BY REGISTERED PRODUCER OF AVIATION FUEL.

    (a) In General.--Section 4091 (relating to aviation fuel) 
is amended by adding at the end the following new subsection:
    ``(d) Refund of Tax-Paid Aviation Fuel to Registered 
Producer of Fuel.--If--
            ``(1) a producer of aviation fuel is registered 
        under section 4101, and
            ``(2) such producer establishes to the satisfaction 
        of the Secretary that a prior tax was paid (and not 
        credited or refunded) on aviation fuel held by such 
        producer,
then an amount equal to the tax so paid shall be allowed as a 
refund (without interest) to such producer in the same manner 
as if it were an overpayment of tax imposed by this section.''.
    (b) Conforming Amendment.--The last sentence of section 
6416(d) is amended by inserting before the period ``or to the 
tax imposed by section 4091 in the case of refunds described in 
section 4091(d)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to fuel acquired by the producer after September 
30, 1997.

                 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 separate 
                        individuals for purposes of clause (i) 
                        of such section.''.
    (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 7436 as section 7437 and by inserting 
after section 7435 the following new section:

``SEC. 7436. 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 redetermination 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 andshall 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), (c), (d), and (f) of section 6213, section 
        6214(a), section 6215, section 6503(a), section 6512, 
        and section 7481 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 
                7436, 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) Subsection (a) of section 7421 is amended by 
        striking ``and 7429(b)'' and inserting ``7429(b), and 
        7436''.
            (3) Sections 7453 and 7481(b) are each amended by 
        striking ``section 7463'' and inserting ``section 
        7436(c) or 7463''.
            (4) The table of sections for subchapter B of 
        chapter 76 is amended by striking the last item and 
        inserting the following:

        ``Sec. 7436. Proceedings for determination of employment status.
        ``Sec. 7437. 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--PENSIONS AND EMPLOYEE BENEFITS

                       Subtitle A--Simplification

SEC. 1501. MATCHING CONTRIBUTIONS OF SELF-EMPLOYED INDIVIDUALS NOT 
                    TREATED AS ELECTIVE EMPLOYER CONTRIBUTIONS.

    (a) In General.--Section 402(g) (relating to limitation on 
exclusion for elective deferrals) is amended by adding at the 
end the following:
            ``(9) Matching contributions on behalf of self-
        employed individuals not treated as elective employer 
        contributions.--Except as provided in section 
        401(k)(3)(D)(ii), any matching contribution described 
        in section 401(m)(4)(A) which is made on behalf of a 
        self-employed individual (as defined in section 401(c)) 
        shall not be treated as an elective employer 
        contribution under a qualified cash or deferred 
        arrangement (as defined in section 401(k)) for purposes 
        of this title.''.
    (b) Conforming Amendment for Simple Retirement Accounts.--
Section 408(p) (relating to simple retirement accounts) is 
amended by adding at the end the following:
            ``(8) Matching contributions on behalf of self-
        employed individuals not treated as elective employer 
        contributions.--Any matching contribution described in 
        paragraph (2)(A)(iii) which is made on behalf of a 
        self-employed individual (as defined in section 401(c)) 
        shall not be treated as an elective employer 
        contribution to a simple retirement account for 
        purposes of this title.''.
    (c) Effective Dates.--
            (1) Elective deferrals.--The amendment made by 
        subsection (a) shall apply to years beginning after 
        December 31, 1997.
            (2) Simple retirement accounts.--The amendment made 
        by subsection (b) shall apply to years beginning after 
        December 31, 1996.

SEC. 1502. MODIFICATION OF PROHIBITION OF ASSIGNMENT OR ALIENATION.

    (a) Amendment to ERISA.--Section 206(d) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1056(d)) is 
amended by adding at the end the following:
    ``(4) Paragraph (1) shall not apply to any offset of a 
participant's benefits provided under an employee pension 
benefit plan against an amount that the participant is ordered 
or required to pay to the plan if--
            ``(A) the order or requirement to pay arises--
                    ``(i) under a judgment of conviction for a 
                crime involving such plan,
                    ``(ii) under a civil judgment (including a 
                consent order or decree) entered by a court in 
                an action brought in connection with a 
                violation (or alleged violation) of part 4 of 
                this subtitle, or
                    ``(iii) pursuant to a settlement agreement 
                between the Secretary and the participant, or a 
                settlement agreement between the Pension 
                Benefit Guaranty Corporation and the 
                participant, in connection with a violation (or 
                alleged violation) of part 4 of this subtitle 
                by a fiduciary or any other person,
            ``(B) the judgment, order, decree, or settlement 
        agreement expressly provides for the offset of all or 
        part of the amount ordered or required to be paid to 
        the plan against the participant's benefits provided 
        under the plan, and
            ``(C) in a case in which the survivor annuity 
        requirements of section 205 apply with respect to 
        distributions from the plan to the participant, if the 
        participant has a spouse at the time at which the 
        offset is to be made--
                    ``(i) either--
                            ``(I) such spouse has consented in 
                        writing to such offset and such consent 
                        is witnessed by a notary public or 
                        representative of the plan (or it is 
                        established to the satisfaction of a 
                        plan representative that such consent 
                        may not be obtained by reason of 
                        circumstances described in section 
                        205(c)(2)(B)), or
                            ``(II) an election to waive the 
                        right of the spouse to a qualified 
                        joint and survivor annuity or a 
                        qualified preretirement survivor 
                        annuity is in effect in accordance with 
                        the requirements of section 205(c),
                    ``(ii) such spouse is ordered or required 
                in such judgment, order, decree, or settlement 
                to pay an amount to the plan in connection with 
                a violation of part 4 of this subtitle, or
                    ``(iii) in such judgment, order, decree, or 
                settlement, such spouse retains the right to 
                receive the survivor annuity under a qualified 
                joint and survivor annuity provided pursuant to 
                section 205(a)(1) and under a qualified 
                preretirement survivor annuity provided 
                pursuant to section 205(a)(2), determined in 
                accordance with paragraph (5).
A plan shall not be treated as failing to meet the requirements 
of section 205 solely by reason of an offset under this 
paragraph.
    ``(5)(A) The survivor annuity described in paragraph 
(4)(C)(iii) shall be determined as if--
            ``(i) the participant terminated employment on the 
        date of the offset,
            ``(ii) there was no offset,
            ``(iii) the plan permitted commencement of benefits 
        only on or after normal retirement age,
            ``(iv) the plan provided only the minimum-required 
        qualified joint and survivor annuity, and
            ``(v) the amount of the qualified preretirement 
        survivor annuity under the plan is equal to the amount 
        of the survivor annuity payable under the minimum-
        required qualified joint and survivor annuity.
    ``(B) For purposes of this paragraph, the term `minimum-
required qualified joint and survivor annuity' means the 
qualified joint and survivor annuity which is the actuarial 
equivalent of the participant's accrued benefit (within the 
meaning of section 3(23)) and under which the survivor annuity 
is 50 percent of the amount of the annuity which is payable 
during the joint lives of the participant and the spouse.''.
    (b) Amendment to 1986 Code.--Section 401(a)(13) (relating 
to assignment and alienation) is amended by adding at the end 
the following:
                    ``(C) Special rule for certain judgments 
                and settlements.--Subparagraph (A) shall not 
                apply to any offset of a participant's benefits 
                provided under a plan against an amount that 
                the participant is ordered or required to pay 
                to the plan if--
                            ``(i) the order or requirement to 
                        pay arises--
                                    ``(I) under a judgment of 
                                conviction for a crime 
                                involving such plan,
                                    ``(II) under a civil 
                                judgment (including a consent 
                                order or decree) entered by a 
                                court in an action brought in 
                                connection with a violation (or 
                                alleged violation) of part 4 of 
                                subtitle B of title I of the 
                                Employee Retirement Income 
                                Security Act of 1974, or
                                    ``(III) pursuant to a 
                                settlement agreement between 
                                the Secretary of Labor and the 
                                participant, or a settlement 
                                agreement between the Pension 
                                Benefit Guaranty Corporation 
                                and the participant, in 
                                connection with a violation (or 
                                alleged violation) of part 4 of 
                                such subtitle by a fiduciary or 
                                any other person,
                            ``(ii) the judgment, order, decree, 
                        or settlement agreement expressly 
                        provides for the offset of all or part 
                        of the amount ordered or required to be 
                        paid to the plan against the 
                        participant's benefits provided under 
                        the plan, and
                            ``(iii) in a case in which the 
                        survivor annuity requirements of 
                        section 401(a)(11) apply with respect 
                        to distributions from the plan to the 
                        participant, if the participant has a 
                        spouse at the time at which the offset 
                        is to be made--
                                    ``(I) either such spouse 
                                has consented in writing to 
                                such offset and such consent is 
                                witnessed by a notary public or 
                                representative of the plan (or 
                                it is established to the 
                                satisfaction of a plan 
                                representative that such 
                                consent may not be obtained by 
                                reason of circumstances 
                                described in section 
                                417(a)(2)(B)), or an election 
                                to waive the right of the 
                                spouse to either a qualified 
                                joint and survivor annuity or a 
                                qualified preretirement 
                                survivor annuity is in effect 
                                in accordance with the 
                                requirements of section 417(a),
                                    ``(II) such spouse is 
                                ordered or required in such 
                                judgment, order, decree, or 
                                settlement to pay an amount to 
                                the plan in connection with a 
                                violation of part 4 of such 
                                subtitle, or
                                    ``(III) in such judgment, 
                                order, decree, or settlement, 
                                such spouse retains the right 
                                to receive the survivor annuity 
                                under a qualified joint and 
                                survivor annuity provided 
                                pursuant to section 
                                401(a)(11)(A)(i) and under a 
                                qualified preretirement 
                                survivor annuity provided 
                                pursuant to section 
                                401(a)(11)(A)(ii), determined 
                                in accordance with subparagraph 
                                (D).
                A plan shall not be treated as failing to meet 
                the requirements of this subsection, subsection 
                (k), section 403(b), or section 409(d) solely 
                by reason of an offset described in this 
                subparagraph.
                    ``(D) Survivor annuity.--
                            ``(i) In general.--The survivor 
                        annuity described in subparagraph 
                        (C)(iii)(III) shall be determined as 
                        if--
                                    ``(I) the participant 
                                terminated employment on the 
                                date of the offset,
                                    ``(II) there was no offset,
                                    ``(III) the plan permitted 
                                commencement of benefits only 
                                on or after normal retirement 
                                age,
                                    ``(IV) the plan provided 
                                only the minimum-required 
                                qualified joint and survivor 
                                annuity, and
                                    ``(V) the amount of the 
                                qualified preretirement 
                                survivor annuity under the plan 
                                is equal to the amount of the 
                                survivor annuity payable under 
                                the minimum-required qualified 
                                joint and survivor annuity.
                            ``(ii) Definition.--For purposes of 
                        this subparagraph, the term `minimum-
                        required qualified joint and survivor 
                        annuity' means the qualified joint and 
                        survivor annuity which is the actuarial 
                        equivalent of the participant's accrued 
                        benefit (within the meaning of section 
                        411(a)(7)) and under which the survivor 
                        annuity is 50 percent of the amount of 
                        the annuity which is payable during the 
                        joint lives of the participant and the 
                        spouse.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to judgments, orders, and decrees issued, and 
settlement agreements entered into, on or after the date of the 
enactment of this Act.

SEC. 1503. ELIMINATION OF PAPERWORK BURDENS ON PLANS.

    (a) Elimination of Unnecessary Filing Requirements.--
Section 101(b) of the Employee Retirement Income Security Act 
of 1974 (29 U.S.C. 1021(b)) is amended by striking paragraphs 
(1), (2), and (3) and by redesignating paragraphs (4) and (5) 
as paragraphs (1) and (2), respectively.
    (b) Elimination of Plan Description.--
            (1) In general.--Section 102(a) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 
        1022(a)) is amended--
                    (A) by striking paragraph (2), and
                    (B) by striking ``(a)(1)'' and inserting 
                ``(a)''.
            (2) Conforming amendments.--
                    (A) Section 102(b) of such Act (29 U.S.C. 
                1022(b)) is amended by striking ``The plan 
                description and summary plan description shall 
                contain'' and inserting ``The summary plan 
                description shall contain''.
                    (B) The heading for section 102 of such Act 
                is amended by striking ``plan description 
                and''.
    (c) Furnishing of Reports.--
            (1) In general.--Section 104(a)(1) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 
        1024(a)(1)) is amended to read as follows:
    ``Sec. 104. (a)(1) The administrator of any employee 
benefit plan subject to this part shall file with the Secretary 
the annual report for a plan year within 210 days after the 
close of such year (or within such time as may be required by 
regulations promulgated by the Secretary in order to reduce 
duplicative filing). The Secretary shall make copies of such 
annual reports available for inspection in the public document 
room of the Department of Labor.''.
            (2) Secretary may request documents.--
                    (A) In general.--Section 104(a) of such Act 
                (29 U.S.C. 1024(a)) is amended by adding at the 
                end the following:
    ``(6) The administrator of any employee benefit plan 
subject to this part shall furnish to the Secretary, upon 
request, any documents relating to the employee benefit plan, 
including but not limited to, the latest summary plan 
description (including any summaries of plan changes not 
contained in the summary plan description), and the bargaining 
agreement, trust agreement, contract, or other instrument under 
which the plan is established or operated.''.
                    (B) Penalty.--Section 502(c) of such Act 
                (29 U.S.C. 1132(c)) is amended by redesignating 
                paragraph (6) as paragraph (7) and by inserting 
                after paragraph (5) the following:
    ``(6) If, within 30 days of a request by the Secretary to a 
plan administrator for documents under section 104(a)(6), the 
plan administrator fails to furnish the material requested to 
the Secretary, the Secretary may assess a civil penalty against 
the plan administrator of up to $100 a day from the date of 
such failure (but in no event in excess of $1,000 per request). 
No penalty shall be imposed under this paragraph for any 
failure resulting frommatters reasonably beyond the control of 
the plan administrator.''.
    (d) Conforming Amendments.--
            (1) Section 104(b)(1) of the Employee Retirement 
        Income Security Act of 1974 (29 U.S.C. 1024(b)(1)) is 
        amended by striking ``section 102(a)(1)'' each place it 
        appears and inserting ``section 102(a)''.
            (2) Section 104(b)(2) of such Act (29 U.S.C. 
        1024(b)(2)) is amended by striking ``the plan 
        description and'' and inserting ``the latest updated 
        summary plan description and''.
            (3) Section 104(b)(4) of such Act (29 U.S.C. 
        1024(b)(4)) is amended by striking ``plan 
        description''.
            (4) Section 106(a) of such Act (29 U.S.C. 1026(a)) 
        is amended by striking ``descriptions,''.
            (5) Section 107 of such Act (29 U.S.C. 1027) is 
        amended by striking ``description or''.
            (6) Section 108(2)(B) of such Act (29 U.S.C. 
        1028(2)(B)) is amended by striking ``plan descriptions, 
        annual reports,'' and inserting ``annual reports''.
            (7) Section 502(a)(6) of such Act (29 U.S.C. 
        1132(a)(6)) is amended by striking ``or (5)'' and 
        inserting ``(5), or (6)''.
    (e) Technical Correction.--Section 1144(c) of the Social 
Security Act (42 U.S.C. 1320b-14(c)) is amended by 
redesignating paragraph (9) as paragraph (8).

SEC. 1504. MODIFICATION OF 403(B) EXCLUSION ALLOWANCE TO CONFORM TO 415 
                    MODIFICATIONS.

    (a) Definition of Compensation.--
            (1) In general.--Section 403(b)(3) (defining 
        includible compensation) is amended by adding at the 
        end the following: ``Such term includes--
                    ``(A) any elective deferral (as defined in 
                section 402(g)(3)), and
                    ``(B) any amount which is contributed or 
                deferred by the employer at the election of the 
                employee and which is not includible in the 
                gross income of the employee by reason of 
                section 125 or 457.''.
            (2) Effective date.--The amendment made by this 
        subsection shall apply to years beginning after 
        December 31, 1997.
    (b) Repeal of Rules in Section 415(e).--The Secretary of 
the Treasury shall modify the regulations regardingthe 
exclusion allowance under section 403(b)(2) of the Internal Revenue 
Code of 1986 to reflect the amendment made by section 1452(a) of the 
Small Business Job Protection Act of 1996. Such modification shall take 
effect for years beginning after December 31, 1999.

SEC. 1505. 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) State and local governmental plans.--
                Paragraphs (3) and (4) shall not apply to a 
                governmental plan (within the meaning of 
                section 414(d)) maintained by a State or local 
                government or political subdivision thereof (or 
                agency or instrumentality thereof).''.
            (2) Additional participation requirements.--Section 
        401(a)(26)(H) (relating to additional participation 
        requirements) is amended to read as follows:
                    ``(H) Exception for state and local 
                governmental plans.--This paragraph shall not 
                apply to a governmental plan (within the 
                meaning of section 414(d)) maintained by a 
                State or local government or political 
                subdivision thereof (or agency or 
                instrumentality thereof).''.
            (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 apply only if such 
        plan meets the requirements of section 401(a)(3) (as in 
        effect on September 1, 1974).''.
    (b) Participation and Discrimination 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) A governmental plan (within the 
                meaning of section 414(d)) maintained by aState 
or local government or political subdivision thereof (or agency or 
instrumentality thereof) shall be treated as meeting the requirements 
of this paragraph.''.
    (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) State and local governmental plans.--
                For purposes of paragraph (1)(D), the 
                requirements of subparagraph (A)(i) (other than 
                those relating to section 401(a)(17)) shall not 
                apply to a governmental plan (within the 
                meaning of section 414(d)) maintained by a 
                State or local government or political 
                subdivision thereof (or agency or 
                instrumentality thereof).''.
    (d) Effective Dates.--
            (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) 
        maintained by a State or local government or political 
        subdivision thereof (or agency or instrumentality 
        thereof) 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. 1506. 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) Exception for certain plans 
                restricted from distributing securities.--
                            ``(i) In general.--A plan to which 
                        this subparagraph applies 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, except that such plan may 
                        distribute employer securities subject 
                        to a requirement that such securities 
                        may be resold to the employer under 
                        terms which meet the requirements of 
                        paragraph (1)(B).
                            ``(ii) Applicable plans.--This 
                        subparagraph shall apply to a plan 
                        which otherwise meets the requirements 
                        of this subsection or section 
                        4975(e)(7) and which is established and 
                        maintained by--
                                    ``(I) an employer whose 
                                charter or bylaws restrict the 
                                ownership of substantially all 
                                outstanding employer securities 
                                to employees or to a trust 
                                described in section 401(a), or
                                    ``(II) an S corporation.''
            (2) Paragraph (2) of section 409(h), as in effect 
        before the amendment made by paragraph (1), 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 striking the last sentence.
    (b) Certain Shareholder-Employees Not Treated as Owner-
Employees.--
            (1) Amendment to 1986 code.--
                    (A) In general.--Section 4975(f) is amended 
                by adding at the end the following new 
                paragraph:
            ``(6) Exemptions not to apply to certain 
        transactions.--
                    ``(A) In general.--In the case of a trust 
                described in section 401(a) which is part of a 
                plan providing contributions or benefits for 
                employees some or all of whom are owner-
                employees (as defined in section 401(c)(3)), 
                the exemptions provided by subsection (d) 
                (other than paragraphs (9) and (12)) shall not 
                apply to a transaction in which the plan 
                directly or indirectly--
                            ``(i) lends any part of the corpus 
                        or income of the plan to,
                            ``(ii) pays any compensation for 
                        personal services rendered to the plan 
                        to, or
                            ``(iii) acquires for the plan any 
                        property from, or sells any property 
                        to,
                any such owner-employee, a member of the family 
                (as defined in section 267(c)(4)) of any such 
                owner-employee, or any corporation in which any 
                such owner-employee owns, directly or 
                indirectly, 50 percent or more of the total 
                combined voting power of all classes of stock 
                entitled to vote or 50 percent or more of the 
                total value of shares of all classes of stock 
                of the corporation.
                    ``(B) Special rules for shareholder-
                employees, etc.--
                            ``(i) In general.--For purposes of 
                        subparagraph (A), the following shall 
                        be treated as owner-employees:
                                    ``(I) A shareholder-
                                employee.
                                    ``(II) A participant or 
                                beneficiary of an individual 
                                retirement plan (as defined in 
                                section 7701(a)(37)).
                                    ``(III) An employer or 
                                association of employees which 
                                establishes such an individual 
                                retirement plan under section 
                                408(c).
                            ``(ii) Exception for certain 
                        transactions involving shareholder-
                        employees.--Subparagraph (A)(iii) shall 
                        not apply to a transaction which 
                        consists of a sale of employer 
                        securities to an employee stock 
                        ownership plan (as defined in 
                        subsection (e)(7)) by a shareholder-
                        employee, a member of the family (as 
                        defined in section 267(c)(4)) of such 
                        shareholder-employee, or a corporation 
                        in which such a shareholder-employee 
                        owns stock representing a 50 percent or 
                        greater interest described in 
                        subparagraph (A).
                    ``(C) Shareholder-employee.--For purposes 
                of subparagraph (B), the term `shareholder-
                employee' means an employee or officer of an S 
                corporation who owns (or is considered as 
                owning within the meaning of section 318(a)(1)) 
                more than 5 percent of the outstanding stock of 
                the corporation on any day during the taxable 
                year of such corporation.''
                    (B) Conforming amendments.--Section 4975(d) 
                is amended--
                            (i) by striking ``The 
                        prohibitions'' and inserting ``Except 
                        as provided in subsection (f)(6), the 
                        prohibitions'', and
                            (ii) by striking the last two 
                        sentences thereof.
            (2) Amendment to erisa.--Section 408(d) of the 
        Employee Retirement Income Security Act of 1974 (29 
        U.S.C. 1108(d)) is amended to read as follows:
    ``(d)(1) Section 407(b) and subsections (b), (c), and (e) 
of this section shall not apply to a transaction in which a 
plan directly or indirectly--
            ``(A) lends any part of the corpus or income of the 
        plan to,
            ``(B) pays any compensation for personal services 
        rendered to the plan to, or
            ``(C) acquires for the plan any property from, or 
        sells any property to,
any person who is with respect to the plan an owner-employee 
(as defined in section 401(c)(3) of the Internal Revenue Code 
of 1986), a member of the family (as defined in section 
267(c)(4) of such Code) of any such owner-employee, or any 
corporation in which any such owner-employee owns, directly or 
indirectly, 50 percent or more of the total combined voting 
power of all classes of stock entitled to vote or 50 percent or 
more of the total value of shares of all classes of stock of 
the corporation.
    ``(2)(A) For purposes of paragraph (1), the following shall 
be treated as owner-employees:
            ``(i) A shareholder-employee.
            ``(ii) A participant or beneficiary of an 
        individual retirement plan (as defined in section 
        7701(a)(37) of the Internal Revenue Code of 1986).
            ``(iii) An employer or association of employees 
        which establishes such an individual retirement plan 
        under section 408(c) of such Code.
    ``(B) Paragraph (1)(C) shall not apply to a transaction 
which consists of a sale of employer securities to an employee 
stock ownership plan (as defined in section 407(d)(6)) by a 
shareholder-employee, a member of the family (as defined in 
section 267(c)(4) of such Code) of any such owner-employee, or 
a corporation in which such a shareholder-employee owns stock 
representing a 50 percent or greater interest described in 
paragraph (1).
    ``(3) For purposes of paragraph (2), the term `shareholder-
employee' means an employee or officer of an S corporation (as 
defined in section 1361(a)(1) of such Code) who owns (or is 
considered as owning within the meaning of section 318(a)(1) of 
such Code) more than 5 percent of the outstanding stock of the 
corporation on any day during the taxable year of such 
corporation.''
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1507. MODIFICATION OF 10-PERCENT TAX FOR NONDEDUCTIBLE 
                    CONTRIBUTIONS.

    (a) In General.--Section 4972(c)(6)(B) (relating to 
exceptions) is amended to read as follows:
                    ``(B) so much of the contributions to 1 or 
                more defined contribution plans which are not 
                deductible when contributed solely because of 
                section 404(a)(7) as does not exceed the 
                greater of--
                            ``(i) the amount of contributions 
                        not in excess of 6 percent of 
                        compensation (within the meaning of 
                        section 404(a)) paid or accrued (during 
                        the taxable year for which the 
                        contributions were made) to 
                        beneficiaries under the plans, or
                            ``(ii) the sum of--
                                    ``(I) the amount of 
                                contributions described in 
                                section 401(m)(4)(A), plus
                                    ``(II) the amount of 
                                contributions described in 
                                section 402(g)(3)(A).''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1508. MODIFICATION OF FUNDING REQUIREMENTS FOR CERTAIN PLANS.

    (a) Funding Rules for Certain Plans.--Section 769 of the 
Retirement Protection Act of 1994 is amended by adding at the 
end the following new subsection:
    ``(c) Transition Rules for Certain Plans.--
            ``(1) In general.--In the case of a plan that--
                    ``(A) was not required to pay a variable 
                rate premium for the plan year beginning in 
                1996;
                    ``(B) has not, in any plan year beginning 
                after 1995 and before 2009, merged with another 
                plan (other than a plan sponsored by an 
                employer that was in 1996 within the controlled 
                group of the plan sponsor); and
                    ``(C) is sponsored by a company that is 
                engaged primarily in the interurban or 
                interstate passenger bus service,
        the transition rules described in paragraph (2) shall 
        apply for any plan year beginning after 1996 and before 
        2010.
            ``(2) Transition rules.--The transition rules 
        described in this paragraph are as follows:
                    ``(A) For purposes of section 412(l)(9)(A) 
                of the Internal Revenue Code of 1986 and 
                section 302(d)(9)(A) of the Employee Retirement 
                Income Security Act of 1974--
                            ``(i) the funded current liability 
                        percentage for any plan year beginning 
                        after 1996 and before 2005 shall be 
                        treated as not less than 90 percent if 
                        for such plan year the funded current 
                        liability percentage is at least 85 
                        percent, and
                            ``(ii) the funded current liability 
                        percentage for any plan year beginning 
                        after 2004 and before 2010 shall be 
                        treated as not less than 90 percent if 
                        for such plan year the funded current 
                        liability percentage satisfies the 
                        minimum percentage determined according 
                        to the following table:

    ``In the case of a plan                                  The minimum
      year beginning in:                                  percentage is:
    2005......................................................        86
    2006......................................................        87
    2007......................................................        88
    2008......................................................        89
    2009 and thereafter.......................................       90.

                    ``(B) Sections 412(c)(7)(E)(i)(I) of such 
                Code and 302(c)(7)(E)(i)(I) of such Act shall 
                be applied--
                            ``(i) by substituting `85 percent' 
                        for `90 percent' for plan years 
                        beginning after 1996 and before 2005, 
                        and
                            ``(ii) by substituting the minimum 
                        percentage specified in the table 
                        contained in subparagraph (A)(ii) for 
                        `90 percent' for plan years beginning 
                        after 2004 and before 2010.
                    ``(C) In the event the funded current 
                liability percentage of a plan is less than 85 
                percent for any plan year beginning after 1996 
                and before 2005, the transition rules under 
                subparagraphs (A) and (B) shall continue to 
                apply to the plan if contributions for such a 
                plan year are made to the plan in an amount 
                equal to the lesser of--
                            ``(i) the amount necessary to 
                        result in a funded current liability 
                        percentage of 85 percent, or
                            ``(ii) the greater of--
                                    ``(I) 2 percent of the 
                                plan's current liability as of 
                                the beginning of such plan 
                                year, or
                                    ``(II) the amount necessary 
                                to result in a funded current 
                                liability percentage of 80 
                                percent as of the end of such 
                                plan year.
                For the plan year beginning in 2005 and for 
                each of the 3 succeeding plan years, the 
                transition rules under subparagraphs (A) and 
                (B) shall continue to apply to the plan for 
                such planyear only if contributions to the plan 
for such plan year equal at least the expected increase in current 
liability due to benefits accruing during such plan year.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to plan years beginning after December 31, 1996.

SEC. 1509. CLARIFICATION OF DISQUALIFICATION RULES RELATING TO 
                    ACCEPTANCE OF ROLLOVER CONTRIBUTIONS.

    The Secretary of the Treasury or his delegate shall clarify 
that, under the Internal Revenue Service regulations protecting 
pension plans from disqualification by reason of the receipt of 
invalid rollover contributions under section 402(c) of the 
Internal Revenue Code of 1986, in order for the administrator 
of the plan receiving any such contribution to reasonably 
conclude that the contribution is a valid rollover contribution 
it is not necessary for the distributing plan to have a 
determination letter with respect to its status as a qualified 
plan under section 401 of such Code.

SEC. 1510. NEW TECHNOLOGIES IN RETIREMENT PLANS.

    (a) In General.--Not later than December 31, 1998, the 
Secretary of the Treasury and the Secretary of Labor shall each 
issue guidance which is designed to--
            (1) interpret the notice, election, consent, 
        disclosure, and time requirements (and related 
        recordkeeping requirements) under the Internal Revenue 
        Code of 1986 and the Employee Retirement Income 
        Security Act of 1974 relating to retirement plans as 
        applied to the use of new technologies by plan sponsors 
        and administrators while maintaining the protection of 
        the rights of participants and beneficiaries, and
            (2) clarify the extent to which writing 
        requirements under the Internal Revenue Code of 1986 
        relating to retirement plans shall be interpreted to 
        permit paperless transactions.
    (b) Applicability of Final Regulations.--Final regulations 
applicable to the guidance regarding new technologies described 
in subsection (a) shall not be effective until the first plan 
year beginning at least 6 months after the issuance of such 
final regulations.

Subtitle B--Other Provisions Relating to Pensions and Employee Benefits

SEC. 1521. INCREASE IN CURRENT LIABILITY FUNDING LIMIT.

    (a) Amendment to 1986 Code.--Section 412(c)(7) (relating to 
full-funding limitation) is amended--
                    (A) by striking ``150 percent'' in 
                subparagraph (A)(i)(I) and inserting ``the 
                applicable percentage'', and
                    (B) by adding at the end the following:
                    ``(F) Applicable percentage.--For purposes 
                of subparagraph (A)(i)(I), the applicable 
                percentage shall be determined in accordance 
                with the following table:

    ``In the case of any plan                             The applicable
      year beginning in--                                percentage is--
    1999 or 2000..............................................      155 
    2001 or 2002..............................................      160 
    2003 or 2004..............................................      165 
    2005 and succeeding years.................................   170.''.

    (b) Amendment to ERISA.--Section 302(c)(7) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7)) 
is amended--
                    (A) by striking ``150 percent'' in 
                subparagraph (A)(i)(I) and inserting ``the 
                applicable percentage'', and
                    (B) by adding at the end the following:
            ``(F) Applicable percentage.--For purposes of 
        subparagraph (A)(i)(I), the applicable percentage shall 
        be determined in accordance with the following table:

    ``In the case of any plan                             The applicable
      year beginning in--                                percentage is--
    1999 or 2000..............................................      155 
    2001 or 2002..............................................      160 
    2003 or 2004..............................................      165 
    2005 and succeeding years.................................   170.''.

    (c) Special Amortization Rule.--
            (1) Code amendment.--Section 412(b)(2) is amended 
        by striking ``and'' at the end of subparagraph (C), by 
        striking the period at the end of subparagraph (D) and 
        inserting ``, and'', and by inserting after 
        subparagraph (D) the following:
                    ``(E) the amount necessary to amortize in 
                equal annual installments (until fully 
                amortized) over a period of 20 years the 
                contributions which would be required to be 
                made under the plan but for the provisions of 
                subsection (c)(7)(A)(i)(I).''.
            (2) ERISA amendment.--Section 302(b)(2) of the 
        Employee Retirement Income Security Act of 1974 (29 
        U.S.C. 1082(b)(2)) is amended by striking ``and'' at 
        the end of subparagraph (C), by striking the period at 
        the end of subparagraph (D) and inserting ``, and'', 
        and by inserting after subparagraph (D) the following:
            ``(E) the amount necessary to amortize in equal 
        annual installments (until fully amortized) over a 
        period of 20 years the contributions which would be 
        required to be made under the plan but for the 
        provisions of subsection (c)(7)(A)(i)(I).''.
            (3) Conforming amendments.--
                    (A) Section 412(c)(7)(D) is amended by 
                adding ``and'' at the end of clause (i), by 
                striking ``, and'' at the end of clause (ii) 
                and inserting a period, and by striking clause 
                (iii).
                    (B) Section 302(c)(7)(D) of the Employee 
                Retirement Income Security Act of 1974 (29 
                U.S.C. 1082(c)(7)(D)) is amended by adding 
                ``and'' at the end of clause (i), by striking 
                ``, and'' at the end of clause (ii) and 
                inserting a period, and by striking clause 
                (iii).
    (d) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to plan years beginning after 
        December 31, 1998.
            (2) Special rule for unamortized balances under 
        existing law.--The unamortized balance (as of the close 
        of the plan year preceding the plan's first year 
        beginning in 1999) of any amortization base established 
        under section 412(c)(7)(D)(iii) of such Code and 
        section 302(c)(7)(D)(iii) of such Act (as repealed by 
        subsection (c)(3)) for any plan year beginning before 
        1999 shall be amortized in equal annual installments 
        (until fully amortized) over a period of years equal to 
        the excess of--
                    (A) 20 years, over
                    (B) the number of years since the 
                amortization base was established.

SEC. 1522. SPECIAL RULES FOR CHURCH PLANS.

    (a) In General.--Section 414(e)(5) (relating to special 
rules for chaplains and self-employed ministers) is amended--
            (1) by striking ``not eligible to participate'' in 
        subparagraph (C) and inserting ``not otherwise 
        participating'', and
            (2) by adding at the end the following new 
        subparagraph:
                    ``(E) Exclusion.--In the case of a 
                contribution to a church plan made on behalf of 
                a minister described in subparagraph 
                (A)(i)(II), such contribution shall not be 
                included in the gross income of the minister to 
                the extent that such contribution would not be 
                so included if the minister was an employee of 
                a church.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to years beginning after December 31, 1997.

SEC. 1523. REPEAL OF APPLICATION OF UNRELATED BUSINESS INCOME TAX TO 
                    ESOPS.

    (a) In General.--Section 512(e) is amended by adding at the 
end the following new paragraph:
            ``(3) Exception for esops.--This subsection shall 
        not apply to employer securities (within the meaning of 
        section 409(l)) held by an employee stock ownership 
        plan described in section 4975(e)(7).''
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997.

SEC. 1524. DIVERSIFICATION OF SECTION 401(K) PLAN INVESTMENTS.

    (a) Limitations on Investment in Employer Securities and 
Employer Real Property by Cash or Deferred Arrangements.--
Section 407(b) of the Employee Retirement Income Security Act 
of 1974 (29 U.S.C. 1107(b)) is amended by redesignating 
paragraph (2) as paragraph (3) and by inserting after paragraph 
(1) the following new paragraph:
            ``(2)(A) If this paragraph applies to an eligible 
        individual account plan, the portion of such plan which 
        consists of applicable elective deferrals (and earnings 
        allocable thereto) shall be treated as a separate 
        plan--
                    ``(i) which is not an eligible individual 
                account plan, and
                    ``(ii) to which the requirements of this 
                section apply.
            ``(B)(i) This paragraph shall apply to any eligible 
        individual account plan if any portion of the plan's 
        applicable elective deferrals (or earnings allocable 
        thereto) are required to be invested in qualifying 
        employer securities or qualifying employer real 
        property or both--
                    ``(I) pursuant to the terms of the plan, or
                    ``(II) at the direction of a person other 
                than the participant on whose behalf such 
                elective deferrals are made to the plan (or a 
                beneficiary).
            ``(ii) This paragraph shall not apply to an 
        individual account plan for a plan year if, on the last 
        day of the preceding plan year, the fair market value 
        of the assets of all individual account plans 
        maintained by the employer equals not more than 10 
        percent of the fair market value of the assets of all 
        pension plans (other than multiemployer plans) 
        maintained by the employer.
            ``(iii) This paragraph shall not apply to an 
        individual account plan that is an employee stock 
        ownership plan as defined in section 4975(e)(7) of the 
        Internal Revenue Code of 1986.
            ``(iv) This paragraph shall not apply to an 
        individual account plan if, pursuant to the terms of 
        the plan, the portion of any employee's applicable 
        elective deferrals which is required to be invested in 
        qualifying employer securities and qualifying employer 
        real property for any year may not exceed 1 percent of 
        the employee's compensation which is taken into account 
        under the plan in determining the maximum amount of the 
        employee's applicable elective deferrals for such year.
            ``(C) For purposes of this paragraph, the term 
        `applicable elective deferral' means any elective 
        deferral (as defined in section 402(g)(3)(A) of the 
        Internal Revenue Code of 1986) which is made pursuant 
        to a qualified cash or deferred arrangement as defined 
        in section 401(k) of the Internal Revenue Code of 
        1986.''
    (b) Effective Date.--The amendments made by this section 
shall apply to elective deferrals for plan years beginning 
after December 31, 1998.

SEC. 1525. 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. 1526. PORTABILITY OF PERMISSIVE SERVICE CREDIT UNDER GOVERNMENTAL 
                    PENSION PLANS.

    (a) In General.--Section 415 (relating to limitations on 
benefits and contributions under qualified plans) is amended by 
adding at the end the following new subsection:
    ``(n) Special Rules Relating to Purchase of Permissive 
Service Credit.--
            ``(1) In general.--If an employee makes 1 or more 
        contributions to a defined benefit governmental plan 
        (within the meaning of section 414(d)) to purchase 
        permissive service credit under such plan, then the 
        requirements of this section shall be treated as met 
        only if--
                    ``(A) the requirements of subsection (b) 
                are met, determined by treating the accrued 
                benefit derived from all such contributions as 
                an annual benefit for purposes of subsection 
                (b), or
                    ``(B) the requirements of subsection (c) 
                are met, determined by treating all such 
                contributions as annual additions for purposes 
                of subsection (c).
            ``(2) Application of limit.--For purposes of--
                    ``(A) applying paragraph (1)(A), the plan 
                shall not fail to meet the reduced limit under 
                subsection (b)(2)(C) solely by reason of this 
                subsection, and
                    ``(B) applying paragraph (1)(B), the plan 
                shall not fail to meet the percentage 
                limitation under subsection (c)(1)(B) solely by 
                reason of this subsection.
            ``(3) Permissive service credit.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `permissive 
                service credit' means service credit--
                            ``(i) recognized by the 
                        governmental plan for purposes of 
                        calculating a participant's benefit 
                        under the plan,
                            ``(ii) which such participant has 
                        not received under such governmental 
                        plan, and
                            ``(iii) which such participant may 
                        receive only by making a voluntary 
                        additional contribution, in an amount 
                        determined under such governmental 
                        plan, which does not exceed the amount 
                        necessary to fund the benefit 
                        attributable to such service credit.
                    ``(B) Limitation on nonqualified service 
                credit.--A plan shall fail to meet the 
                requirements of this section if--
                            ``(i) more than 5 years of 
                        permissive service credit attributable 
                        to nonqualified service are taken into 
                        account for purposes of this 
                        subsection, or
                            ``(ii) any permissive service 
                        credit attributable to nonqualified 
                        service is taken into account under 
                        this subsection before the employee has 
                        at least 5 years of participation under 
                        the plan.
                    ``(C) Nonqualified service.--For purposes 
                of subparagraph (B), the term `nonqualified 
                service' means service for which permissive 
                service credit is allowed other than--
                            ``(i) service (including parental, 
                        medical, sabbatical, and similar leave) 
                        as an employee of the Government of the 
                        United States, any State or political 
                        subdivision thereof, or any agency or 
                        instrumentality of any of the foregoing 
                        (other than military service or service 
                        for credit which was obtained as a 
                        result of a repayment described in 
                        subsection (k)(3)),
                            ``(ii) service (including parental, 
                        medical, sabbatical, and similar leave) 
                        as an employee (other than as an 
                        employee described in clause (i)) of an 
                        educational organization described in 
                        section 170(b)(1)(A)(ii) which is a 
                        public, private, or sectarian school 
                        which provides elementary or secondary 
                        education (through grade 12), as 
                        determined under State law,
                            ``(iii) service as an employee of 
                        an association of employees who are 
                        described in clause (i), or
                            ``(iv) military service (other than 
                        qualified military service under 
                        section 414(u)) recognized by such 
                        governmental plan.
                In the case of service described in clauses 
                (i), (ii), or (iii), such service will be 
                nonqualified service if recognition of such 
                service would cause a participant to receive a 
                retirement benefit for the same service under 
                more than one plan.''
    (b) Special Rule for Repayment of Cashouts.--Section 415(k) 
(relating to special rules) is amended by adding at the end the 
following new paragraph:
            ``(3) Repayments of cashouts under governmental 
        plans.--In the case of any repayment of contributions 
        (including interest thereon) to the governmental plan 
        with respect to an amount previously refunded upon a 
        forfeiture of service credit under the plan or under 
        another governmental plan maintained by a State or 
        local government employer within the same State, any 
        such repayment shall not be taken into account for 
        purposes of this section.''
    (c) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to permissive service credit 
        contributions made in years beginning after December 
        31, 1997.
            (2) Transition rule.--
                    (A) In general.--In the case of an eligible 
                participant in a governmental plan (within the 
                meaning of section 414(d) of the Internal 
                Revenue Code of 1986), the limitations of 
                section 415(c)(1) of such Code shall not be 
                applied to reduce the amount of permissive 
                service credit which may be purchased to an 
                amount less than the amount which was allowed 
                to be purchased under the terms of the plan as 
                in effect on the date of the enactment of this 
                Act.
                    (B) Eligible participant.--For purposes of 
                subparagraph (A), an eligible participant is an 
                individual who first became a participant in 
                the plan before the first plan year beginning 
                after the last day of the calendar year in 
                which the next regular session (following the 
                date of the enactment of this Act) of the 
                governing body with authority to amend the plan 
                ends.

SEC. 1527. REMOVAL OF DOLLAR LIMITATION ON BENEFIT PAYMENTS FROM A 
                    DEFINED BENEFIT PLAN MAINTAINED FOR CERTAIN POLICE 
                    AND FIRE EMPLOYEES.

    (a) In General.--Subparagraph (G) of section 415(b)(2) is 
amended by striking ``participant--'' and all that follows and 
inserting ``participant, subparagraph (C) of this paragraph 
shall not apply.''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to years beginning after December 31, 1996.

SEC. 1528. SURVIVOR BENEFITS FOR PUBLIC SAFETY OFFICERS KILLED IN THE 
                    LINE OF DUTY.

    (a) In General.--Section 101 (relating to certain death 
benefits) is amended by adding at the end the following new 
subsection:
    ``(h) Survivor Benefits Attributable to Service by a Public 
Safety Officer Who Is Killed in the Line of Duty.--
            ``(1) In general.--Gross income shall not include 
        any amount paid as a survivor annuity on account of the 
        death of a public safety officer (as such term is 
        defined in section 1204 of the Omnibus Crime Control 
        and Safe Streets Act of 1968) killed in the line of 
        duty--
                    ``(A) 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 public safety officer or to a 
                child of such officer; and
                    ``(B) to the extent such annuity is 
                attributable to such officer's service as a 
                public safety officer.
            ``(2) Exceptions.--Paragraph (1) shall not apply 
        with respect to the death of any public safety officer 
        if, as determined in accordance with the provisions of 
        the Omnibus Crime Control and Safe Streets Act of 
        1968--
                    ``(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 such 
                Act) at the time of death;
                    ``(C) the officer was performing such 
                officer's duties in a grossly negligent manner 
                at the time of death; or
                    ``(D) the payment is to an individual whose 
                actions were a substantial contributing factor 
                to the death of the officer.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to amounts received in taxable years beginning 
after December 31, 1996, with respect to individuals dying 
after such date.

SEC. 1529. 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 theInternal 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 (including res 
judicata), then 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. 1530. 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 subsection (g)(4)), all or part of 
such securities are 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 2032A(e)(2)) 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 
        2032A(e)(2)) 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 a member of the 
                        decedent's family (within the meaning 
                        of section 2032A(e)(2)), 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 employeestock 
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 describedin 
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 comma at the 
                end of paragraph (2) ``60 percent of the total 
                value of all employer securities as of such 
                disposition in the case of any qualified 
                employer securities acquired 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 (A) 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.

         Subtitle C--Provisions Relating to Certain Health Acts

SEC. 1531. AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986 TO IMPLEMENT 
                    THE NEWBORNS' AND MOTHERS' HEALTH PROTECTION ACT OF 
                    1996 AND THE MENTAL HEALTH PARITY ACT OF 1996.

    (a) In General.--Subtitle K is amended--
            (1) by striking all that precedes section 9801 and 
        inserting the following:

              ``Subtitle K--Group Health Plan Requirements

        ``Chapter 100. Group health plan requirements.

              ``CHAPTER 100--GROUP HEALTH PLAN REQUIREMENTS

        ``Subchapter A. Requirements relating to portability, access, 
                  and renewability.
        ``Subchapter B. Other requirements.
        ``Subchapter C. General provisions.

   ``Subchapter A--Requirements Relating to Portability, Access, and 
                              Renewability

        ``Sec. 9801. Increased portability through limitation on 
                  preexisting condition exclusions.
        ``Sec. 9802. Prohibiting discrimination against individual 
                  participants and beneficiaries based on health status.
        ``Sec. 9803. Guaranteed renewability in multiemployer plans and 
                  certain multiple employer welfare arrangements.'',

            (2) by redesignating sections 9804, 9805, and 9806 
        as sections 9831, 9832, and 9833, respectively,
            (3) by inserting before section 9831 (as so 
        redesignated) the following:

                   ``Subchapter C--General Provisions

        ``Sec. 9831. General exceptions.
        ``Sec. 9832. Definitions.
        ``Sec. 9833. Regulations.'', and

            (4) by inserting after section 9803 the following:

                   ``Subchapter B--Other Requirements

        ``Sec. 9811. Standards relating to benefits for mothers and 
                  newborns.
        ``Sec. 9812. Parity in the application of certain limits to 
                  mental health benefits.

 ``SEC. 9811. STANDARDS RELATING TO BENEFITS FOR MOTHERS AND NEWBORNS.

    ``(a) Requirements for Minimum Hospital Stay Following 
Birth.--
            ``(1) In general.--A group health plan may not--
                    ``(A) except as provided in paragraph (2)--
                            ``(i) restrict benefits for any 
                        hospital length of stay in connection 
                        with childbirth for the mother or 
                        newborn child, following a normal 
                        vaginal delivery, to less than 48 
                        hours, or
                            ``(ii) restrict benefits for any 
                        hospital length of stay in connection 
                        with childbirth for the mother or 
                        newborn child, following a caesarean 
                        section, to less than 96 hours; or
                    ``(B) require that a provider obtain 
                authorization from the plan or the issuer for 
                prescribing any length of stay required under 
                subparagraph (A) (without regard to paragraph 
                (2)).
            ``(2) Exception.--Paragraph (1)(A) shall not apply 
        in connection with any group health plan in any case in 
        which the decision to discharge the mother or her 
        newborn child prior to the expiration of the minimum 
        length of stay otherwise required under paragraph 
        (1)(A) is made by an attending provider in consultation 
        with the mother.
    ``(b) Prohibitions.--A group health plan may not--
            ``(1) deny to the mother or her newborn child 
        eligibility, or continued eligibility, to enroll or to 
        renew coverage under the terms of the plan, solely for 
        the purpose of avoiding the requirements of this 
        section;
            ``(2) provide monetary payments or rebates to 
        mothers to encourage such mothers to accept less than 
        the minimum protections available under this section;
            ``(3) penalize or otherwise reduce or limit the 
        reimbursement of an attending provider because such 
        provider provided care to an individual participant or 
        beneficiary in accordance with this section;
            ``(4) provide incentives (monetary or otherwise) to 
        an attending provider to induce such provider to 
        provide care to an individual participant or 
        beneficiary in a manner inconsistent with this section; 
        or
            ``(5) subject to subsection (c)(3), restrict 
        benefits for any portion of a period within a hospital 
        length of stay required under subsection (a) in a 
        manner which is less favorable than the benefits 
        provided for any preceding portion of such stay.
    ``(c) Rules of Construction.--
            ``(1) Nothing in this section shall be construed to 
        require a mother who is a participant or beneficiary--
                    ``(A) to give birth in a hospital; or
                    ``(B) to stay in the hospital for a fixed 
                period of time following the birth of her 
                child.
            ``(2) This section shall not apply with respect to 
        any group health plan which does not provide benefits 
        for hospital lengths of stay in connection with 
        childbirth for a mother or her newborn child.
            ``(3) Nothing in this section shall be construed as 
        preventing a group health plan from imposing 
        deductibles, coinsurance, or other cost-sharing in 
        relation to benefits for hospital lengths of stay in 
        connection with childbirth for a mother or newborn 
        child under the plan, except that such coinsurance or 
        other cost-sharing for any portion of a period within a 
        hospital length of stay required under subsection (a) 
        may not be greater than such coinsurance or cost-
        sharing for any preceding portion of such stay.
    ``(d) Level and Type of Reimbursements.--Nothing in this 
section shall be construed to prevent a group health plan from 
negotiating the level and type of reimbursement with a provider 
for care provided in accordance with this section.
    ``(f) Preemption; Exception for Health Insurance Coverage 
in Certain States.--The requirements of this section shall not 
apply with respect to health insurance coverage if there is a 
State law (including a decision, rule, regulation, or other 
State action having the effect of law) for a State that 
regulates such coverage that is described in any of the 
following paragraphs:
            ``(1) Such State law requires such coverage to 
        provide for at least a 48-hour hospital length of stay 
        following a normal vaginal delivery and at least a 96-
        hour hospital length of stay following a caesarean 
        section.
            ``(2) Such State law requires such coverage to 
        provide for maternity and pediatric care in accordance 
        with guidelines established by the American College of 
        Obstetricians and Gynecologists, the American Academy 
        of Pediatrics, or other established professional 
        medical associations.
            ``(3) Such State law requires, in connection with 
        such coverage for maternity care, that the hospital 
        length of stay for such care is left to the decision of 
        (or required to be made by) the attending provider in 
        consultation with the mother.

``SEC. 9812. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL 
                    HEALTH BENEFITS.

    ``(a) In General.--
            ``(1) Aggregate lifetime limits.--In the case of a 
        group health plan that provides both medical and 
        surgical benefits and mental health benefits--
                    ``(A) No lifetime limit.--If the plan does 
                not include an aggregate lifetime limit on 
                substantially all medical and surgical 
                benefits, the plan may not impose any aggregate 
                lifetime limit on mental health benefits.
                    ``(B) Lifetime limit.--If the plan includes 
                an aggregate lifetime limit on substantially 
                all medical and surgical benefits (in this 
                paragraph referred to as the `applicable 
                lifetime limit'), the plan shall either--
                            ``(i) apply the applicable lifetime 
                        limit both to the medical and surgical 
                        benefits to which it otherwise would 
                        apply and to mental health benefits and 
                        not distinguish in the application of 
                        such limit between such medical and 
                        surgical benefits and mental health 
                        benefits; or
                            ``(ii) not include any aggregate 
                        lifetime limit on mental health 
                        benefits that is less than the 
                        applicable lifetime limit.
                    ``(C) Rule in case of different limits.--In 
                the case of a plan that is not described in 
                subparagraph (A) or (B) and that includes no or 
                different aggregate lifetime limits on 
                different categories of medical and surgical 
                benefits, the Secretary shall establish rules 
                under which subparagraph (B) is applied to such 
                plan with respect to mental health benefits by 
                substituting for the applicable lifetime limit 
                an average aggregate lifetime limit that is 
                computed taking into account the weighted 
                average of the aggregate lifetime limits 
                applicable to such categories.
            ``(2) Annual limits.--In the case of a group health 
        plan that provides both medical and surgical benefits 
        and mental health benefits--
                    ``(A) No annual limit.--If the plan does 
                not include an annual limit on substantially 
                all medical and surgical benefits, the plan may 
                not impose any annual limit on mental health 
                benefits.
                    ``(B) Annual limit.--If the plan includes 
                an annual limit on substantially all medical 
                and surgical benefits (in this paragraph 
                referred to as the `applicable annual limit'), 
                the plan shall either--
                            ``(i) apply the applicable annual 
                        limit both to medical and surgical 
                        benefits to which it otherwise would 
                        apply and to mental health benefits and 
                        not distinguishin the application of 
such limit between such medical and surgical benefits and mental health 
benefits; or
                            ``(ii) not include any annual limit 
                        on mental health benefits that is less 
                        than the applicable annual limit.
                    ``(C) Rule in case of different limits.--In 
                the case of a plan that is not described in 
                subparagraph (A) or (B) and that includes no or 
                different annual limits on different categories 
                of medical and surgical benefits, the Secretary 
                shall establish rules under which subparagraph 
                (B) is applied to such plan with respect to 
                mental health benefits by substituting for the 
                applicable annual limit an average annual limit 
                that is computed taking into account the 
                weighted average of the annual limits 
                applicable to such categories.
    ``(b) Construction.--Nothing in this section shall be 
construed--
            ``(1) as requiring a group health plan to provide 
        any mental health benefits; or
            ``(2) in the case of a group health plan that 
        provides mental health benefits, as affecting the terms 
        and conditions (including cost sharing, limits on 
        numbers of visits or days of coverage, and requirements 
        relating to medical necessity) relating to the amount, 
        duration, or scope of mental health benefits under the 
        plan, except as specifically provided in subsection (a) 
        (in regard to parity in the imposition of aggregate 
        lifetime limits and annual limits for mental health 
        benefits).
    ``(c) Exemptions.--
            ``(1) Small employer exemption.--This section shall 
        not apply to any group health plan for any plan year of 
        a small employer (as defined in section 4980D(d)(2)).
            ``(2) Increased cost exemption.--This section shall 
        not apply with respect to a group health plan if the 
        application of this section to such plan results in an 
        increase in the cost under the plan of at least 1 
        percent.
    ``(d) Separate Application to Each Option Offered.--In the 
case of a group health plan that offers a participant or 
beneficiary two or more benefit package options under the plan, 
the requirements of this section shall be applied separately 
with respect to each such option.
    ``(e) Definitions.--For purposes of this section:
            ``(1) Aggregate lifetime limit.--The term 
        `aggregate lifetime limit' means, with respect to 
        benefits under a group health plan, a dollar limitation 
        on the total amount that may be paid with respect to 
        such benefits under the plan with respect to an 
        individual or other coverage unit.
            ``(2) Annual limit.--The term `annual limit' means, 
        with respect to benefits under a group health plan, a 
        dollar limitation on the total amount of benefits that 
        may be paid with respect to such benefits in a 12-month 
        period under the plan with respect to an individual or 
        other coverage unit.
            ``(3) Medical or surgical benefits.--The term 
        `medical or surgical benefits' means benefits with 
        respect to medical or surgical services, as defined 
        under the terms of the plan, but does not include 
        mental health benefits.
            ``(4) Mental health benefits.--The term `mental 
        health benefits' means benefits with respect to mental 
        health services, as defined under the terms of the 
        plan, but does not include benefits with respect to 
        treatment of substance abuse or chemical dependency.
    ``(f) Sunset.--This section shall not apply to benefits for 
services furnished on or after September 30, 2001.''
    (b) Conforming Amendments.--
            (1) Chapter 100 of such Code is further amended--
                    (A) in the last sentence of section 
                9801(c)(1), by striking ``section 9805(c)'' and 
                inserting ``section 9832(c)'';
                    (B) in section 9831(b), by striking 
                ``9805(c)(1)'' and inserting ``9832(c)(1)'';
                    (C) in section 9831(c)(1), by striking 
                ``9805(c)(2)'' and inserting ``9832(c)(2)'';
                    (D) in section 9831(c)(2), by striking 
                ``9805(c)(3)'' and inserting ``9832(c)(3)''; 
                and
                    (E) in section 9831(c)(3), by striking 
                ``9805(c)(4)'' and inserting ``9832(c)(4)''.
            (2) Section 4980D of such Code is amended--
                    (A) in subsection (a), by striking ``plan 
                portability, access, and renewability'' and 
                inserting ``plans'';
                    (B) in subsection (c)(3)(B)(i)(I), by 
                striking ``9805(d)(3)'' and inserting 
                ``9832(d)(3)'';
                    (C) in subsection (d)(1), by inserting 
                ``(other than a failure attributable to section 
                9811)'' after ``on any failure'';
                    (D) in subsection (d)(3), by striking 
                ``9805'' and inserting ``9832'';
                    (E) in subsection (f)(1), by striking 
                ``9805(a)'' and inserting ``9832(a)''.
            (3) The table of subtitles for such Code is amended 
        by striking the item relating to subtitle K and 
        inserting the following new item:

        ``Subtitle K. Group health plan requirements.''

    (c) Effective Date.--The amendments made by this section 
shall apply with respect to group health plans for plan years 
beginning on or after January 1, 1998.

SEC. 1532. SPECIAL RULES RELATING TO CHURCH PLANS.

    (a) In General.--Section 9802 (relating to prohibiting 
discrimination against individual participants and 
beneficiaries based on health status) is amended by adding at 
the end the following new subsection:
    ``(c) Special Rules for Church Plans.--A church plan (as 
defined in section 414(e)) shall not be treated as failing to 
meet the requirements of this section solely because such plan 
requires evidence of good health for coverage of--
            ``(1) both any employee of an employer with 10 or 
        less employees (determined without regard to section 
        414(e)(3)(C)) and any self-employed individual, or
            ``(2) any individual who enrolls after the first 90 
        days of initial eligibility under the plan.
This subsection shall apply to a plan for any year only if the 
plan included the provisions described in the preceding 
sentence on July 15, 1997, and at all times thereafter before 
the beginning of such year.''
    (b) Effective Date.--The amendments made by subsection (a) 
shall take effect as if included in the amendments made by 
section 401(a) of the Health Insurance Portability and 
Accountability Act of 1996.

           Subtitle D--Provisions Relating to Plan Amendments

SEC. 1541. PROVISIONS RELATING TO PLAN AMENDMENTS.

    (a) In General.--If this section applies to any plan or 
contract amendment--
            (1) such plan or contract shall be treated as being 
        operated in accordance with the terms of the plan 
        during the period described in subsection (b)(2)(A), 
        and
            (2) such plan shall not fail to meet the 
        requirements of section 411(d)(6) of the Internal 
        Revenue Code of 1986 or section 204(g) of the Employee 
        RetirementIncome Security Act of 1974 by reason of such 
amendment.
    (b) Amendments to Which Section Applies.--
            (1) In general.--This section shall apply to any 
        amendment to any plan or annuity contract which is 
        made--
                    (A) pursuant to any amendment made by this 
                title or subtitle H of title X, and
                    (B) before the first day of the first plan 
                year beginning on or after January 1, 1999.
        In the case of a governmental plan (as defined in 
        section 414(d) of the Internal Revenue Code of 1986), 
        this paragraph shall be applied by substituting 
        ``2001'' for ``1999''.
            (2) Conditions.--This section shall not apply to 
        any amendment unless--
                    (A) during the period--
                            (i) beginning on the date the 
                        legislative amendment described in 
                        paragraph (1)(A) takes effect (or in 
                        the case of a plan or contract 
                        amendment not required by such 
                        legislative amendment, the effective 
                        date specified by the plan), and
                            (ii) ending on the date described 
                        in paragraph (1)(B) (or, if earlier, 
                        the date the plan or contract amendment 
                        is adopted),
                the plan or contract is operated as if such 
                plan or contract amendment were in effect, and
                    (B) such plan or contract amendment applies 
                retroactively for such period.

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

SEC. 1600. COORDINATION WITH OTHER TITLES.

    For purposes of applying the amendments made by any title 
of this Act other than this title, the provisions of this title 
shall be treated as having been enacted immediately before the 
provisions of such other titles.

SEC. 1601. 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(c)(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 ofthe 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 any requirement of this subsection 
                        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 subsection.''.
                    (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 insertingthe 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) 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 
                theextent that such distribution is not 
includible in income by reason of--
                            (i) in the case of distributions 
                        before January 1, 1998, section 403 
                        (b)(8) or (b)(10) of such Code 
                        (determined after the application of 
                        section 1450(b)(2) of such Act), and
                            (ii) in the case of distributions 
                        on and after such date, such section 
                        403(b)(1).
                    (B) This paragraph shall apply as if 
                included in section 1450 of the Small Business 
                Job Protection Act of 1996.
            (5) Amendment related to section 1451.--Clause (ii) 
        of section 205(c)(8)(A) of the Employee Retirement 
        Income Security Act of 1974 is amended by striking 
        ``Secretary'' and inserting ``Secretary of the 
        Treasury''.
            (6) Amendments related to section 1461.--
                    (A) Section 414(e)(5)(A) is amended to read 
                as follows:
                    ``(A) Certain ministers may participate.--
                For purposes of this part--
                            ``(i) In general.--A duly ordained, 
                        commissioned, or licensed minister of a 
                        church is described in paragraph (3)(B) 
                        if, in connection with the exercise of 
                        their ministry, the minister--
                                    ``(I) is a self-employed 
                                individual (within the meaning 
                                of section 401(c)(1)(B)), or
                                    ``(II) is employed by an 
                                organization other than an 
                                organization which is described 
                                in section 501(c)(3) and with 
                                respect to which the minister 
                                shares common religious bonds.
                            ``(ii) Treatment as employer and 
                        employee.--For purposes of sections 
                        403(b)(1)(A) and 404(a)(10), a minister 
                        described in clause (i)(I) shall be 
                        treated as employed by the minister's 
                        own employer which is an organization 
                        described in section 501(c)(3) and 
                        exempt from tax under section 
                        501(a).''.
                    (B) Section 403(b)(1)(A) is amended by 
                striking ``or'' at the end of clause (i), by 
                inserting ``or'' at the end of clause (ii), and 
                by adding at the end the following new clause:
                            ``(iii) for the minister described 
                        in section 414(e)(5)(A) by the minister 
                        or by an employer,''.
            (7) 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).
    (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''.
                    (C) The amendments made by this paragraph 
                shall apply to sales after the date of the 
                enactment of this Act.
            (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 dispositionwas 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. 1602. 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(c) 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) Amendments 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 after October 13, 1995, by reason of no 
        additional premiums being received under the 
        contract.''.
    (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 
thissubparagraph 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)(B) is 
        amended by striking ``such foreign country in respect 
        of property included in the gross estate as the value 
        of the property'' and inserting ``such foreign country 
        as the value of the property subjected to such taxes by 
        such foreign country and''.
            (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. 1603. 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. 1604. 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)(A) Subclause (II) of section 412(m)(5)(E)(ii) 
        is amended by striking ``clause (i)'' and inserting 
        ``subclause (I)''.
            (B) Subclause (II) of section 302(e)(5)(E)(ii) of 
        the Employee Retirement Income Security Act of 1974 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) Amendments Related to Tax Reform Act of 1986.--
            (1) Paragraph (3) of section 1059(d) is amended by 
        striking ``subsection (a)(2)'' and inserting 
        ``subsection (a)''.
            (2)(A) Subparagraph (A) of section 833(b)(1) is 
        amended--
                    (i) by inserting before the comma at the 
                end of clause (i) ``and liabilities incurred 
                during the taxable year under cost-plus 
                contracts'', and
                    (ii) by inserting before the comma at the 
                end of clause (ii) ``or in connection with the 
                administration of cost-plus contracts''.
            (B) The amendment made by subparagraph (A) shall 
        take effect as if included in the amendments made by 
        section 1012 of the Tax Reform Act of 1986.
    (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) Amendments Related to Balanced Budget Act of 1997.--
            (1) The Balanced Budget Act of 1997 is amended--
                    (A) in the table of contents for title IV, 
                in the item relating to section 4921, by 
                striking ``children with'';
                    (B) in the heading for section 4921, by 
                striking ``children with''; and
                    (C) in the section added by section 4921--
                            (i) in the heading for such 
                        section, by striking ``children with''; 
                        and
                            (ii) by amending subsection (a) to 
                        read as follows:
    ``(a) In General.--The Secretary, directly or through 
grants, shall provide for research into the prevention and cure 
of Type I diabetes.''.
            (2)(A) Section 11201(g)(2)(B)(iii) of the Balanced 
        Budget Act of 1997 shall apply as if the reference in 
        such section to ``December 31, 2003'' were a reference 
        to ``December 31, 2001''.
            (B) Notwithstanding section 11104(b)(3) of the 
        Balanced Budget Act of 1997, in carrying out any of the 
        management reform plans under such section, the head of 
        a department of the government of the District of 
        Columbia shall report solely to the District of 
        Columbia Financial Responsibility and Management 
        Assistance Authority.
            (3) Section 9302 of the Balanced Budget Act of 1997 
        is amended by adding at the end the following new 
        subsection:
    ``(k) Coordination With Tobacco Industry Settlement 
Agreement.--The increase in excise taxes collected as a result 
of the amendments made by subsections (a), (e), and (g) of this 
section shall be credited against the total payments made by 
parties pursuant to Federal legislation implementing the 
tobacco industry settlement agreement of June 20, 1997.
    (4) The provisions of, and amendments made by, this 
subsection shall take effect immediately after the sections 
referred to in this subsection take effect.
    (g) 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).

TITLE XVII--IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM 
                                  VETO

SEC. 1701. IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM 
                    VETO.

    Section 1021(a)(3) of the Congressional Budget and 
Impoundment Control Act of 1974 shall only apply to--
            (1) section 101(c) (relating to high risk pools 
        permitted to cover dependents of high risk 
        individuals);
            (2) section 222 (relating to limitation on 
        qualified 501(c)(3) bonds other than hospital bonds);
            (3) section 224 (relating to contributions of 
        computer technology and equipment for elementary or 
        secondary school purposes);
            (4) section 312(a) (relating to treatment of 
        remainder interests for purposes of provision relating 
        to gain on sale of principal residence);
            (5) section 501(b) (relating to indexing of 
        alternative valuation of certain farm, etc., real 
        property);
            (6) section 504 (relating to extension of treatment 
        of certain rents under section 2032A to lineal 
        descendants);
            (7) section 505 (relating to clarification of 
        judicial review of eligibility for extension of time 
        for payment of estate tax);
            (8) section 508 (relating to treatment of land 
        subject to qualified conservation easement);
            (9) section 511 (relating to expansion of exception 
        from generation-skipping transfer tax for transfers to 
        individuals with deceased parents);
            (10) section 601 (relating to the research tax 
        credit);
            (11) section 602 (relating to contributions of 
        stock to private foundations);
            (12) section 603 (relating to the work opportunity 
        tax credit);
            (13) section 604 (relating to orphan drug tax 
        credit);
            (14) section 701 (relating to incentives for 
        revitalization of the District of Columbia) to the 
        extent it amends the Internal Revenue Code of 1986 to 
        create sections 1400 and 1400A (relating to tax-exempt 
        economic development bonds);
            (15) section 701 (relating to incentives for 
        revitalization of the District of Columbia) to the 
        extent it amends the Internal Revenue Code of 1986 to 
        create section 1400C (relating to first-time homebuyer 
        credit for District of Columbia);
            (16) section 801 (relating to incentives for 
        employing long-term family assistance recipients);
            (17) section 904(b) (relating to uniform rate of 
        tax on vaccines) as it relates to any vaccine 
        containing pertussis bacteria, extracted or partial 
        cell bacteria, or specific pertussis antigens;
            (18) section 904(b) (relating to uniform rate of 
        tax on vaccines) as it relates to any vaccine against 
        measles;
            (19) section 904(b) (relating to uniform rate of 
        tax on vaccines) as it relates to any vaccine against 
        mumps;
            (20) section 904(b) (relating to uniform rate of 
        tax on vaccines) as it relates to any vaccine against 
        rubella;
            (21) section 905 (relating to operators of multiple 
        retail gasoline outlets treated as wholesale 
        distributors for refund purposes);
            (22) section 906 (relating to exemption of electric 
        and other clean-fuel motor vehicles from luxury 
        automobile classification);
            (23) section 907(a) (relating to rate of tax on 
        liquefied natural gas determined on basis of BTU 
        equivalency with gasoline);
            (24) section 907(b) (relating to rate of tax on 
        methanol from natural gas determined on basis of BTU 
        equivalency with gasoline);
            (25) section 908 (relating to modification of tax 
        treatment of hard cider);
            (26) section 914 (relating to mortgage financing 
        for residences located in disaster areas);
            (27) section 962 (relating to assignment of 
        workmen's compensation liability eligible for exclusion 
        relating to personal injury liability assignments);
            (28) section 963 (relating to tax-exempt status for 
        certain State worker's compensation act companies);
            (29) section 967 (relating to additional advance 
        refunding of certain Virgin Island bonds);
            (30) section 968 (relating to nonrecognition of 
        gain on sale of stock to certain farmers' 
        cooperatives);
            (31) section 971 (relating to exemption of the 
        incremental cost of a clean fuel vehicle from the 
        limits on depreciation for vehicles);
            (32) section 974 (relating to clarification of 
        treatment of certain receivables purchased by 
        cooperative hospital service organizations);
            (33) section 975 (relating to deduction in 
        computing adjusted gross income for expenses in 
        connection with service performed by certain officials) 
        with respect to taxable years beginning before 1991;
            (34) section 977 (relating to elective carryback of 
        existing carryovers of National Railroad Passenger 
        Corporation);
            (35) section 1005(b)(2)(B) (relating to transition 
        rule for instruments described in a ruling request 
        submitted to the Internal Revenue Service on or before 
        June 8, 1997);
            (36) section 1005(b)(2)(C) (relating to transition 
        rule for instruments described on or before June 8, 
        1997, in a public announcement or in a filing with the 
        Securities and Exchange Commission) as it relates to a 
        public announcement;
            (37) section 1005(b)(2)(C) (relating to transition 
        rule for instruments described on or before June 8, 
        1997, in a public announcement or in a filing with the 
        Securities and Exchange Commission) as it relates to a 
        filing with the Securities and Exchange Commission;
            (38) section 1011(d)(2)(B) (relating to transition 
        rule for distributions made pursuant to the terms of a 
        tender offer outstanding on May 3, 1995);
            (39) section 1011(d)(3) (relating to transition 
        rule for distributions made pursuant to the terms of a 
        tender offer outstanding on September 13, 1995);
            (40) section 1012(d)(3)(B) (relating to transition 
        rule for distributions pursuant to an acquisition 
        described in section 355(e)(2)(A)(ii) of the Internal 
        Revenue Code of 1986 described in a ruling request 
        submitted to the Internal Revenue Service on or before 
        April 16, 1997);
            (41) section 1012(d)(3)(C) (relating to transition 
        rule for distributions pursuant to an acquisition 
        described in section 355(e)(2)(A)(ii) of the Internal 
        Revenue Code of 1986 described in a public announcement 
        or filing with the Securities and Exchange Commission) 
        as it relates to a public announcement;
            (42) section 1012(d)(3)(C) (relating to transition 
        rule for distributions pursuant to an acquisition 
        described in section 355(e)(2)(A)(ii) of the Internal 
        Revenue Code of 1986 described in a public announcement 
        or filing with the Securities and Exchange Commission) 
        as it relates to a filing with the Securities and 
        Exchange Commission;
            (43) section 1013(d)(2)(B) (relating to transition 
        rule for distributions or acquisitions after June 8, 
        1997, described in a ruling request submitted to the 
        Internal Revenue Service submitted on or before June 8, 
        1997);
            (44) section 1013(d)(2)(C) (relating to transition 
        rule for distributions or acquisitions after June 8, 
        1997, described in a public announcement or filing with 
        the Securities and Exchange Commission on or before 
        June 8, 1997) as it relates to a public announcement;
            (45) section 1013(d)(2)(C) (relating to transition 
        rule for distributions or acquisitions after June 8, 
        1997, described in a public announcement or filing with 
        the Securities and Exchange Commission on or before 
        June 8, 1997) as it relates to a filing with the 
        Securities and Exchange Commission;
            (46) section 1014(f)(2)(B) (relating to transition 
        rule for any transaction after June 8, 1997, if such 
        transaction is described in a ruling request submitted 
        to the Internal Revenue Service on or before June 8, 
        1997);
            (47) section 1014(f)(2)(C) (relating to transition 
        rule for any transaction after June 8, 1997, if such 
        transaction is described in a public announcement or 
        filing with the Securities and Exchange Commission on 
        or before June 8, 1997) as it relates to a public 
        announcement;
            (48) section 1014(f)(2)(C) (relating to transition 
        rule for any transaction after June 8, 1997, if such 
        transaction is described in a public announcement or 
        filing with the Securities and Exchange Commission on 
        or before June 8, 1997) as it relates to a filing with 
        the Securities and Exchange Commission;
            (49) section 1042(b) (relating to special rules for 
        provision terminating certain exceptions from rules 
        relating to exempt organizations which provide 
        commercial-type insurance);
            (50) section 1081(a) (relating to termination of 
        suspense accounts for family corporations required to 
        use accrual method of accounting) as it relates to the 
        repeal of Internal Revenue Code section 447(i)(3);
            (51) section 1089(b)(3) (relating to reformations);
            (52) section 1089(b)(5)(B)(i) (relating to persons 
        under a mental disability);
            (53) section 1171 (relating to treatment of 
        computer software as FSC export property);
            (54) section 1175 (relating to exemption for active 
        financing income);
            (55) section 1204 (relating to travel expenses of 
        certain Federal employees engaged in criminal 
        investigations);
            (56) section 1236 (relating to extension of time 
        for filing a request for administrative adjustment);
            (57) section 1243 (relating to special rules for 
        administrative adjustment request with respect to bad 
        debts or worthless securities);
            (58) section 1251 (relating to clarification of 
        limitation on maximum number of shareholders);
            (59) section 1253 (relating to attribution rules 
        applicable to stock ownership);
            (60) section 1256 (relating to modification of 
        earnings and profits rules for determining whether REIT 
        has earnings and profits from non-REIT year);
            (61) section 1257 (relating to treatment of 
        foreclosure property);
            (62) section 1261 (relating to shared appreciation 
        mortgages);
            (63) section 1302 (relating to clarification of 
        waiver of certain rights of recovery);
            (64) section 1303 (relating to transitional rule 
        under section 2056A);
            (65) section 1304 (relating to treatment for estate 
        tax purposes of short-term obligations held by 
        nonresident aliens);
            (66) section 1311 (relating to clarification of 
        treatment of survivor annuities under qualified 
        terminable interest rules);
            (67) section 1312 (relating to treatment of 
        qualified domestic trust rules of forms of ownership 
        which are not trusts);
            (68) section 1313 (relating to opportunity to 
        correct failures under section 2032A);
            (69) section 1414 (relating to fermented material 
        from any brewery may be received at a distilled spirits 
        plant);
            (70) section 1417 (relating to use of additional 
        ameliorating material in certain wines);
            (71) section 1418 (relating to domestically 
        produced beer may be withdrawn free of tax for use of 
        foreign embassies, legations, etc.);
            (72) section 1421 (relating to transfer to brewery 
        of beer imported in bulk without payment of tax);
            (73) section 1422 (relating to transfer to bonded 
        wine cellars of wine imported in bulk without payment 
        of tax);
            (74) section 1506 (relating to clarification of 
        certain rules relating to employee stock ownership 
        plans of S corporations);
            (75) section 1507 (relating to modification of 10-
        percent tax for nondeductible contributions);
            (76) section 1523 (relating to repeal of 
        application of unrelated business income tax to ESOPs);
            (77) section 1530 (relating to gratuitous transfers 
        for the benefit of employees);
            (78) section 1532 (relating to special rules 
        relating to church plans); and
            (79) section 1604(c)(2) (relating to amendment 
        related to Omnibus Budget Reconciliation Act of 1993).
                For consideration of the House bill, and the 
                Senate amendment, and modifications committed 
                to conference:
                                   John R. Kasich,
                                   Bill Archer,
                                   Phil Crane,
                                   William M. Thomas,
                                   Dick Armey,
                                   Tom Delay,
                                   Charles B. Rangel,
                As additional conferees from the Committee on 
                Transportation and Infrastructure, for 
                consideration of secs. 702 and 704 of the 
                Senate amendment, and modifications committed 
                to conference:
                                   Bud Shuster,
                                   Susan Molinari,
                                   James L. Oberstar,
                As additional conferees from the Committee on 
                Education and the Workforce, for consideration 
                of secs. 713-14, 717, 879, 1302, 1304-5, and 
                1311 of the Senate amendment, and modifications 
                committed to conference:
                                   Bill Goodling,
                                   Harris W. Fawell,
                                   Donald M. Payne,
                                 Managers on the Part of the House.

                From the Committee on Finance:
                                   Bill Roth,
                                   Trent Lott,
                                   Daniel P. Moynihan,
                From the Committee on the Budget:
                                   Pete Domenici,
                                   Don Nickles,
                                   Frank R. Lautenberg,
                                Managers on the Part of the Senate.
       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

      The managers on the part of the House and the Senate at 
the conference on the disagreeing votes of the two Houses on 
the amendment of the Senate to the bill (H.R. 2014) 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, submit the following joint statement to the 
House and the Senate in explanation of the effect of the action 
agreed upon by the managers and recommended in the accompanying 
conference report:
      The Senate amendment struck all of the House bill after 
the enacting clause and inserted a substitute text.
      The House recedes from its disagreement to the amendment 
of the Senate with an amendment that is a substitute for the 
House bill and the Senate amendment. The differences between 
the House bill, the Senate amendment, and the substitute agreed 
to in conference are noted below, except for clerical 
corrections, conforming changes made necessary by agreements 
reached by the conferees, and minor drafting and clerical 
changes.

    I. CHILD AND DEPENDENT CARE TAX CREDIT; HEALTH CARE FOR CHILDREN

 A. Child Tax Credit (sec. 101 (a), (c), and (d) of the House bill and 
                   sec. 101 of the Senate amendment)

                              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 for 
certain qualified individuals: (1) a dependent child under age 
13; (2) a dependent physically or mentally unable to care for 
him or herself; or (3) a spouse who is physically or mentally 
unable to care for him or herself. 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.

                               House Bill

Size of credit
      The House bill provides a $500 ($400 for taxable year 
1998) nonrefundable tax credit for each qualifying child under 
the age of 17.
Qualifying child
      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 descendent of either), a 
stepson or stepdaughter of the taxpayer or an eligible foster 
child of the taxpayer.
Savings requirement
      No provision.
Reduction for dependent care credit
      After 1999, the child credit is reduced by one-half of 
the dependent care credit (no reduction with respect to 
dependents who are physically or mentally incapable of self-
care). The reduction applies to married individuals with AGI 
above $60,000 ($30,000 for married individuals filing 
separately). In the case taxpayer's filing as a single or head 
of household, the reduction applies to AGI above $33,000.
Phaseout of credit
      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. 
The phaseout rate is $25 for each $1,000 of modified AGI (or 
fraction thereof) in excess of the threshold. 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.
Maximum allowable child credit
      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.
IRS notice and withholding
      The House bill provides that the Secretary of the 
Treasury shall submit notice to all taxpayers of the passage of 
the child tax credit. In addition, it directs the Secretary of 
the Treasury to modify the withholding tables for single 
taxpayers claiming more than one exemption and for married 
taxpayers claiming more than two exemptions to take account of 
the effects of the child tax credit. The adjustments to the 
withholding tables apply to employees whose annualized wages 
from an employer are expected to be at least $30,000, but not 
more than $100,000.
Effective date
      Generally, the child tax credit is effective for taxable 
years beginning after December 31, 1997. The provision to 
reduce the other-wise 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.

                            Senate Amendment

Size of credit
      The Senate amendment provides a $500 ($250 in 1997 for 
children under the age of 13) nonrefundable tax credit for each 
qualifying child under the age of 17. For taxable years 
beginning after December 31, 2002, the credit is allowed for 
each qualifying child under the age of 18.
Qualifying child
      Same as the House bill.
Savings requirement
      In the case of each child age 13 to 16 (13 to 17 for 
taxable years beginning after December 31, 2002), the credit 
generally is available only for amounts contributed to savings 
for education with respect to that child.
Reduction for dependent care credit
      No provision.
Phaseout
      Generally the same as the House bill, except the 
dependent care credit is not phased out.
Maximum allowable child credit
      The maximum amount of the child credit for each taxable 
year cannot 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 one-half of the earned income 
credit allowed.
IRS notice and withholding
      No provision.
Effective date
      The child tax credit is effective July 1, 1997, for 
taxable years beginning after December 31, 1996.

                          Conference Agreement

                             Size of credit

      The conference agreement provides a $500 ($400 for 
taxable year 1998) credit for each qualifying child under the 
age of 17.

                            Qualifying child

      The conference agreement follows the House bill and the 
Senate amendment. The conference agreement includes a 
requirement that the taxpayer include the name and taxpayer 
identification number (TIN) for each qualifying child. The 
conference agreement also extends the math and clerical error 
rule to the child tax credit.

                          Savings requirement

      The conference agreement does not include the Senate 
amendment.

                  Reduction for dependent care credit

      The conference agreement does not include the House bill 
provision.

                                Phaseout

      The conference agreement follows the House bill and the 
Senate amendment with one modification. The modification is to 
increase the phaseout rate to $50 for each $1,000 of modified 
AGI (or fraction thereof) in excess of the threshold. The 
threshold amounts are unchanged from both the House bill and 
the Senate amendment.

                     Maximum allowable child credit

      In general, in the case of a taxpayer with qualifying 
children, the amount of the child credit equals $500 times the 
number of qualifying children.
      In the case of a taxpayer with one or two qualifying 
children, a portion of the child credit may be treated as a 
supplemental child credit amount. This amount equals the excess 
of (1) $500 times the number of qualifying children up to the 
excess of the taxpayer's income tax liability (net of 
applicable credits other than the earned income credit) over 
the taxpayer's tentative minimum tax liability (determined 
without regard to the alternative minimum foreign tax credit) 
over (2) the sum of the taxpayer's regular income tax liability 
(net of applicable credits other than the earned income credit) 
and the employee share of FICA (and one-half of the taxpayer's 
SECA tax liability, if applicable) reduced by any earned income 
credit amount. In no case will the total amount of the 
allowable child credit exceed the amount that would result from 
its calculation as a nonrefundable personal credit.
      In the case of a taxpayer with three or more qualifying 
children, the maximum amount of the child credit for each 
taxable year cannot exceed the greater of: (1) the excess of 
the taxpayer's regular tax liability (net of applicable credits 
other than the earned income credit) over the taxpayer's 
tentative minimum tax liability (determined without regard to 
the alternative minimum foreign tax credit), or (2) an amount 
equal to the excess of the sum of the taxpayer's regular income 
tax liability (net of applicable credits other than the earned 
income credit) and the employee share of FICA (and one-half of 
the taxpayer's SECA tax liability, if applicable) reduced by 
the earned income credit. To the extent that the amount 
determined under (1) is greater than the amount determined 
under (2), the difference is treated as a supplemental child 
credit amount.
      The conferees anticipate that the Secretary of the 
Treasury will determine whether a simplified method of 
calculating the child credit, consistent with the formula 
described above, can be achieved.

                     Refundable child credit amount

      In the case of a taxpayer with three or more qualifying 
children, if the amount of the allowable child credit as 
computed under the computation described immediately above 
exceeds the taxpayer's regular tax liability before the 
computation, then the excess is a refundable tax credit.

                       IRS notice and withholding

      The conference agreement does not include the House bill 
provision.

                             Effective date

      Generally, the child tax credit is effective for taxable 
years beginning after December 31, 1997.

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

                              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.

                               House Bill

      The House 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 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.--Taxable years beginning after December 
31, 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, with a 
modification to further expand the definition of high-risk 
individuals to include the spouse of an individual who meets 
the present-law definition of a high-risk individual.

  C. Indexing of the Dependent Care Credit; Phase Out for High-Income 
                 Taxpayers (sec. 102 of the House bill)

                              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.
      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. 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 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.

                               House Bill

Dollar limits
      Under the House bill, 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.
Phaseout
      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. 
The phaseout rate is $25 for each $1,000 of modified AGI (or 
fraction thereof) in excess of the threshold. 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. (See above the 
description of the phaseout in the child tax credit.)
Effective date
      The provision is effective for taxable years beginning 
after December 31, 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.

D. Tax Credit for Employer Expenses for Child Care Facilities (sec. 103 
                        of the Senate amendment)

                              Present Law

      Ordinary and necessary business expenses are deductible 
by an employer.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides a tax credit equal to 50 
percent of an employers' qualified child care expenses for the 
taxable year. The maximum credit allowable cannot exceed 
$150,000 per year.
      Qualified child care expenses are any amounts paid or 
incurred: (1) to acquire, construct, rehabilitate or expand 
property which is to be used as part of a qualified child care 
facility, with respect to which a deduction for depreciation is 
allowable, and which is not part of the principal residence of 
the taxpayer or an employee of the taxpayer; (2) for the 
operating costs of a qualified child care facility; (3) under a 
contract with a qualified child care facility to provide child 
care services to employees of the taxpayer; (4) under a 
contract to provide child care resource and referral services 
to employees of the taxpayer; or (5) for the costs of seeking 
accreditation for a child care facility. A qualified child care 
facility is a facility the principal use of which is to provide 
child care assistance and which meets the requirements of all 
applicable laws and regulations of the State and local 
government in which it is located. A facility is not a 
qualified child care facility unless enrollment in the facility 
is open to employees of the taxpayer during the year, the 
facility is not the principal trade or business of the taxpayer 
(unless at least 30 percent of the enrolled are dependents of 
employees of the taxpayer) and the use of (or eligibility to 
use) the facility does not discriminate in favor of highly 
compensated employees.
      A recapture of the credit applies if the facility ceases 
to operate as a qualified child care facility or the facility 
is disposed of.
      No deduction or credit is allowed under any other 
provision with respect to the amount of credit determined under 
this provision. The taxpayer's basis in property is reduced by 
the amount of credit determined with respect to such property.
      Effective date.--The provision is effective with respect 
to taxable years beginning after December 31, 1997, but before 
January 1, 2000.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

 E. Expansion of Coordinated Enforcement Efforts Between the Internal 
   Revenue Service and the Health and Human Services Office of Child 
         Support Enforcement (sec. 104 of the Senate amendment)

                              Present Law

      The Internal Revenue Service (``IRS'') and various 
Federal departments and agencies have information sharing 
agreements. The Secretary of Health and Human Services 
(``HHS'') has been directed to create and maintain various data 
bases which may be used by the IRS to collect unpaid child 
support amounts, to administer the earned income credit and to 
verify a claim with respect to employment on a tax return.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment gives the IRS expanded access to 
information in the National Directory of New Hires to verify 
any information which is required on a tax return. It also 
gives the IRS access to the names and social security numbers 
of custodial parents in the Federal Case Registry of Child 
Support Orders. This information is made available to 
administer the Internal Revenue Code provisions which grant tax 
benefits based on the support and residence of dependent 
children.
      Effective date.--The provision is effective on October 1, 
1997.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

 F. Penalty-Free Withdrawals From IRAs for Adoption Expenses (sec. 105 
                        of the Senate amendment)

                              Present Law

      Under present law, amounts held in an individual 
retirement arrangement (``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.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that the 10-percent early 
withdrawal tax does not apply to distributions from IRAs that 
are not in excess of $2,000 if the taxpayer uses the amounts to 
pay qualified adoption expenses.
      The penalty-free withdrawal is available for ``qualified 
adoption expenses,'' meaning reasonable and necessary adoption 
fees, court costs, attorney fees, and other expenses which are 
directly related to, and the principal purpose of which is for, 
the legal adoption of an eligible child by the taxpayer. 
Qualified adoption expenses do not include expenses (1) 
incurred in violation of State or Federal law, (2) incurred in 
carrying out any surrogate parenting arrangement, (3) incurred 
in connection with the adoption of a child of a spouse, or (4) 
which are reimbursed under an employer program or otherwise.
      Effective date.--The provision is effective for 
distributions after December 31, 1996.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

                      II. EDUCATION TAX INCENTIVES

             A. Tax Benefits Relating to Education Expenses

1. HOPE tax credit and Lifetime Learning tax credit for higher 
        education tuition expenses (sec. 201 of the House bill and the 
        Senate amendment)

                              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 expired 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 
involvingsports, 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.2 ``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.
---------------------------------------------------------------------------
    \2\ 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 
(and their spouses and dependents) of certain educational 
organizations.3 Section 117(c) specifically provides 
that the exclusion for qualified scholarships and qualified 
tuition reductions 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 or tuition reduction.
---------------------------------------------------------------------------
    \3\ A special rule provides that qualified tuition reductions under 
section 117(d) may be provided for graduate-level courses in cases of 
graduate students who are engaged in teaching or research activities 
for the educational organization (sec. 117(d)(5)).
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                               House Bill

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
---------------------------------------------------------------------------
    \5\ The HOPE credit may not be claimed against a taxpayer's 
alternative minimum tax (AMT) liability.
---------------------------------------------------------------------------
      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). The income phase-out ranges will be indexed 
for inflation occurring after the year 1999, rounded down to 
the closest multiple of $5,000. The first taxable year for 
which the inflation adjustment could be made to increase the 
income phase-out ranges will be 2001.
      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 three months 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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
    \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 claimed by 
any taxpayer with respect to the student for the taxable year.
---------------------------------------------------------------------------
Eligible students
      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 institutions
      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 provision. The Secretary of the 
Treasury will have authority to issue 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.
Effective date
      The provision is effective for expenses paid after 
December 31, 1997, for educationfurnished in academic periods 
beginning after such date.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except: (1) the credit rate is 75 percent (rather than 50 
percent) for students attending two-year community colleges and 
vocational schools; 9 (2) an eligible student must 
have earned a high-school diploma (or equivalent degree) prior 
to attending any post-secondary classes with respect to which 
the HOPE credit is claimed, with the exception of students who 
did not receive a high-school degree by reason of enrollment in 
an early admission program at a post-secondary institution; and 
(3) for a taxable year, a taxpayer may elect with respect to an 
eligible student either the HOPE credit or the proposed 
exclusion from gross income for certain distributions from a 
qualified tuition program or education IRA provided for by the 
Senate amendment.
---------------------------------------------------------------------------
    \9\ Thus, under the Senate amendment, students attending two-year 
community colleges or vocational schools may be eligible for the $1,500 
maximum HOPE credit if they incur $2,000 of qualified tuition and 
related expenses. In contrast, students attending other institutions 
(e.g., four-year colleges) may be eligible for the $1,500 maximum HOPE 
credit if they incur $3,000 of qualified tuition and related expenses.
---------------------------------------------------------------------------

                          Conference Agreement

In general
      The conference agreement follows the House bill, except: 
(1) the HOPE credit rate is 100 percent on the first $1,000 of 
qualified tuition and fees, and 50 percent on the next $1,000 
of qualified tuition and fees; 10 (2) the HOPE 
credit is available only for tuition and fees required for the 
enrollment or attendance of an eligible student at an eligible 
institution, and is not available for expenses incurred to 
purchase books; and (3) for a taxable year, a taxpayer may 
elect with respect to an eligible student the HOPE credit, the 
20-percent ``Lifetime Learning'' credit (as described below), 
or the exclusion from gross income for certain distributions 
from an education IRA (as provided by the conference 
agreement).
---------------------------------------------------------------------------
    \10\ Thus, an eligible student who incurs $1,000 of qualified 
tuition and fees is eligible (subject to the AGI phaseout) for a $1,000 
HOPE credit; and if such a student incurs $2,000 of qualified tuition 
and fees, then he or she is eligible for a $1,500 HOPE credit.
    The maximum HOPE credit amount will be indexed for inflation 
occurring after the year 2000, by increasing the cap on qualified 
tuition and fees subject to the 100-percent credit rate and the cap on 
such tuition and fees subject to the 50-percent credit rate (both caps 
rounded down to the closest multiple of $100). The first taxable year 
for which the inflation adjustment could be made to increase the cap on 
qualified tuition and fees will be 2002. In addition, under the 
conference agreement, the income phase-out ranges for the HOPE credit 
will be indexed for inflation occurring after the year 2000, rounded 
down to the closest multiple of $1,000. The first taxable year for 
which the inflation adjustment could be made to increase the income 
phase-out ranges will be 2002.
---------------------------------------------------------------------------
Lifetime Learning credit for qualified tuition and fees
      Allowance of credit.--The conference agreement provides 
that individual taxpayers are allowed to claim a nonrefundable 
``Lifetime Learning'' credit against Federal income taxes equal 
to 20 percent of qualified tuition and fees incurred during the 
taxable year on behalf of the taxpayer, the taxpayer's spouse, 
or any dependents. For expenses paid after June 30, 1998, and 
prior to January 1, 2003, up to $5,000 of qualified tuition and 
fees per taxpayer return will be eligible for the 20-percent 
Lifetime Learning credit (i.e., the maximum credit per taxpayer 
return will be $1,000). For expenses paid after December 31, 
2002, up to $10,000 of qualified tuition and fees per taxpayer 
return will be eligible for the 20-percent Lifetime Learning 
credit (i.e., the maximum credit per taxpayer return will be 
$2,000).
      In contrast to the HOPE credit, a taxpayer may claim the 
Lifetime Learning credit for an unlimited number of taxable 
years. Also in contrast to the HOPE credit, the maximum amount 
of the Lifetime Learning credit that may be claimed on a 
taxpayer's return will not vary based on the number of students 
in the taxpayer's family.
      The Lifetime Learning credit is phased out ratably over 
the same phaseout range that applies for purposes of the HOPE 
credit--i.e., taxpayers with modified AGI between $40,000 and 
$50,000 ($80,000 and $100,000 for joint returns). The income 
phase-out ranges will be indexed for inflation occurring after 
the year 2000, rounded down to the closest multiple of $1,000. 
The first taxable year for which the inflation adjustment could 
be made to increase the income phase-out ranges will be 2002.
      The Lifetime Learning 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 three months of the next year. Qualified tuition and fees 
paid with the proceeds of a loan generally are eligible for the 
Lifetime Learning credit (rather than repayment of the loan 
itself).
      Dependent students.--As with the HOPE credit, a taxpayer 
may claim the Lifetime Learning credit with respect to a 
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 student him- or 
herself is not entitled to claim the Lifetime Learning 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 Lifetime Learning credit, HOPE credit, or 
exclusion from gross income for certain distributions from 
education IRAs.--A taxpayer may claim the Lifetime Learning 
credit for a taxable year with respect to one or more students, 
even though the taxpayer also claims a HOPE credit (or claims 
an exclusion from gross income for certain distributions from 
qualified State tuition programs or education IRAs) for that 
same taxable year with respect to other students. If, for a 
taxable year, a taxpayer claims a HOPE credit with respect to a 
student (or claims an exclusion for certain distributions from 
an education IRA with respect to a student), then the Lifetime 
Learning credit will not be available with respect to that same 
student for that year (although the Lifetime Learning credit 
may be available with respect to that same student for other 
taxable years).
      Qualified tuition and fees.--The Lifetime Learning credit 
is available for ``qualified tuition and fees,'' meaning 
tuition and fees required for the enrollment or attendance of 
the eligible student at an eligible institution. Charges and 
fees associated with meals, lodging, student activities, 
athletics, insurance, transportation, and similar personal, 
living or family expenses are not included. The 20-percent 
credit is not available for expenses incurred to purchase 
books. 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.
      In contrast to the HOPE credit, qualified tuition and 
fees for purposes of the Lifetime Learning credit include 
tuition and fees incurred with respect to undergraduate or 
graduate-level (and professional degree) courses.11 
In addition to allowing a credit for the tuition and fees of a 
student who attends classes on at least a half-time basis as 
part of a degree or certificate program, the Lifetime Learning 
credit also is available with respect to any course of 
instruction at an eligible educational institution (whether 
enrolled in by the student on a full-time, half-time, or less 
than half-time basis) to acquire or improve job skills of the 
student.
---------------------------------------------------------------------------
    \11\ The HOPE credit is available only with respect to the first 
two years of a student's undergraduate education.
---------------------------------------------------------------------------
      Qualified tuition and fees are defined in the same manner 
as under the HOPE credit provisions. Thus, qualified tuition 
and fees generally include only out-of-pocket expenses. 
Qualified tuition and fees 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 fees 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 (such as employer-provided educational assistance 
excludable under section 127). No reduction of qualified 
tuition and fees is required for a gift, bequest, devise, or 
inheritance within the meaning of section 102(a). Under the 
provision, a Lifetime Learning 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.12
---------------------------------------------------------------------------
    \12\ In addition, the conference agreement 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 
Lifetime Learning credit claimed by any taxpayer with respect to the 
student for the taxable year.
---------------------------------------------------------------------------
      Eligible educational institutions.--Eligible educational 
institutions are (as with the HOPE credit) 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, graduate-level or professional 
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 provision. The 
Secretary of the Treasury will have authority to issue 
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 Lifetime Learning credit 
potentially available.
      Effective date.--The provision is effective for expenses 
paid after June 30, 1998, for education furnished in academic 
periods beginning after such date.
2. Tax treatment of qualified State tuition programs and education 
        IRAs; exclusion for certain distributions from education IRAs 
        used to pay qualified higher education expenses (secs. 202 (a), 
        (b), and (d) and 211-212 of the House bill and secs. 211-213 of 
        the Senate amendment)

                              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 expired 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.13 ``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.
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    \13\ 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 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 
(and their spouses and dependents) of certain educational 
organizations.14 Section 117(c) specifically 
provides that the exclusion for qualified scholarships and 
qualified tuition reductions 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 or tuition reduction.
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    \14\ A special rule provides that qualified tuition reductions 
under section 117(d) may be provided for graduate-level courses in 
cases of graduate students who are engaged in teaching or research 
activities for the educational organization (sec. 117(d)(5)).
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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.15
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    \15\ 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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Estate and gift tax rules
      In general, a taxpayer may exclude $10,000 of gifts made 
by an individual ($20,000 in the case of a married couple that 
elects to split their gifts) to any one donee during a calendar 
year (sec. 2503(b)). This annual exclusion does not apply to 
gifts of future interests, and thus may not be applicable to 
contributions made to a State tuition program.
      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 tuitionprogram (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.

                               House Bill

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.16 A deduction is not allowed under the 
House 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.17
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    \16\ 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.
    \17\ 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 House bill may 
be claimed with respect to that student for a subsequent taxable year.
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       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 provision (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 House 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.18 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.19
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    \18\ 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).
    \19\ 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.
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Qualified higher education expenses
      Under the House 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 investment accounts
      Under the House 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.20 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.21 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.22
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    \20\ The House 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 House 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.
    \21\ 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.
    \22\ 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 during 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.23
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    \23\ 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 House 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 section 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.

                            Senate Amendment

In general
      Under the Senate amendment, amounts distributed from 
qualified tuition programs and certain education investment 
accounts (referred to as ``education IRAs'') are excludable 
from gross income to the extent that the amounts distributed do 
not exceed qualified higher education expenses of an eligible 
student incurred during the year the distribution is 
made.24 In addition, distributions from education 
IRAs (but not qualified tuition programs) in taxable years 
beginning in 2001 or later will be excludable from gross income 
to the extent that the amounts distributed do not exceed 
certain qualified elementary and secondary education expenses. 
An exclusion 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 
taxable year the distribution is made.25
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    \24\ The exclusion will not be a preference item for alternative 
minimum tax (AMT) purposes.
    \25\ 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 exclusion provided for by the bill may be 
claimed with respect to that student for a subsequent taxable year.
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      Distributions from a qualified tuition program or 
education IRA generally will be deemed to consist of 
distributions of principal (which, under all circumstances, are 
excludable from gross income) and earnings (which may be 
excludable from gross income under the Senate amendment) by 
applying the ratio that the aggregate amount of contributions 
to the program or account for the beneficiary bears to the 
total balance (or value) of the program or account for the 
beneficiary at the time the distribution is made.26 
If the qualified higher education expenses of the student for 
the year are at least equal to the total amount of the 
distribution (i.e., principal and earnings combined) from a 
qualified tuition program or education IRA, then the earnings 
in their entirety will be excludable from gross income. If, on 
the other hand, the qualified higher education expenses of the 
student for the year are less than the total amount of the 
distribution (i.e., principal and earnings combined) from a 
qualified tuition program or education IRA, then the qualified 
higher education expenses will be deemed to be paid from a pro-
rata share of both the principal and earnings components of the 
distribution. Thus, in such a case, only a portion of the 
earnings will be excludable under the bill (i.e., a portion of 
the earnings based on the ratio that the qualified higher 
education expenses bear to the total amount of the 
distribution) and the remaining portion of the earnings will be 
includible in the gross income of the distributee.27
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    \26\ Specifically, the Senate amendment provides as a general rule 
that distributions from a qualified tuition program or education IRA 
are includible in gross income to the extent allocable to income on the 
program or account and are not includible in gross income to the extent 
allocable to the investment (i.e., contributions) in the program or 
account. However, the Senate amendment further provides that, if the 
HOPE credit is not claimed with respect to the student for the taxable 
year, then a distribution from a qualified tuition program or education 
IRA will not be includible in gross income to the extent that the 
distribution does not exceed the qualified higher expenses of the 
student for the year. If a distribution consists of providing in-kind 
education benefits to the student which, if paid for by the student, 
would constitute payment of qualified higher education expenses, then 
no portion of such distribution will be includible in gross income.
    At the time that a final distribution is made from a qualified 
tuition program or education IRA, the distribution will be deemed to 
include the full amount of any basis remaining with respect to the 
program or account.
    \27\ For example, if a $1,000 distribution from a qualified tuition 
program or education IRA consists of $600 of principal (i.e., 
contributions) and $400 of earnings, and if the student incurs $750 of 
qualified higher education expenses during the year, then $300 of the 
earnings will be excludable from gross income under the bill (i.e., an 
exclusion will be provided for the pro-rata portion of the earnings, 
based on the ratio that the $750 of qualified expenses bears to the 
$1,000 total distribution) and the remaining $100 of earnings will be 
includible in the distributee's gross income.
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Eligible students
      To be an eligible student, an individual must be at least 
a half-time student in a degree or certificate undergraduate or 
graduate program at an eligible educational institution. For 
this purpose, a student is at least a half-time student if he 
or she is carrying 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, a graduate-level or professional 
degree, or another recognized post-secondary credential. 
Certain proprietary institutions and post-secondary vocational 
institutions also are eligible institutions. The institution 
must be eligible to participate in Department of Education 
student aid programs.
Qualified education expenses
      ``Qualified higher education expenses'' include 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) for any period during which 
the student is at least a half-time student. Qualified higher 
education expenses include expenses with respect to 
undergraduate or graduate-level courses.
      In addition, in taxable years beginning after December 
31, 2000, the exclusion is available to the extent that 
distributions from an education IRA (but not a qualified 
tuition program) do not exceed ``qualified elementary and 
secondary education expenses,'' meaning tuition, fees, 
tutoring, special needs services, books, supplies, equipment, 
transportation, and supplementary expenses (including 
homeschooling expenses if the requirements of State or local 
law are satisfied with respect to such homeschooling) required 
for the enrollment or attendance of a dependent of the taxpayer 
at a public, private, or sectarian elementary or secondary 
school (through grade 12).
      Qualified higher education expenses (and qualified 
elementary and secondary education expenses) generally include 
only out-of-pocket expenses. Such qualified 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 education expenses are reduced by scholarship or 
fellowship grants excludable from gross income under present-
law section 117, as well as any other tax-free educational 
benefits, such as employer-provided educational assistance that 
is excludable from the employee's gross income under section 
127. In addition, qualified education expenses do not include 
expenses paid with amounts that are excludible under section 
135. No reduction of qualified education expenses is required 
for a gift, bequest, devise, or inheritance within the meaning 
of section 102(a). If education expenses for a taxable year are 
deducted under section 162 or any other section of the Code, 
then such expenses are not qualified education expenses under 
the Senate amendment.
Qualified tuition programs and education IRAs
      Under the Senate amendment, a ``qualified tuition 
program'' means any qualified State-sponsored tuition program, 
defined under section 529 (as modified by the bill), as well as 
any program established and maintained by one or more eligible 
educational institutions (which could be private institutions) 
that satisfy the requirements under section 529 (other than 
present-law State ownership rule). An ``education IRA'' means a 
trust (or custodial account) which is created or organized in 
the United States exclusively for the purpose of paying the 
qualified higher education expenses (and qualified elementary 
and secondary education expenses) of the account holder and 
which satisfies certain other requirements.
      Contributions to qualified tuition programs or education 
IRAs may be made only in cash. 28 Such contributions 
may not be made after the designated beneficiary or account 
holder reaches age 18. Annual contributions to a qualified 
tuition program not maintained by a State (i.e., a qualified 
tuition program operated by one or more private schools) or to 
an education IRA are limited to $2,000 per beneficiary or 
account holder, plus the amount of any child credit (as 
provided for by the Senate amendment) that is allowed for the 
taxable year with respect to the beneficiary or account 
holder.29 Thus, in the case of any child with 
respect to whom the maximum $500 child credit is allowed for 
the taxable year, the contribution limit with respect to such 
child for the year will be $2,500.30 Trustees of 
qualified tuition programs not maintained by a State and 
trustees of education IRAs are prohibited from accepting 
contributions to any account on behalf of a beneficiary in 
excess of $2,500 for any year (except in cases involving 
certain tax-free rollovers, as described below).31
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    \28\ The Senate amendment 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 IRA 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 IRA will be the 
contributor's basis in the bonds (i.e., the original purchase price 
paid by the contributor for such bonds).
    The Senate amendment also provides that funds from an education IRA 
are deemed to be distributed to pay qualified higher education expenses 
if the funds are used to make contributions to (or purchase tuition 
credits from) a qualified tuition program for the benefit of the 
account holder.
    \29\ 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 limit on annual contributions that can be made under 
the program on behalf of a designated beneficiary.
    \30\ The maximum contribution limit for the year is increased even 
if the child is younger than age 13--that is, even in cases where the 
parent is not required (under the provision described previously) but 
may elect to deposit an amount equal to the child credit into a 
qualified tuition program or education IRA on behalf of the child.
    \31\ The annual $2,000 to $2,500 contribution limit is applied by 
taking into account all contributions made to any qualified tuition 
program not maintained by a State and any education IRA on behalf of a 
designated individual (but not any contributions made to State-
sponsored qualified tuition programs). To the extent contributions 
exceed the annual contribution 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 
during which the excess contribution is made.
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       If any balance remaining in an education IRA is not 
distributed by the time that the account holder becomes 30 
years old, then the account will be deemed to be an IRA Plus 
account (as provided for by the bill and described below) 
established on behalf of the same account holder.32 
The Senate amendment allows (but does not require) tax-free 
transfers or rollovers of account balances from a qualified 
tuition program to an IRA Plus account when the beneficiary 
becomes 30 years old, provided that the funds from the 
qualified tuition program account are deposited in the IRA Plus 
account within 60 days after being distributed from the 
qualified tuition program.33 In addition, the Senate 
amendment allows tax-free transfers or rollovers of credits or 
account balances from one qualified tuition program or 
education IRA account benefiting one beneficiary to another 
program or account benefiting another beneficiary (as well as 
redesignations of the named beneficiary), provided that the new 
beneficiary is a member of the family of the old 
beneficiary.34
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    \32\ In such cases, the 5-year holding period applicable to IRA 
Plus accounts begins with the taxable year in which the education IRA 
is deemed to be an IRA Plus account.
    \33\ In the event of such a rollover, the 5-year holding period 
applicable to IRA Plus accounts begins with the taxable year in which 
the rollover occurs.
    \34\ 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.
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       Qualified tuition programs and education IRAs (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.35
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    \35\ 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 Senate amendment, an additional 10-percent 
penalty tax will be imposed on any distribution from a 
qualified tuition program not maintained by a State or from an 
education IRA to the extent that the distribution exceeds 
qualified higher education expenses (or, in the case of an 
education IRA, qualified elementary and secondary education 
expenses) incurred by the taxpayer (and is not made on account 
of the death, disability, or scholarship received by the 
designated beneficiary or account holder).36
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    \36\ Distributions from State-sponsored qualified tuition programs 
will not be subject to this 10-percent additional penalty tax, but will 
continue to be governed by the present-law section 529(b)(3) rule that 
the State-sponsored programs themselves are required to impose a ``more 
than de minimis penalty'' on any refund of earnings not used for 
qualified higher education expenses (other than in cases where the 
refund is made on account of death or disability of, or receipt of a 
scholarship by, the beneficiary).
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Estate and gift tax treatment
      Contributions to qualified tuition programs and education 
IRAs will not be considered taxable gifts for Federal gift tax 
purposes, and in no event will distributions from a qualified 
tuition programs or education IRAs be treated as taxable 
gifts.37 For estate tax purposes, the value of any 
interest in a qualified tuition program or education IRA will 
be includible in the estate of the designated beneficiary. In 
no event will such an interest be includible in the estate of 
the contributor.
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    \37\ Contributions to only one State-sponsored qualified tuition 
program per beneficiary will be excluded from the gift tax by reason of 
the bill (although a contributor may also make contributions excluded 
from the gift tax on behalf of other beneficiaries to the same State-
sponsored program or any other State-sponsored program).
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Effective date
      The provision applies to distributions made, and 
qualified higher education expenses paid, after December 31, 
1997, for education furnished in academic periods beginning 
after such date. In addition, in the case of education IRAs, 
the provision applies to qualified elementary and secondary 
expenses paid in taxable years beginning after December 31, 
2000. The provisions governing contributions to, and the tax-
exempt status of, qualified tuition plans and education IRAs 
generally apply 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.

                          Conference Agreement

Qualified State tuition programs
      The conference agreement makes the following 
modifications to present-law section 529, which governs the tax 
treatment of qualified State tuition programs.
      Room and board expenses.--The conference agreement 
expands the definition of ``qualified higher education 
expenses'' under section 529(e)(3) to include 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) 
for any period during which the student is at least a half-time 
student.
      Eligible educational institution.--The conference 
agreement expands the definition of ``eligible educational 
institution'' for purposes of section 529 by defining such term 
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, a graduate-level or professional 
degree, or another recognized post-secondary credential. 
Certain proprietary institutions and post-secondary vocational 
institutions also are eligible institutions. The institution 
must be eligible to participate in Department of Education 
student aid programs.
      Definition of ``member of family''.--The conference 
agreement expands the definition of the term ``member of the 
family'' for purposes of allowing tax-free transfers or 
rollovers of credits or account balances in qualified State 
tuition programs (and redesignations of named beneficiaries), 
so that the term means persons described in paragraphs (1) 
through (8) of section 152(a)--e.g., sons, daughters, brothers, 
sisters, nephews and nieces, certain in-laws, etc.--and any 
spouse of such persons.38
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    \38\ The conference agreement also provides a special rule that, in 
the case of any contract issued prior to August 20, 1996 (i.e., the 
date of enactment of section 529), section 529(c)(3)(C) will be applied 
without regard to the requirement that a distribution be transferred to 
a member of the family or the requirement that a change in 
beneficiaries may be made only to a member of the family.
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      Prohibition against investment direction.--The conference 
clarifies the present-law rule contained in section 529(b)(5) 
that qualified State tuition programs may not allow 
contributors or designated beneficiaries to direct the 
investment of contributions to the program (or earnings 
thereon) by specifically providing that contributors and 
beneficiaries may not ``directly or indirectly'' direct the 
investment of contributions to the program (or earnings 
thereon).
      Interaction with HOPE credit and Lifetime Learning 
credit.--Under the conference agreement (as under present law), 
no amount will be includible in the gross income of a 
contributor to, or beneficiary of, a qualified State tuition 
program with respect to any contribution to or earnings on such 
a program until a distribution is made from the program, at 
which time the earnings portion of the distribution (whether 
made in cash or in-kind) will be includible in the gross income 
of the distributee. However, to the extent that a distribution 
from a qualified State tuition program is used to pay for 
qualified tuition and fees, the distributee (or another 
taxpayer claiming the distributee as a dependent) will be able 
to claim the HOPE credit or Lifetime Learning credit provided 
for by the conference agreement with respect to such tuition 
and fees (assuming that the other requirements for claiming the 
HOPE credit or Lifetime Learning credit are satisfied and the 
modified AGI phaseout for those credits does not 
apply).39
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    \39\ In cases where in-kind benefits are provided to a beneficiary 
under a qualified State prepaid tuition program, present-law section 
529(c)(3)(B) provides that the provision of such benefits is treated as 
a distribution to the beneficiary. Thus, to the extent such in-kind 
benefits, if paid for by the beneficiary, would constitute payment of 
qualified tuition and fees for purposes of the HOPE credit or Lifetime 
Learning credit, the beneficiary (or another taxpayer claiming the 
beneficiary as a dependent) may be able to claim the HOPE credit or 
Lifetime Learning credit with respect to payments that are deemed to be 
made by the beneficiary with respect to the in-kind benefit.
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      Effective date.--The modifications to section 529 
generally are effective after December 31, 1997. The expansion 
of the term ``qualified higher education expenses'' to cover 
certain room and board expenses is effective as if included in 
the Small Business Job Protection Act of 1996 (enacted on 
August 20, 1996).
Education IRAs
      The conference agreement generally follows the Senate 
amendment with respect to the treatment of education IRAs, with 
the following modifications.
      Contribution limit.--Under the conference agreement, 
annual contributions to education IRAs are limited to $500 per 
beneficiary. This $500 annual contribution limit for education 
IRAs is phased out ratably for contributors with modified AGI 
between $95,000 and $110,000 ($150,000 and $160,000 for joint 
returns). Individuals with modified AGI above the phase-out 
range are not allowed to make contributions to an education IRA 
established on behalf of any other individual.40
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    \40\ The conference agreement clarifies that no amount is 
includible in the gross income of a beneficiary of an education IRA 
with respect to any contribution to or earnings on such account.
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      Qualified expenses.--Education IRAs must be created 
exclusively for the purpose of paying qualified higher 
education expenses, meaning post-secondary tuition, fees, 
books, supplies, equipment, and certain room and board 
expenses, and not including elementary or secondary school 
expenses.
      Expansion of exclusion for part-time students.--The 
conference agreement provides that distributions from an 
education IRA are excludable from gross income to the extent 
that the distribution does not exceed qualified higher 
education expenses incurred by the beneficiary during the year 
the distribution is made, regardless of whether the beneficiary 
is enrolled at aneligible educational institution on a full-
time, half-time, or less than half-time basis. However, 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) are qualified higher education expenses 
only if the student incurring such expenses is enrolled at an eligible 
educational institution on at least a half-time basis.
      Termination of education IRAs.--Under the conference 
agreement, any balance remaining in an education IRA at the 
time a beneficiary becomes 30 years old must be distributed, 
and the earnings portion of such a distribution will be 
includible in gross income of the beneficiary and subject to an 
additional 10-percent penalty tax because the distribution was 
not for educational purposes. However, as under the Senate 
amendment, prior to the beneficiary reaching age 30, the 
conference agreement allows tax-free (and penalty-free) 
transfers and rollovers of account balances from one education 
IRA benefiting one beneficiary to another education IRA 
benefiting a different beneficiary (as well as redesignations 
of the named beneficiary), provided that the new beneficiary is 
a member of the family of the old beneficiary.41
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    \41\ For this purpose, a ``member of the family'' means--as under 
the conference agreement modifications to section 529--persons 
described in paragraphs (1) through (8) of section 152(a), and any 
spouse of such persons.
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      Interaction with qualified State tuition programs.--The 
conference agreement provides that no contribution may be made 
by any person to an education IRA established on behalf of a 
beneficiary during any taxable year in which any contributions 
are made by anyone to a qualified State tuition program 
(defined under sec. 529) on behalf of the same beneficiary.
      Interaction with HOPE credit and Lifetime Learning 
credit.--The conference agreement provides that, in any taxable 
year in which an exclusion from gross income is claimed with 
respect to a distribution from an education IRA on behalf of a 
beneficiary, neither a HOPE credit nor a Lifetime Learning 
credit may be claimed with respect to educational expenses 
incurred during that year on behalf of the same beneficiary. 
The HOPE credit or Lifetime Learning credit will be available 
in other taxable years with respect to that beneficiary 
(provided that no exclusion is claimed in such other taxable 
years for distributions from an education IRA on behalf of the 
beneficiary and provided that the requirements of the HOPE 
credit or Lifetime Learning credit are satisfied in such other 
taxable years).
      Effective date.--The provisions governing education IRAs 
apply to taxable years beginning after December 31, 1997.
Estate and gift tax treatment
      The conference agreement follows the House bill with 
respect to the estate and gift tax treatment of contributions 
to qualified State tuition programs and education IRAs, except 
that a special rule is provided in the case of contributions 
that exceed the annual gift tax exclusion limit (presently 
$10,000 in the case of an individual or $20,000 in the case of 
a married couple that splits their gifts, but this amount is 
scheduled to increase under other provisions of the conference 
agreement). For such contributions, the contributor may elect 
to have the contribution treated as if made ratably over a 
five-year period.
      Thus, for Federal estate and gift tax purposes, any 
contribution to a qualified tuition program or education IRA 
will be treated as a completed gift of a present interest from 
the contributor to the beneficiary at the time of the 
contribution. Annual contributions are eligible for the 
present-law gift tax exclusion provided by Code section 2503(b) 
and also are 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 gift-tax exclusion 
limit of $10,000, or $20,000 in the case of a married couple).
      If a contribution in excess of $10,000 ($20,000 in the 
case of a married couple) is made in one year--which, under the 
conference agreement, can occur only in the case of a qualified 
State tuition program and not an education IRA (which cannot 
receive contributions in excess of $500 per year)--the 
contributor may elect to have the contribution treated as if 
made ratably over five years beginning in the year the 
contribution is made. For example, a $30,000 contribution to a 
qualified State tuition program would be treated as five annual 
contributions of $6,000, and the donor could therefore make up 
to $4,000 in other transfers to the beneficiary each year 
without payment of gift tax. Under this rule, a donor may 
contribute up to $50,000 every five years ($100,000 in the case 
of a married couple) with no gift tax consequences, assuming no 
other gifts are made from the donor to the beneficiary in the 
five-year period. A gift tax return must be filed with respect 
to any contribution in excess of the annual gift-tax exclusion 
limit, and the election for five-year averaging must be made on 
the contributor's gift tax return.
      If a donor making an over-$10,000 contribution dies 
during the five-year averaging period, the portion of the 
contribution that has not been allocated to the years prior to 
death is includible in the donor's estate. For example, if a 
donor makes a $40,000 contribution, elects to treat the 
transfer as being made over a five-year period, and dies the 
following year, $8,000 would be allocated to the year of 
contribution, another $8,000 would be allocated to the year of 
death, and the remaining $24,000 would be includible in the 
estate.
      If a beneficiary's interest is rolled over to another 
beneficiary, there are no transfer tax consequences if the two 
beneficiaries are in the same generation. If a beneficiary's 
interest is rolled over to a beneficiary in a lower generation 
(e.g., parent to child or uncle to niece), the five-year 
averaging rule described above may be applied to exempt up to 
$50,000 of the transfer from gift tax.
      The Federal estate and gift tax treatment of educational 
accounts has no effect on the actual rights and obligations of 
the parties pursuant to the terms of the contracts under State 
law.
      Effective date.--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 
        House bill)

                              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,42 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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    \42\ 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.
---------------------------------------------------------------------------

                               House Bill

      The House 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.
      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).

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
4. Deduction for student loan interest (sec. 202 of the Senate 
        amendment)

                              Present Law

      The Tax Reform Act of 1986 repealed the deduction for 
personal interest. Student loan interest generally is treated 
as personal interest and thus is not allowable as an itemized 
deduction from income.
      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). 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 relate to the employee's 
current job and only to the extent that the expenses, along 
with other miscellaneous deductions, exceed 2 percent of the 
taxpayer's adjusted gross income (AGI).

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, certain individuals who have 
paid interest on qualified education loans may claim an above-
the-line deduction for such interest expenses, up to a maximum 
deduction of $2,500 per year. The deduction is allowed only 
with respect to interest paid on a qualified education loan 
during the first 60 months in which interest payments are 
required. Months during which the qualified education loan is 
in deferral or forbearance do not count against the 60-month 
period. No deduction is allowed to an individual if that 
individual is claimed as a dependent on another taxpayer's 
return for the taxable year. Beginning in 1999, the maximum 
deduction of $2,500 is indexed for inflation, rounded down to 
the closest multiple of $50.
      A qualified education loan generally is defined as any 
indebtedness incurred to pay for the qualified higher education 
expenses of the taxpayer, the taxpayer's spouse, or any 
dependent of the taxpayer as of the time the indebtedness was 
incurred in attending (1) post-secondary educational 
institutions and certain vocational schools defined by 
reference to section 481 of the Higher Education Act of 1965, 
or (2) institutions conducting internship or residency programs 
leading to a degree or certificate from an institution of 
higher education, a hospital, or a health care facility 
conducting postgraduate training. Qualified higher education 
expenses are defined as the student's cost of attendance as 
defined in section 472 of the Higher Education Act of 
1965(generally, tuition, fees, room and board, and related expenses), 
reduced by (1) any amount excluded from gross income under section 135 
(i.e., United States savings bonds used to pay higher education tuition 
and fees), (2) any amount distributed from a qualified tuition program 
or education investment account and excluded from gross income (under 
the provision described above), and (3) the amount of any scholarship 
or fellowship grants excludable from gross income under present-law 
section 117, as well as any other tax-free educational benefits, such 
as employer-provided educational assistance that is excludable from the 
employee's gross income under section 127. Such expenses must be paid 
or incurred within a reasonable period before or after the indebtedness 
is incurred, and must be attributable to a period when the student is 
at least a half-time student.
      The deduction is phased out ratably for taxpayers with 
modified adjusted gross income (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), 
and is calculated after application of section 86 (income 
inclusion of certain Social Security benefits), section 219 
(deductible IRA contributions), and section 469 (limitation on 
passive activity losses and credits).43 Beginning in 
2001, the income phase-out ranges are indexed for inflation, 
rounded down to the closest multiple of $5,000.
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    \43\ For purposes of sections 86, 135, 219, and 469, adjusted gross 
income is determined without regard to the deduction for student loan 
interest.
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      Any person in a trade or business or any governmental 
agency that receives $600 or more in qualified education loan 
interest from an individual during a calendar year must provide 
an information report on such interest to the IRS and to the 
payor.
      Effective date.--The provision is effective for payments 
of interest due after December 31, 1996, on any qualified 
education loan. Thus, in the case of already existing qualified 
education loans, interest payments qualify for the deduction to 
the extent that the 60-month period has not expired. For 
purposes of counting the 60 months, any qualified education 
loan and all refinancing (that is treated as a qualified 
education loan) of such loan are treated as a single loan.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
except that the maximum deduction is phased in over 4 years, 
with a $1,000 maximum deduction in 1998, $1,500 in 1999, $2,000 
in 2000, and $2,500 in 2001. The maximum deduction amount is 
not indexed for inflation. In addition, the deduction is phased 
out ratably for individual taxpayers with modified AGI of 
$40,000-$55,000 ($60,000-$75,000 for joint returns); such 
income ranges will be indexed for inflation occurring after the 
year 2002, rounded down to the closest multiple of $5,000. 
Thus, the first taxable year for which the inflation adjustment 
could be made will be 2003. For purposes of the deduction, 
modified AGI includes amounts excludable from gross income 
under section 137 (qualified adoption expenses).44
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    \44\ For purposes of section 137, adjusted gross income is 
determined without regard to the deduction for student loan interest.
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      Qualified higher education expenses are defined as the 
student's cost of attendance as defined in section 472 of the 
Higher Education Act of 1965 (generally, tuition, fees, room 
and board, and related expenses), reduced by (1) any amount 
excluded from gross income under section 135, (2) any amount 
distributed from an education IRA and excluded from gross 
income, and (3) the amount of any scholarship or fellowship 
grants excludable from gross income under present-law section 
117, as well as any other tax-free educational benefits, such 
as employer-provided educational assistance that is excludable 
from the employee's gross income under section 127.
      The conferees expect that the Secretary of Treasury will 
issue regulations setting forth reporting procedures that will 
facilitate the administration of this provision. Specifically, 
such regulations should require lenders separately to report to 
borrowers the amount of interest that constitutes deductible 
student loan interest (i.e., interest on a qualified education 
loan during the first 60 months in which interest payments are 
required). In this regard, the regulations should include a 
method for borrower certification to a lender that the loan 
proceeds are being used to pay for qualified higher education 
expenses.
      The provision is effective for interest payments due and 
paid after December 31, 1997, on any qualified education loan.
5. Penalty-free withdrawals from IRAs for higher education expenses 
        (sec. 203 of the House bill and Senate amendment)

                              Present Law

      Under present law, amounts held in an individual 
retirement arrangement (``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.

                               House Bill

      The House bill provides that the 10-percent early 
withdrawal tax does not apply to distributions from IRAs if the 
taxpayer used 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 made after December 31, 1997, which respect to 
expenses paid after such date for education furnished in 
academic periods beginning after such date.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
6. Tax credit for expenses for education which supplements elementary 
        and secondary education (sec. 204 of the House bill)

                              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.

                               House Bill

      The House 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 thecost 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
7. Certain teacher education expenses not subject to 2-percent floor on 
        miscellaneous itemized deductions (sec. 224 of the Senate 
        amendment)

                              Present Law

      In general, taxpayers are not permitted to deduct 
education expenses. However, employees may deduct the cost of 
certain work-related education. For costs to be deductible, the 
education must either be required by the taxpayer's employer or 
by law to retain taxpayer's current job or be necessary to 
maintain or improve skills required in the taxpayer's current 
job. Expenses incurred for education that is necessary to meet 
minimum education requirements of an employee's present trade 
or business or that can qualify an employee for a new trade or 
business are not deductible.
      An employee is allowed to deduct work-related education 
and other business expenses only to the extent such expenses 
(together with other miscellaneous itemized deductions) exceed 
2 percent of the taxpayer's adjusted gross income.

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, qualified professional 
development expenses incurred by an elementary or secondary 
school teacher \45\ with respect to certain courses of 
instruction are not subject to the 2-percent floor on 
miscellaneous itemized deductions. Qualified professional 
development expenses mean expenses for tuition, fees, books, 
supplies, equipment and transportation required for enrollment 
or attendance in a qualified course, provided that such 
expenses are otherwise deductible under present law section 
162. A qualified course of instruction means a course at an 
institution of higher education (as defined in sec. 481 of the 
Higher Education Act of 1965) which is part of a program of 
professional development that is approved and certified by the 
appropriate local educational agency as furthering the 
individual's teaching skills.
---------------------------------------------------------------------------
    \45\ To be eligible, a teacher must have completed at least two 
academic years as a K-12 teacher in an elementary or secondary school 
before the qualified professional development expenses are incurred.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

               B. Other Education-Related Tax Provisions

1. Extension of exclusion for employer-provided educational assistance 
        (sec. 221 of the House bill and sec. 221 of the Senate 
        amendment)

                              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 of instruction 
beginning after June 30, 1997.\46\ In the absence of the 
exclusion, educational assistance is excludable from income 
only if it is related to the employee's current job.
---------------------------------------------------------------------------
    \46\ The legislative history reflects congressional intent that the 
provision expire with respect to courses beginning after May 31, 1997.
---------------------------------------------------------------------------

                               House Bill

      The exclusion for employer-provided educational 
assistance is extended through courses beginning on or before 
December 31, 1997.
      Effective date.--The provision is effective with respect 
to taxable years beginning after December 31, 1996.

                            Senate Amendment

      The exclusion for employer-provided educational 
assistance is extended permanently. Beginning in 1997, the 
exclusion applies to graduate-level courses.
      Effective date.--The extension of the exclusion with 
respect to undergraduate courses applies with respect to 
taxable years beginning after December 31, 1996. The extension 
of the exclusion with respect to graduate-level courses applies 
to courses beginning after December 31, 1996.

                          Conference Agreement

      The conference agreement follows the House bill, with 
modifications. Under the conference agreement, the exclusion 
for undergraduate education is extended with respect to courses 
beginning before June 1, 2000. As under the House bill, the 
exclusion does not apply with respect to graduate-level 
courses.
2. Modification of $150 million limit on qualified 501(c)(3) bonds 
        other than hospital bonds (sec. 222 of the House bill and sec. 
        222 of the Senate amendment)

                              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.

                               House Bill

      Under the House bill, 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.

                            Senate Amendment

      The Senate amendment repeals the $150 million limit for 
bonds issued after the date of enactment to finance capital 
expenditures incurred after the date of enactment.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment to finance capital 
expenditures incurred after such date.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment. Because this provision of 
the conference agreement applies only to bonds issued with 
respect tocapital expenditures incurred after the date of 
enactment, the $150 million limit will continue to govern issuance of 
other non-hospital qualified 501(c)(3) bonds (e.g., refunding bonds or 
new-money bonds for capital expenditures incurred before the date of 
enactment). Thus, the conferees understand that bond issuers will 
continue to need Treasury Department guidance on the application of 
this limit in the future and expect that the Treasury will continue to 
provide interpretative rules on this limit.
3. Enhanced deduction for corporate contributions of computer 
        technology and equipment (sec. 223 of the House bill)

                              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.\47\ 
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)).
---------------------------------------------------------------------------
    \47\ 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.
---------------------------------------------------------------------------
      Special rules in the Code provide augmented deductions 
for certain corporate \48\ 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)).\49\ 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.
---------------------------------------------------------------------------
    \48\ S corporations are not eligible donors for purposes of section 
170(e)(3) or section 170(e)(4).
    \49\ 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.
---------------------------------------------------------------------------

                               House Bill

      The House 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 House 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 House bill permits 
payment by the donee organization of shipping, transfer, and 
installation costs.\50\ 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.
---------------------------------------------------------------------------
    \50\ In the case of contributions made through private foundations, 
the bill permits the payment by the private foundation of shipping, 
transfer, and installation costs.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for 
contributions made in taxable years beginning after 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, except 
that the provision is sunset after three years. Thus, the 
provision is effective for contributions made in taxable years 
beginning after 1997 and before January 1, 2001. In addition, 
the conference agreement clarifies that the original use of the 
donated property must commence with the donor or the donee. 
Accordingly, qualified contributions generally are limited to 
property that is no more than two years old.
4. Expansion of arbitrage rebate exception for certain bonds (sec. 223 
        of the Senate amendment)

                              Present Law

      Generally, all arbitrage profits earned on investments 
unrelated to the purpose of the borrowing (``nonpurpose 
investments'') when such earnings are permitted must be rebated 
to the Federal Government.
      An exception is provided for bonds issued by governmental 
units having general taxing powers if the governmental unit 
(and all subordinate units) issues $5 million or less of 
governmental bonds during the calendar year (``the small-issuer 
exception''). This exception does not apply to private activity 
bonds.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that up to $5 million of 
bonds used to finance public school capital expenditures 
incurred after December 31, 1997, are excluded from application 
of the present-law $5 million limit. Thus, small issuers will 
continue to benefit from the small issue exception from 
arbitrage rebate if they issue no more than $10 million in 
governmental bonds per calendar year and no more than $5 
million of the bonds is used to finance expenditures other than 
for public school capital expenditures.
      Effective date.--The provision is effective for bonds 
issued after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
5. Treatment of cancellation of certain student loans (sec. 224 of the 
        House bill and sec. 225 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, except thatthe conference agreement does not 
include the provision expanding the exclusion 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.
6. Tax credit for holders of qualified zone academy bonds

                              Present Law

      Under present law, interest on bonds issued for general 
governmental purposes, including public schools, is exempt from 
Federal income tax.

                               House Bill

      No provision.

                            Senate Amendment

      No provision.

                          Conference Agreement

      Under the conference agreement, certain financial 
institutions (i.e., banks, insurance companies, and 
corporations actively engaged in the business of lending money) 
that hold ``qualified zone academy bonds'' are entitled to a 
nonrefundable tax credit in an amount equal to a credit rate 
(set by the Treasury Department) multiplied by the face amount 
of the bond. The credit rate applies to all such bonds 
purchased in each month. A taxpayer holding a qualified zone 
academy bond is entitled to a credit for each year the taxpayer 
holds the bond. The credit is includible in gross income, but 
may be claimed against regular income tax and AMT liability.
      The Treasury Department will set the credit rate each 
month so that such bonds can be issued without discount and 
without any interest cost to the issuer. The maximum term of 
the bond issued in a given month also is determined by the 
Treasury Department so that the present value of the obligation 
to repay the bond is 50 percent of the face value of the bond. 
Such present value will be determined using as a discount rate 
the average annual interest rate of tax-exempt obligations with 
a term of 10 years or more issued during the month.
      ``Qualified zone academy bonds'' are defined as any bond 
issued by a State or local government, provided that (1) 95 
percent of the proceeds are used for the purpose of renovating, 
providing equipment to, developing course materials for use at, 
or training teachers and other school personnel in a 
``qualified zone academy'' and (2) private entities have 
promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, 
or other property or services with a value equal to at least 10 
percent of the bond proceeds.
      A school is a ``qualified zone academy'' if (1) the 
school is a public school that provides education and training 
below the college level, (2) the school operates a special 
academic program in cooperation with businesses to enhance the 
academic curriculum and increase graduation and employment 
rates, and (3) either (a) the school is located in an 
empowerment zone or enterprise community (including empowerment 
zones designated or authorized to be designated under the 
conference agreement), or (b) it is reasonably expected that at 
least 35 percent of the students at the school will be eligible 
for free or reduced-cost lunches under the school lunch program 
established under the National School Lunch Act.
      A total of $400 million of ``qualified zone academy 
bonds'' may be issued in each of 1998 and 1999. The $800 
million aggregate bond cap will be allocated to the States 
according to their respective populations of individuals below 
the poverty line. A State may carry over any unused allocation 
into subsequent years. Each State, in turn, will allocate the 
credit to qualified zone academies within such State.
      Effective date.--The provision is effective for bonds 
issued after 1997.

               III. SAVINGS AND INVESTMENT TAX INCENTIVES

                 A. Individual Retirement Arrangements

1. Increase deductible IRA phase-out range and modify active 
        participant rule (sec. 301 of the Senate amendment)

                              Present Law

      If an individual (or, if married, the individual's 
spouse) is an active participant in an employer-sponsored 
retirement plan, the $2,000 IRA deduction limit is phased out 
over the following levels of adjusted gross income (``AGI''): 
$25,000 to $35,000 in the case of a single taxpayer and $40,000 
to $50,000 in the case of married taxpayers.

                               House Bill

      No provision.

                            Senate Amendment

      An individual is not considered to be an active 
participant in an employer-sponsored retirement plan merely 
because the individual's spouse is such an active participant.
      The income phase-out range for single individuals is 
increased as follows: for 1998 and 1999, the phase-out range is 
$30,000 to $40,000; for 2000 and 2001, $35,000 to $45,000; for 
2002 and 2003, $40,000 to $50,000; and for 2004 and thereafter, 
$50,000 to $60,000.
      The income phase-out range for married individuals is 
increased as follows: for 1998 and 1999, the phase-out range is 
$50,000 to $60,000; for 2000 and 2001, $60,000 to $70,000; for 
2002 and 2003, $70,000 to $80,000; and 2004 and thereafter, 
$80,000 to $100,000.
      Effective date.--The provisions are effective for taxable 
years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with modifications.
      Under the conference agreement, as under the Senate 
amendment, an individual is not considered an active 
participant in an employer-sponsored retirement plan merely 
because the individual's spouse is an active participant. 
However, under the conference agreement, the maximum deductible 
IRA contribution for an individual who is not an active 
participant, but whose spouse is, is phased out for taxpayers 
with AGI between $150,000 and $160,000.
      Under the conference agreement, the deductible IRA income 
phase-out limits are increased as follows:

------------------------------------------------------------------------
                                                       Phase-out range  
------------------------------------------------------------------------
                              Joint Returns                             
                                                                        
  Taxable years beginning in:                                           
    1998..........................................      $50,000--$60,000
    1999..........................................      $51,000--$61,000
    2000..........................................      $52,000--$62,000
    2001..........................................      $53,000--$63,000
    2002..........................................      $54,000--$64,000
    2003..........................................      $60,000--$70,000
    2004..........................................      $65,000--$75,000
    2005..........................................      $70,000--$80,000
    2006..........................................      $75,000--$85,000
    2007 and thereafter...........................     $80,000--$100,000
                                                                        
                            Single Taxpayers                            
                                                                        
  Taxable years beginning in:                                           
    1998..........................................      $30,000--$40,000
    1999..........................................      $31,000--$41,000
    2000..........................................      $32,000--$42,000
    2001..........................................      $33,000--$43,000
    2002..........................................      $34,000--$44,000
    2003..........................................      $40,000--$50,000
    2004..........................................      $45,000--$55,000
    2005 and thereafter...........................      $50,000--$60,000
------------------------------------------------------------------------

      The following examples illustrate the income phase-out 
rules.
      Example 1.--Suppose for a year W is an active participant 
in an employer-sponsored retirement plan, and W's husband, H, 
is not. Further assume that the combined AGI of H and W for the 
year is $200,000. Neither W nor H is entitled to make 
deductible contributions to an IRA for the year.
      Example 2.--Same as example 1, except that the combined 
AGI of W and H is $125,000. H can make deductible contributions 
to an IRA. However, a deductible contribution could not be made 
for W.
2. Tax-free nondeductible IRAs (sec. 301 of the House bill and sec. 302 
        of the Senate amendment)

                              Present Law

      No provision. However, present law provides that an 
individual can make nondeductible contributions to an IRA to 
the extent the individual cannot or does not make deductible 
contributions. Earnings on nondeductible contributions are 
includible in income when withdrawn.

                               House Bill

In general
      The House bill replaces present-law nondeductible IRAs 
with new American Dream IRAs (``AD IRAs'') to which individuals 
may make nondeductible contributions of up to $2,000 annually. 
No income limits apply to AD IRAs, and contributions to AD IRAs 
are in addition to other IRA contributions. The $2,000 
contribution limit is indexed for inflation in $50 increments.
Taxation of distributions
      Qualified distributions from an AD IRA are not includible 
in income. Qualified distributions are distributions (1) made 
after the 5-taxable year period beginning with the first 
taxable year for which a contribution was made to an AD IRA and 
(2) which are (a) made on or after the date on which the 
individual attains age 59\1/2\, (b) made to a beneficiary on or 
after the death of the individual, (c) attributable to the 
individual's being disabled, or (d) for a qualified special 
purpose distribution. A qualified special purpose distribution 
is a distribution for first-time homebuyer expenses.
Conversions of IRAs to AD IRAs
      An IRA may be converted to an AD IRA before January 1, 
1999. Amounts that would have been includible in income had the 
amounts converted been withdrawn are includible in income 
ratably over 4 years. The additional tax on early withdrawals 
does not apply to conversions of IRAs to AD IRAs.
Effective date
      Taxable years beginning after December 31, 1997.

                            Senate Amendment

In general
      Same as the House bill, except that: (1) the new IRAs are 
called IRA Plus accounts and (2) no more than $2,000 of annual 
contributions can be made to all an individual's IRAs.
Taxation of distributions
      Same as the House bill, except that special purpose 
distributions also include distributions to long-term 
unemployed individuals.
Conversions of IRAs to AD IRAs
      Same as the House bill, except that conversions of an IRA 
to an IRA Plus can be made at any time. If the conversion is 
made before January 1, 1999, the amounts that would have been 
includible in income had the amounts converted been withdrawn 
are includible in income ratably over 4 years. In any case, the 
10-percent tax on early withdrawals does not apply.

                             Effective date

      Same as the House bill.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with modifications. Under the conference agreement, the new IRA 
is called the ``Roth IRA'' rather than the IRA Plus. The 
maximum contribution that can be made to a Roth IRA is phased 
out for individuals with AGI between $95,000 and $110,000 and 
for joint filers with AGI between $150,000 and $160,000. Under 
the conference agreement, distributions to long-term unemployed 
individuals do not qualify as special purpose distributions. 
Thus, only first-time homebuyer expenses (as defined under the 
Senate amendment) qualify as special purpose distributions.
      Under the conference agreement, only taxpayers with AGI 
of less than $100,000 51 are eligible to roll over 
or convert an IRA into a Roth IRA.
---------------------------------------------------------------------------
    \51\ For this purpose, AGI is determined before any amount 
includible in income as a result of the rollover or conversion.
---------------------------------------------------------------------------
       The conference agreement retains present-law 
nondeductible IRAs. Thus, an individual who cannot (or does 
not) make contributions to a deductible IRA or a Roth IRA can 
make contributions to a nondeductible IRA. In no case can 
contributions to all an individual's IRAs for a taxable year 
exceed $2,000.
3. Modifications to early withdrawal tax (sec. 301 of the House bill 
        and sec. 303 of the Senate amendment)

                              Present Law

      Under present law, a 10-percent additional tax applies to 
distributions from an IRA prior to age 59\1/2\, unless an 
exception applies.

                               House Bill

      The House bill adds an additional exception to the early 
withdrawal tax for AD IRAs only. The early withdrawal tax does 
not apply to distributions from an AD IRA for first-time 
homebuyer expenses, subject to a $10,000 life-time cap.
      Effective date.--Taxable years beginning after December 
31, 1997.

                            Senate Amendment

      The early withdrawal tax does not apply to distributions 
from any IRA for first-time homebuyer expenses or for long-term 
unemployed individuals.
      Effective date.--Same as the House bill.

                          Conference Agreement

      The conference agreement follows the Senate amendment but 
does not include the provision relating to long-term unemployed 
individuals.52
---------------------------------------------------------------------------
    \52\ As under the House bill and Senate amendment, the conference 
agreement includes a penalty-free withdrawal provision for education 
expenses.
---------------------------------------------------------------------------
4. IRA investments in coins and bullion (sec. 304 of the Senate 
        amendment)

                              Present Law

      IRA assets may not be invested in collectibles. This 
prohibition does not apply to certain gold and silver coins or 
to coins issued by a State.

                               House Bill

      No provision.

                            Senate Amendment

      IRA assets may be invested in certain platinum coins and 
in certain gold, silver, platinum or palladium bullion.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

                      B. Capital Gains Provisions

1. Maximum rate of tax on net capital gain of individuals (sec. 311 of 
        the House bill and sec. 311 of the Senate amendment)

                              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.

                               House Bill

      Under the House 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 the gain 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. 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 forgo indexing.
      Effective date.--The provision generally applies to sales 
and exchanges (and installment payments received) after May 6, 
1997.

                            Senate Amendment

      The Senate amendment is the same as the House bill except 
the maximum rate on gain attributable to the depreciation of 
section 1250 property is 24 percent (rather than 26 percent). 
(Differences in the provisions relating to indexing and small 
business stock are described below.)
      Effective date.--The effective date is the same as the 
House bill.

                          Conference Agreement

      The conference agreement generally follows the House bill 
and the Senate amendment. The maximum rate of tax on gain 
attributable to the depreciation of section 1250 property will 
be 25 percent.
      In addition, for taxable years beginning after December 
31, 2000, the maximum capital gains rates for assets which are 
held more than 5 years, are 8 percent and 18 percent (rather 
than 10 percent and 20 percent). The 18-percent rate only 
applies to assets the holding period for which begins after 
December 31, 2000. A taxpayer holding a capital asset or asset 
used in the taxpayer's trade or business on January 1, 2001, 
may elect to treat the 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, any gain is recognized (and any loss 
disallowed). The conference agreement allows the Treasury 
Department to issue regulations coordinating the capital gain 
provisions with other rules involving the treatment of sales 
and exchanges by pass-thru entities and of interests therein.
      Under the conference agreement, the lower capital gains 
rates do not apply to the sale or exchange of assets held for 
18 months or less, effective for amounts properly taken into 
account after July 28, 1997. The 28-percent maximum rate will 
continue to apply to the sale or exchange of capital assets 
held more than 1 year but not more than 18 months.
2. Small business stock (sec. 311 of the House bill and secs. 312 and 
        313 of the Senate amendment)

                              Present Law

      The Revenue Reconciliation Act of 1993 provided 
individuals a 50-percent exclusion for the sale of certain 
small business stock acquired at original issue and held for at 
least five years. One-half of the excluded gain is a minimum 
tax preference.
      The amount of gain eligible for the 50-percent exclusion 
by an individual with respect to any corporation is the greater 
of (1) 10 times the taxpayer's basis in the stock or (2) $10 
million.
      In order to qualify as a small business, when the stock 
is issued, the gross assets of the corporation may not exceed 
$50 million. The corporation also must meet an active trade or 
business requirement.

                               House Bill

      Under the House bill, the lower capital gains rates do 
not apply to the includible portion of the gain from the 
qualifying sale of small business stock. Thus, the maximum rate 
of regular tax on the sale of small business stock remains at 
14 percent.

                            Senate Amendment

      Under the Senate amendment, the 50-percent exclusion will 
apply to small business stock (other than stock of a subsidiary 
corporation) held by a corporation. The minimum tax preference 
is repealed. Under the provision, in the case of a qualifying 
sale of small business stock by an individual, the maximum rate 
of tax, will be 10 percent.
      The Senate amendment increases the size of an eligible 
corporation from gross assets of $50 million to gross assets of 
$100 million. The Senate amendment also repeals the limitation 
on the amount of gain a taxpayer can exclude with respect to 
the stock of any corporation.
      The Senate amendment provides that certain working 
capital must be expended within five years (rather than two 
years) in order to be treated as used in the active conduct of 
a trade or business. No limit on the percent of the 
corporation's assets that are working capital is imposed.
      The Senate amendment provides that if the corporation 
establishes a business purpose for a redemption of its stock, 
that redemption is disregarded in determining whether other 
newly issued stock could qualify as eligible stock.
      The Senate amendment allows a taxpayer to roll over gain 
from the sale or exchange of small business stock held more 
than five years where the taxpayer uses the proceeds to 
purchase other small business stock within 60 days of the sale 
of the original stock. If the taxpayer sells the replacement 
stock, any gain attributable to the original stock is treated 
as gain from the sale or exchange of small business stock held 
more than five years, and any remaining gain will be so treated 
after the replacement stock is held for at least five years. In 
addition, any gain that otherwise would be recognized from the 
sale of the replacement stock can be rolled over to other small 
business stock purchased within 60 days.
      Effective date.--The increase in the size of corporations 
whose stock is eligible for the exclusion applies to stock 
issued after the date of the enactment of the proposal. The 
remaining provisions apply to stock issued after August 10, 
1993 (the original effective date of the small business stock 
provision).

                          Conference Agreement

      The conference agreement follows the provisions in the 
House bill. The conference agreement reduces the minimum tax 
preference from one-half of the excluded gain to 42 percent of 
such gain.
      In addition, the conference agreement allows an 
individual to roll over tax-free gain from the sale or exchange 
of qualified small business stock held more than 6 months where 
the taxpayer uses the proceeds to purchase other qualified 
small business stock within 60 days of the sale. For purposes 
of the rollover provision, the replacement stock must meet the 
active business requirement for the 6-month period following 
the purchase. Generally, the holding period of the stock 
purchased will include the holding period of the stock sold, 
except for purposes of determining whether the 6-month holding 
period is met. The provision applies to sales after the date of 
enactment of this Act.
3. Indexing of basis of certain assets for purposes of determining gain 
        (sec. 312 of the House bill)

                              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.

                               House Bill

      The House bill generally provides for an inflation 
adjustment to (i.e., indexing of) the adjusted basis of certain 
assets (called ``indexed assets'') held more than three 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 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 inflation adjustment under the provision is computed 
by multiplying the taxpayer's adjusted basis in the indexed 
asset by an inflation adjustment percentage, based on the 
chain-type price index for GDP (``Gross Domestic Product').
      Special rules apply to RICS, REITS, partnerships, S 
corporations and common trust funds.
      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, any gain is recognized (and any loss is 
disallowed).

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
4. Exclusion of gain on sale of principal residence (sec. 313 of the 
        House bill and sec. 314 of the Senate amendment)

                              Present Law

      Under present law, 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.
      Also, under present law, 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).

                               House Bill

      Under the House 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 House 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 bill, 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 after May 6, 
1997, and replaces the present-law rollover and one-time 
exclusion provisions applicable to principal residences.
      A taxpayer may 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 such 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill with 
technical modifications.

                          Conference Agreement

      The conference agreement generally follows the House bill 
and the Senate amendment.
      The conferees wish to clarify that the provision limiting 
the exclusion to only one sale every two years by the taxpayer 
does not prevent a husband and wife filing a joint return from 
each excluding up to $250,000 of gain from the sale or exchange 
of each spouse's principal residence provided that each spouse 
would be permitted to exclude up to $250,000 of gain if they 
filed separate returns.
5. Corporate capital gains (sec. 321 of the House bill)

                              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.

                               House Bill

      The House bill provides an 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 House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
      The conference agreement provides that the amount of gain 
subject to the alternative rate of tax under section 1201(a)(2) 
may not exceed the corporation's taxable income. Because the 
section 1201 alternative tax does not presently apply, this 
change has no effect under the rate structure of present law.

                 IV. ALTERNATIVE MINIMUM TAX PROVISIONS

   A. Increase Exemption Amount Applicable to Individual Alternative 
  Minimum Tax (sec. 401 of the House bill and sec. 102 of the Senate 
                               amendment)

                              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 exemptions 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.

                               House Bill

      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.

                            Senate Amendment

      For taxable years beginning after 2000 and before 2003, 
the exemption amounts of the individual alternative minimum tax 
are increased as follows in each year: (1) by $600 in the case 
of married individuals filing a joint return and surviving 
spouses; (2) by $450 in the case of other unmarried 
individuals; and (3) by $300 in the case of married individuals 
filing separate returns. For taxable years beginning after 
2003, the exemption amounts of the individual alternative 
minimum tax are increased as follows in each year: (1) by $950 
in the case of married individuals filing a joint return and 
surviving spouses; (2) by $700 in the case of other unmarried 
individuals; and (3) by $475 in the case of married individuals 
filing separate returns.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2000.

                          Conference Agreement

      The conference agreement contains neither the House bill 
nor the Senate amendment.

 B. Repeal Alternative Minimum Tax for Small Businesses and Repeal the 
     Depreciation Adjustment (secs. 402 and 403 of the House bill)

                              Present Law

      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.

                               House Bill

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 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 is limited to the amount by 
which corporation's regular tax liability (reduced by other 
credits) exceeds 25 percent of the excess (if any) of the 
corporation's regular tax (reduced by other credits) over 
$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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement generally follows the House bill 
with respect to the repeal of the corporate alternative minimum 
tax for small businesses. In addition, for property (including 
pollution control facilities) placed in service after December 
31, 1998, the conference agreement conforms the recovery 
periods used for purposes of the alternative minimum tax 
depreciation adjustment to the recovery periods used for 
purposes of the regular tax under present law.

 C. Repeal AMT Installment Method Adjustment for Farmers (sec. 404 of 
          the House bill and sec. 732 of the Senate amendment)

                              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.

                               House Bill

      The House 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, with a special rule for dispositions occurring in 1987.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

        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 
        House bill and sec. 401(a) of the Senate amendment)

                              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.53 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)).54
---------------------------------------------------------------------------
    \53\ Prior to 1976, separate tax rate schedules applied to the gift 
tax and the estate tax.
    \54\ 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.
---------------------------------------------------------------------------

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment 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 2006. The 
increase in the effective exemption is phased in according to 
the following schedule: the effective exemption is $625,000 for 
decedents dying and gifts made in 1998; $640,000 in 1999; 
$660,000 in 2000; $675,000 in 2001; $725,000 in 2002; $750,000 
in 2003; $800,000 in 2004; $900,000 in 2005; and $1 million in 
2006. After 2006, the effective exemption is indexed annually 
for inflation. The indexed exemption amount is rounded to the 
next lowest multiple of $10,000.
      The Senate amendment includes the same conforming 
amendments as were made in the House bill.
      Effective date.--The provision is effective for decedents 
dying, and gifts made, after December 31, 1997.

                          Conference Agreement

      The conference agreement 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 2006. 
The increase in the effective exemption is phased in according 
to the following schedule: the effective exemption is $625,000 
for decedents dying and gifts made in 1998; $650,000 in 1999; 
$675,000 in 2000 and 2001; $700,000 in 2002 and 2003; $850,000 
in 2004; $950,000 in 2005; and $1 million in 2006 and 
thereafter. The conference does not index the effective 
exemption for inflation.
      The conference agreement includes the conforming 
amendments made in the House bill and the Senate amendment.
      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 House bill and sec. 401 (b)-(e) of the Senate 
        amendment)

                              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)).

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Estate tax exclusion for qualified family-owned businesses (sec. 402 
        of the Senate amendment)

                              Present Law

      There are no special estate tax rules for qualified 
family-owned businesses. All taxpayers are allowed a unified 
credit in computing the taxpayer's estate and gift tax, which 
effectively exempts a total of $600,000 in cumulative taxable 
transfers from the estate and gift tax (sec. 2010). An executor 
also may elect, under section 2032A, to value certain qualified 
real property used in farming or another qualifying closely-
held trade or business at its current use value, rather than 
its highest and best use value (up to a maximum reduction of 
$750,000). In addition, an executor may elect to pay the 
Federal estate tax attributable to a qualified closely-held 
business in installments over, at most, a 14-year period (sec. 
6166). The tax attributable to the first $1,000,000 in value of 
a closely-held business is eligible for a special 4-percent 
interest rate (sec. 6601(j)).

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment allows an executor to elect special 
estate tax treatment for qualified ``family-owned business 
interests'' if such interests comprise more than 50 percent of 
a decedent's estate and certain other requirements are met. In 
general, the provision excludes the first $1 million of value 
in qualified family-owned business interests from a decedent's 
taxable estate.
      This new exclusion for qualified family-owned business 
interests is provided in addition to the unified credit (which 
currently effectively exempts $600,000 of taxable transfers 
from the estate and gift tax, and will be increased to an 
effective exemption of $1,000,000 of taxable transfers under 
other provisions of the Senate amendment), the special-use 
provisions of section 2032A (which permit the exclusion of up 
to $750,000 in value of a qualifying farm or other closely-held 
business from a decedent's estate), and the provisions of 
section 6166 (which provide for the installment payment of 
estate taxes attributable to closely held businesses).
Qualified family-owned business interests
      For purposes of the provision, a qualified family-owned 
business interest is defined as any interest in a trade or 
business (regardless of the form in which it is held) with a 
principal place of business in the United States if ownership 
of the trade or business is held at least 50 percent by one 
family, 70 percent by two families, or 90 percent by three 
families, as long as the decedent's family owns at least 30 
percent of the trade or business. Under the provision, members 
of an individual's family are defined using the same definition 
as is used for the special-use valuation rules of section 
2032A, and thus 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. 
For purposes of applying the ownership tests in the case of a 
corporation, the decedent and members of the decedent's family 
are required to own the requisite percentage of the total 
combined voting power of all classes of stock entitled to vote 
and the requisite percentage of the total value of all shares 
of all classes of stock of the corporation. In the case of a 
partnership, the decedent and members of the decedent's family 
are required to own the requisite percentage of the capital 
interest, and the requisite percentage of the profits interest, 
in the partnership.
      In the case of a trade or business that owns an interest 
in another trade or business (i.e., ``tiered entities''), 
special look-through rules apply. Each trade or business owned 
(directly or indirectly) by the decedent and members of the 
decedent's family is separately tested to determine whether 
that trade or business meets the requirements of a qualified 
family-owned business interest. In applying these tests, any 
interest that a trade or business owns in another trade or 
business is disregarded in determining whether the first trade 
or business is a qualified family-owned business interest. The 
value of any qualified family-owned business interest held by 
an entity is treated as being proportionately owned by or for 
the entity's partners, shareholders, or beneficiaries. In the 
case of a multi-tiered entity, such rules are sequentially 
applied to look through each separate tier of the entity.
      For example, if a holding company owns interests in two 
other companies, each of the three entities will be separately 
tested under the qualified family-owned business interest 
rules. In determining whether the holding company is a 
qualified family-owned business interest, its ownership 
interest in the other two companies is disregarded. Even if the 
holding company itself does not qualify as a family-owned 
business interest, the other two companies still may qualify if 
the direct and indirect interests held by the decedent and his 
or her family members satisfy the requisite ownership 
percentages and other requirements of a qualified family-owned 
business interest. If either (or both) of the lower-tier 
entities qualify, the value of the qualified family-owned 
business interests owned by the holding company are treated as 
proportionately owned by the holding company's shareholders.
      An interest in a trade or business does not qualify if 
the business's (or a related entity's) stock or securities were 
publicly-traded at any time within three years of the 
decedent's death. An interest in a trade or business also does 
not qualify if more than 35 percent of the adjusted ordinary 
gross income of the business for the year of the decedent's 
death was personal holding company income (as defined in 
section 543). This personal holding company restriction does 
not apply to banks or domestic building and loan associations.
      The value of a trade or business qualifying as a family-
owned business interest is reduced to the extent the business 
holds passive assets or excess cash or marketable securities. 
Under the provision, the value of qualified family-owned 
business interests does not include any cash or marketable 
securities in excess of the reasonably expected day-to-day 
working capital needs of the trade or business. For this 
purpose, it is intended that day-to-day working capital needs 
be determined based on a historical average of the business's 
working capital needs in the past, using an analysis similar to 
that set forth in Bardahl Mfg. Corp., 24 T.C.M. 1030 (1965). It 
is further intended that accumulations for capital acquisitions 
not be considered ``working capital'' for this purpose. The 
value of the qualified family-owned business interests also 
does not include certain other passive assets. For this 
purpose, passive assets include any assets that: (1) produce 
dividends, interest, rents, royalties, annuities and certain 
other types of passive income (as described in sec. 543(a)); 
(2) are an interest in a trust, partnership or REMIC (as 
described in sec. 954(c)(1)(B)(ii)); (3) produce no income (as 
described in sec. 954(c)(1)(B)(iii)); (4) give rise to income 
from commodities transactions or foreign currency gains (as 
described in sec. 954(c)(1) (C) and (D)); (5) produce income 
equivalent to interest (as described in sec. 954(c)(1)(E)); or 
(6) produce income from notional principal contracts or 
payments in lieu of dividends (as described in new secs. 
954(c)(1) (F) and (G), added elsewhere in the Senate 
amendment). In the case of a regular dealer in property, such 
property is not considered to produce passive income under 
these rules, and thus, is not considered to be a passive asset.
Qualifying estates
      A decedent's estate qualifies for the special treatment 
only if the decedent was a U.S. citizen or resident at the time 
of death, and the aggregate value of the decedent's qualified 
family-owned business interests that are passed to qualified 
heirs exceeds 50 percent of the decedent's adjusted gross 
estate (the ``50-percent liquidity test''). For this purpose, 
qualified heirs include any individual who has been actively 
employed by the trade or business for at least 10 years prior 
to the date of the decedent's death, and members of the 
decedent's family. If a qualified heir is not a citizen of the 
United States, any qualified family-owned business interest 
acquired by that heir must be held in a trust meeting 
requirements similar to those imposed on qualified domestic 
trusts (under present-law sec. 2056A(a)), or through certain 
other security arrangements that meet the satisfaction of the 
Treasury Secretary. The 50-percent liquidity test generally is 
applied by adding all transfers of qualified family-owned 
business interests made by the decedent to qualified heirs at 
the time of the decedent's death, plus certain lifetime gifts 
of qualified family-owned business interests made to members of 
the decedent's family, and comparing this total to the 
decedent's adjusted gross estate. To the extent that a decedent 
held qualified family-owned business interests in more than one 
trade or business, all such interests are aggregated for 
purposes of applying the 50-percent liquidity test.
      The 50-percent liquidity test is calculated using a 
ratio, the numerator and denominator of which are described 
below.
      The numerator is determined by aggregating the value of 
all qualified family-owned business interests that are 
includible in the decedent's gross estate and are passed from 
the decedent to a qualified heir, plus any lifetime transfers 
of qualified business interests that are made by the decedent 
to members of the decedent's family (other than the decedent's 
spouse), provided such interests have been continuously held by 
members of the decedent's family and were not otherwise 
includible in the decedent's gross estate. For this purpose, 
qualified business interests transferred to members of the 
decedent's family during the decedent's lifetime are valued as 
of the date of such transfer. This amount is then reduced by 
all indebtedness of the estate, except for the following: (1) 
indebtedness on a qualified residence of the decedent 
(determined in accordance with the requirements for 
deductibility of mortgage interest set forth in section 
163(h)(3)); (2) indebtedness incurred to pay the educational or 
medical expenses of the decedent, the decedent's spouse or the 
decedent's dependents; and (3) other indebtedness of up to 
$10,000.
      The denominator is equal to the decedent's gross estate, 
reduced by any indebtedness of the estate, and increased by the 
amount of the following transfers, to the extent not already 
included in the decedent's gross estate: (1) any lifetime 
transfers of qualified business intereststhat were made by the 
decedent to members of the decedent's family (other than the decedent's 
spouse), provided such interests have been continuously held by members 
of the decedent's family, plus (2) any other transfers from the 
decedent to the decedent's spouse that were made within 10 years of the 
date of the decedent's death, plus (3) any other transfers made by the 
decedent within three years of the decedent's death, except non-taxable 
transfers made to members of the decedent's family. The Secretary of 
Treasury is granted authority to disregard de minimis gifts. In 
determining the amount of gifts made by the decedent, any gift that the 
donor and the donor's spouse elected to have treated as a split gift 
(pursuant to sec. 2513) is treated as made one-half by each spouse for 
purposes of this provision.
Participation requirements
      To qualify for the beneficial treatment provided under 
the Senate amendment, the decedent (or a member of the 
decedent's family) must have owned and materially participated 
in the trade or business for at least five of the eight years 
preceding the decedent's date of death. In addition, each 
qualified heir (or a member of the qualified heir's family) is 
required to materially participate in the trade or business for 
at least five years of any eight-year period within 10 years 
following the decedent's death. For this purpose, ``material 
participation'' is defined as under present-law section 2032A 
(special use valuation) and the regulations promulgated 
thereunder. See, e.g., Treas. Reg. sec. 20.2032A-3. Under such 
regulations, no one factor is determinative of the presence of 
material participation and the uniqueness of the particular 
industry (e.g., timber, farming, manufacturing, etc.) must be 
considered. Physical work and participation in management 
decisions are the principal factors to be considered. For 
example, an individual generally is considered to be materially 
participating in the business if he or she personally manages 
the business fully, regardless of the number of hours worked, 
as long as any necessary functions are performed.
      If a qualified heir rents qualifying property to a member 
of the qualified heir's family on a net cash basis, and that 
family member materially participates in the business, the 
material participation requirement will be considered to have 
been met with respect to the qualified heir for purposes of 
this provision.
Recapture provisions
      The benefit of the exclusions for qualified family-owned 
business interests are subject to recapture if, within 10 years 
of the decedent's death and before the qualified heir's death, 
one of the following ``recapture events'' occurs: (1) the 
qualified heir ceases to meet the material participation 
requirements (i.e., if neither the qualified heir nor any 
member of his or her family has materially participated in the 
trade or business for at least five years of any eight-year 
period); (2) the qualified heir disposes of any portion of his 
or her interest in the family-owned business, other than by a 
disposition to a member of the qualified heir's family or 
through a conservation contribution under section 170(h); (3) 
the principal place of business of the trade or business ceases 
to be located in the United States; or (4) the qualified heir 
loses U.S. citizenship. A qualified heir who loses U.S. 
citizenship may avoid such recapture by placing the qualified 
family-owned business assets into a trust meeting requirements 
similar to a qualified domestic trust (as described in present 
law sec. 2056A(a)), or through certain other security 
arrangements.
      If one of the above recapture events occurs, an 
additional tax is imposed on the date of such event. As under 
section 2032A, each qualified heir is personally liable for the 
portion of the recapture tax that is imposed with respect to 
his or her interest in the qualified family-owned business. 
Thus, for example, if a brother and sister inherit a qualified 
family-owned business from their father, and only the sister 
materially participates in the business, her participation will 
cause both her and her brother to meet the material 
participation test. If she ceases to materially participate in 
the business within 10 years after her father's death (and the 
brother still does not materially participate), the sister and 
brother would both be liable for the recapture tax; that is, 
each would be liable for the recapture tax attributable to his 
or her interest.
      The portion of the reduction in estate taxes that is 
recaptured would be dependent upon the number of years that the 
qualified heir (or members of the qualified heir's family) 
materially participated in the trade or business after the 
decedent's death. If the qualified heir (or his or her family 
members) materially participated in the trade or business after 
the decedent's death for less than six years, 100 percent of 
the reduction in estate taxes attributable to that heir's 
interest is recaptured; if the participation was for at least 
six years but less than seven years, 80 percent of the 
reduction in estate taxes is recaptured; if the participation 
was for at least seven years but less than eight years, 60 
percent is recaptured; if the participation was for at least 
eight years but less than nine years, 40 percent is recaptured; 
and if the participation was for at least nine years but less 
than 10 years, 20 percent of the reduction in estate taxes is 
recaptured. In general, there is no requirement that the 
qualified heir (or members of his or her family) continue to 
hold or participate in the trade or business more than 10 years 
after the decedent's death. As under present-law section 2032A, 
however, the 10-year recapture period may be extended for a 
period of up to two years if the qualified heir does not begin 
to use the property for a period of up to two years after the 
decedent's death.
      If a recapture event occurs with respect to any qualified 
family-owned business interest (or portion thereof), the amount 
of reduction in estate taxes attributable to that interest is 
determined on a proportionate basis. For example, if the 
decedent's estate included $2 million in qualified family-owned 
business interests and $1 million of such interests received 
beneficial treatment under this proposal, one-half of the value 
of the interest disposed of is deemed to have received the 
benefits provided under this proposal.
Effective date
      The provision is effective with respect to the estates of 
decedents dying after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
except that the exclusion forfamily-owned business interests 
may be taken only to the extent that the exclusion for family-owned 
business interests, plus the amount effectively exempted by the unified 
credit, does not exceed $1.3 million.
      The conferees clarify that a sale or disposition, in the 
ordinary course of business, of assets such as inventory or a 
piece of equipment used in the business (e.g., the sale of 
crops or a tractor) would not result in recapture of the 
benefits of the qualified family-owned business exclusion.
4. Reduction in estate tax for certain land subject to permanent 
        conservation easement (sec. 403 of the Senate amendment)

                              Present Law

      A deduction is allowed for estate and gift tax purposes 
for a contribution of a qualified real property interest to a 
charity (or other qualified organization) exclusively for 
conservation purposes (secs. 2055(f), 2522(d)). For this 
purpose, a qualified real property interest means the entire 
interest of the transferor in real property (other than certain 
mineral interests), a remainder interest in real property, or a 
perpetual restriction on the use of real property (sec. 
170(h)). A ``conservation purpose'' is (1) preservation of land 
for outdoor recreation by, or the education of, the general 
public, (2) preservation of natural habitat, (3) preservation 
of open space for scenic enjoyment of the general public or 
pursuant to a governmental conservation policy, and (4) 
preservation of historically important land or certified 
historic structures. Also, a contribution will be treated as 
``exclusively for conservation purposes'' only if the 
conservation purpose is protected in perpetuity.
      A donor making a qualified conservation contribution 
generally is not allowed to retain an interest in minerals 
which may be extracted or removed by any surface mining method. 
However, deductions for contributions of conservation interests 
satisfying all of the above requirements will be permitted if 
two conditions are satisfied. First, the surface and mineral 
estates in the property with respect to which the contribution 
is made must have been separated before June 13, 1976 (and 
remain so separated) and, second, the probability of surface 
mining on the property with respect to which a contribution is 
made must be so remote as to be negligible (sec. 170(h)(5)(B)).
      The same definition of qualified conservation 
contributions also applies for purposes of determining whether 
such contributions qualify as charitable deductions for income 
tax purposes.

                               House Bill

      No provision.

                            Senate Amendment

Reduction in estate taxes for certain land subject to permanent 
        conservation easement
      The Senate amendment allows an executor to elect to 
exclude from the taxable estate 40 percent of the value of any 
land subject to a qualified conservation easement that meets 
the following requirements: (1) the land is located within 25 
miles of a metropolitan area (as defined by the Office of 
Management and Budget) or a national park or wilderness area, 
or within 10 miles of an Urban National Forest (as designated 
by the Forest Service of the U.S. Department of Agriculture); 
(2) the land has been owned by the decedent or a member of the 
decedent's family at all times during the three-year period 
ending on the date of the decedent's death; and (3) a qualified 
conservation contribution (within the meaning of sec. 170(h)) 
of a qualified real property interest (as generally defined in 
sec. 170(h)(2)(C)) was granted by the decedent or a member of 
his or her family. For purposes of the provision, preservation 
of a historically important land area or a certified historic 
structure does not qualify as a conservation purpose. To the 
extent that the value of such land is excluded from the taxable 
estate, the basis of such land acquired at death is a carryover 
basis (i.e., the basis is not stepped-up to its fair market 
value at death). Debt-financed property is not eligible for the 
exclusion.
      The exclusion amount is calculated based on the value of 
the property after the conservation easement has been placed on 
the property. The exclusion from estate taxes does not extend 
to the value of any development rights retained by the decedent 
or donor, although payment for estate taxes on retained 
development rights may be deferred for up to two years, or 
until the disposition of the property, whichever is earlier. 
For this purpose, retained development rights are any rights 
retained to use the land for any commercial purpose which is 
not subordinate to and directly supportive of farming purposes, 
as defined in section 6420 (e.g., tree farming, ranching, 
viticulture, and the raising of other agricultural or 
horticultural commodities).
Maximum benefit allowed
      The 40-percent estate tax exclusion for land subject to a 
qualified conservation easement (described above) may be taken 
only to the extent that the total exclusion for qualified 
conservation easements, plus the exclusion for qualified 
family-owned business interests (described in V.A.3., above), 
does not exceed $1 million. The executor of an estate holding 
land subject to a qualified conservation easement and/or 
qualified family-owned business interests is required to 
designate which of the two benefits is being claimed with 
respect to each property on which a benefit is claimed.
      If the value of the conservation easement is less than 30 
percent of (1) the value of the land without the easement, 
reduced by (2) the value of any retained development rights, 
then the exclusion percentage is reduced. The reduction in the 
exclusion percentage is equal to two percentage points for each 
point that the above ratio falls below 30 percent. Thus, for 
example, if the value of the easement is 25 percent of the 
value of the land before the easement less the value of the 
retained development rights, the exclusion percentage is 30 
percent (i.e., the 40 percent amount is reduced by twice the 
difference between 30 percent and 25 percent). Under this 
calculation, if the value of the easement is 10 percent or less 
of the value of the land beforethe easement less the value of 
the retained development rights, the exclusion percentage is equal to 
zero.
Treatment of land subject to a conservation easement for purposes of 
        special-use valuation
      The granting of a qualified conservation easement (as 
defined above) is not treated as a disposition triggering the 
recapture provisions of section 2032A. In addition, the 
existence of a qualified conservation easement does not prevent 
such property from subsequently qualifying for special-use 
valuation treatment under section 2032A.
Retained mineral interests
      The Senate amendment also allows a charitable deduction 
(for income tax purposes or estate tax purposes) to taxpayers 
making a contribution of a permanent conservation easement on 
property where a mineral interest has been retained and surface 
mining is possible, but its probability is ``so remote as to be 
negligible.'' Present law provides for a charitable deduction 
in such a case if the mineral interests have been separated 
from the land prior to June 13, 1976. The provision allows such 
a charitable deduction to be taken regardless of when the 
mineral interests had been separated.
Effective date
      The estate tax exclusion applies to decedents dying after 
December 31, 1997. The rules with respect to the treatment of 
conservation easements under section 2032A and with respect to 
retained mineral interests are effective for easements granted 
after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
except that the maximum exclusion for land subject to a 
qualified conservation easement is limited to $100,000 in 1998, 
$200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and 
$500,000 in 2002 and thereafter. The exclusion for land subject 
to a qualified conservation easement may be taken in addition 
to the maximum exclusion for qualified family-owned business 
interests (i.e., there is no coordination between the two 
provisions).
      The conference agreement provides that de minimis 
commercial recreational activity that is consistent with the 
conservation purpose, such as the granting of hunting and 
fishing licenses, will not cause the property to fail to 
qualify under this provision. It is anticipated that the 
Secretary of the Treasury will provide guidance as to the 
definition of ``de minimis'' activities. In addition, the 
conference agreement makes technical modifications (a) to 
provide that the definition of farming for purposes of this 
provision is the same as the definition set forth in section 
2032A(e)(5), and (b) to clarify that a post-mortem conservation 
easement may be placed on the property, as long as the easement 
has been made no later than the date of the election.
      The conferees clarify that debt-financed property is 
eligible for this provision to the extent of the net equity in 
the property. For example, if a $1 million property is subject 
to an outstanding debt balance of $100,000, it is treated in 
the same manner as a $900,000 property that is not debt-
financed.
5. Installment payments of estate tax attributable to closely held 
        businesses (secs. 502-503 of the House bill and secs. 404-405 
        of the Senate amendment)
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.

                               House Bill

      The House 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 House 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).
      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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement reduces the 4-percent interest 
rate to 2 percent, and makes the interest paid on estate taxes 
deferred under section 6166 non-deductible for estate or income 
tax purposes. The 2-percent interest rate 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 and any other 
exclusions).55 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.
---------------------------------------------------------------------------
    \55\ The $1,000,000 threshold is indexed under other provisions of 
the bill.
---------------------------------------------------------------------------
      The conference agreement does not include the provision 
that extends the repayment period to a maximum period of 24 
years or the provision that provides a zero-percent interest 
rate for a portion of the deferred estate tax attributable to 
closely held businesses.
      Effective date.--The provision is effective for decedents 
dying after December 31, 1997. Estates deferring estate tax 
under current law may make a one-time election to use the lower 
interest rates and forego the interest deduction for 
installments due after the date of the election (but such 
estates do not receive the benefit of the increase in the 
amount eligible for the 6601(j) interest rate--i.e., only the 
amount that was previously eligible for the 4-percent rate 
would be eligible for the 2-percent rate).
6. Estate tax recapture from cash leases of specially-valued property 
        (sec. 504 of the House bill and sec. 406 of the Senate 
        amendment)

                              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 additional estate 
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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
7. Clarify eligibility for extension of time for payment of estate tax 
        (sec. 505 of the House bill)

                              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 electionis 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.

                               House Bill

      The House bill 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
8. Gifts may not be revalued for estate tax purposes after expiration 
        of statute of limitations (sec. 506 of the House bill)

                              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 thereturn. 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 a suit 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).

                               House Bill

      The House 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 House 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 also is 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
9. Repeal of throwback rules applicable to domestic trusts (sec. 507 of 
        the House bill)

                              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 
56 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.
---------------------------------------------------------------------------
    \56\ 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 had realized 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 
distributions of previously accumulated trust income from a 
foreign trust than to distributions of such income 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.

                               House Bill

      The House bill exempts from the throwback rules amounts 
distributed by a domestic trust after the date of enactment. 
The House bill 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,57 
remains unchanged.
---------------------------------------------------------------------------
    \57\ Rev. Rul. 91-6, 1991-1 C.B. 89.
---------------------------------------------------------------------------
       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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, except 
that the throwback rules continue to apply with respect to (a) 
foreign trusts, (b) domestic trusts that were once treated as 
foreign trusts (except as provided in Treasury regulations), 
and (c) domestic trusts created before March 1, 1984, that 
would be treated as multiple trusts under sec. 643(f) of the 
Code.
10. Unified credit of decedent increased by unified credit of spouse 
        used on split gift included in decedent's gross estate (sec. 
        508 of the House bill)

                              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.

                               House Bill

      With respect to any split-gift property that is 
subsequently includible in both spouses' estates, the House 
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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
11. Reformation of defective bequests to spouse of decedent (sec. 509 
        of the House bill)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.

                 B. Generation-Skipping Tax Provisions

1. Severing of trusts holding property having an inclusion ratio of 
        greater than zero (sec. 511 of the House bill)

                              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).

                               House Bill

      If a trust with an inclusion ratio of greater than zero 
is severed into two separate trusts, the House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
2. Modification of generation-skipping transfer tax for transfers to 
        individuals with deceased parents (sec. 512 of the House bill 
        and sec. 407 of the Senate amendment)

                              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.

                               House Bill

      The House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

            VI. EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS

A. Research Tax Credit (sec. 601 of the House bill and sec. 501 of the 
                           Senate amendment)

                              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, 
1997.1
---------------------------------------------------------------------------
    \1\ 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).
---------------------------------------------------------------------------
      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.2
---------------------------------------------------------------------------
    \2\ 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 research 
expenditures to gross receipts for any five years selected by the 
taxpayer from its fifth through tenth taxable years after 1993 (sec. 
41(c)(3)(B)).
---------------------------------------------------------------------------
      In computing the credit, a taxpayer's base amount may not 
be less than 50 percent of its current-year qualified research 
expenditures.
      To prevent artificial increases in research expenditures 
by shifting expenditures among commonly controlled or otherwise 
related entities, a special aggregation rule provides that all 
members of the same controlled group of corporations are 
treated as a single taxpayer (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 of the 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'').3
---------------------------------------------------------------------------
    \3\ 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.
---------------------------------------------------------------------------
      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)).

                               House Bill

      The research tax credit is extended for 19 months--i.e., 
generally for the period June 1, 1997, through December 31, 
1998.
      Under the House bill, 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.

                            Senate Amendment

      The research tax credit is extended for 24 months--i.e., 
generally for the period June 1, 1997, through May 31, 1999.
      Under the Senate amendment, 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, 1999. A special rule 
provides that, notwithstanding the general termination date for 
the research credit of December 31, 1999, 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 35-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 24-month extension provided for by the Senate 
amendment. However, to prevent taxpayers from effectively 
obtaining more than 35 months of research credits from the 
Small Business Job Protection Act of 1996 and this bill, the 
35-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.

                          Conference Agreement

      Under the conference agreement, the research tax credit 
is extended for 13 months--i.e., generally for the period June 
1, 1997, through June 30, 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 June 30, 1998. A special rule 
provides that, notwithstanding the general termination date for 
the research credit of June 30, 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 24-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 13-month extension provided for by the conference 
agreement. However, to prevent taxpayers from effectively 
obtaining more than 24 months of research credits from the 
Small Business Job Protection Act of 1996 and this bill, the 
24-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 House 
               bill and sec. 502 of the Senate amendment)

                              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.4 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.5
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    \4\ 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)).
    \5\ As part of the Omnibus Budget Reconciliation Act of 1993, 
Congress eliminated the treatment of contributions of appreciated 
property (real, personal, and intangible) as a tax preference for 
alternative minimum tax (AMT) purposes. Thus, if a taxpayer makes a 
gift to charity of property (other than short-term gain, inventory, or 
other ordinary income property, or gifts to private foundations) that 
is real property, intangible property, or tangible personal property, 
the use of which is related to the donee's tax-exempt purpose, the 
taxpayer is allowed to claim the same fair-market-value deduction for 
both regular tax and AMT purposes (subject to present-law percentage 
limitations).
---------------------------------------------------------------------------
      In cases involving contributions to a private foundation 
(other than certain private operating foundations), the amount 
of the deduction is limited to the taxpayer's basis in the 
property. However, under a special rule contained in section 
170(e)(5), taxpayers are allowed a deduction equal to the fair 
market value of ``qualified appreciated stock'' contributed to 
a private foundation prior to May 31, 1997.6 
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.
---------------------------------------------------------------------------
    \6\ 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.
---------------------------------------------------------------------------

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment 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 May 31, 1999.
      Effective date.--The provision is effective for 
contributions of qualified appreciated stock to private 
foundations made during the period June 1, 1997, through May 
31, 1999.

                          Conference Agreement

      The conference agreement provides that the special rule 
contained in section 170(e)(5) is extended for the period June 
1, 1997, through June 30, 1998. The provision is effective for 
contributions of qualified appreciated stock to private 
foundations made during the period June 1, 1997, through June 
30, 1998.

C. Work Opportunity Tax Credit (sec. 603 of the House bill and sec. 503 
                        of the Senate amendment)

                              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. Generally, 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.
      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.
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 yet 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 
released from active duty in the Armed Forces for a service-
connected disability. However, any individual who has served 
for a period of more than 90 days during which the individual 
was on active duty (other than for training) is not an eligible 
employee if any of this active duty occurredduring 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 
yet 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.

                               House Bill

Extension
      The House bill provides a one-year extension of the work 
opportunity tax credit.
Targeted categories
      The bill extends eligibility to members of families 
receiving AFDC benefits for any nine months during the eighteen 
month period ending on the hiring date.
Minimum employment period
      The minimum employment period is reduced from 400 to 120 
hours.
Credit percentage
      The House bill provides a credit percentage of 25 percent 
for employment of less than 400 hours of employment and 40 
percent for employment of 400 or more hours.
Alternative minimum tax (AMT)
      The House bill allows the credit against the AMT.
Effective date
      Generally, the provision is 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.

                            Senate Amendment

Extension
      The Senate amendment provides a 20-month extension of the 
work opportunity tax credit.
Targeted categories
      Same as the House bill, except the Senate amendment adds 
SSI beneficiaries as a new category of workers for which the 
credit is available.
Minimum employment period
      Same as the House bill.
Credit percentage
      Same as the House bill.
Alternative minimum tax (AMT)
      No provision.
Effective date
      The provision is effective for wages paid or incurred to 
qualified individuals who begin work for the employer after 
September 30, 1997, and before June 1, 1999.

                          Conference Agreement

Extension
      The conference agreement provides for a 9-month extension 
of the work opportunity tax credit.
Targeted categories
      The conference agreement follows the Senate amendment.
Minimum employment period
      The conference agreement follows the House bill and the 
Senate amendment.
Credit percentage
      The conference agreement follows the House bill and the 
Senate amendment.
Alternative minimum tax (AMT)
      The conference agreement does not include the House bill 
provision.
Effective date
      The conference agreement is generally effective for wages 
paid to qualified individuals who begin work for an employer 
after September 30, 1997, and before July 1, 1998.

 D. Orphan Drug Tax Credit (sec. 604 of the House bill and sec. 504 of 
                         the Senate amendment)

                              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, 1997.7
---------------------------------------------------------------------------
    \7\ 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.
---------------------------------------------------------------------------

                               House Bill

      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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and 
Senate amendment--i.e., the orphan drug tax credit is 
permanently extended.

      

                VII. DISTRICT OF COLUMBIA TAX INCENTIVES

 (secs. 701-702 of the House bill and sec. 601 of the Senate amendment)

                              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.8 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.
---------------------------------------------------------------------------
    \8\ 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), and Rio Grande Valley Texas (Cameron, Hidalgo, 
Starr, and Willacy counties, Texas).
---------------------------------------------------------------------------
      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's tangible property is used 
within a zone or community; (4) substantially all of the 
business's 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 5 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. 9 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.
---------------------------------------------------------------------------
    \9\ 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.
---------------------------------------------------------------------------
            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 10), 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.
---------------------------------------------------------------------------
    \10\ For purposes of the tax-exempt financing rules, an 
``enterprise zone business'' also includes a business located in a zone 
or community which would qualify as an enterprise zone business if it 
were separately incorporated.
---------------------------------------------------------------------------
      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.11 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.
---------------------------------------------------------------------------
    \11\ The Revenue Reconciliation Act of 1993 added Code section 
1202, 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.
---------------------------------------------------------------------------
      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 to $24,650..........................  15 percent of taxable income   
$24,651 to $59,750.....................  $3,698, plus 28% of the amount 
                                          over $24,650                  
$59,751 to $124,650....................  $13,526, plus 31% of the amount
                                          over $59,750                  
$124,651 to $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 to $33,050..........................  15 percent of taxable income   
$33,051 to $85,350.....................  $4,958, plus 28% of the amount 
                                          over $33,050                  
$85,351 to $138,200....................  $19,602 plus 31% of the amount 
                                          over $85,350                  
$138,201 to $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 to $41,200..........................  15 percent of taxable income   
$41,201 to $99,600.....................  $6,180, plus 28% of the amount 
                                          over $41,200                  
$99,601 to $151,750....................  $22,532, plus 31% of the amount
                                          over $99,600                  
$151,751 to $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 to $20,600..........................  15 percent of taxable income   
$20,601 to $49,800.....................  $3,090, plus 28% of the amount 
                                          over $20,600                  
$49,801 to $75,875.....................  $11,266, plus 31% of the amount
                                          over $49,800                  
$75,876 to $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          
------------------------------------------------------------------------

                               House Bill

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, 2002.12
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    \12\ The status of certain census tracts within the District as an 
enterprise community designated under section 1391 also terminates on 
December 31, 2002.
---------------------------------------------------------------------------
      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.13
---------------------------------------------------------------------------
    \13\ In addition, the House 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.
---------------------------------------------------------------------------
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 House 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 $75 million in tax credits to no less than $300 million in 
equity investments in, or loans, to eligible businesses.
      Under the House 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 House bill applies to credit amounts allocated for 
taxable years beginning after December 31, 1997, and before 
January 1, 2003.14
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    \14\ As a general business credit, the credit can be carried back 
three years (but not before January 1, 1998) and forward for 15 years.
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            Zero-percent capital gains rate
      The House 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, 
qualified ``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 qualified 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 15 and during substantially all 
of the taxpayer's holding period, was a qualified D.C. Zone 
business, provided that such stock was acquired by the taxpayer 
on original issue from the corporation solely in exchange for 
cash before January 1, 2003.16 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 17 and during substantially 
all of the taxpayer's holding period, the partnership was a 
qualified 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 qualified D.C. Zone business of the 
taxpayer.
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    \15\ In the case of a new corporation, it is sufficient if the 
corporation is being organized for purposes of being a qualified D.C. 
Zone business.
    \16\ 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 D.C. Zone partnership interests.
    \17\ In the case of a new partnership, it is sufficient if the 
partnership is being formed for purposes of being a qualified D.C. Zone 
business.
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      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 House bill specifically excludes land 
that is not an integral part of a qualified 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 
qualified D.C. Zone business, or (2) the property is an 
ownership interest in a qualified D.C. Zone 
business.18
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    \18\ 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 qualified D.C. Zone business 
qualifies for the zero-percent rate.
      The House 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 
qualified 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 qualified 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 
qualified D.C. Zone business during substantially all of the 
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 House 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 House 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 House 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. All of the D.C. tax incentives are contingent 
upon the enactment of a Federal law, prior to January 1, 1998, 
creating a District of Columbia economic development 
corporation that is an instrumentality of the District of 
Columbia government.

                            Senate Amendment

First-time homebuyer credit
      The Senate amendment provides first-time homebuyers of a 
principal residence in the District a tax credit of up to 
$5,000 of the amount of the purchase price. The $5,000 maximum 
credit amount applies both to individuals and married couples. 
Married individuals filing separately can claim a maximum 
credit of $2,500 each. The Secretary of Treasury is directed to 
prescribe regulations allocating the credit among unmarried 
purchasers of a residence.19
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    \19\ The provision of the Senate amendment that excludes sales of 
certain personal residences from the real estate transaction reporting 
requirement would not apply to sales of personal residences in the 
District of Columbia. In addition, the Senate amendment anticipates 
that the Secretary of Treasury will require such information as may be 
necessary to verify eligibility for the D.C. first-time homebuyer 
credit.
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      To qualify as a ``first-time homebuyer,'' neither the 
individual (nor the individual's spouse, if married) can have 
had a present ownership interest in a principal residence in 
the District for the one-year period prior to the date of 
acquisition of the principal residence.20
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    \20\ Special rules apply to members of the Armed Forces and certain 
individuals with tax homes outside the United States with respect to 
whom the rollover period available under section 1034 (as in effect 
prior to the enactment of the bill) is suspended pursuant to section 
1034 (h) or (k).
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      A taxpayer will be treated as a first-time homebuyer with 
respect to only one residence--i.e., the credit may be claimed 
one time only. The date of acquisition is the date on which a 
binding contract to purchase the principal residence is entered 
into or the date on which construction or reconstruction of 
such residence commences.
      The credit applies to purchases after the date of 
enactment and before January 1, 2002. Any excess credit may be 
carried forward indefinitely to succeeding taxable years.
Tax credits for equity investments in and loans to businesses located 
        in the District of Columbia
      The Senate amendment is the same as the House bill, 
except that the economic development corporation is authorized 
to allocate $60 million (rather than $75 million) in credits.
Zero-percent capital gains rate
      Like the House bill, the Senate amendment provides a 
zero-percent capital gains rate for capital gains from the sale 
of certain qualified D.C. assets held for more than five years. 
In general, qualified D.C. assets mean stock or partnership 
interests held in, or tangible property held by, a qualified 
D.C. business. However; the Senate amendment provides that 
capital gain from the sale of any D.C. asset acquired during 
calendar year 1998 shall be subject to tax at a 10 percent 
rate. A special rule provides that if the basis of any D.C. 
asset is determined in whole or part by reference to a D.C. 
asset acquired in 1998, all gain from the sale or exchange of 
such asset is taxed at the 10 percent rate.
            Qualified D.C. business
      A ``qualified D.C. business'' generally is required to 
satisfy the requirements of an ``enterprise zone business'' 
under present law, applied as if the District (in its entirety) 
were an empowerment zone. Thus, a corporation or partnership is 
a qualified D.C. business if: (1) its sole trade or business is 
the active conduct of a ``qualified business'' within the 
District; (2) at least 80 percent of the total gross income is 
derived from the active conduct of a ``qualified business'' 
within the District; (3) substantially all of the business's 
tangible property is used within the District; (4) 
substantially all of the business's 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 the District; and (6) no more 
than 5 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.21 A ``qualified business'' 
means any trade or business other than a trade or business that 
consists predominantly of the development or holding of 
intangibles for sale or license.22 In addition, the 
leasing of real property that is located within the District 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 qualified D.C. 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 
qualified D.C. businesses or by residents of the District.
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    \21\ The requirement under present-law section 1397B(b)(6) that at 
least 35 percent of the employees of the business be zone residents 
does not apply when determining whether an entity is a qualified D.C. 
business.
    \22\ Also, as under present law, 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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            Qualified D.C. assets
      For purposes of the Senate amendment, qualified ``D.C. 
assets'' include (1) D.C. business stock, (2) D.C. partnership 
interests, and (3) D.C. business property.
      ``D.C. business stock'' means stock in a domestic 
corporation originally issued after December 31, 1997, that, at 
the time of issuance 23 and during substantially all 
of the taxpayer's holding period, was a qualified D.C. 
business, provided that such stock was acquired by the taxpayer 
on original issue from the corporation solely in exchange for 
cash before January 1, 2003.24 A ``D.C. partnership 
interest'' means 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 25 and during substantially 
all of the taxpayer's holding period, the partnership was a 
qualified D.C. business. Finally, ``D.C. business property'' 
means 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 District 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 qualified D.C. business of the taxpayer.
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    \23\ In the case of a new corporation, it is sufficient if the 
corporation is being organized for purposes of being a qualified D.C. 
business.
    \24\ As under section 1202(c)(3), D.C. 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 D.C. partnership interests.
    \25\ In the case of a new partnership, it is sufficient if the 
partnership is being formed for purposes of being a qualified D.C. 
business.
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      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 District 
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 District can 
constitute D.C. business property. However, the bill 
specifically excludes land that is not an integral part of a 
qualified D.C. business from the definition of D.C. business 
property.
      In addition, qualified D.C. assets include property that 
was a qualified D.C. 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 
qualified D.C. business, or (2) the property is an ownership 
interest in a qualified D.C. business.
      In general, gain eligible for the zero-percent tax rate 
means gain from the sale or exchange of a qualified D.C. 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, is not qualified capital 
gain. No gain attributable to real property, or an intangible 
asset, which is not an integral part of a qualified D.C. 
business qualifies for the zero-percent rate.
      The Senate amendment provides that property that ceases 
to be a qualified D.C. asset because the property is no longer 
used in (or no longer represents an ownership interest in) a 
qualified D.C. business after the five-year period beginning on 
the date the taxpayer acquired such property continues to be 
treated as a qualified D.C. 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 
qualified D.C. business during substantially all of the 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 
underlying 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. 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 Senate amendment also provides that, in the case of a 
transfer of a qualified D.C. 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. 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.
Trust fund for D.C. schools
      The Senate amendment provides for a total of $50 million 
($5 million for each year 1998 through 2007) to be transferred 
from Federal income taxes paid by District individual residents 
to a Trust Fund for D.C. schools. Amounts in the Trust Fund are 
to be used to pay debt service on qualified D.C. school bonds, 
which are taxable bonds issued after March 31, 1998, by the 
District to finance the rehabilitation and repair of District 
schools.
Effective dates
      The D.C. first-time homebuyer credit is effective for 
purchases after the date of enactment and before January 1, 
2002. The tax credit for equity investments and loans applies 
to credit amounts allocated for taxable years beginning after 
December 31, 1997, and before January 1, 2003. The zero-percent 
tax rate for capital gains is effective for qualified D.C. 
assets purchased (or substantially renovated) during the period 
January 1, 1998, through December 31, 2002, for any gain 
accruing with respect to such assets after the date or purchase 
(or substantial renovation). The Trust Fund for D.C. schools 
will be funded $5 million per year for 1998 through 2007.

                          Conference Agreement

      The conference agreement follows the House bill in part 
and the Senate amendment in part.
Designation of D.C. Enterprise Zone
      The conference agreement includes the House bill 
provision that designates certain economically depressed census 
tracts within the District of Columbia as the ``D.C. Enterprise 
Zone,'' within which businesses and individual residents are 
eligible for special tax incentives. Under the conference 
agreement, however, the census tracts that compose the D.C. 
Enterprise Zone for purposes of the wage credit, expensing, and 
tax-exempt financing incentives are expanded to include census 
tracts within the District of Columbia where the poverty rate 
is not less than 20 percent. Thus, the D.C. Enterprise Zone 
consists of (1) all census tracts that presently are part of 
the D.C. enterprise community designated under Code 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 not less than 20 percent. As under the House bill, 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.
Empowerment zone wage credit, expensing, and tax-exempt financing
      The conference agreement includes the House bill 
provision with respect to the tax incentives that are available 
in the D.C. Enterprise Zone, modified to provide that the wage 
credit is available with respect to all residents of the 
District and is not limited to residents of the D.C. Enterprise 
Zone and to eliminate the requirement that 35 percent of the 
employees of a qualified ``D.C. Zone business'' must be 
residents of the D.C. Enterprise Zone.26 Thus, the 
following tax incentives that are available under present law 
in empowerment zones generally will be available in the D.C. 
Enterprise Zone: (1) a 20-percent wage credit for the first 
$15,000 of wages paid to D.C. 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.27 
The conference agreement does not include the provision 
limiting the special tax-exempt financing benefits to bonds 
issued by the Economic Development Corporation.
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    \26\ The provision of the conference agreement that authorizes the 
designation of additional empowerment zones also modifies the 
definition of an enterprise zone business to provide that, in addition 
to satisfying the other requirements of section 1397B, at least 50 
percent (as opposed to 80 percent under present law) of the total gross 
income of a qualified enterprise zone business must be derived from the 
active conduct of a ``qualified business'' within a zone or community. 
The conference agreement makes certain other modifications to the 
definition of an enterprise zone business as well. This modified 
definition of enterprise zone business, determined without regard to 
the 35-percent zone resident employee requirement, generally applies 
for purposes of the increased expensing and tax-exempt financing 
available in the D.C. Enterprise Zone.
    \27\ The provision of the conference agreement that authorizes the 
designation of additional empowerment zones contains certain 
modifications to the rules applicable to present-law empowerment zone 
facility bonds. Such modifications (not including the exception to the 
volume cap) will apply in the D.C. Enterprise Zone as well.
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Zero-percent capital gains rate
      The conference agreement includes the House bill 
provision that 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. For purposes of the zero-
percent capital gains rate, the D.C. Enterprise Zone is defined 
to include all census tracts within the District of Columbia 
where the poverty rate is not less than 10 percent.
      For purposes of the zero-percent capital gains rate, the 
definition of qualified ``D.C. Zone business'' generally is the 
same as the definition applicable for purposes of the increased 
expensing described above. However, solely for purposes of the 
zero-percent capital gains rate, a qualified ``D.C. Zone 
business'' must derive at least 80 percent (as opposed to 50 
percent) of its total gross income from the active conduct of a 
``qualified business'' within the D.C. Enterprise Zone.
First-time homebuyer tax credit
      The conference agreement includes the Senate amendment 
provision that allows first-time homebuyers of a principal 
residence in the District a tax credit of up to $5,000 of the 
amount of the purchase price, except that the credit phases out 
for individual taxpayers with adjusted gross income between 
$70,000 and $90,000 ($110,000-$130,000 for joint filers). The 
conference agreement clarifies that the credit is available 
with respect to purchases of existing property as well as new 
construction, and specifies that a taxpayer's basis in a 
property is reduced by the amount of any homebuyer tax credit 
claimed with respect to such property. In addition, the 
conference agreement sunsets the credit after December 31, 
2000. Thus, the credit is available with respect to property 
purchased after the date of enactment and before January 1, 
2001.

                    VIII. WELFARE-TO-WORK TAX CREDIT

                      (sec. 801 of the House bill)

                              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. Generally, 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 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.

                               House Bill

      The House bill provides to employers a tax 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 
percent of the first $10,000 of eligible wages in the first 
year of employment and 50 percent 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 include cash wages paid to an employee 
plus 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 sec. 
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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.

                      IX. MISCELLANEOUS PROVISIONS

                        A. Excise Tax Provisions

1. Repeal excise tax on diesel fuel used in recreational motorboats 
        (sec. 901 of the House bill and sec. 701 of the Senate 
        amendment)

                              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.

                               House Bill

      The House bill 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Continued application of tax on imported recycled halon-1211 (sec. 
        902 of the House bill)

                              Present Law

      An excise tax is imposed on the sale or use by the 
manufacturer or importer of certain ozone-depleting chemicals 
(Code sec. 4681). The amount of tax generally is determined by 
multiplying the base tax amount applicable for the calendar 
year by an ozone-depleting factor assigned to each taxable 
chemical. The base tax amount is $6.25 per pound in 1997, and 
is scheduled to 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 
beprovided 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.

                               House Bill

      The House bill repeals the present-law exemption for 
imported recycled halon-1211.
      Effective date.--The provision is effective on the date 
of enactment.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
3. Transfer of General Fund highway fuels tax revenues to the Highway 
        Trust Fund (sec. 704 of the Senate amendment)

                              Present Law

      The Highway Trust Fund receives revenues from taxes on 
gasoline and special motor fuels (14 cents per gallon) and 
diesel fuel (20 cents per gallon) used in highway vehicles, 
through September 30, 1999. These fuels also are subject to an 
additional, permanent 4.3-cents-per-gallon rate. Revenues from 
the 4.3-cents-per-gallon rate are retained in the General Fund.
      Excise taxes imposed on these three motor fuels 
(gasoline, diesel fuel, and special motor fuels) generally must 
be paid to the Treasury in semi-monthly deposits, which are 
credited to tax liability that is reported on quarterly 
returns. Subject to special rules for deposits attributable to 
taxes for the period September 16-26, deposits generally must 
be made 9 days after the end of each semi-monthly period (14 
days in the case of gasoline and diesel fuel taxes deposited 
electronically).

                               House Bill

      No provision.

                            Senate Amendment

      Transfer of revenues to Highway Trust Fund.--Revenues 
from the General Fund 4.3-cents-per-gallon tax (net of 0.5-
cent-per-gallon transferred to a new Intercity Passenger Rail 
Fund under sec. 702 of the Senate amendment for the period, 
October 1, 1997-April 15, 2001) are transferred to the Highway 
Trust Fund. Of such amounts transferred to the Highway Trust 
Fund, 20 percent are to be credited to the Mass Transit Account 
and 80 percent to the Highway Account.
      Conforming amendments ensure that no direct spending 
increases will occur as a result of the provision.
      Deposit rules for highway motor fuels taxes.--No 
provision.
      Effective date.--October 1, 1997.

                          Conference Agreement

      Transfer of revenues to Highway Trust Fund.--The 
conference agreement follows the Senate amendment with a 
modification to reflect deletion from the agreement of the 
Senate amendment provision transferring 0.5 cents per gallon of 
these revenues to a new Intercity Passenger Rail Fund. As under 
the Senate amendment, revenues from the 4.3-cents-per-gallon 
tax will be divided between the Highway Trust Fund's Highway 
Account (3.45 cents per gallon) and Mass Transit Account (0.85 
cents per gallon).
      Deposit rules for highway motor fuels taxes.--The 
conference agreement provides that the excise taxes imposed on 
gasoline (sec. 4081), diesel fuel (sec. 4081), special motor 
fuels (sec. 4041), and kerosene (sec. 4081) that otherwise 
would be required to be deposited with the Treasury after July 
31, 1998, and before September 30, 1998, are not required to be 
deposited until October 5, 1998.
4. Tax certain alternative fuels based on energy equivalency to 
        gasoline (sec. 705 of the Senate amendment)

                              Present Law

      Special motor fuels are subject to an 18.3-cents-per-
gallon excise tax: 14 cents per gallon of the tax is dedicated 
to the Highway Trust Fund, and the remaining 4.3 cents per 
gallon is retained in the General Fund. Special motor fuels 
include propane, methanol derived from natural gas, liquefied 
natural gas, and compressed natural gas. Reduced tax rates 
apply to methanol from natural gas and compressed natural gas.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment adjusts the aggregate tax rates 
imposed on propane, liquefiednatural gas, and methanol derived 
from natural gas to reflect the energy content of these fuels relative 
to gasoline. The revised tax rates per gallon (through September 30, 
1999) are--

                                                                        
                                                                        
                                                                        
Propane..............................................        13.6 cents.
Methanol.............................................        9.15 cents.
Liquified natural gas................................        11.9 cents.
                                                                        


      After September 30, 1999, these three fuels will be taxed 
based on Btu equivalency to gasoline's 4.3-cents-per-gallon 
rate. No change is made to the current reduced tax rate on 
compressed natural gas.
      Effective date.--October 1, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
5. Extend and modify tax benefits for ethanol (sec. 605 of the House 
        bill and sec. 707 of the Senate amendment)

                              Present Law

      Ethanol used as a fuel is eligible for a 54-cents-per-
gallon tax benefit. The benefit may be claimed either as an 
income tax credit, through reduced excise tax on sales of 
gasoline that is blended with ethanol, or by expedited refunds 
of tax paid on such gasoline. This benefit is scheduled to 
expire after September 30, 1999. However, provisions relating 
to excise taxes dedicated to trust funds generally are assumed 
to be permanent for budget scorekeeping purposes.

                               House Bill

      The House bill provides that preferential excise tax 
rates (and associated credits and refunds) that statutorily are 
scheduled to expire are not assumed to be permanent for budget 
scorekeeping purposes.

                            Senate Amendment

      The Senate amendment extends the ethanol tax benefit 
through 2007, and modifies the benefit rate per gallon of 
alcohol, as follows: 2001 and 2002--53 cents; 2003 and 2004--52 
cents; and 2005, 2006, and 2007--51 cents.
      Effective date.--Date of enactment.

                          Conference Agreement

      No provision (i.e., the conference agreement does not 
include either the House bill or the Senate amendment 
provision).
6. Treat certain gasoline ``chain retailers'' as wholesale distributors 
        under the gasoline excise tax refund rules (sec. 904 of the 
        House bill)

                              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 that are 
not also wholesale distributors do not qualify, regardless of 
their size.

                               House Bill

      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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
7. Exemption of electric and other clean-fuel motor vehicles from 
        luxury automobile classification (sec. 905 of the House bill)

                              Present Law

      Present law imposes an excise tax on the sale of 
automobiles whose price exceeds a designated threshold, 
currently $36,000. 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 $36,000 threshold is indexed for 
inflation. The present-law indexed threshold of $36,000 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 parts and 
accessories for a vehicle within six months of the first retail 
sale when the sum of the separate purchases of the vehicle, 
parts, and accessories exceeds the luxury tax threshold (sec. 
4003).28
---------------------------------------------------------------------------
    \28\ 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.29
---------------------------------------------------------------------------
    \29\ A technical correction under both the House bill (Title XV) 
and the Senate amendment (Title XIV) conforms the expiration date of 
the tax under section 4003 to the expiration date under section 4001.
---------------------------------------------------------------------------

                               House Bill

      The House 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, 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.
      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 the 
next lowest multiple of $2,000.
      Effective date.--The provision is effective for sales and 
installations occurring on or after the date of enactment.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, with a 
modification to the effective date that provides that the 
provision is effective for sales and installations occurring 
after the date of enactment.
8. Reduce rate of alcohol excise tax on certain hard ciders (sec. 703 
        of the Senate amendment)

                              Present Law

      Distilled spirits are taxed at a rate of $13.50 per proof 
gallon; beer is taxed at a rate of $18 per barrel 
(approximately 58 cents per gallon); and still wines of 14 
percent alcohol or less are taxed at a rate of $1.07 per wine 
gallon. Higher rates of tax are applied to wines with greater 
alcohol content and to sparkling wines (champagne).
      Certain small wineries may claim a credit against the 
excise tax on wine of 90 cents per wine gallon on the first 
100,000 gallons of wine produced annually (i.e., net tax rate 
of 17 cents per wine gallon). Certain small breweries pay a 
reduced tax of $7.00 per barrel (approximately 22.6 cents per 
gallon) on the first 60,000 barrels of beer produced annually.
      Apple cider containing alcohol (``hard cider'') is 
classified and taxed as wine.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment adjusts the tax rate on apple cider 
having an alcohol content of no more than 7 percent to 22.6 
cents per gallon for those persons who produce more than 
100,000 gallons of ``hard cider'' during a calendar year. The 
tax rate applicable to hard cider produced by persons who 
produce 100,000 gallons or less in a calendar year will remain 
as under present law and those persons may continue to claim 
the 90 cents per wine gallon credit permitted for small 
wineries. Hard cider production will continue to be counted in 
determining whether other production of a producer qualifies 
for the tax credit for small producers. The Senate amendment 
does not change the classification of qualifying hard cider as 
wine.
      Effective date.--The provision is effective for hard 
cider removed after September 30, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
9. Study feasibility of moving collection point for distilled spirits 
        excise tax (sec. 706 of the Senate amendment)

                              Present Law

      Distilled spirits are subject to tax at $13.50 per proof 
gallon. (A proof gallon is a liquid gallon consisting of 50 
percent alcohol.) In the case of domestically produced 
distilled spirits and distilled spirits imported into the 
United States in bulk containers for domestic bottling, the tax 
is imposed on removal of the beverage from the distillery 
(without regard to whether a sale occurs at that time). Bottled 
distilled spirits that are imported into the United States 
comprise approximately 15 percent of the current market for 
these beverages; tax is imposed on these imports when the 
distilled spirits are removed from the first customs bonded 
warehouse in which they are deposited upon entry into the 
United States.
      In the case of certain distilled spirits products, a tax 
credit for alcohol derived from fruit is allowed. This credit 
reduces the effective tax paid on those beverages. The credit 
is determined when the tax is paid (i.e., at the distillery or 
on importation).

                               House Bill

      No provision.

                            Senate Amendment

      The Treasury Department is directed to study options for 
changing the point at which the distilled spirits excise tax is 
collected. One of the options evaluated should be collecting 
the tax at the point at which the distilled spirits are removed 
from registered wholesale warehouses. As part of this study, 
the Treasury is to focus on administrative issues associated 
with the identified options, including the effects on tax 
compliance. For example, the Treasury is to evaluate the actual 
compliance record of wholesale dealers that currently pay the 
excise tax on imported bottled distilled spirits, and the 
compliance effects of allowing additional wholesale dealers to 
be distilled spirts taxpayers. The study also is to address the 
number of taxpayers involved, the types of financial 
responsibility requirements that might be needed, and any 
special requirements regarding segregation of non-tax-paid 
distilled spirits from other products carried by thepotential 
new taxpayers. The study further is to review the effects of the 
options on Treasury staffing and other budgetary resources as well as 
projections of the time between when tax currently is collected and the 
time when tax otherwise would be collected.
      The study is required to be completed and transmitted to 
the Senate Committee on Finance and the House Committee on Ways 
and Means no later than January 31, 1998.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with a modification delaying the due date of the study to March 
31, 1998.
10. Codify Treasury Department regulations regulating wine labels (sec. 
        708 of the Senate amendment)

                              Present Law

      The Code includes provisions regulating the labeling of 
wine when it is removed from a winery for marketing. In 
general, the regulations under these provisions allow the use 
of semi-generic names for wine that reflect geographic 
identifications understood in the industry, provided that the 
labels include clear indication of any deviation from that 
which is generally understood in the source of the grapes or 
the process by which the wine is produced.

                               House Bill

      No provision.

                            Senate Amendment

      The current Treasury Department regulations governing the 
use of semi-generic wine designations which reflect geographic 
origin are codified into the Code's wine labeling provisions.
      Effective date.--The provision is effective on the date 
of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with a modification deleting the Secretary of the Treasury's 
discretion to eliminate currently listed semi-generic names.
11. Uniform rate of excise tax on vaccines (sec. 903 of the House bill 
        and sec. 844 of the Senate amendment)

                              Present Law

      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 of the taxable vaccines.

                               House Bill

      The House 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 House 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 House bill adds three new taxable 
vaccines to the present-law taxable vaccines: (1) HIB 
(haemophilus 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill 
regarding rates of tax and taxable vaccines. In addition, the 
committee report on the Senate amendment directs the Secretary 
of the Treasury to undertake a study of the efficacy of the new 
flat-rate vaccine tax system as a means to finance the Vaccine 
Injury Compensation Trust Fund. Results of the Treasury study 
are to be submitted to the Senate Committee on Finance and the 
House Committee on Ways and Means by September 30, 1999.
      Effective date.--The provision is effective for vaccine 
purchases after September 30, 1997. No floor stocks tax is to 
be collected or refunds permitted for amounts held for sale on 
October 1, 1997. Returns to the manufacturer occurring on or 
after October 1, 1997, are assumed to be returns of vaccines to 
which the new rates of tax apply.

                          Conference Agreement

      The conference agreement generally follows the House bill 
and the Senate amendment by imposing a uniform rate of tax, but 
at a rate of $0.75 per dose on any listed vaccine component. 
The conference agreement also adds the HIB (haemophilus 
influenza type B), Hepatitis B, and varicella (chickenpox) 
vaccines to the list of taxable vaccines.
      The conference agreement does not require the Secretary 
to study the new vaccine tax structure.
      Effective date.--The provision is effective for sales 
after the date of enactment. No floor stocks tax is to be 
collected, or floor stocks refunds permitted, for vaccines held 
on the effective date. For the purpose of determining the 
amount of refund of tax on a vaccine returned to the 
manufacturer or importer, for vaccines returned after the date 
of enactment and before January 1, 1999, the amount of tax 
assumed to have been paid on the initial purchase of the 
returned vaccine shall not exceed $0.75 per dose.

                     B. Disaster Relief Provisions

1. Authority to postpone certain tax-related deadlines by reason of 
        presidentially declared disaster (sec. 921 of the House bill)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, except 
that it is applicable to all deadlines (not just taxpayer 
deadlines).
2. Use of certain appraisals to establish amount of disaster loss (sec. 
        922 of the House bill)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
3. Treatment of livestock sold on account of weather-related conditions 
        (sec. 923 of the House bill and sec. 721 of the Senate 
        amendment)

                              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.

                               House Bill

      The House 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 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 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
4. Mortgage bond financing for residences located in Presidentially 
        declared disaster areas (sec. 924 of the House bill and sec. 
        723 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill except 
for the effective date.
      Effective date.--The provision applies to loans financed 
with bonds issued after December 31, 1996, and before January 
1, 1999.

                          Conference Agreement

      The conference agreement allows the waivers of 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 two-year period following the date of disaster 
declaration.
      Effective date.--The provision applies to loans financed 
with bonds issued after December 31, 1996 and before January 1, 
1999 (i.e., is the same as the Senate amendment).
5. Rules relating to denial of earned income credit on basis of 
        disqualified income (sec. 722 of the Senate amendment)

                              Present Law

      For taxable years beginning after December 31, 1995, 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 $2,200. This threshold is indexed for 
inflation. 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.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment clarifies that gain or loss from the 
sale of livestock (as defined under sec.1231(b)(3) of the Code) 
is disregarded for purposes of the calculation of capital gain 
net income under the disqualified income test of the earned 
income credit.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1995.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
6. Penalty-free withdrawals from IRAs for disaster-related expenses 
        (sec. 724 of the Senate amendment)

                              Present Law

      Under present law, amounts held in an individual 
retirement arrangement (``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.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that the 10-percent early 
withdrawal tax does not apply to distributions from IRAs made 
to a taxpayer for qualified disaster-related expenses.
      The penalty-free withdrawal is available for ``qualified 
disaster-related distributions'' meaning distributions made to 
pay for the repair or replacement of tangible property which 
was located in a disaster area and was destroyed or 
substantially damaged as a result of the disaster. The term 
``disaster area'' means an area determined by the President of 
the United States during 1997 to warrant assistance by the 
Federal Government under the Robert T. Stafford Disaster Relief 
and Emergency Assistance Act.
      The penalty-free withdrawal rule only applies to 
qualified disaster distributions that (1) are made within the 
2-year period beginning on the date the determination is made 
that the area is a disaster area, (2) are used by the taxpayer 
within 60 days of the payment or distribution to pay for the 
disaster-related expenses, and (3) do not exceed $10,000 during 
the 2-year period.
      Effective date.--The provision is effective for 
distributions after December 31, 1996, with respect to 
disasters occurring after such date.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
7. Elimination of 10-percent floor for casualty losses resulting from 
        Presidentially declared disaster (sec. 725 of the Senate 
        amendment)

                              Present Law

      Non-business casualty and theft losses are deductible as 
an itemized deduction only to the extent each loss is more than 
$100 and the total of all losses during the year is more than 
10 percent of adjusted gross income (``AGI'').

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment eliminates the 10 percent of AGI 
floor for casualty losses resulting from a Presidentially 
declared disaster that occurs in 1997.
      Effective date.--Disasters occurring in 1997.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
8. Requirement to abate interest by reason of Presidentially declared 
        disaster (sec. 726 of the Senate amendment)

                              Present Law

      In the case of a Presidentially declared disaster, the 
Secretary of the Treasury has the authority to postpone some 
tax-related deadlines, but there is no authority to abate 
interest.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment requires the IRS to abate interest 
for the same period of time for which the IRS has provided an 
extension of time to file tax returns and pay taxes for 
individuals located in Presidentially declared disaster areas 
during 1997.
      Effective date.--Disasters occurring in 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

               C. Provisions Relating to Employment Taxes

1. Employment tax status of distributors of bakery products (sec. 931 
        of the House bill)

                              Present Law

      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. Bakery drivers generally 
take the position that they are not employees under the 
statutory rule.

                               House Bill

      The House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
2. Clarification of standard to be used in determining tax status of 
        retail securities brokers (sec. 932 of the House bill and sec. 
        779 of the Senate amendment)

                              Present Law

      Under present law, whether a worker is an employee or 
independent contractor generally is 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. Whether such control exists is 
determined based on the relevant facts and circumstances. 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.

                               House Bill

      Under the House bill, in determining the status of a 
registered representative of a broker-dealer for Federal tax 
purposes, no weight is to 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.--Services performed after December 31, 
1997. No inference is intended that the provision is not 
present law.

                            Senate Amendment

      Same as the House bill, except that the provision applies 
only for Federal income tax purposes.
      Effective date.--Same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill.
3. Clarification of exemption from self-employment tax for certain 
        termination payments received by former insurance salesmen 
        (sec. 933 of the House bill)

                              Present Law

      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 old age, survivors, and 
disability income (OASDI) and 2.9 percent for Medicare Hospital 
Insurance taxes) 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 ($65,400 for 1997). 
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 thereforeare 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).

                               House Bill

      The House 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 House bill also amends 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, with 
clarifications with respect to the requirement as to the amount 
of the payments. The conference agreement clarifies that the 
provision applies if the amount of the payment depends 
primarily on policies sold by or credited to the account of the 
individual during the last year of the service agreement and/or 
the extent to which such policies remain in force for some 
period after such termination and does not depend on length of 
service or overall earnings. The conference agreement clarifies 
that the eligibility for the payment can be based on length of 
service or overall earnings.
4. Safe harbor for independent contractors (sec. 934 of the House 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'') 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.

                               House Bill

In general
      The House 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 House 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 apolitical 
subdivision (or an agency or instrumentality of a State or political 
subdivision).
      The documentation requirement is 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.
Effective date
      The provision is effective with respect to services 
performed after December 31, 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
5. Combined employment tax reporting demonstration project (sec. 769 of 
        the Senate amendment)

                              Present Law

      Traditionally, Federal tax forms are filed with the 
Federal Government and State tax forms are filed with 
individual states. This necessitates duplication of items 
common to both returns. Some States have recently been working 
with the IRS to implement combined State and Federal reporting 
of certain types of items on one form as a way of reducing the 
burdens on taxpayers. The State of Montana and the IRS have 
cooperatively developed a system to combine State and Federal 
employment tax reporting on one form. The one form would 
contain exclusively Federal data, exclusively State data, and 
information common to both: the taxpayer's name, address, TIN, 
and signature.
      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)).
      Implementation of the combined Montana-Federal employment 
tax reporting project has been hindered because the IRS 
interprets section 6103 to apply that provision's restrictions 
on disclosure to information common to both the State and 
Federal portions of the combined form, although these 
restrictions would not apply to the State with respect to the 
State's use of State-requested information if that information 
were supplied separately to both the State and the IRS.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment permits implementation of a 
demonstration project to assess the feasibility and 
desirability of expanding combined reporting in the future. 
There are several limitations on the demonstration project. 
First, it is limited to the State of Montana and the IRS. 
Second, it is limited to employment tax reporting. Third, it is 
limited to disclosure of the name, address, TIN, and signature 
of the taxpayer, which is information common to both the 
Montana and Federal portions of the combined form. Fourth, it 
is limited to a period of five years.
      Effective date.--The provision is effective on the date 
of enactment, and will expire on the date five years after the 
date of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with a technical modification providing a cross-reference to 
the provision in section 6103 of the Code.

                D. Provisions Relating to Small Business

1. Delay imposition of penalties for failure to make payments 
        electronically through EFTPS (sec. 941 of the House bill and 
        sec. 731 of the Senate amendment)

                              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) 30). The Electronic Federal Tax Payment 
System (``EFTPS'') was developed by Treasury in response to 
this requirement.31 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.
---------------------------------------------------------------------------
    \30\ This requirement was enacted in 1993 (sec. 523 of P.L. 103-
182).
    \31\ 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, 1997.32 
This was done to provide additional time prior to 
implementation of the 1997 requirements so that employers could 
be better informed about their responsibilities.
---------------------------------------------------------------------------
    \32\ Sec. 1809 of P.L. 104-188.
---------------------------------------------------------------------------
      On June 2, 1997, the IRS announced 33 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.
---------------------------------------------------------------------------
    \33\ IR-97-32.
---------------------------------------------------------------------------

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except it applies to penalties for failures to use EFTPS prior 
to July 1, 1998.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
2. Home office deduction: clarification of definition of principal 
        place of business (sec. 942 of the House bill)

                              Present Law

      A taxpayer's business use of his or her home may give 
rise to a deduction for the business portion of expenses 
related to operating the home (e.g., a portion of rent or 
depreciation and repairs). Code section 280A(c)(1) provides, 
however, that business deductions generally are allowed only 
with respect to a portion of a home that is used exclusively 
and regularly in one of the following ways: (1) as the 
principal place of business for a trade or business; (2) as a 
place of business used to meet with patients, clients, or 
customers in the normal course of the taxpayer's trade or 
business; or (3) in connection with the taxpayer's trade or 
business, if the portion so used constitutes a separate 
structure not attached to the dwelling unit. In the case of an 
employee, the Code further requires that the business use of 
the home must be for the convenience of the employer (sec. 
280A(c)(1)).34 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).
---------------------------------------------------------------------------
    \34\ 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.35 
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).
---------------------------------------------------------------------------
    \35\ 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)).

                               House Bill

      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 House 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 is 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 office deduction 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, except 
that the provision is effective for taxable years beginning 
after December 31, 1998.
3. Increase deduction for health insurance costs of self-employed 
        individuals (sec. 733 of the Senate amendment)

                              Present Law

      Under present law, self-employed individuals are entitled 
to deduct the amount paid for health insurance for the self-
employed individual and the individual's spouse and dependents 
as follows: the deduction is 40 percent in 1997; 45 percent in 
1998 through 2002; 50 percent in 2003; 60 percent in 2004; 70 
percent in 2005; and 80 percent in 2006 and thereafter. The 
deduction for health insurance expenses of self-employed 
individuals is not available for any month in which the 
taxpayer is eligible to participate in a subsidized health plan 
maintained by the employer of the taxpayer or the taxpayer's 
spouse.
      Under present law employees can exclude from income 100 
percent of employee-provided health insurance.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment permits self-employed individuals to 
deduct a higher percentage of the amount paid for health 
insurance as follows: the deduction is 50 percent in 1997 and 
1998; 60 percent in 1999 through 2002; 70 percent in 2003; 80 
percent in 2004; 85 percent in 2005; 90 percent in 2006; and 
100 percent in 2007 and all years thereafter.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1996.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with modifications. Under the conference agreement, the self-
employed health deduction is phased up as follows: the 
deduction is 40 percent in 1997, 45 percent in 1998 and 1999, 
50 percent in 2000 and 2001, 60 percent in 2002, 80 percent in 
2003 through 2005, 90 percent in 2006, and 100 percent in 2007 
and thereafter.

                          E. Other Provisions

1. Shrinkage estimates for inventory accounting (sec. 951 of the House 
        bill and sec. 1013 of the Senate amendment)

                              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.36 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''.
---------------------------------------------------------------------------
    \36\ 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,37 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,38 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 39 
have held that taxpayers' methods of accounting that included 
shrinkage estimates do clearly reflect income.
---------------------------------------------------------------------------
    \37\ 101 T.C. 462 (1993).
    \38\ T.C. Memo 1997-260.
    \39\ 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 
tax purposes. The Supreme Court has made clear, however, that 
GAAP does not enjoy a presumption of accuracy that must be 
rebutted by the Commissioner.''

                               House Bill

      The House 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 adoption of this 
provision with regard to whether any particular method of 
accounting for inventories is permissible under present law.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, with the following clarifications regarding 
safe harbor methods for the estimation of inventory shrinkage.
      In general.--The conferees expect that the Secretary of 
the Treasury will issue guidance establishing one or more safe 
harbor methods for the estimation of inventory shrinkage that 
will be deemed to result in a clear reflection of income, 
provided such safe harbor method is consistently applied and 
the taxpayer's inventory methods otherwise satisfy the clear 
reflection of income standard.
      Safe harbors applicable to retail trade.--In the case of 
taxpayers primarily engaged in retail trade (the resale of 
personal property to the general public), where physical 
inventories are normally taken at each location at least 
annually, the conferees anticipate that a safe harbor method 
will be established that will use a historical ratio of 
shrinkage to sales, multiplied by total sales between the date 
of the last physical inventory and year-end. This historical 
ratio is based on the actual shrinkage established by all 
physical inventories taken during the most recent three taxable 
years and the sales for related periods. The historical ratio 
should be separately determined for each store or department in 
a store of the taxpayer. The historical ratio, or estimated 
shrinkage determined using the historical ratio, cannot be 
adjusted by judgmental or other factors (e.g., floors or caps). 
The conferees expect that estimated shrinkage determined in 
accordance with the consistent application of the safe harbor 
method will not be required to be recalculated, through a 
lookback adjustment or otherwise, to reflect the results of 
physical inventories taken after year-end.
      In the case of a new store or department in a store that 
has not verified shrinkage by a physical inventory in each of 
the most recent three taxable years, the historical ratio is 
the average of the historical ratios of the retailer's other 
stores or departments. Retailers using last in, first out 
(LIFO) methods of inventory are expected to be required to 
allocate shrinkage among their various inventory pools in a 
reasonable and consistent manner.
      The conferees expect that procedures will be provided 
allowing an automatic election of such method of accounting for 
a taxpayer's first taxable year ending after the date of 
enactment. Any adjustment required by section 481 as a result 
of the change in method of accounting generally will be taken 
into account over a period of four years.

   2. Treatment of workmen's compensation liability under rules for 
 certain personal injury liability assignments (sec. 952 of the House 
                                 bill)

                              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 underworkmen'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.

                               House Bill

      The House bill 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.--Effective for workmen's compensation 
claims filed after the date of enactment.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
3. Tax-exempt status for certain State workmen's compensation act 
        companies (sec. 953 of the House bill and sec. 761 of the 
        Senate amendment)

                              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 a 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.

                               House Bill

      The House bill 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, 40 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.
---------------------------------------------------------------------------
    \40\ Related coverage that is incidental to workmen's compensation 
insurance includes liability under Federal workmen's compensation laws, 
for example.
---------------------------------------------------------------------------
      Effective date.--Taxable years beginning after December 
31, 1997. No inference is intended as to the status of such 
organizations under present law.

                            Senate Amendment

      The Senate amendment is the same as the House bill. The 
Senate Finance committee report clarifies that related coverage 
that is incidental to workmen's compensation insurance includes 
liability under Federal workmen's compensation laws, the Jones 
Act, and the Longshore and Harbor Workers Compensation Act, for 
example. The Senate Finance committee report also clarifies 
that many organizations described in the provision have been 
operating as tax-exempt organizations. No inference is intended 
that organizations described in the provision are not tax-
exempt under present law.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment with modifications.
      The conference agreement modifies the full-faith-and-
credit portion of the requirement that the State must extend 
its full faith and credit to debt of the organization (or 
provide the initial operating capital of such organization). 
Under the conference agreement, the State must extend its full 
faith and credit to the initial debt of the organization.
      The conference agreement also modifies the requirement 
relating to reversion of assets to the State upon dissolution. 
The conference agreement requires that, in the case of periods 
after the date of enactment, either the assets of the 
organization must revert to the State upon dissolution, or 
State law must not permit the dissolution of the organization, 
absent an act of the State legislature. Should dissolution of 
the organization become permissible under applicable State law, 
then the requirement that the assets of the organization revert 
to the State upon dissolution applies.
      Many organizations described in the provision have been 
operating as organizations that are exempt from tax (e.g., as 
an organization that is exempt from tax because it is serving 
an essential governmental function of a State). No inference is 
intended that organizations described in the provision are not 
exempt from tax under present law. In addition, no inference is 
intended that the benefit plans of such organizations are not 
properly maintained by the organization. It is anticipated that 
Federal regulatory agencies will take appropriate action to 
address transition issues faced by organizations to conform to 
their benefit plans under the provision. For example, it is 
intended that an organization that has been maintaining a 
section 457 plan as an agency or instrumentality of a State 
could (without creating any inference with respect to present-
law treatment) freeze future contributions to the section 457 
plan and establish a retirement arrangement (e.g., a section 
401(k) plan) that is consistent with the treatment of the 
organization as a tax-exempt employer under the provision.
4. Election for 1987 partnerships to continue exception from treatment 
        of publicly traded partnerships as corporations (sec. 954 of 
        the House bill and sec. 762 of the Senate amendment)

                              Present Law

      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 property held 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 publicly traded 
partnerships only for taxable years beginning after December 
31, 1997. 41 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 17, 
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).
---------------------------------------------------------------------------
    \41\ Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) (the 
``1987 Act''), sec. 10211(c).
---------------------------------------------------------------------------

                               House Bill

      Under the House bill, 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.--Taxable years beginning after December 
31, 1997.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that the tax is 3.5 percent of the partnership's gross 
income from the active conduct of a trade or business.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with technical modifications. The conference agreement 
clarifies that the provision applies to any electing 1987 
partnership, which means any publicly traded partnership, if 
(1) it is an existing partnership within the meaning of section 
10211(c)(2) of the 1987 Act, (2) it has not been treated as a 
corporation for taxable years beginning after December 31, 
1987, and before January 1, 1998 (and would not have been 
treated as a corporation even without regard to section 
7704(c), the exception for partnerships with ``passive-type'' 
income), and (3) the partnership elects under the provision to 
be subject to a tax on gross income from the active conduct of 
a trade or business. An electing 1987 partnership ceases to be 
treated as such as of the first day after December 31, 1997, on 
which there has been the addition of a substantial new line of 
business with respect to the partnership.
5. Exclusion from UBIT for certain corporate sponsorship payments (sec. 
        955 of the House bill and sec. 763 of the Senate amendment)

                              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.42 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.43
---------------------------------------------------------------------------
    \42\ 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).
    \43\ 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.
---------------------------------------------------------------------------

                               House Bill

      Under the House 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.44 
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).
---------------------------------------------------------------------------
    \44\ 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and 
Senate amendment, except that the conference agreement 
clarifies that the qualified sponsorship payment provision does 
not apply to payments that entitle the payor to the use or 
acknowledgment of the payor's trade or business name or logo 
(or product lines) in tax-exempt organization periodicals. 
Similarly, the qualified sponsorship payment provision does not 
apply to payments made in connection with ``qualified 
convention or trade show activities,'' as defined in present-
law section 513(d)(3). Such payments are outside the qualified 
sponsorship payment provision's safe-harbor exclusion, and, 
therefore, will be governed by present-law rules that determine 
whether the payment is subject to the UBIT. Thus, for example, 
payments that entitle the payor to a depiction of the payor's 
name or logo in a tax-exempt organization periodical may or may 
not be subject to the UBIT depending on the application of 
present-law rules regarding periodical advertising and 
nontaxable donor recognition.45
---------------------------------------------------------------------------
    \45\ For guidance regarding the treatment of periodical advertising 
under the UBIT, see section 513(c); United States v. American College 
of Physicians, 475 U.S. 834 (1986); Treas. Reg. 1.513-1(d)(4)(iv), 
Example 7; Rev. Rul. 82-139, 1982-2 C.B. 108; Rev. Rul. 74-38, 1974-1 
C.B. 144; PLR 9137049; and PLR 9234002. For guidance regarding the 
treatment of donor acknowledgments under the UBIT, see Rev. Rul. 76-93, 
1976-1 C.B. 170; PLR 8749085; and PLR 9044071. In the interest of 
administrative convenience, the conferees encourage the Treasury 
Department to permit tax-exempt entities to provide combined reporting 
of payments that are both qualified sponsorship payments and nontaxable 
payments made in exchange for donor acknowledgments in a periodical or 
in connection with a qualified convention or trade show. In addition, 
to the extent tax-exempt entities are required to allocate portions of 
payments, the conferees encourage the Treasury Department to minimize 
the reporting burden associated with any such allocation.
---------------------------------------------------------------------------
      As a further clarification, the conferees intend that, as 
provided under Prop. Treas. Reg. sec. 1.513-4, the use of 
promotional logos or slogans that are an established part of 
the sponsor's identity would not, by itself, constitute 
advertising for purposes of determining whether a payment is a 
qualified sponsorship payment.
6. Timeshare associations (sec. 956 of the House bill and sec. 764 of 
        the Senate amendment)

                              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 
nonexempt 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).

                               House Bill

      In general.--The House bill amends section 528 to permit 
timeshare associations to qualify for taxation under that 
section. Timeshare associations will 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). 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.
      60-percent test.--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.
      90-percent test.--At least 90 percent of the expenditures 
of the timeshare association must be for the acquisition, 
management, maintenance, or care of ``association property,'' 
and activities provided by the association to, or on behalf of, 
members of the timeshare association. ``Activities provided to 
or on behalf of members of the [timeshare] association'' 
includes events located on association property (e.g., member's 
meetings at the association's meeting room, parties at the 
association's swimming pool, golf lessons on association's golf 
range, transportation to and from association property, etc.).
      Organizational and operational tests.--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, the timeshare 
association must elect to be taxed under section 528.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1996.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that the Senate amendment provides that association 
property includes property in which a timeshare association or 
members of the association have rights arising out of recorded 
easements, covenants, and other recorded instruments to use 
property related to the timeshare project.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 1996.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

   7. Deferral of gain on certain sales of farm product refiners and 
                processors (sec. 958 of the House bill)

                              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 an eligible worker-owned 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.

                               House Bill

      The House 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 of 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 House bill applies to gain 
on the sale of stock by a C corporation.
      Effective date.--The provision applies to sales after 
December 31, 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, with the 
modification that the requirement that the refiner or processor 
purchase more than one-half of the products to be refined or 
processed from farmers who make up the cooperative which is 
purchasing the stock or the cooperative must be satisfied for 
at least one year prior to the sale.
8. Exception from real estate reporting requirements for certain sales 
        of principal residences (sec. 959 of the House bill and secs. 
        314(c) and 601 of the Senate amendment)

                              Present Law

      Persons who close real estate transactions are required 
to file information returns with the IRS. These returns, filed 
on Form 1099S, are required to show the name and address of the 
seller of the real estate, details with regard to the gross 
proceeds of the sale, and the portion of any real property tax 
which is treated as a tax imposed on the purchaser. Code 
section 6045(e) also provides for reporting whether any 
financing of the seller was federally-subsidized indebtedness, 
but Treasury regulations do not currently require the reporting 
of this information.

                               House Bill

      The House 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 information 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 with regard 
to sales or exchanges occurring after the date of enactment.

                            Senate Amendment

      The Senate amendment follows the House bill, with two 
modifications.
      First, the requirement that the person who would 
otherwise be required to file the information return obtain 
written assurances that no financing of the seller was 
federally-subsidized indebtedness does not apply until such 
time as the Secretary of the Treasury requires this information 
to be included in information returns reporting real estate 
transactions.
      Second, the Senate amendment does not exclude from the 
information reporting requirement any sale of a personal 
residence in the District of Columbia, if such sale is required 
to be reported for the purpose of verifying eligibility for the 
D.C. first-time homeowner credit. The Senate amendment 
separately establishes a credit of $5,000 for first-time home 
buyers in the District of Columbia. The Senate amendment 
anticipates that the Secretary of the Treasury will require 
such information as is necessary to verify eligibility for the 
D.C. first-time home buyer credit.
      Effective date.--Same as the House bill.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with one modification, allowing the Secretary of the Treasury 
the discretion to increase the dollar thresholds if he 
determines that such an increase will not materially reduce 
revenues to the Treasury.
9. Increased deduction for business meals for individuals operating 
        under Department of Transportation hours of service limitations 
        (sec. 960 of the House bill and sec. 765 of the Senate 
        amendment)

                              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.

                               House Bill

      The House 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.
      Individuals subject to the hours of service limitations 
of the Department of Transportation include:
            (1) certain air transportation employees such as 
        pilots, crew, dispatchers, mechanics, and control tower 
        operators pursuant to Federal Aviation Administration 
        regulations,
            (2) interstate truck operators and interstate bus 
        drivers pursuant to Department of Transportation 
        regulations,
            (3) certain railroad employees such as engineers, 
        conductors, train crews, dispatchers and control 
        operations personnel pursuant to Federal Railroad 
        Administration regulations, and
            (4) certain merchant mariners pursuant to Coast 
        Guard regulations.
      The increase in the deductible percentage is phased in 
according to the following schedule:
        Taxable years beginning in--               Deductible 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
10. Deductibility of meals provided for the convenience of the employer 
        and provided by remote seafood processors (secs. 765 and 778 of 
        the Senate amendment)

                              Present Law

      In general, subject to several exceptions, only 50 
percent of business meal and entertainment expenses are allowed 
as a deduction (sec. 274(n)). Under one exception, the value of 
meals that are excludable from employees' incomes as a de 
minimis fringe benefit (sec. 132) are fully deductible by the 
employer.
      In addition, the courts that have considered the issue 
have held that if meals are provided for the convenience of the 
employer pursuant to section 119 they are fully deductible 
pursuant to section 274(n)(2)(B) provided they satisfy the 
relevant section 132 requirements. (Boyd Gaming Corp. v. 
Commissioner \46\ and Gold Coast Hotel & Casino v. I.R.S.\47\).
---------------------------------------------------------------------------
    \46\ 106 T.C. No. 19 (May 23, 1996).
    \47\ U.S.D.C. Nev. CV-5-94-1146-HDM(LRL) (September 26, 1996).
---------------------------------------------------------------------------
      Exceptions to this 50-percent rule are also provided for 
food and beverages provided to crew members of certain vessels 
and offshore oil or gas platforms or drilling rigs.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that meals that are 
excludable from employees' incomes because they are provided 
for the convenience of the employer pursuant to section 119 of 
the Code are excludable as a de minimis fringe benefit and 
therefore are fully deductible by the employer, provided they 
satisfy the relevant section 132 requirements. No inference is 
intended as to whether such meals are fully deductible under 
present law.
      The Senate amendment also increases to 80 percent the 
deductible percentage of the cost of food and beverages 
consumed by workers at remote seafood processing facilities 
located in the United States north of 53 degrees north 
latitude. A seafood processing facility is remote when there 
are insufficient eating facilities in the vicinity of the 
employer's premises.\48\
---------------------------------------------------------------------------
    \48\ See Treas. Reg. Sec. 1.119-1(a)(2)(ii)(c) and 1.119-1(f) 
(Example 7).
---------------------------------------------------------------------------
      The increase in the deductible percentage is phased in 
according to the following schedule:
        Taxable years beginning in--               Deductible percentage
1998, 1999........................................................    55
2000, 2001........................................................    60
2002, 2003........................................................    65
2004, 2005........................................................    70
2006, 2007........................................................    75
2008 and thereafter...............................................    80

      Effective dates.--The provisions are effective for 
taxable years beginning after 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment as 
to meals provided pursuant to section 119. Because food and 
beverages consumed by workers at these specified remote seafood 
processing facilities are provided for the convenience of the 
employer pursuant to section 119 and therefore will be 
deductible under the Senate amendment provision as to meals 
provided pursuant to section 119 (provided they satisfy the 
relevant section 132 requirements), the conference agreement 
does not include the Senate amendment provision relating to 
remote seafood processors because it is subsumed by the section 
119 provision.
11. Deduction of traveling expenses while working away from home on 
        qualified construction projects (sec. 775 of the Senate 
        amendment)

                              Present Law

      A taxpayer is allowed, subject to limitations, to deduct 
the ordinary and necessary expenses of carrying on a trade or 
business, including the trade or business of being an employee. 
Expenses of carrying on the trade or business of being an 
employee are miscellaneous itemized deductions, deductible only 
to the extent they exceed 2 percent of adjusted gross income.
      Deductible expenses include travel expenses (including 
amounts expended for meals and lodging) while temporarily away 
from home in pursuit of a trade or business. In the absence of 
facts and circumstances indicating otherwise, a taxpayer is 
considered to be temporarily away from home if the period of 
employment away from home does not exceed one year. If the 
period of employment away from home exceeds one year, the 
taxpayer is considered to be on an indefinite or permanent work 
assignment, and travel expenses (including amounts expended for 
meals and lodging) are not deductible.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that, in the absence of 
facts and circumstances indicating otherwise, taxpayers 
employed on qualified construction projects will be considered 
to be temporarily away from home if the period of their 
employment away from home does not exceed 18 months (24 months 
if the qualified construction project is in a remote location), 
rather than one year as under present law. A qualified 
construction project is one that is identifiable and that has a 
completion date that is reasonably expected to occur within 
five years of its starting date. A qualified construction 
project is considered to be in a remote location if it is 
located in an area which lacks adequate housing, educational, 
medical or other facilities necessary for families.
      These revised standards for workers on qualified 
construction projects apply only to taxpayers who continue to 
maintain a household, and therefore incur duplicative expenses, 
at their place of principal residence.
      Effective date.--The provision is effective for amounts 
paid or incurred in taxable years beginning after December 31, 
1997.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
12. Provide above-the-line deduction for certain business expenses 
        (sec. 766 of the Senate amendment)

                              Present Law

      Under present law, individuals may generally deduct 
ordinary and necessary business expenses in determining 
adjusted gross income (``AGI''). This deduction does not apply 
in the case of an individual performing services as an 
employee. Employee business expenses are generally deductible 
only as a miscellaneous itemized deduction, i.e., only to the 
extent all the taxpayer's miscellaneous itemized deductions 
exceed 2 percent of the taxpayer's AGI. Employee business 
expenses are not allowed as a deduction for alternative minimum 
tax purposes.

                               House Bill

      No provision.

                            Senate Amendment

      Employee business expenses relating to service as an 
official of a State or local government (or political 
subdivision thereof) are deductible in computing AGI (``above 
the line''), provided the official is compensated in whole or 
in part on a fee basis. Consequently, such expenses are also 
deductible for minimum tax purposes.
      Effective date.--The provision applies to expenses paid 
or incurred in taxable years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
      Effective date.--The conference agreement is effective 
with respect to expenses paid or incurred in taxable years 
beginning after December 31, 1986.
13. Increase in standard mileage rate for purposes of computing 
        charitable deduction (sec. 767 of the Senate amendment)

                              Present Law

      In general, individuals who itemize their deductions may 
deduct charitable contributions. For purposes of computing the 
charitable deduction for the use of a passenger automobile, the 
standard mileage rate is 12 cents per mile (sec. 170(i)).

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment increases this mileage rate to 15 
cents per mile. This rate is indexed for inflation, rounded 
down to the nearest whole cent.
      Effective date.--The increase to 15 cents is effective 
for taxable years beginning after December 31, 1997. The 
indexation is effective for inflation occurring after 1997. 
Accordingly, the first adjustment for indexing will occur in 
1999 to reflect inflation in 1998.

                          Conference Agreement

      The conference agreement increases this mileage rate to 
14 cents per mile (not indexed for inflation), effective for 
taxable years beginning after December 31, 1997.
14. Expensing of environmental remediation costs (``brownfields'') 
        (sec. 768 of the Senate amendment)

                              Present Law

      Code section 162 allows a deduction for ordinary and 
necessary expenses paid or incurred in carrying on any trade or 
business. Treasury Regulations provide that the cost of 
incidental repairs which neither materially add to the value of 
property nor appreciably prolong its life, but keep it in an 
ordinarily efficient operating condition, may be deducted 
currently as a business expense. Section 263(a)(1) limits the 
scope of section 162 by prohibiting a current deduction for 
certain capital expenditures. Treasury Regulations define 
``capital expenditures'' as amounts paid or incurred to 
materially add to the value, or substantially prolong the 
useful life, of property owned by the taxpayer, or to adapt 
property to a new or different use. Amounts paid for repairs 
and maintenance do not constitute capital expenditures. The 
determination of whether an expense is deductible or 
capitalizable is based on the facts and circumstances of each 
case.
      Treasury regulations provide that capital expenditures 
include the costs of acquiring or substantially improving 
buildings, machinery, equipment, furniture, fixtures and 
similar property having a useful life substantially beyond the 
current year. In INDOPCO, Inc. v. Commissioner, 112 S. Ct. 1039 
(1992), the Supreme Court required the capitalization of legal 
fees incurred by a taxpayer in connection with a friendly 
takeover by one of its customers on the grounds that the merger 
would produce significant economic benefits to the taxpayer 
extending beyond the currentyear; capitalization of the costs 
thus would match the expenditures with the income produced. Similarly, 
the amount paid for the construction of a filtration plant, with a life 
extending beyond the year of completion, and as a permanent addition to 
the taxpayer's mill property, was a capital expenditure rather than an 
ordinary and necessary current business expense. Woolrich Woolen Mills 
v. United States, 289 F.2d 444 (3d Cir. 1961).
      Although Treasury regulations provide that expenditures 
that materially increase the value of property must be 
capitalized, they do not set forth a method of determining how 
and when value has been increased. In Plainfield-Union Water 
Co. v. Commissioner, 39 T.C. 333 (1962), nonacq., 1964-2 C.B. 
8, the U.S. Tax Court held that increased value was determined 
by comparing the value of an asset after the expenditure with 
its value before the condition necessitating the expenditure. 
The Tax Court stated that ``an expenditure which returns 
property to the state it was in before the situation prompting 
the expenditure arose, and which does not make the relevant 
property more valuable, more useful, or longer-lived, is 
usually deemed a deductible repair.''
      In several Technical Advice Memoranda (TAM), the Internal 
Revenue Service (IRS) declined to apply the Plainfield Union 
valuation analysis, indicating that the analysis represents 
just one of several alternative methods of determining 
increases in the value of an asset. In TAM 9240004 (June 29, 
1992), the IRS required certain asbestos removal costs to be 
capitalized rather than expensed. In that instance, the 
taxpayer owned equipment that was manufactured with insulation 
containing asbestos; the taxpayer replaced the asbestos 
insulation with less thermally efficient, non-asbestos 
insulation. The IRS concluded that the expenditures resulted in 
a material increase in the value of the equipment because the 
asbestos removal eliminated human health risks, reduced the 
risk of liability to employees resulting from the 
contamination, and made the property more marketable. 
Similarly, in TAM 9411002 (November 19, 1993), the IRS required 
the capitalization of expenditures to remove and replace 
asbestos in connection with the conversion of a boiler room to 
garage and office space. However, the IRS permitted deduction 
of costs of encapsulating exposed asbestos in an adjacent 
warehouse.
      In 1994, the IRS issued Rev. Rul. 94-38, 1994-1 C.B. 35, 
holding that soil remediation expenditures and ongoing water 
treatment expenditures incurred to clean up land and water that 
a taxpayer contaminated with hazardous waste are deductible. In 
this ruling, the IRS explicitly accepted the Plainfield Union 
valuation analysis.49 However, the IRS also held 
that costs allocable to constructing a groundwater treatment 
facility are capital expenditures.
---------------------------------------------------------------------------
    \49\ Rev. Rul. 94-38 generally rendered moot the holding in TAM 
9315004 (December 17, 1992) requiring a taxpayer to capitalize certain 
costs associated with the remediation of soil contaminated with 
polychlorinated biphenyls (PCBs).
---------------------------------------------------------------------------
      In 1995, the IRS issued TAM 9541005 (October 13, 1995) 
requiring a taxpayer to capitalize certain environmental study 
costs, as well as associated consulting and legal fees. The 
taxpayer acquired the land and conducted activities causing 
hazardous waste contamination. After the contamination, but 
before it was discovered, the company donated the land to the 
county to be developed into a recreational park. After the 
county discovered the contamination, it reconveyed the land to 
the company for $1. The company incurred the costs in 
developing a remediation strategy. The IRS held that the costs 
were not deductible under section 162 because the company 
acquired the land in a contaminated state when it purchased the 
land from the county. In January, 1996, the IRS revoked and 
superseded TAM 9541005 (PLR 9627002). Noting that the company's 
contamination of the land and liability for remediation were 
unchanged during the break in ownership by the county, the IRS 
concluded that the break in ownership should not, in and of 
itself, operate to disallow a deduction under section 162.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that taxpayers could elect 
to treat certain environmental remediation expenditures that 
would otherwise be chargeable to capital account as deductible 
in the year paid or incurred. The deduction applies for both 
regular and alternative minimum tax purposes. The expenditure 
must be incurred in connection with the abatement or control of 
hazardous substances at a qualified contaminated site. In 
general, any expenditure for the acquisition of depreciable 
property used in connection with the abatement or control of 
hazardous substances at a qualified contaminated site does not 
constitute a qualified environmental remediation expenditure. 
However, depreciation deductions allowable for such property 
which would otherwise be allocated to the site under the 
principles set forth in Comm'r v. Idaho Power Co.50 
and section 263A are treated as qualified environmental 
remediation expenditures.
---------------------------------------------------------------------------
    \50\ Comm'r v. Idaho Power Co., 418 U.S. 1 (1974) (holding that 
equipment depreciation allocable to the taxpayer's construction of 
capital facilities must be capitalized under section 263(a)(1)).
---------------------------------------------------------------------------
      A ``qualified contaminated site'' generally is any 
property that (1) is held for use in a trade or business, for 
the production of income, or as inventory; (2) is certified by 
the appropriate State environmental agency to be located within 
a targeted area; and (3) contains (or potentially contains) a 
hazardous substance (so-called ``brownfields''). Targeted areas 
would mean (1) empowerment zones and enterprise communities (as 
designated under present law, including any supplemental zone 
designated on December 21, 1994); and (2) sites announced 
before February, 1997, as being subject to one of the 76 
Environmental Protection Agency (EPA) Brownfields Pilots.
      Both urban and rural sites qualify. However, sites that 
are identified on the national priorities list under the 
Comprehensive Environmental Response, Compensation, and 
Liability Act of 1980 (CERCLA) cannot be targeted areas. 
Appropriate State environmental agencies are designated by the 
EPA; if no State agency is designated, the EPA is responsible 
for providing thecertification. Hazardous substances generally 
are defined by reference to sections 101(14) and 102 of CERCLA, subject 
to additional limitations applicable to asbestos and similar substances 
within buildings, certain naturally occurring substances such as radon, 
and certain other substances released into drinking water supplies due 
to deterioration through ordinary use.
      The Senate amendment further provides that, in the case 
of property to which a qualified environmental remediation 
expenditure otherwise would have been capitalized, any 
deduction allowed under the bill would be treated as a 
depreciation deduction and the property would be treated as 
subject to section 1245. Thus, deductions for qualified 
environmental remediation expenditures would be subject to 
recapture as ordinary income upon sale or other disposition of 
the property.
      Effective date.--The provision applies to eligible 
expenditures incurred after the date of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
except that the definition of ``targeted areas'' is expanded to 
include population census tracts with a poverty rate of 20 
percent or more and certain industrial and commercial areas 
that are adjacent to such census tracts. Thus, targeted areas 
generally would include: (1) empowerment zones and enterprise 
communities as designated under present law and under the 
conference agreement 51 (including any supplemental 
empowerment zone designated on December 21, 1994); (2) sites 
announced before February 1997, as being subject to one of the 
76 Environmental Protection Agency (EPA) Brownfields Pilots; 
(3) any population census tract with a poverty rate of 20 
percent or more; and (4) certain industrial and commercial 
areas that are adjacent to tracts described in (3) above.
---------------------------------------------------------------------------
    \51\ Thus, the 20 additional empowerment zones authorized to be 
designated under the conference agreement as well as the D.C. 
Enterprise Zone established under the conference agreement are 
``targeted areas'' for purposes of this provision.
---------------------------------------------------------------------------
      With respect to certification of targeted areas, the 
conference agreement provides that the chief executive officer 
of a State may, in consultation with the Administrator of the 
EPA, designate an appropriate State environmental agency. If no 
State environmental agency is so designated within 60 days of 
the date of enactment, the appropriate environmental agency for 
such State shall be designated by the Administrator of the EPA.
      In addition, the conference agreement sunsets the 
provision after three years. Thus, the provision applies only 
to eligible expenditures incurred in taxable years ending after 
date of enactment and before January 1, 2001.
      Finally, the conferees wish to clarify that providing 
current deductions for certain environmental remediation 
expenditures under the conference agreement creates no 
inference as to the proper treatment of other remediation 
expenditures not described in the agreement.
15. Treatment of consolidation of certain mutual savings bank life 
        insurance departments (sec. 962 of the House bill)

                              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.

                               House Bill

      The House bill 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: (1) the payments 
are only with respect to policies in effect immediately before 
the consolidation; (2) the payments are only with respect to 
policies that are participating (i.e., on which policyholder 
dividends are paid) before and after the consolidation; (3) the 
payments cease with respect to any policy if the policy lapses 
after the consolidation; (4) the policyholders before the 
consolidation had no divisible right to the surplus of any life 
insurance department and had no right to vote; and (5) 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
16. Offset of past-due, legally enforceable State tax obligations 
        against Federal overpayments (sec. 963 of the House bill)

                              Present Law

      Overpayments of Federal tax are 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 refunded to the person making the overpayment.

                               House Bill

      The House bill provides that 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 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, including regulations prescribing the time and 
manner in which States may submit notices of past-due, legally 
enforceable State tax obligations. The Secretary of the 
Treasury may require States to pay a fee to reimburse the 
Secretary for the cost of applying the offset procedure.
      Effective date.--The provision is effective for refunds 
payable after December 31, 1998.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
17. Modify limits on depreciation of luxury automobiles for certain 
        clean-burning fuel and electric vehicles (sec. 964 of the House 
        bill)

                              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.

                               House Bill

      The House bill modifies the present-law limitation on 
depreciation in the case of qualified clean-burning fuel 
vehicles and certain electric vehicles. With respect to 
qualified clean-burningfuel 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 present-law 
limitation. Generally, this has the same effect as only subjecting the 
cost of the vehicle before modification to the present-law limitations.
      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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, with a 
modification to the effective date that provides that the 
provision is effective for property placed in service after the 
date of enactment and before January 1, 2005.
18. Survivor benefits of public safety officers killed in the line of 
        duty (sec. 965 of the House bill and sec. 784 of the Senate 
        amendment)

                              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 income 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 
except to the extent the benefits are a return of after-tax 
employee contributions. Survivor benefits paid under a 
government plan only to survivors of officers who died as a 
result of injuries sustained in the line of duty are in the 
nature of workers'' compensation and are generally excludable 
from income.

                               House Bill

      The House 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 is 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill except 
that the provision applies to public safety officers killed in 
the line of duty. Public safety officers include law 
enforcement officers, firefighters, rescue squad or ambulance 
crew.

                          Conference Agreement

      The conference agreement follows the Senate amendment. 
The conference agreement clarifies that the provision does not 
apply with respect to the death of a public safety officer if 
it is determined by the appropriate supervising authority that 
(1) the death was caused by the intentional misconduct of the 
officer or by the officers intention to bring about the death, 
(2) the officer was voluntarily intoxicated at the time of 
death, (3) the officer was performing his or her duties in a 
grossly negligent manner at the time of death, or (4) the 
actions of the individual to whom payment is to be made were a 
substantial contributing factor to the death of the officer.
19. Temporary suspension of income limitations on percentage depletion 
        for production from marginal wells (sec. 966 of the House bill 
        and sec. 772 of the Senate amendment)

                              Present Law

      The Code permits taxpayers to recover their investments 
in oil and gas wells through depletion deductions. In the case 
of certain properties, the deductions may be determined using 
the percentage depletion method. Certain limitations apply in 
calculating percentage depletion deductions. One limitation is 
a restriction that these deductions may not exceed 65 percent 
of the taxpayer's taxable income. Another limitation is a 
restriction that the amount deducted may not exceed 100 percent 
of the net income from that property in any 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 from which 
substantially all of the production 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 ofdomestic 
crude oil and domestic natural gas from producing wells on the property 
for the calendar year by the number of wells.

                               House Bill

      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.

                            Senate Amendment

      The 100-percent-of-net-income property limitation with 
respect to oil and gas produced from marginal properties does 
not apply for any taxable year beginning in a calendar year in 
which the annual average wellhead price for crude oil (within 
the meaning of section 29(d)(2)(C)) is below $14 per barrel.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1997.

                          Conference Agreement

      The 100-percent-of-net-income property 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.
20. Extend production credit for electricity produced from wind and 
        ``closed loop'' biomass (sec. 771 of the Senate amendment)

                              Present Law

      An income tax credit is allowed for the production of 
electricity from either qualified wind energy or qualified 
``closed-loop'' biomass facilities. The credit is equal to 1.5 
cents (plus adjustments for inflation since 1992) per kilowatt 
hour of electricity produced from these qualified sources 
during the 10-year period after the facility is placed in 
service.
      The credit applies to electricity produced by qualified 
wind or closed-loop biomass facilities placed in service before 
July 1, 1999. In order to claim the credit, a taxpayer must own 
the facility and sell the electricity produced by the facility 
to an unrelated party.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment extends the income tax credit for 
electricity produced from wind and closed-loop biomass for two 
years. Thus, the credit is available for qualifying electricity 
produced from facilities placed in service before July 1, 2001. 
As under present law, the credit is allowable for a period of 
10 years after the facility is placed in service.
      Effective date.--The provision is effective as of the 
date of enactment.

                          Conference Agreement

      The conference agreement does not include the provision 
in the Senate amendment.
21. Modification of advance refunding rules for certain tax-exempt 
        bonds issued by the Virgin Islands (sec. 957 of the House bill)

                              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.

                               House Bill

      Under the House bill, 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
22. Qualified small-issue bonds (sec. 770 of the Senate amendment)

                              Present Law

      Interest on certain small issues of private activity 
bonds issued by State or local governments (``qualified small-
issue bonds'') is excluded from gross income if certain 
conditions are met. First, at least 95 percent of the bond 
proceeds must be used to finance manufacturing facilities or 
certain agricultural land or equipment. Second, the bond issue 
must have an aggregate face amount of $1 million or less, or 
alternatively, the aggregate face amount of the issue, together 
with the aggregate amount of certain related capital 
expenditures during the six-year period beginning three years 
before the date of the issue and ending three years after that 
date, must not exceed $10 million. (The maximum face amount of 
bonds would not be increased over present-law amounts.)
      Issuance of qualified small-issue bonds, like most other 
private activity bonds, is subject to annual State volume 
limitations and to other rules.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment increases the maximum capital 
expenditure limit under present law from $10 million to $20 
million. The maximum amount of bonds is not increased over 
present-law amounts.
      Effective date.--The provision is effective for bonds 
issued after December 31, 1997.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
23. Treatment of bonds issued by the Federal Home Loan Bank Board under 
        the Federal guarantee rules (sec. 774 of the Senate amendment)

                              Present Law

      Generally, interest on bonds which are Federally 
guaranteed do not qualify for tax-exemption for Federal income 
tax purposes. Certain exceptions are provided including 
otherwise qualifying bonds guaranteed by the Federal Housing 
Administration, the Veterans' Administration, the Federal 
National Mortgage Association, the Federal Home Loan Mortgage 
Corporation, and the Government National Mortgage Association.

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, bonds guaranteed by the 
Federal Home Loan Bank Board are not treated as Federally 
guaranteed for purposes of the Federal guarantee prohibition 
generally applicable to tax-exempt bonds.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
24. Current refundings of certain bonds issued by Indian tribal 
        governments (sec. 789 of the Senate amendment)

                              Present Law

      Indian tribal governments are permitted to issue tax-
exempt bonds for essential government functions. Since 1987, 
this term has been defined to include only those activities 
that traditionally are carried out as governmental functions by 
State governments.
      Before 1987, some Indian tribes issued tax-exempt bonds 
to acquire existing businesses as investments. Under present 
law, tax-exempt bonds may not be issued for this purpose, and 
outstanding pre-1987 bonds issued for such acquisitions may not 
be refunded.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment allows pre-1987 tax-exempt bonds 
issued by Indian tribal governments for business acquisitions 
to be refunded if:
            (1) the refunded bonds are redeemed within 90 days 
        after the refunding bonds are issued;
            (2) the outstanding principal amount of the bonds 
        is not increased; and
            (3) the maturity date of the bonds is not extended.
      Effective date.--The provision applies to bonds issued 
after the date of enactment.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
25. Purchasing of receivables by tax-exempt hospital cooperative 
        service organizations (sec. 773 of the Senate amendment)

                               Present Law

      Section 501(e) provides that an organization organized on 
a cooperative basis by tax-exempt hospitals will itself be tax-
exempt if the organization is operated solely to perform, on a 
centralized basis, one or more of certain enumerated services 
for its members. These services are: data processing, 
purchasing (including the purchase of insurance on a group 
basis), warehousing, billing and collection, food, clinical, 
industrial engineering, laboratory, printing, communications, 
record center, and personnel services. An organization does not 
qualify under section 501(e) if it performs services other than 
the enumerated services. (Treas. reg. sec. 1.501(e)(-1(c)).

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment clarifies that, for purposes of 
section 501(e), billing and collection services include the 
purchase of patron accounts receivable on a recourse basis. 
Thus, hospital cooperative service organizations are permitted 
to advance cash on the basis of member accounts receivable, 
provided that each member hospital retains the risk of non-
payment with respect to its accounts receivable.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1996. No inference is 
intended with respect to taxable years prior to the effective 
date.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
26. Charitable contribution deduction for certain expenses incurred in 
        support of Native Alaskan subsistence whaling (sec. 776 of the 
        Senate amendment)

                              Present Law

      In computing taxable income, individuals who do not elect 
the standard deduction may claim itemized deductions, including 
a deduction (subject to certain limitations) for charitable 
contributions or gifts made during the taxable year to a 
qualified charitable organization or governmental entity (sec. 
170). Individuals who elect the standard deduction may not 
claim a deduction for charitable contributions made during the 
taxable year.
      No charitable contribution deduction is allowed for a 
contribution of services. However, unreimbursed expenditures 
made incident to the rendition of services to an organization, 
contributions to which are deductible, may constitute a 
deductible contribution (Treas. Reg. sec. 1.170A-1(g)). 
Specifically, section 170(j) provides that no charitable 
contribution deduction is allowed for traveling expenses 
(including amounts expended for meals and lodging) while away 
from home, whether paid directly or by reimbursement, unless 
there is no significant element of personal pleasure, 
recreation, or vacation in such travel.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment allows individuals to claim a 
deduction under section 170 not exceeding $7,500 per taxable 
year for certain expenses incurred in carrying out sanctioned 
whaling activities. The deduction is available only to an 
individual who is recognized by the Alaska Eskimo Whaling 
Commission as a whaling captain charged with the responsibility 
of maintaining and carrying out sanctioned whaling activities. 
The deduction is available for reasonable and necessary 
expenses paid by the taxpayer during the taxable year for (1) 
the acquisition and maintenance of whaling boats, weapons, and 
gear used in sanctioned whaling activities, (2) the supplying 
of food for the crew and other provisions for carrying out such 
activities, and (3) storage and distribution of the catch from 
such activities.
      For purposes of the provision, the term ``sanctioned 
whaling activities'' means subsistence bowhead whale hunting 
activities conducted pursuant to the management plan of the 
Alaska Eskimo Whaling Commission. No inference is intended 
regarding the deductibility of any whaling expenses incurred in 
a taxable year ending before the date of enactment.
      Effective date.--The provision is effective for taxable 
years ending after the date of enactment.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
27. Designation of additional empowerment zones; modification of 
        empowerment zone and enterprise community criteria (sec. 777 of 
        the Senate amendment)

                              Present Law

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.\52\ 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).
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    \52\ 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), and 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) A 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 section 179 
expensing 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); 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 100 percent of the taxpayer's basis in 
the property at the beginning of the period, or $5,000 
(whichever is greater).
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's tangible property is used 
within a zone or community; (4) substantially all of the 
business's 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. 53 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.
---------------------------------------------------------------------------
    \53\ 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.
---------------------------------------------------------------------------
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 54), 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.
---------------------------------------------------------------------------
    \54\ For purposes of the tax-exempt financing rules, an 
``enterprise zone business'' also includes a business located in a zone 
or community which would qualify as an enterprise zone business if it 
were separately incorporated.
---------------------------------------------------------------------------
      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.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment modifies the present-law empowerment 
zone and enterprise community designation criteria under 
section 1392 so that, in the event that additional empowerment 
zones or enterprise communities are authorized to be designated 
in the future, any zones or communities designated in the 
States of Alaska or Hawaii will not be subject to the general 
size limitations under section 1392(a)(3), nor will such zones 
or communities be subject to the general poverty-rate criteria 
under section 1392(a)(4). Instead, nominated areas in either 
State will be eligible for designation as an empowerment zone 
or enterprise community if, for each census tract or block 
group within such area, at least 20 percent of the families 
have incomes which are 50 percent or less of the State-wide 
median family income. Such zones and communities will be 
subject to the population limitations under present-law section 
1392(a)(1).
      Effective date.--The provision is effective on the date 
of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment. In 
addition, the conference agreement provides for the designation 
of 20 additional empowerment zones pursuant to slightly 
expanded eligibility criteria, and includes certain 
modifications to the definition of an enterprise zone business 
and the tax-exempt financing rules.
Two additional empowerment zones with same tax incentives as previously 
        designated empowerment zones
      Under the conference agreement, the Secretary of HUD is 
authorized to designate two additional empowerment zones 
located in urban areas (thereby increasing to eight the total 
number of empowerment zones located in urban areas) with 
respect to which generally apply the same tax incentives (i.e., 
the wage credit, additional expensing, and special tax-exempt 
financing) as are available within the empowerment zones 
authorized by the Omnibus Budget Reconciliation Act of 1993 
(OBRA 1993). The wage credit available in the two new urban 
empowerment zones is modified slightly to provide that the 
percentage of wages taken into account for purposes of 
determining the wage credit is 20 percent for 2000-2004, 15 
percent for 2005, 10 percent for 2006, and 5 percent for 2007. 
No wage credit is available in the two new urban empowerment 
zones after 2007.
      The two additional empowerment zones are subject to the 
same eligibility criteria under present-law section 1392 that 
applies to the original six urban empowerment zones. In order 
to permit designation of these two additional empowerment 
zones, the conference agreement increases the present-law 
750,000 aggregate population cap applicable to empowerment 
zones located in urban areas to a cap of 1,000,000 aggregate 
population for the eight urban empowerment zones.
      The two empowerment zones must be designated within 180 
days after the date of enactment. However, the designations 
will not take effect before January 1, 2000, and generally will 
remain in effect for 10 years.
Designation of additional empowerment zones
      The conference agreement authorizes the Secretaries of 
HUD and Agriculture to designate an additional 20 empowerment 
zones (no more than 15 in urban areas and no more than five in 
rural areas).55 With respect to these additional 
empowerment zones, the present-law eligibility criteria are 
expanded slightly. First, the square mileage limitations of 
present law (i.e., 20 square miles for urban areas and 1,000 
for rural areas) are expanded to allow the empowerment zones to 
include an additional 2,000 acres. This additional acreage, 
which could be developed for commercial or industrial purposes, 
is not subject to the poverty rate criteria and could be 
divided among up to three noncontiguous parcels. In addition, 
the present-law requirement that at least half of the nominated 
area consist of census tracts with poverty rates of 35 percent 
or more does not apply. Thus, under present-law section 
1392(a)(4), at least 90 percent of the census tracts within a 
nominated area must have a poverty rate of 25 percent or more, 
and the remaining census tracts must have a poverty rate of 20 
percent or more.56 For this purpose, census tracts 
with populations under 2,000 are treated as satisfying the 25-
percent poverty rate criteria if (1) at least 75 percent of the 
tract is zoned for commercial or industrial use and (2) the 
tract is contiguous to one or more other tracts that actually 
have a poverty rate of 25 percent or more.
---------------------------------------------------------------------------
    \55\ Under the conference agreement, areas located within Indian 
reservations are eligible for designation as empowerment zones.
    \56\ In lieu of the poverty criteria, outmigration may be taken 
into account in designating one rural empowerment zone.
---------------------------------------------------------------------------
      Within the 20 additional empowerment zones, qualified 
``enterprise zone businesses'' are eligible to receive up to 
$20,000 of additional section 179 expensing 57 and 
to utilize special tax-exempt financing benefits. The 
``brownfields'' tax incentive provided under the conference 
agreement also is available within all designated empowerment 
zones. Businesses within the 20 additional empowerment zones 
are not, however, eligible to receive the present-law wage 
credit available within the 11 other designated empowerment 
zones (i.e., the wage credit would be available only in the 
nine present-law zones and two new urban empowerment zones 
designated under the conference agreement).
---------------------------------------------------------------------------
    \57\ However, the additional section 179 expensing is not available 
within the additional 2,000 acres allowed to be included under the 
conference agreement within an empowerment zone.
---------------------------------------------------------------------------
      The 20 additional empowerment zones are required to be 
designated before 1999, and the designations generally will 
remain in effect for 10 years.
Modification of definition of enterprise zone business
      The conference agreement modifies the present-law 
requirement of section 1397B that an entity may qualify as an 
``enterprise zone business'' only if (in addition to the other 
present-law criteria) at least 80 percent of the total gross 
income of such entity is derived from the active conduct of a 
qualified business within an empowerment zone or enterprise 
community. The conference agreement liberalizes this present-
law requirement by reducing the percentage threshold so that an 
entity could qualify as an enterprise zone business if at least 
50 percent of the total gross income of such entity is derived 
from the active conduct of a qualified business within an 
empowerment zone or enterprise community (assuming that the 
other criteria of section 1397B are satisfied).
      In addition, section 1397B is modified so that rather 
than requiring that ``substantially all'' tangible and 
intangible property (and employee services) of an enterprise 
zone business be used (and performed) within a designated zone 
or community, a ``substantial portion'' of tangible and 
intangible property (and employee services) of an enterprise 
zone business would be required to be used (and performed) 
within a designated zone or community. Moreover, the conference 
agreement further amends the section 1397B rule governing 
intangible assets so that a substantial portion of an entity's 
intangible property must be used in the active conduct of a 
qualified business within a zone or community, but there is no 
need (as under present law) to determine whether the use of 
such assets is ``exclusively related to'' such business. 
However, the present-law rule of section 1397B(d)(4) continues 
to apply, such that a ``qualified business'' would not include 
any trade or business consisting predominantly of the 
development or holding or intangibles for sale or license. The 
conference agreement also clarifies that an enterprise zone 
business that leases to others commercial property within a 
zone or community may rely on a lessee's certification that the 
lessee is an enterprise zone business. Finally, the conference 
agreement provides that the rental to others of tangible 
personal property shall be treated as a qualified business if 
and only if at least 50 percent of the rental of such property 
is by enterprise zone businesses or by residents of a zone or 
community (rather than the present-law requirement that 
``substantially all'' tangible personal property rentals of an 
enterprise zone business satisfy this test).
      This modified ``enterprise zone business'' definition 
applies to all previously designated empowerment zones and 
enterprise communities, the two urban empowerment zones 
designated under the conference agreement, as well as to the 20 
additional empowerment zones authorized to be designated 
pursuant to the conference agreement. 58
---------------------------------------------------------------------------
    \58\ In addition, the modifications to the enterprise zone business 
definition will apply for purposes of defining a ``D.C. Zone business'' 
under certain provisions of the conference agreement that provide 
certain tax incentives for the District of Columbia.
---------------------------------------------------------------------------
Tax-exempt financing rules
            Exceptions to volume cap
      The conference agreement allows ``new empowerment zone 
facility bonds'' to be issued for qualified enterprise zone 
businesses in the 20 additional empowerment zones. These bonds 
are not subject to the State private activity bond volume caps 
or the special limits on issue size applicable to qualified 
enterprise zone facility bonds under present law. The maximum 
amount of these bonds that can be issued is limited to $60 
million per rural zone, $130 million per urban zone with a 
population of less than 100,000, and $230 million per urban 
zone with a population of 100,000 or more.
            Changes to certain rules applicable to both empowerment 
                    zone facility bonds and qualified enterprise 
                    community facility bonds
      Qualified enterprise zone businesses located in newly 
designated empowerment zones, as well as those located in 
previously designated empowerment zones and enterprise 
communities, would be eligible for special tax-exempt bond 
financing under present-law rules, subject to the modifications 
described below (and the exception to the volume cap described 
above for newly designated empowerment zones).
      The conference agreement waives until the end of a 
``startup period'' the requirement that 95 percent or more of 
the proceeds of bond issue be used by a qualified enterprise 
zone business. With respect to each property, the startup 
period ends at the beginning of the first taxable year 
beginning more than two years after the later of (1) the date 
of the bond issue financing such property, or (2) the date the 
property was placed in service (but in no event more than three 
years after the date of bond issuance). This waiver is only 
available if, at the beginning of the startup period, there is 
a reasonable expectation that the use by a qualified enterprise 
zone business would be satisfied at the end of the startup 
period and the business makes bona fide efforts to satisfy the 
enterprise zone business definition.
      The conference agreement also waives the requirements of 
an enterprise zone business (other than the requirement that at 
least 35 percent of the business' employees be residents of the 
zone or community) for all years after a prescribed testing 
period equal to first three taxable years after the startup 
period.
      Finally, the conference agreement relaxes the 
rehabilitation requirement for financing existing property with 
qualified enterprise zone facility bonds. In the case of 
property which is substantially renovated by the taxpayer, the 
property need not be acquired by the taxpayer after zone or 
community designation or originally used by the taxpayer within 
the zone if, during any 24-month period after zone or community 
designation, the additions to the taxpayer's basis in the 
property exceeded 15 percent of the taxpayer's basis at the 
beginning of the period, or $5,000 (whichever is greater).
Effective date
      The two additional urban empowerment zones (within which 
generally are available the same tax incentives as are 
available in the empowerment zones designated pursuant to OBRA 
1993) must be designated within 180 days after enactment, but 
the designation will not take effect before January 1, 2000. 
The 20 additional empowerment zones (within which the wage 
credit is not available) are to be designated after enactment 
but prior to January 1, 1999. For purposes of the additional 
section 179 expensing available within empowerment zones, the 
modifications to the definition of ``enterprise zone business'' 
are effective for taxable years beginning on or after the date 
of enactment.
      The changes to the tax-exempt financing rules are 
effective for qualified enterprise zone facility bonds and the 
new empowerment zone facility bonds issued after the date of 
enactment.
28. Conducting of certain games of chance not treated as unrelated 
        trade or business (sec. 783 of the Senate amendment)

                              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).59 Certain income, however, is exempted 
from the UBIT (such as interest, dividends, royalties, and 
certain rents), unless derived from debt-financed property 
(sec. 512(b)). Other exemptions from the UBIT are provided for 
activities in which substantially all the work is performed by 
volunteers and for income from the sale of donated goods (sec. 
513(a)).
---------------------------------------------------------------------------
    \59\ The UBIT applies not only to private, tax-exempt entities but 
also to colleges and universities that are agencies or 
instrumentalities of (or are owned or operated by) a State or local 
government or Indian tribal government (secs. 511(a)(2)(B) and 
7871(a)(5)). In the case of such a college or university, the 
``substantially related'' test is applied by determining whether the 
trade or business activity at issue is substantially related to the 
exercise or performance of any purpose or function described in section 
501(c)(3) (see sec. 513(a)).
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      A specific exemption from the UBIT is provided for 
certain bingo games 60 conducted by tax-exempt 
organizations, provided that the conducting of the bingo games 
is not an activity ordinarily carried out on a commercial basis 
and the conducting of which does not violate any State or local 
law (sec. 513(f)).61 In addition, a specific 
exemption from the UBIT is provided for qualified public 
entertainment activities (meaning entertainment or recreation 
activities of a kind traditionally conducted at fairs or 
expositions promoting agricultural and educational purposes) 
conducted by an organization described in section 501 (c)(3), 
(c)(4), or (c)(5) which regularly conducts an agricultural and 
educational fair or exposition as one of its substantial exempt 
purposes (sec. 513(d)).62
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    \60\ For purposes of this exemption, the term ``bingo game'' is 
defined as any game of bingo of a type in which usually (1) the wagers 
are placed, (2) the winners are determined, and (3) the distribution of 
prizes or other property is made in the presence of all persons placing 
wagers in such game (sec. 513(f)(2)). See Julius M. Israel Lodge of 
B'nai B'rith v. Comm'r, No. 96-60087 (Fifth Cir., October 25, 1996) 
(holding that ``instant bingo'' game did not fall within sec. 513(f) 
exemption, because each player's participation in the game is wholly 
independent of any other's and requires only that the player remove a 
pull-tab to determine whether he or she has a winning card).
    \61\ In 1978, at the same time that Congress enacted section 
513(f), section 527 was modified to provide that bingo income of 
political organizations is to be treated as ``exempt function income'' 
and, thus, not subject to Federal income tax if such income is used for 
certain political purposes (sec. 527(c)(3)(D)).
    \62\ In addition, section 311 of the Deficit Reduction Act of 1984 
(as modified by the Tax Reform Act of 1986) provides a special, off-
Code exemption from the UBIT for games of chance conducted by nonprofit 
organizations in the State of North Dakota.
---------------------------------------------------------------------------
      In South End Italian Independent Club, Inc. v. 
Commissioner, 87 T.C. 168 (1986), acq. 1987-2 C.B. 1, the Tax 
Court held that gambling profits of a social club described in 
section 501(c)(7) that were required by State law to be used 
for charitable purposes were fully deductible under section 162 
in computing the UBIT liability of the social club. The effect 
of this decision was to exempt gambling income of that social 
club from UBIT. The IRS has indicated that, until further 
guidance is available with respect to this issue, the issue of 
the deductibility of amounts required under State law to be 
used for charitable or other so-called ``lawful'' purposes 
should be resolved consistent with the South End case, 
regardless of whether the gaming proceeds are donated to other 
charitable organizations or spent internally on the 
organization's own charitable activities.63
---------------------------------------------------------------------------
    \63\ See IRS, Exempt Organizations: Technical Instruction Program 
for FY 1996 (Training 4277-048 (7-95)) at page 96.
---------------------------------------------------------------------------

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that the UBIT will not 
apply to income from a ``qualified game of chance,'' meaning 
any game of chance (other than a bingo game exempt under 
present-law sec. 513(f)) conducted by a tax-exempt organization 
if (1) such organization is licensed pursuant to State law to 
conduct such game, (2) only organizations which are organized 
as nonprofit corporations or are exempt from Federal income tax 
under section 501(a) may be so licensed to conduct such game 
within the State, and (3) the conduct of such game does not 
violate State or local law.
      No inference is intended regarding the treatment for 
purposes of the UBIT of games of chance conducted by tax-exempt 
organizations prior to the date of enactment.
      Effective date.--The provision is effective on the date 
of enactment.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
29. Exclusion from income of certain severance payments (sec. 788(a) of 
        the Senate amendment)

                              Present Law

      Severance payments are includible in income.

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, certain severance payments 
are excludable from income. The provision applies to payments 
of up to $2,000 received by an individual who was separated 
from service in connection with a reduction in the work force 
of the employer and who does not attain employment within 6 
months of the separation from service at a compensation level 
that is at least 95 percent of the compensation the individual 
was receiving before the separation from service. The exclusion 
does not apply if the total separation payments received by the 
individual exceed $125,000.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 1997, and before July 1, 2002.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
30. Special rule for thrift institutions that became large banks (sec. 
        790 of the Senate amendment)

                              Present Law

      A provision of the Small Business Job Protection Act of 
1996 repealed the percentage-of-taxable-income method of 
determining bad debt deductions of thrift institutions for 
taxable years beginning after 1995. A large bank (i.e., one 
with assets in excess of $500 million as of the end of its 1995 
taxable year) that was required to change its method of 
accounting by reason of the provision generally is required to 
recapture its post-1987 bad debt reserve over a 6-year period. 
The amount of recapture for a small bank generally is reduced 
to the extent the bank's reserve for bad debts determined under 
the experience method applicable to such institutions exceeded 
its pre-1988 reserve.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment allows a thrift institution that 
first became a large bank in its first taxable year beginning 
after 1994 to be treated as a small bank for purposes of the 
Small Business Job Protection Act provision. In addition, such 
institutions may apply the required change in accounting method 
on a cut-off basis.
      Effective date.--The provision is effective as if 
included in the Small Business Job Protection Act of 1996.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
31. Income averaging for farmers (sec. 792 of the Senate amendment)

                              Present Law

      The ability for an individual taxpayer to reduce his or 
her tax liability by averaging his or her income over a number 
of years was repealed by the Tax Reform Act of 1986.

                               House Bill

      No provision.

                            Senate Amendment

      An individual taxpayer is allowed to elect to compute his 
or her current year tax liability by averaging, over the prior 
three-year period, all or a portion of his or her taxable 
income from the trade of business of farming.
      Effective date.--The provision is effective for taxable 
years beginning after the date of enactment and before January 
1, 2001.

                          Conference Agreement

      The conference agreement includes the Senate amendment 
with modifications. The conference agreement clarifies that the 
provision operates such that an electing eligible taxpayer (1) 
designates all or a portion of his or her taxable income from 
the trade or business of farming from the current year as 
``elected farm income;'' (2) allocates one-third of such 
``elected farm income'' to each of the prior three taxable 
years; and (3) determines his or her current year section 1 tax 
liability by determining the sum of (a) his or her current year 
section 1 liability without the elected farm income allocated 
to the three prior taxable years plus (b) the increases in the 
section 1 tax for each of the three prior taxable years by 
taking into account the allocable share of the elected farm 
income for such years. If a taxpayer elects the operation the 
provision for a taxable year, the allocation of elected farm 
income among taxable years pursuant to the election shall apply 
for purposes of any election in a subsequent taxable year.
      The provision does not apply for employment tax purposes, 
or to an estate or a trust. Further, the provision does not 
apply for purposes of the alternative minimum tax under section 
55. Finally, the provision does not require the recalculation 
of the tax liability of any other taxpayer, including a minor 
child required to use the tax rates of his or her parents under 
section 1(g).
      The election shall be made in the manner prescribed by 
the Secretary of the Treasury and, except as provided by the 
Secretary, shall be irrevocable. In addition, the Secretary of 
the Treasury shall prescribe such regulations as are necessary 
to carry out the purposes of the provision, including 
regulations regarding the order and manner in which items of 
income, gain, deduction, loss, and credits (and any limitations 
thereon) are to be taken into account for purposes of the 
provision and the application of the provision to any short 
taxable year. It is expected that such regulations will deny 
the multiple application of items that carryover from one 
taxable year to the next (e.g., net operating loss or tax 
credit carryovers).
      The provision applies to taxable years beginning after 
December 31, 1997, and before January 1, 2001.
32. Intercity Passenger Rail Fund; Elective carryback of existing net 
        operating losses of the National Railroad Passenger Corporation 
        (Amtrak) (sec. 702 of the Senate amendment)

                              Present Law

      In addition to current transportation-related trust fund 
fuels excise taxes, there is a permanent 4.3-cents-per-gallon 
General Fund excise tax on transportation fuels.
      Generally, net operating losses may be carried back to 
the three taxable years preceding the year of loss (10 taxable 
years preceding the year of loss in certain circumstances).

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment dedicates net revenues from 0.5 cent 
per gallon of the 4.3-cents-per gallon transportation motor 
fuels excise tax to a new Intercity Passenger Rail Fund (``Rail 
Fund'') to finance capital improvements of National Railroad 
Passenger Corporation (Amtrak) and certain transportation 
activities in States not receiving Amtrak service. Dedicated 
revenues are those from fuels taxes imposed from October 1, 
1997 through April 15, 2001.
      The Senate amendment also expands the purposes for which 
non-Amtrak States may use Rail Fund monies to include: (1) 
local transit needs such as transportation for the elderly and 
handicapped; (2) rail/highway crossing safety projects 
(generally financed through the Highway Trust Fund); (3) 
certain capital expenditures of smaller freight railroads; and 
(4) certain rural airport capital expenditures.
      Amounts received from the Rail Fund are not included in 
income. No tax deduction or addition to basis is allowed by the 
recipient with respect to expenditure of the amount.
      Rail Fund spending is subject to appropriation, and is 
provided for under provisions of the Fiscal Year 1998 Budget 
Resolution.
      Effective date.--The provision is effective on the date 
of enactment.

                          Conference Agreement

      The conference agreement follows the approach of the 
Senate amendment with modifications. The conference agreement 
provides elective procedures that allows Amtrak to consider the 
tax attributes of its predecessors, those railroads that were 
relieved of their responsibility to provide intercity rail 
passenger service as a result of the Rail Passenger Service Act 
of 1970, in the use of its net operating losses. The benefit 
allowable under these procedures is limited to the least of: 
(1) 35 percent of Amtrak's existing qualified carryovers, (2) 
the net tax liability for the carryback period, or (3) 
$2,323,000,000. One half of the amount so calculated will be 
treated as a payment of the tax imposed by chapter 1 of the 
Internal Revenue Code of 1986 for each of the first two taxable 
years ending after the date of enactment.
      The existing qualified carryovers are the net operating 
loss carryovers that are available under section 172(b) in 
Amtrak's first taxable year ending after September 30, 1997. 
The net tax liability for the carryback period is the aggregate 
of the net tax liability of Amtrak's railroad predecessors for 
all taxable years beginning before January 1, 1971, for which 
there is a net Federal tax liability. Amtrak's railroad 
predecessors are those railroads that were relieved of their 
responsibility to provide intercity rail passenger service as a 
result of the Rail Passenger Service Act of 1970, and their 
predecessors. In the case of a railroad predecessor who joined 
in the filing of a consolidated tax return, the net tax 
liability of the predecessor will be the net tax liability of 
the consolidated group.
      The net operating losses of Amtrak are required to be 
reduced by an amount equal to the amount obtained by Amtrak 
under this provision, divided by 0.35. The Secretary of the 
Treasury is to adjust, as he deems appropriate, the tax account 
of each predecessor railroad for the carryback period to 
reflect the utilization of the net operating losses. The amount 
of the adjustment is equal to the amount of the benefit and is 
to be taken into consideration on the tax accounts of the 
predecessor railroads on a first-in, first-out basis, starting 
with balances for the earliest year for which any predecessor 
railroad has a net tax liability. No additional refund to any 
taxpayer other than Amtrak is to be allowed as a result of 
these adjustments.
      The availability of the elective procedures is 
conditioned on Amtrak (1) agreeing to make payments of one 
percent (1%) of the amount it receives to each of the non-
Amtrak States to offset certain transportation related 
expenditures and (2) using the balance for certain qualified 
expenses. Non-Amtrak States are those States that are not 
receiving Amtrak service at any time during the period 
beginning on the date of enactment and ending on the date of 
payment.
      No deduction is allowed with respect to any qualified 
expense whose payment is attributable to the proceeds made 
available as a result of this provision. The basis of any 
property must be reduced by the portion of its cost that is 
attributable to such proceeds. An item of cost or expense is 
attributable to such proceeds if it is (1) paid from the 
proceeds of the refund or (2) to the extent the principal and 
interest of any borrowings are paid from the proceeds of the 
refund, from the proceeds of such borrowings.
      Amtrak's earnings and profits will be increased by the 
amount of the refund. However, the conferees expect that this 
amount will not be included in adjusted current earnings for 
alternative minimum tax purposes, consistent with Treas. Reg. 
sec. 1.56(g)-1(c)(4) (ii).
      Effective date.--The provision is effective on the date 
of enactment. However, no refund shall be made as a result of 
this provision earlier than the date of enactment of Federal 
legislation which authorizes reforms of Amtrak. No interest 
shall accrue with respect to the payment of any refund until 45 
days after the later of (1) the enactment of such reform 
legislation, or (2) the filing by Amtrak of a Federal income 
tax return which includes the election to use the procedures 
described in this provision.

                     X. REVENUE-INCREASE PROVISIONS

                         A. Financial Products

1. Require recognition of gain on certain appreciated financial 
        positions in personal property (sec. 1001(a) of the House bill 
        and sec. 801(a) of the Senate amendment)

                              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. Special rules under the 
Code can defer or accelerate recognition in certain 
circumstances. Transactions designed to reduce or eliminate 
risk of loss, such as a ``short sale against the box,'' or an 
``equity swap,'' generally do not cause realization.

                               House Bill

      The House bill requires recognition of gain (but not 
loss) upon a constructive sale of any ``appreciated financial 
position'' in stock, a partnership interest or debt other than 
certain ``straight'' debt instruments (as defined in sec. 
1361(c)(5)(B)). A constructive sale occurs when the taxpayer 
enters into one of the following transactions with respect to 
the same or substantially identical property: (1) a short sale, 
(2) an offsetting notional principal contract, or (3) a futures 
or forward contact. For a taxpayer who has one of these 
transactions, a constructive sale occurs when it acquires the 
related long position. Other transactions will be treated as 
constructive sales to the extent provided in Treasury 
regulations.
      The House bill provides an exception for transactions 
that are closed before the end of the 30th day after the close 
of the taxable year. This exception does not apply to 
transactions closed during the 90-day period ending on such day 
unless, for the 60 days after closing, (1) the taxpayer holds 
the appreciated financial position and (2) at no time is the 
taxpayer's risk of loss reduced by holding certain other 
positions.
      Effective date.--The constructive sale provision is 
effective for constructive sales entered into after June 8, 
1997. In the case of a decedent dying after June 8, 1997, if 
(1) a constructive sale 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, all positions comprising 
the constructive sale will be treated as property constituting 
rights to receive income in respect of a decedent under section 
691. A special rule is also provided for transactions entered 
into before June 8, 1997, that in some circumstances prevents 
such transactions from resulting in constructive sales after 
the effective date.

                            Senate Amendment

      The Senate amendment is the same as the House bill with 
two modifications. Under the Senate amendment, the types of 
debt instruments excluded from the definition of ``appreciated 
financial position'' are instruments that are not convertible 
and the interest on which is either fixed, payable at certain 
variable rates or based on certain interest payments on a pool 
of mortgages. In addition, the Senate amendment provides an 
exception for transactions closed during the 90-day period 
ending on the 30th day after the close of the taxable year that 
are reestablished during such period, so long as the normal 
requirements for positions closed within such 90-day period are 
met by the reestablished position.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with the following modifications.
      A trust instrument that is actively traded is generally 
treated as stock for purposes of determining whether the 
instrument is an appreciated financial position. The conference 
agreement provides that a trust instrument will not be treated 
as stock if substantially all (by value) of the property held 
by the trust is debt that qualifies for the exception to the 
definition of appreciated financial position for certain debt 
instruments. In addition, the conference agreement clarifies 
that only debt instruments that entitle the holder to receive 
an unconditional principal amount qualify for the exception.
      The conference agreement modifies the exception to 
constructive sale treatment for transactions that are closed in 
the 90-day period ending with the 30th day after the close of 
the taxable year by applying similar requirements to all 
transactions closed prior to such day. Under the conference 
agreement, the exception is available only if, for the 60 days 
after closing a transaction, (1) the taxpayer holds the 
appreciated financial position and (2) at no time is the 
taxpayer's risk of loss reduced by holding certain other 
positions. If a transaction that is closed is reestablished in 
a substantially similar position, the exception applies 
provided that the reestablished position is closed prior to the 
end of the 30th day after the close of the taxable year and the 
above two requirements are met after such closing.
      The conferees also wish to clarify some aspects of the 
application of the provision. The conferees do not intend that 
an agreement that is not a contract for purposes of applicable 
contract law will be treated as a forward contract. Thus, 
contingencies to which the contract is subject will generally 
be taken into account.
      The conferees intend that the constructive sale provision 
generally will apply to transactions that are identified 
hedging or straddle transactions under other Code provisions 
(secs. 1092 (a)(2), (b)(2) and (e), 1221 and 1256(e)). Where 
either position in such an identified transaction is an 
appreciated financial position and a constructive sale of such 
position results from the other position, the conferees intend 
that the constructive sale will be treated as having occurred 
immediately before the identified transaction. The constructive 
sale will not, however, prevent qualification of the 
transaction as an identified hedging or straddle transaction. 
Where, after the establishment of such an identified 
transaction, there is a constructive sale of eitherposition in 
the transaction, gain will generally be recognized and accounted for 
under the relevant hedging or straddle provision. However, the 
conferees intend that future Treasury regulations may except certain 
transactions from the constructive sale provision where the gain 
recognized would be deferred under an identified hedging or straddle 
provision (e.g. Treas. reg. sec. 1.446-4(b)).
      The conferees wish to clarify certain other aspects of 
the Treasury's regulatory authority under the provision. The 
conferees urge that the Treasury issue prompt guidance, 
including safe harbors, with respect to common transactions 
entered into by taxpayers.
      The legislative history to both the House bill and the 
Senate amendment describe ``collar'' transactions and recommend 
that Treasury regulations provide standards for determining 
which collar transactions result in constructive sales. The 
conferees expect that these Treasury regulations with respect 
to collars will be applied prospectively, except in cases to 
prevent abuse.
      The legislative history states that, under the 
regulations to be issued by the Treasury, either a taxpayer's 
appreciated financial position or an offsetting transaction may 
in certain circumstances be considered on a disaggregated basis 
for purposes of the constructive sale determination. The 
conferees wish to clarify that this authority is intended to be 
used only where such disaggregated treatment reflects the 
economic reality of the transaction and is administratively 
feasible. For example, one transaction for which disaggregated 
treatment might be appropriate is an equity swap that 
references a small group of stocks, where the transaction is 
entered into by a taxpayer owning only one of the stocks. 
1
---------------------------------------------------------------------------
    \1\ A standard similar to that of Treas. reg. sec. 1.246-5 would be 
appropriate for determining whether the relationship between the stock 
held and the group of stocks shorted is sufficient for constructive 
sale purposes.
---------------------------------------------------------------------------
      Effective date.--The conference agreement modifies the 
special rule for decedents dying after June 8, 1997, to require 
that a position be open at some time during the three-year 
period ending on the decedent's death. Thus, no amount will be 
treated as income in respect of a decedent under the rule 
unless this requirement is met, as well as the requirements 
that the transaction remains open for not less than two years 
and that the transaction is not closed within 30 days after the 
date of enactment. Finally, the conference agreement modifies 
the special rule to provide that gain with respect to a 
position that accrues after the transaction is closed will not 
be included in income in respect of a decedent.
2. Election of mark-to-market for securities traders and for traders 
        and dealers in commodities (sec. 1001(b) of the House bill and 
        sec. 801(b) of the Senate amendment)

                              Present Law

      A dealer in securities must compute its income pursuant 
to the mark-to-market method of accounting. Mark-to-market 
treatment does not apply to traders in securities or dealers in 
other property.

                               House Bill

      The House bill allows securities traders and commodities 
traders and dealers to elect mark-to-market accounting similar 
to that currently required for securities dealers. 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. Property not held in connection with 
its trade or business is not subject to the election provided 
that it is identified by the taxpayer under rules similar to 
the present law rules for securities dealers. Gain or loss 
recognized by an electing taxpayer under the provision is 
ordinary gain or loss.
      Under the House bill, commodities for purposes of the 
provision would include only commodities of a kind customarily 
dealt in on an organized commodities exchange.
      Effective date.--The election applies to taxable years 
ending after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and 
Senate amendment with the following modifications.
      The conference agreement clarifies that if a securities 
trader elects application of the provision, all securities held 
in connection with its trade or business will generally be 
subject to mark-to-market accounting. An exception is provided 
for securities that have no connection with activities as a 
trader and that are identified on the day acquired (or at such 
other times as provided in Treasury regulations). The conferees 
do not intend that an electing taxpayer can mark-to-market 
loans made to customers or receivables or debt instruments 
acquired from customers that are not received or acquired in 
connection with a trade or business as a securities trader. 
Because the conferees are concerned about issues of taxpayer 
selectivity, the conferees intend that an electing taxpayer 
must be able to demonstrate by clear and convincing evidence 
that a security bears no relation to activities as a trader in 
order to be identified as not subject to the mark-to-market 
regime. Any security that hedges another security that is held 
in connection with the taxpayer's trade or business as a trader 
will be treated as so held. Any position that is properly 
subject to the mark-to-market regime will not be taken into 
account for purposes of the constructive sale rules of section 
1259. Similar rules apply to commodities traders.
      The conference agreement expands the definition of a 
commodity for purposes of theprovision to include any commodity 
that is actively traded (within the meaning of section 1092(d)(1)), any 
option, forward contract, futures contract, short position, notional 
principal contract or derivative instrument that references such a 
commodity, and any other evidence of an interest in such a commodity. 
Also included are positions that hedge the listed items and that are 
identified by the taxpayer under rules similar to the rules for 
securities.
      The conferees anticipate that Treasury regulations 
applying section 475(b)(4), which prevents a dealer from 
treating certain notional principal contracts and other 
derivative financial instruments as held for investment will, 
in the case of a commodities trader or dealer apply only to 
contracts and instruments referenced to commodities.
      Effective date.--The conferees wish to clarify that the 
special rule with respect to the section 481 adjustment applies 
only to taxpayers making the election for the taxable year 
which includes the date of enactment. Any elections made 
thereafter will be governed by rules and procedures established 
by the Secretary of the Treasury.
3. Limitation on exception for investment companies under section 351 
        (sec. 1002 of the House bill and sec. 802 of the Senate 
        amendment)

                              Present Law

      Gain or loss is recognized upon a contribution by a 
shareholder to a corporation that is an investment company. 
Gain, but not loss, is recognized upon a contribution by a 
partner to a partnership that would be treated as an investment 
company. Under Treasury regulations, a contribution of property 
is treated as made to an investment company only if (1) the 
contribution results, directly or indirectly, in a 
diversification of the transferor's interest 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

                               House Bill

      The House bill modifies the definition of an investment 
company by requiring that the following assets also be taken 
into account for purposes of the 80-percent test: money, 
financial instruments, foreign currency, and interests in RICs, 
REITs, common trust funds, publicly-traded partnerships and 
precious metals. The House bill provides an exception for 
precious metals that are produced, used or held in an active 
trade or business by a partnership. The House bill also 
provides ``look through'' rules for certain entities that hold 
the above-listed items.
      Effective date.--The provision is effective for transfers 
after June 8, 1997, in taxable years ending after such date, 
with an exception for transfers pursuant to certain binding 
written contracts in effect on that date.

                            Senate Amendment

      The Senate amendment follows the House bill, but 
clarifies that equity interests in non-corporate entities will 
be taken into account for purposes of the investment company 
determination only if (1) the entity is a REIT, publicly-traded 
partnership or common trust fund, (2) the interest is 
convertible into or exchangeable for one of the other listed 
assets or (3) the entity holds listed assets and is subject to 
the ``look-through'' rules. The Senate amendment also clarifies 
that the exception for precious metals used or held in an 
active trade or business applies to both corporations and 
partnerships. The Senate amendment deletes the exception for 
precious metals that are produced by a partnership. The Senate 
amendment also provides the Treasury with regulatory authority 
to remove items from the list in appropriate circumstances.

                          Conference Agreement

      The conference agreement is the same as the Senate 
amendment.
4. Disallowance of interest on indebtedness allocable to tax-exempt 
        obligations (sec. 1003 of the House bill)

                              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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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 of 
indebtedness 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
---------------------------------------------------------------------------
    \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.

                               House Bill

General rule
      The House 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 
House bill does not extend the small-issuer exception to 
taxpayers which are not financial institutions.
Exceptions
      The House bill 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 House 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 House 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 House bill 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 present law.
      Effective date.--The provision is effective for taxable 
years beginning after the date of enactment with respect to 
obligations acquired after June 8, 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the provision 
of the House bill.
5. Gains and losses from certain terminations with respect to property 
        (sec. 1004 of the House bill and sec. 803 of the Senate 
        amendment)

                              Present Law

      Extinguishment treated as sale or exchange.--The 
definition of capital gains and losses in section 1222 requires 
that there be a ``sale or exchange'' of a capital asset. Court 
decisions interpreted this requirement to mean that when a 
disposition is not a sale or exchange of a capital asset, for 
example, a lapse, cancellation, or abandonment, the disposition 
produces ordinary income or loss,4 Under a 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 (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) of a type which is actively traded and 
which is, or would be on acquisition, a capital asset in the 
hands of the taxpayer and (2) a ``section 1256 contract'' 
5 which is capital asset in the hands of the 
taxpayer. Section 1234A does not apply to the retirement of a 
debt instrument.
---------------------------------------------------------------------------
    \4\ See Fairbanks v. U.S., 306 U.S. 436 (1039); Comm'r v. Pittston 
Co., 252 F. 2d 344 (2nd Cir.), cert. denied, 357 U.S. 919 (1958).
    \5\ A ``section 1256 contract'' means (1) any regulated futures 
contract, (2) foreign currency contract, (3) nonequity option, or (4) 
dealer equity option.
---------------------------------------------------------------------------
      Character of gain on retirement of debt obligations.--
Amounts received on the retirement of any debt instrument are 
treated as amounts received in exchange therefor (sec. 
1271(a)(1)). In addition, gain on the sale or exchange of a 
debt instrument with OID 6 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.
---------------------------------------------------------------------------
    \6\ 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. 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)).
---------------------------------------------------------------------------

                               House Bill

      Extension of relinquishment rule to all types of 
property.--The House 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.
      Character of gain on retirement of debt obligations 
issued by natural persons.--The House bill 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. Thus, under the House bill, gain or 
loss on the retirement of such debt will be capital gain or 
loss if the debt is a capital asset. The House bill retains the 
present-law exceptions for debt issued before July 2, 1982, by 
noncorporations or nongovernments.
      Effective date.--The extension of the extinguishment rule 
applies to property acquired or positions established 30 days 
after the date of enactment. 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 debt issued or purchased after June 8, 1997.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except for the effective date.
      Effective date.--The extension of the extinguishment rule 
applies to property acquired or positions established 30 days 
after the date of enactment. 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 debt issued or purchased (within the meaning of 
section 1272(d)(1)) after June 8, 1997. Thus, 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, does not apply to transfers after June 8, 
1997, where the basis of the debt instrument to the transferee 
is determined in whole or in part by reference to the adjusted 
basis of that instrument in the hands of the transferor (i.e., 
the basis to the transferee is a carryover basis). However, the 
repeal of the except to the character of gain on retirement of 
debt instruments issued by natural person applies to any debt 
instruments issued after June 8, 1997.

                          Conference Agreement

      The conference agreement generally follows the Senate 
amendment.
      In addition, the conference agreement provides that if a 
taxpayer enters into a short sale of property and such property 
becomes substantially worthless, the taxpayer shall recognize 
gain as if the short sale were closed when the property becomes 
substantially worthless. The conference agreement also extends 
the statute of limitations with respect to such gain 
recognition to the earlier of: (1) three years after the 
Treasury Secretary is notified that the position has become 
substantially worthless; or (2) six years after the date of 
filing of the income tax return for the taxable year during 
which the position became substantially worthless. To the 
extent provided in Treasury regulations, similar gain 
recognition rules shall apply to any option with respect to 
property, any offsetting notional principal contract with 
respect to property, any futures or forward contract to deliver 
property, or with respect to any similar transaction or 
position that becomes substantially worthless. The provision 
applies to property that becomes substantially worthless after 
the date of enactment of the Act. No inference is intended as 
to the proper treatment of these or similar transactions or 
positions under present law.
6. Determination of original issue discount where pooled debt 
        obligations subject to acceleration (sec. 1005 of the House 
        bill)

                              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.
      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.

                               House Bill

      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 yield on which may be reduced 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 
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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement generally follows the House 
bill, with modifications. The conference agreement applies to 
any pool of debt instruments the yield on which may be affected 
by reason of prepayments. In addition, the conferees wish to 
clarify that it is within the discretion of the Secretary of 
the Treasury to grant changes of methods of accounting that are 
pending for pre-effective date years.
7. Deny interest deduction on certain debt instruments (sec. 1006 of 
        the House bill)

                              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 adividends-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.

                               House Bill

      Under the House 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 to 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 House bill does not 
affect the treatment of a holder of an instrument.
      The House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill. The 
conference agreement clarifies that for purposes of the 
provision, principal or interest shall be treated as required 
to be paid in, converted to, or determined with reference to 
the value of equity if it may be so required at the option of 
the holder or a related party and there is a substantial 
certainty that the option will be exercised.

             B. Corporate Organizations and Reorganizations

1. Require gain recognition for certain extraordinary dividends (sec. 
        1011 of the House bill and sec. 811 of the Senate amendment)

                              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.7 Treasury regulations provide for 
application of the provision when a corporation is a partner in 
a partnership that receives a distribution.8
---------------------------------------------------------------------------
    \7\ See H. Rept. 99-841, II-166, 99th Cong. 2d Sess. (September 18, 
1986).
    \8\ 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)).

                               House Bill

      Under the House 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.9
---------------------------------------------------------------------------
    \9\ 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 House 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, 1995.10 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.
---------------------------------------------------------------------------
    \10\ 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 recognition 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Require gain recognition on certain distributions of controlled 
        corporation stock (sec. 1012 of the House bill and sec. 812 of 
        the Senate amendment)

                              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. (secs. 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).11 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.
---------------------------------------------------------------------------
    \11\ If a controlled corporation is acquired after a distribution, 
an issue may arise whether the acquisition can be viewed under step-
transaction concepts 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.
---------------------------------------------------------------------------
      After a spin-off transaction, the amount of a 
stockholder's basis in the stock of the distributing 
corporation is generally allocated between the stock of 
distributing and controlled received by that shareholder, in 
proportion to their relative fair market values. (sec. 358(c); 
see Treas. reg. sec. 1.358-2). In the case of an affiliated 
group of corporations filing a consolidated return, this basis 
allocation rule generally eliminates any excess loss account in 
the stock of a controlled corporation that is distributed 
within the group, and its basis is generally determined with 
reference to the basis of the distributing 
corporation.12
---------------------------------------------------------------------------
    \12\ Excess loss accounts in consolidation generally are created 
when a subsidiary corporation makes a distribution (or has a loss that 
is used by other members of the group) that exceeds the parent's basis 
in the stock of the subsidiary. In general, such excess loss accounts 
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-off prior to the 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 distribution from the 
subsidiary is structured to meet the form of a section 355 
distribution.
---------------------------------------------------------------------------
      The treatment of basis of the distributing and controlled 
corporations in a section 355 distribution differs from a 
distribution of stock that is not a qualified section 355 spin-
off. In a non-qualified distribution within an affiliated group 
of corporations filing a consolidated return, not only is gain 
generally recognized (though deferred) on the excess of value 
over basis at the distributing corporation level, the basis of 
the distributing corporation's stock is increased by any gain 
recognized in the distribution (when that gain is taken into 
account under the relevant regulations), and reduced by the 
fair market value of the distribution if the distribution is 
within an affiliated group filing a consolidated return. The 
basis of the stock of the distributed corporation within the 
group is a fair market value basis. In the case of a 
distribution between members of an affiliated group that is not 
filing a consolidated return, the distribution causes a 
reduction of basis of the distributing corporation only to the 
extent it exceeds the earnings and profits of the distributing 
corporation or it is an extraordinary dividend.

                               House Bill

      The House bill adopts additional restrictions under 
section 355 on acquisitions and dispositions of the stock of 
the distributing or controlled corporation.
      Under the House 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 to be 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 gaining recognition by showing that an 
acquisition occurring during this four-year period was 
unrelated to the distribution.
      The House 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 House 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 House 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 House 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 provision is generally effective for 
distributions after April 16, 1997. However, the part of the 
provision that provides a 50-percent control requirement 
immediately after certain section 351 and 368(a)(1)(D) 
distributions governed by section 355 is effective for 
transfers after the date of enactment.
      No part of the provision 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 whichwas 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 (``SEC'') 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.

                            Senate Amendment

      The Senate amendment generally follows the House bill 
with a number of modifications.
      The Senate amendment modifies the House bill denial of 
section 355 treatment to certain distributions within an 
affiliated group of corporations. Under the Senate amendment, 
except as provided in Treasury regulations, in the case of 
distributions of stock within an affiliated group of 
corporations (as defined in section 1504(a), and whether or not 
filing a consolidated return), section 355 does not apply to 
any distribution of the stock of one member of the group to 
another member if the distribution is part of a transaction 
that results in an acquisition that would be taxable to either 
the distributing or the controlled corporation under the 
provision.
      In addition, in the case of any distribution of stock of 
one member of an affiliated group of corporations to another 
member, the Secretary of the Treasury is authorized under 
section 358(c) to provide adjustments to the basis of any stock 
in a corporation which is a member of such group, to reflect 
appropriately the proper treatment of such distribution. As one 
example, the Secretary of the Treasury may consider providing 
rules that require a carryover basis within the group for the 
stock of the distributed corporation (including a carryover of 
an excess loss account, if any, in a consolidated return) and 
that also provide a reduction in the basis of the stock of the 
distributing corporation to reflect the change in the value and 
basis of the distributing corporation's assets. The Treasury 
Department may determine that the aggregate stock basis of 
distributing and controlled after the distribution may be 
adjusted to an amount that is less than the aggregate basis of 
the stock of the distributing corporation before the 
distribution, to prevent inappropriate potential for artificial 
losses or diminishment of gain on disposition of any of the 
corporations involved in the spin off.
      The Senate amendment modifies the House bill 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 greater than 50 
percent interest (rather than a 50 percent or greater interest, 
as under the House bill) in the vote and value of stock of the 
distributed corporation.
      Effective date.--The provision is generally effective for 
distributions after April 16, 1997. However, the part of the 
amendment providing a greater-than-50-percent control 
requirement immediately after certain section 351 and 
368(a)(1)(D) distributions governed by section 355 is effective 
for transfers after the date of enactment.
      The provision will not apply to a distribution after 
April 16, 1997 that is part of an acquisition that would 
otherwise cause gain recognition to the distributing or 
controlled corporation under the bill, if such acquisition is: 
(1) made pursuant to a written agreement which was binding on 
April 16, 1997 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 (``SEC'') required solely by reason of the 
distribution or acquisition. Any written agreement, ruling 
request, or public announcement or SEC filing is not within the 
scope of these transition provisions unless it identifies the 
acquiror of the distributing corporation or of any controlled 
corporation, whichever is applicable.
      The part of the provision that provides a greater-than-
50-percent control provision for certain transfers after the 
date of enactment will not apply if such transfer meets the 
requirements of (1), (2), or (3) of the preceding paragraph.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with additional modifications.

       Amount and timing of gain recognition under section 355(e)

      Under the conference agreement, in the case of an 
acquisition of either the distributing corporation or the 
controlled corporation, the amount of gain recognized is the 
amount that the distributing corporation would have recognized 
had the stock of the controlled corporation been sold for fair 
market value on the date of the distribution. Such gain is 
recognized immediately before the distribution. As under the 
House bill and Senate amendment, no adjustment to the basis of 
the stock or assets of either corporation is allowed by reason 
of the recognition of the gain.13
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    \13\ There is no intention to limit the otherwise applicable 
Treasury regulatory authority under section 336(e) of the Code. There 
is also no intention to limit the otherwise applicable provisions of 
section 1367 with respect to the effect on shareholder stock basis of 
gain recognized by an S corporation under this provision.
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               Acquisitions resulting in gain recognition

      Under the conference agreement, as under the House bill 
and Senate amendment, the gain recognition provisions of 
section 355(e) apply when one or more persons acquire 50 
percent ormore of the voting power or value of the stock of 
either the distributing corporation or the controlled corporation, 
pursuant to a plan or series of related transactions.
      The conference agreement provides certain additions and 
clarifications to identify cases that do not cause gain 
recognition under the provisions of section 355(e).
            Single affiliated group
      Under the conference agreement, a plan (or series of 
related transactions) is not one that will cause gain 
recognition if, immediately after the completion of such plan 
or transactions, the distributing corporation and all 
controlled corporations are members of a single affiliated 
group of corporations (as defined in section 1504 without 
regard to subsection (b) thereof).
      Example 1: P corporation is a member of an affiliated 
group of corporations that includes subsidiary corporation S 
and subsidiary corporation S1. P owns all the stock of S. S 
owns all the stock of S1. P corporation is merged into 
unrelated X corporation in a transaction in which the former 
shareholders of X corporation will own 50 percent or more of 
the vote or value of the stock of surviving X corporation after 
the merger. As part of the plan of merger, S1 will be 
distributed by S to X, in a transaction that otherwise 
qualifies under section 355. After this distribution, S, S1, 
and X will remain members of a single affiliated group of 
corporations under section 1504 (without regard to whether any 
of the corporations is a foreign corporation, an insurance 
company, a tax exempt organization, or an electing section 936 
company). Even though there has been an acquisition of P, S, 
and S1 by X, and a distribution of S1 by S that is part of a 
plan or series of related transactions, the plan is not treated 
as one that requires gain recognition on the distribution of S1 
to X. This is because the distributing corporation S and the 
controlled corporation S1 remain within a single affiliated 
group after the distribution (even though the P group has 
changed ownership).
            Continuing direct or indirect ownership
      The conference agreement clarifies that an acquisition 
does not require gain recognition if the same persons own 50 
percent or more of both corporations, directly or indirectly 
(rather than merely indirectly, as in the House bill and Senate 
amendment), before and after the acquisition and distribution, 
provided the stock owned before the acquisition was not 
acquired as part of a plan (or series of related transactions) 
to acquire a 50 percent or greater interest in either 
distributing or controlled.
      Example 2: Individual A owns all the stock of P 
corporation. P owns all the stock of a subsidiary corporation, 
S. Subsidiary S is distributed to individual A in a transaction 
that otherwise qualifies under section 355. As part of a plan, 
P then merges with corporation X, also owned entirely by 
individual A. There is not an acquisition that requires gain 
recognition under the provision, because individual A owns 
directly or indirectly 100 percent of all the stock of both X, 
the successor to P, and S before and after the 
transaction.14 The same result would occur if P were 
contributed to a holding company, all the stock of which is 
owned by A.
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    \14\ The example assumes that A did not acquire his or her stock in 
P as part of a plan or series of related transactions that results in 
the direct or indirect ownership of 50 percent or more of S or P 
separately by A. If A's stock in P was acquired as part of such a plan, 
the transaction would be one requiring gain recognition on the spin-off 
of S.
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      The conference agreement, following the House bill and 
Senate amendment, continues to provide that except as provided 
in Treasury regulations, certain other acquisitions are not 
taken into account. For example, under section 355(e)(3)(A), 
the following other types of acquisitions of stock are not 
subject to the provision, provided that the stock owned before 
the acquisition was not acquired pursuant to a plan or series 
of related transactions to acquire a 50-percent or greater 
ownership interest in either distributing or controlled:
      First, the acquisition of stock in the controlled 
corporation by the distributing corporation (as one example, in 
the case of a drop-down of property by the distributing 
corporation to the corporation to be distributed in exchange 
for the stock of the controlled corporation);
      Second, the acquisition by a person of stock in any 
controlled corporation by reason of holding stock or securities 
in the distributing corporation (as one example, the receipt by 
a distributing corporation shareholder of controlled 
corporation stock in a distribution--including a split-off 
distribution in which a shareholder that did not own 50 percent 
of the stock of distributing owns 50 percent or more of the 
stock of controlled); and
      Third, the acquisition by a person of stock in any 
successor corporation of the distributing corporation or any 
controlled corporation by reason of holding stock or securities 
in such distributing or controlled corporation (for example, 
the receipt by former shareholders of distributing of 50 
percent or more of the stock of a successor corporation in a 
merger of distributing).
      As under the House bill and Senate amendment, a public 
offering of sufficient size can result in an acquisition that 
causes gain recognition under the provision.
            Attribution
      The conference agreement also modifies the attribution 
rule for determining when an acquisition has occurred. Rather 
than apply section 355(d)(8)(A), which attributes stock owned 
by a corporation to a corporate shareholder only if that 
shareholder owns 10 percent of the corporation, the conference 
agreement provides that, except as provided in regulations, 
section 318(a)(2)(C) applies without regard to the amount of 
stock ownership of the corporation.
      Example 3: Assume the facts are the same as in the 
immediately preceding exampleexcept that corporations P and X 
are each owned by the same 20 individual 5-percent shareholders (rather 
than wholly by individual A). The transaction described in the previous 
example, in which S is spun off by P to P's shareholders and P is 
acquired by X, would not cause gain recognition, because the same 
shareholders would own directly or indirectly 50 percent or more of the 
stock of each corporation both before and after the transaction.
Section 355(f)
      The conference agreement follows the Senate amendment in 
providing that, except as provided in Treasury regulations, 
section 355 (or so much of section 356 as relates to section 
355) shall not apply to the distribution of stock from one 
member of an affiliated group of corporations (as defined in 
section 1504(a)) to another member of such group (an 
``intragroup spin-off'') if such distribution is part of a plan 
(or series of related transactions) described in subsection 
(e)(2)(A)(ii), pursuant to which one or more persons acquire 
directly or indirectly stock representing a 50-percent or 
greater interest in the distributing corporation or any 
controlled corporation.
      Example 4: P corporation owns all the stock of subsidiary 
corporation S. S owns all the stock of subsidiary corporation 
T. S distributes the stock of T corporation to P as part of a 
plan or series of related transactions in which P then 
distributes S to its shareholders and then P is merged into 
unrelated X corporation. After the merger, former shareholders 
of X corporation own 50 percent or more of the voting power or 
value of the stock of the merged corporation. Because the 
distribution of T by S is part of a plan or series of related 
transactions in which S is distributed by P outside the P 
affiliated group and P is then acquired under section 355(e), 
section 355 in its entirety does not apply to the intragroup 
spin-off of T to P, under section 355(f). Also, the 
distribution of S by P is subject to section 355(e).
      The conference agreement clarifies that, in determining 
whether an acquisition described in subsection (e)(2)(A)(ii) 
occurs, all the provisions of new subsection 355(e) are 
applied. For example, an intragroup spin-off in connection with 
an overall transaction that does not cause gain recognition 
under section 355(e) because it is described in section 
355(e)(2)(C), or because of section 355(e)(3), is not subject 
to the rule of section 355(f).
      The Treasury Department has regulatory authority to vary 
the result that the intragroup distribution under section 
355(f) does not qualify for section 355 treatment. In this 
connection, the Treasury Department could by regulation 
eliminate some or all of the gain recognition required under 
section 355(f) in connection with the issuance of regulations 
that would cause appropriate basis results with respect to the 
stock of S and T in the above example so that concerns 
regarding present law section 355 basis rules (described below 
in connection with section 358(c)) would be eliminated.\15\
---------------------------------------------------------------------------
    \15\ Examples of approaches that the Treasury Department may 
consider are discussed in connection with section 358(c), infra.)
---------------------------------------------------------------------------
Treasury regulatory authority under section 358(c)
      As under the Senate amendment, the conference agreement 
provides that in the case of any distribution of stock of one 
member of an affiliated group of corporations to another member 
under section 355 (``intragroup spin-off'), the Secretary of 
the Treasury is authorized under section 358(c) to provide 
adjustments to the basis of any stock in a corporation which is 
a member of such group, to reflect appropriately the proper 
treatment of such distribution. It is understood that the 
approach of any such regulations applied to intragroup spin-
offs that do not involve an acquisition may also be applied 
under the Treasury regulatory authority to modify the rule of 
section 355(f) as may be appropriate.
      The conferees believe that the concerns relating to basis 
adjustments in the case of intragroup spin offs are essentially 
similar, whether or not an acquisition is currently intended as 
part of a plan or series of related transactions. The concerns 
include the following. First, under present law consolidated 
return regulations, it is possible that an excess loss account 
of a lower tier subsidiary may be eliminated. This creates the 
potential for the subsidiary to leave the group without 
recapture of the excess loss account, even though the group has 
benefitted from the losses or distributions in excess of basis 
that led to the existence of the excess loss account.
      Second, under present law, a shareholder's stock basis in 
its stock of the distributing corporation is allocated after a 
spin-off between the stock of the distributing and controlled 
corporations, in proportion to the relative fair market values 
of the stock of those companies. If a disproportionate amount 
of asset basis (as compared to value) is in one of the 
companies (including but not limited to a shift of value and 
basis through a borrowing by one company and contribution of 
the borrowed cash to the other), present law rules under 
section 358(c) can produce an increase in stock basis relative 
to asset basis in one corporation, and a corresponding decrease 
in stock basis relative to asset basis in the other company. 
Because the spin-off has occurred within the corporate group, 
the group can continue to benefit from high inside asset basis 
either for purposes of sale or depreciation, while also 
choosing to benefit from the disproportionately high stock 
basis in the other corporation. If, for example, both 
corporations were sold at a later date, a prior distribution 
can result in a significant decrease in the amount of gain 
recognized than would have occurred if the two corporations had 
been sold together without a prior spin off (or separately, 
without a prior spin-off).
      Example 5: P owns all the stock of S1 and S1 owns all the 
stock of S2. P's basis in the stock of S1 is 50; the inside 
asset basis of S1's assets is 50; and the total value of S1's 
stock and assets (including the value of S2) is 150. S1's basis 
in the stock of S2 is 0; the inside basis of S2's assets is 0; 
and the value of S2's stock and assets is 100. If S1 were sold, 
holding S2, the total gain would be 100. S1 distributes S2 to P 
in a section 355 transaction. After this spin-off, under 
present law, P's basis in the stock of S1 is approximately 17 
(50/150 times the total 50 stock basis in S1 prior to the spin-
off) and the inside asset basis of S1 is 50. P's basis in 
thestock of S2 is 33 (100/150 times the total 50 stock basis in S1 
prior to the spin-off) and the inside asset basis of S2 is 0. After a 
period of time, S2 can be sold for its value of 100, with a gain of 67 
rather than 100. Also, since S1 remains in the corporate group, the 
full 50 inside asset basis can continue to be used. S1's assets could 
be sold for 50 with no gain or loss. Thus, S1 and S2 can be sold later 
at a total gain of 67, rather than the total gain of 100 that would 
have occurred had they been sold without the spin-off.
      As one variation on the foregoing concern, taxpayers have 
attempted to utilize spin-offs to extract significant amounts 
of asset value and basis, (including but not limited to 
transactions in which one corporation decreases its value by 
incurring debt, and increases the asset basis and value of the 
other corporation by contributing the proceeds of the debt to 
the other corporation) without creation of an excess loss 
account or triggering of gain, even when the extraction is in 
excess of the basis in the distributing corporation's stock.
      The Treasury Department may promulgate any regulations 
necessary to address these concerns and other collateral 
issues. As one example, the Treasury Department may consider 
providing rules that require a carryover basis within the group 
(or stock basis conforming to asset basis as appropriate) for 
the distributed corporation (including a carryover of an excess 
loss account, if any, in a consolidated return). Similarly, the 
Treasury Department may provide a reduction in the basis of the 
stock of the distributing corporation to reflect the change in 
the value and basis of the distributing corporation's assets. 
The Treasury Department may determine that the aggregate stock 
basis of distributing and controlled after the distribution may 
be adjusted to an amount that is less than the aggregate basis 
of the stock of the distributing corporation before the 
distribution, to prevent inappropriate potential for artificial 
losses or diminishment of gain on disposition of any of the 
corporations involved in the spin-off. The Treasury Department 
may provide separate regulations for corporations in affiliated 
groups filing a consolidated return and for affiliated groups 
not filing a consolidated return, as appropriate to each 
situation.
Effective date
      The conferees wish to clarify certain aspects of the 
effective date and transitional relief under the provision.
      First, the conference agreement clarifies that an 
acquisition of stock that occurs on or before April 16, 1997 
will not cause gain recognition under the provision, even if 
there is a distribution after that date that is part of a plan 
or series of related transactions that would otherwise be 
subject to the provision.
      Second, any contract that is in fact binding under State 
law as of April 16, 1997, even though not written, is eligible 
for transition relief. It would be expected, in such a case, 
that some form of contemporaneous written evidence of such 
contract would be in existence. As one example, if under State 
law acceptance of the terms and conditions of a contract by a 
corporate board of directors creates a binding contract with an 
acquiror, then such contract, and the terms and conditions 
presented to the board, could satisfy the requirement for 
binding contract transitional relief under the conference 
agreement. If there was such an offer and acceptance on or 
before April 16, 1997 and a ruling request filed on or before 
April 16, 1997, with respect to a proposed spin-off and 
acquisition, which identifies the acquiror as one of a list of 
prospective acquirors, then the transaction may be eligible for 
relief under the transition rules.
      Finally, with respect to the Treasury Department 
regulatory authority under section 358(c) as applied to 
intragroup spin-off transactions that are not part of a plan or 
series of related transactions under new section 355(f), the 
conferees expect that any Treasury regulations will be applied 
prospectively, except in cases to prevent abuse.
3. Reform tax treatment of certain corporate stock transfers (sec. 1013 
        of the House bill and sec. 813 of the Senate amendment)
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.
House Bill
      Under the House 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 House 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 corporation that 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House Bill and the 
Senate amendment.
4. Modify holding period for dividends-received deduction (sec. 1014 of 
        the House bill and sec. 814 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill except 
for the effective date.
      Effective date.-- The Senate amendment is generally 
effective for dividends paid or accrued after the 30th day 
after the date of enactment. However, the provision will not 
apply to dividends received within two years of the date of 
enactment if: (1) the dividend is paid with respect to stock 
held on June 8, 1997, and all times thereafter until the 
dividend is received; (2) the stock is continuously subject to 
a position described in section 246(c)(4) on June 8, 1997, and 
all times thereafter until the dividend is received; and (3) 
such stock and related position is identified by the taxpayer 
within 30 days after enactment of this Act. A stock will not be 
considered to be continuously subject to a position if such 
position is sold, closed or otherwise terminated and is 
reestablished.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

                     C. Other Corporate Provisions

1. Registration of confidential corporate tax shelters and substantial 
        understatement penalty (sec. 1021 of the House bill and sec. 
        821 of the Senate amendment)

                              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.

                               House Bill

Tax shelter registration
      The House bill 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 anypromoter 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 House bill 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 House bill 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 House bill 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 House bill 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Treat certain preferred stock as ``boot'' (sec. 1022 of the House 
        bill and sec. 822 of the Senate amendment)

                              Present Law

      In reorganization transactions within the meaning of 
section 368 and certain other restructurings, 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 
under section 351.

                               House Bill

      The House 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 House 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 
recapitalization 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment with certain clarifications.
      The conference agreement clarifies that nonqualified 
preferred stock is treated as ``boot'' under section 351(b). 
The transferor receiving such stock thus is not treated as 
receiving nonrecognition treatment under section 351(a). 
However, the nonqualified preferred stock continues to be 
treated as stock received by a transferor for purposes of 
qualification of a transaction under section 351(a), unless and 
until regulations may provide otherwise.
      Thus, for example, if A contributes appreciated property 
to new corporation X for all the common stock (representing 90 
percent of the value and all the voting power) of X stock and B 
contributes cash for nonqualified preferred stock representing 
10 percent of the value of X stock, B has received ``boot,'' 
but the preferred stock is still treated as stock for purposes 
of sections 351(a) and 368(c), unless and until Treasury 
Regulations are issued requiring a different result. Thus, the 
transaction qualifies for non-recognition under section 351. If 
B had received other stock in addition to nonqualified 
preferred stock, B would be required to recognize gain only to 
the extent of the fair market value of the nonqualified 
preferred stock B receives.
      The conference agreement also clarifies the treatment of 
certain conversion or exchange rights, by deleting any 
statutory reference to the existence of a ``conversion 
privilege.'' The conferees wish to clarify that in no event 
will a conversion privilege into stock of the issuer 
automatically be considered to constitute participation in 
corporate growth to any significant extent. The conferees also 
wish to clarify that stock that is convertible or exchangeable 
into stock of a corporation other than the issuer (including, 
for example, stock of a parent corporation or other related 
corporation) is not considered to be stock that participates in 
corporate growth to any significant extent for purposes of the 
provision.

                      D. Administrative Provisions

1. Reporting of certain payments made to attorneys (sec. 1031 of the 
        House bill)

                              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.

                               House Bill

      The House bill 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 be 
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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
2. Information reporting on persons receiving contract payments from 
        certain Federal agencies (sec. 1032 of the House bill and sec. 
        831 of the Senate amendment)

                              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)).

                               House Bill

      The House bill 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Disclosure of tax return information for administration of certain 
        veterans programs (sec. 1033 of the House bill and sec. 832 of 
        the Senate amendment)

                              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(l)(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.

                               House Bill

      The House bill permanently extends the DVA disclosure 
provision.
      Effective date.--The provision is effective on the date 
of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement extends the DVA disclosure 
provision through September 30, 2003.
4. Establish IRS continuous levy and improve debt collection (secs. 
        1034, 1035, and 1036 of the House bill and secs. 834, 835, and 
        836 of the Senate amendment)

                           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 
16 by the IRS, the IRS may then collect the tax by 
levy upon all property and rights to property belonging to the 
person,17 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.18
---------------------------------------------------------------------------
    \16\ 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).
    \17\ Code sec. 6331.
    \18\ Code secs. 6335-6343.
---------------------------------------------------------------------------
      In general, a levy does not apply to property acquired 
after the date of the levy,19 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.20 The only exception to this rule is for 
salary and wages.21 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.
---------------------------------------------------------------------------
    \19\ Code sec. 6331(b).
    \20\ Code sec. 6331(c).
    \21\ Code sec. 6331(e).
---------------------------------------------------------------------------
      A minimum exemption is provided for salary and 
wages.22 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 52.23 For a family of four for taxable year 1996, 
the weekly minimum exemption is $325.24
---------------------------------------------------------------------------
    \22\ Code sec. 6334(a)(9).
    \23\ Code sec. 6334(d).
    \24\ Standard deduction of $6,700 plus four personal exemptions at 
$2,550 each equals $16,900, which when divided by 52 equals $325.
---------------------------------------------------------------------------

                               House Bill

      The House bill 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 House bill 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

                  B. Modifications of levy exemptions

                              Present Law

      The Code exempts from levy workmen's compensation 
payments 25 and annuity or pension payments under 
the Railroad Retirement Act and benefits under the Railroad 
Unemployment Insurance Act,26 unemployment benefits 
27 and means-tested public assistance.28
---------------------------------------------------------------------------
    \25\ Code sec. 6334(a)(7).
    \26\ Code sec. 6334(a)(6).
    \27\ Sec. 6334(a)(4).
    \28\ Sec. 6334(a)(11).
---------------------------------------------------------------------------

                               House Bill

      The House bill provides that the following property is 
not exempt from continuous 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that it does not apply to annuity or pension payments 
under the Railroad Retirement Act and benefits under the 
Railroad Unemployment Insurance Act.

                          Conference Agreement

      The conference agreement follows the House bill.
5. Consistency rule for beneficiaries of trusts and estates (sec. 1037 
        of the House bill and sec. 833 of the Senate amendment)

                              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.

                               House Bill

      Under the House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

                        E. Excise Tax Provisions

1. Extension and modification of Airport and Airway Trust Fund excise 
        taxes (sec. 1041 of the House bill and sec. 841 of the Senate 
        amendment)

                              Present Law

      In general.--Excise taxes imposed on commercial air 
transportation of passengers (10 percent of fare) and cargo 
(6.25 percent of shipping charge) and on noncommercial aviation 
fuels (15 cents per gallon on aviation gasoline and 17.5 cents 
per gallon on jet fuel) are transferred to the Airport and 
Airway Trust Fund to finance a portion of the cost of programs 
administered by the Federal Aviation Administration. The 
Airport and Airway Trust Fund excise taxes are scheduled to 
expire after September 30, 1997.
      Commercial passenger tax.--Domestic passenger 
transportation is taxed at 10 percent of the fare. There is no 
special tax rate for flight segments to or from small, rural 
airports. Application of the 10-percent tax to transportation 
sold through credit card frequent flyer award and similar 
arrangements is unclear.
      Passengers traveling on domestic flights that connect to 
or from international flights are not subject to tax. 
International departures are taxed at $6 per passenger; no tax 
is imposed on international arrivals.
      Travel between the 48 contiguous States and Alaska or 
Hawaii (and between those two States) is taxed at 10 percent of 
the fare attributable to U.S.-territorial miles plus a $6 per 
passenger international departure tax.
      Passengers are liable for the tax; air carrier liability 
is only for collection and remittance to the government. Air 
carriers deposit collected taxes semimonthly, generally no 
later than the 10th day of the second semimonthly period after 
the transportation is deemed sold.
      Advertising.--Airlines are required to advertise their 
fares either tax-inclusive or, if separately stated, to state 
the pre-tax fare, tax, and total in equal sized type.
      General Fund fuels tax.--In addition to the Airport and 
Airway Trust fuel taxes, aviation fuels used in both commercial 
and noncommercial aviation are subject to a 4.3-cents-per-
gallon excise tax. Revenues from this tax are retained in the 
General Fund.

                               House Bill

      Extension.--Subject to the modifications described below, 
the House bill extends the present-law Airport and Airway Trust 
Fund excise taxes for 10 years, through September 30, 2007.
      Commercial passenger tax modifications.--Domestic 
passenger transportation is taxed at 7.5 percent of the fare 
plus $2 per flight segment. (A flight segment is a flight 
involving one take-off). The $2 rate increases to $3 in four 
equal annual increments (1999-2002), and is indexed to the 
consumer price index (``CPI'') thereafter. The House bill 
specifies that payments for the right to award frequent flyer-
type points and similar price reductions through credit card 
and other arrangements are subject to the 7.5-percent tax rate.
      The House bill retains the present-law exemption for 
passengers traveling on domestic flights that connect to or 
from international flights. Both international departures and 
arrivals are taxed at $15.50 per passenger. The $15.50-per-
passenger rate is indexed to the CPI after 1998.
      Travel between the 48 contiguous States and Alaska or 
Hawaii (or between those States) is taxed at 7.5 percent of the 
fare attributable to U.S. territorial miles, plus $2 per flight 
segment, plus the $15.50 per passenger rate international 
departure tax.
      The House bill imposes secondary liability for tax on air 
carriers. The House bill also provides two special delays in 
deposits: (1) taxes otherwise due in the period August 15-
September 30, 1997, are due October 10, 1997; and (2) taxes 
otherwise due in the period July 1-September 30, 1998, are due 
October 13, 1998.
      Advertising.--The House bill requires airlines to state 
separately pre-tax fare and tax, with tax being stated in print 
at least 50 percent the size of print in which fare is stated.
      Transfer of General Fund fuels tax revenues.--The House 
bill transfers revenues from the 4.3-cents-per-gallon fuels tax 
to the Airport and Airway Trust Fund for taxes received in the 
Treasury on or after October 1, 1997.
      Effective date.--The provisions apply generally to 
transportation beginning after September 30, 1997, with special 
rules for (1) prepayments between related parties under credit 
card and similar arrangements after June 11, 1997, that are 
related to rights to transportation to be awarded or otherwise 
distributed after September 30, 1997, and (2) tickets sold 
after date of enactment and before October 1, 1997 for 
transportation beginning after September 30, 1997.

                            Senate Amendment

      Extension.--Subject to the modifications described below, 
the Senate amendment extends the present-law Airport and Airway 
excise taxes for 10 years, the same period as in the House 
bill.
      Commercial passenger tax modifications.--Domestic 
passenger transportation is taxed at 10 percent (the same rate 
as under present law). The Senate amendment also includes a 
7.5-percent rate for flight segments to or from airports that 
enplaned no more than 100,000 passengers in the second 
preceding calendar year and that either (1) are at least 75 
miles from a airport that had more than 100,000 passenger 
enplanements in that year, or (2) qualify foressential air 
service subsidies as of the date of the amendment's enactment. The 
Senate amendment specifies that payments for frequent-flyer-type awards 
or similar price reductions through credit card and other arrangements 
are subject to the 10-percent tax.
      The Senate amendment taxes passengers traveling on 
domestic flights that connect to or from international flights 
the same as other domestic passengers (i.e., at 10 percent of 
fare, or 7.5 percent for certain rural airport flight segments, 
for the domestic flight). Both international departures and 
arrivals are taxed at $8 per passenger. Unlike under the 
comparable House bill provision, the $8 per passenger rate is 
not indexed.
      Travel between the 48 contiguous States and Alaska or 
Hawaii (or between those two States) is taxed the same as under 
present law.
      The Senate amendment is the same as the House bill on 
liability for tax. The Senate amendment provides two special 
delays in deposits: (1) taxes otherwise due in the period 
August 15-September 30, 1997, are due October 10, 1997; and (2) 
taxes otherwise due in the period July 1-September 30, 2001, 
are due October 10, 2001.
      Advertising.--No provision.
      Transfer of General Fund fuels tax.--No provision.
      Effective date.--The Senate amendment is the same as the 
House bill, except the credit card prepayment rule applies to 
payments after June 16, 1997.

                          Conference Agreement

      Extension.--The conference agreement follows the House 
bill and the Senate amendment (i.e., extends the present-law 
Airport and Airway Trust Fund excise taxes for 10 years, 
subject to the modifications described below).
      Commercial passenger tax modifications.--The conference 
agreement follows the House bill's domestic passenger tax 
structure with the following modifications to the rates:

                                                                        
                                                                        
                                                                        
October 1, 1997-September 30, 1998........  9 percent of the fare, plus 
                                             $1 per domestic flight     
                                             segment.                   
October 1, 1998-September 30, 1999........  8 percent of the fare, plus 
                                             $2 per domestic flight     
                                             segment.                   
September 30, 1999-December 31, 1999......  7.5 percent of the fare,    
                                             plus $2.25 per domestic    
                                             flight segment.            
                                                                        

      After December 31, 1999, the ad valorem rate will remain 
at 7.5 percent. The domestic flight segment component of the 
tax will increase to $2.50 (January 1, 2000-December 31, 2000), 
to $2.75 (January 1, 2001-December 31, 2001), and to $3 
(January 1, 2002-December 31, 2002). Beginning on January 1, 
2003, the $3 rate will be indexed to the CPI as under the House 
bill.29
---------------------------------------------------------------------------
    \29\ Similar to a provision of the House bill, the conference 
agreement includes a rule of administrative convenience that there is 
no change in the number of segment taxes imposed if a passenger's route 
between two locations is changed (with a resulting change in the number 
of domestic segments) if there is no change in the fare charged 
(including no imposition of any additional administrative or other fee 
associated with the route change).
---------------------------------------------------------------------------
      The conference agreement follows the Senate amendment on 
the treatment of certain domestic flight segments to and from 
qualified rural airports, with a modification. Under the 
conference agreement, the tax rate on these flight segments 
will be 7.5 percent of fare, with no flight segment rate being 
imposed on eligible flight segments.
      The conference agreement follows the House bill and the 
Senate amendment provisions extending the tax on international 
departures and expanding that tax to include international 
arrivals, with a modification setting the tax rate on both 
international departures and arrivals at $12 per passenger 
(indexed to the CPI beginning on January 1, 1999, as under the 
House bill). The conferees believe this increased tax level is 
consistent with the user tax principles of the Airport and 
Airway Trust Fund taxes which include the recovery from 
international passengers of a greater percentage of the costs 
those passengers impose on FAA-programs than are collected by 
the present-law international departure tax, so that purely 
domestic passengers and the General Fund will not be required 
to subsidize the costs imposed by international travelers to 
the extent occurring under present law.
      The conference agreement does not include the provision 
of the Senate amendment extending tax to domestic flights that 
connect to or from international flights. Rather, those flights 
will continue to be tax-free when the flights constitute 
segments of uninterrupted international transportation (i.e., 
the scheduled interval at any intermediate stop does not exceed 
12 hours). If an intermediate stop exceeds 12 hours, subsequent 
domestic segments are taxed as domestic transportation.
      The conference agreement follows the Senate amendment 
provision retaining the $6 per passenger rate applicable to the 
international airspace component of flights between the 48 
contiguous States and Alaska or Hawaii (or to flights between 
Alaska and Hawaii).30 For example, a passenger 
traveling from Los Angeles to Honolulu in December 1997 would 
be taxed at 9 percent of the fare applicable to U.S. 
territorial miles plus $1 per flight segment plus $6. As with 
the general $12 international arrival and departure rate, this 
$6-per-passenger rate will be indexed to the CPI beginning on 
January 1, 1999.
---------------------------------------------------------------------------
    \30\ In contrast, transportation between Alaska or Hawaii and 
foreign countries (including U.S. possessions) is taxed exclusively as 
international travel, subject to the $12 per passenger arrival and 
departure tax.
---------------------------------------------------------------------------
      The conference agreement follows the House bill and 
Senate amendment provisions clarifying that the air passenger 
excise tax applies to payments to air carriers (and related 
parties) for the right to award air travel benefits. The tax 
rate is 7.5 percent. Examples of such taxable payments include 
(1) payments for frequent flyer miles (including other rights 
to air transportation) purchased by credit card companies, 
telephone companies, rental car companies, television networks, 
restaurants and hotels, air carriers and related parties, and 
other businesses, and (2) amounts received by air carriers (or 
related parties) pursuant to joint venture credit card or other 
marketing arrangements. The conference agreement includes an 
exception to this general rule in the case of payments for air 
transportation rights between corporations that are members of 
a 100 percent commonly owned controlled group (e.g., 
transportation purchased from an air carrier by a 100 percent 
commonly owned corporation operating a frequent flyer award 
program for the air carrier).
      The conferees are aware that consumers accrue mileage 
awards from numerous sources, including actual air travel as 
well as programs giving rise to taxable payments under this 
provision of the conference agreement. Once awarded to 
consumers, these miles are commingled in the consumer's account 
such that any miles used for a specific purpose may not be 
traceable to the source which gave rise to them. The conference 
agreement authorizes the Treasury Department to develop 
regulations excluding from the tax base a portion of otherwise 
taxable payments, if any, with respect to awarded frequent 
flyer miles if the Treasury determines that a portion properly 
can be allocated (traced) to miles which are used by consumers 
for purposes other than air transportation. Miles that are 
unused should not be treated as used for purposes other than 
air transportation. As part of any rulemaking process it 
undertakes, the Treasury is authorized to review airline 
frequent flyer programs and other information from all 
available sources, including industry and third-party data, in 
determining whether mileage awards can be adequately traced to 
support tax-base allocations based on the ultimate use of the 
awards. The conferees intend that an adjustment to the tax base 
will be prescribed only if the Treasury finds a consistent 
pattern of non-air transportation usage by consumers at levels 
indicating that significant mileage awarded pursuant to 
payments taxable under this provision is being used for 
purposes other than air transportation. In making any such 
adjustment, the Treasury Department should treat mileage used 
for non-air transportation purposes as coming first from 
mileage awarded to consumers from actual air travel (and other 
sources not subject to tax under this provision).
      The conference agreement follows the House bill and the 
Senate amendment provisions extending secondary liability for 
the passenger taxes to air carriers.
      The conference agreement includes the provision of the 
House bill changing certain commercial air passenger excise tax 
deposit dates for taxes otherwise due after August 14, 1997, 
and before October 1, 1997, to October 10, 1997. Additionally, 
the conference agreement provides that deposits of commercial 
air passenger taxes that otherwise would be required after 
August 14, 1998, and before October 1, 1998, will be due on 
October 5, 1998. Deposits of the commercial air cargo and 
aviation fuels taxes that otherwise would be required to be 
made after July 31, 1998, and before October 1, 1998, will be 
due on October 5, 1998.
      Advertising.--The conference agreement does not include 
the House bill provision changing the rules governing airline 
fare advertising.
      Transfer of General Fund fuels tax revenues.--The 
conference agreement includes the House bill provision 
transferring gross receipts from the 4.3-cents-per-gallon 
general fund tax on aviation fuels to the Airport and Airway 
Trust Fund.
      Effective date.--The conference agreement follows the 
House bill.
2. Extend diesel fuel excise tax rules to kerosene (sec. 1042 of the 
        House bill)

                              Present Law

      Diesel fuel is taxed at 24.3 cents per gallon when the 
fuel is removed from a registered terminal storage facility 
unless the fuel is dyed and is destined for a nontaxable use.
      Kerosene is taxed at the wholesale level if it is sold as 
an aviation fuel. If kerosene is blended with diesel fuel, tax 
is due from the blender unless the kerosene, and the diesel 
fuel with which it is blended, are dyed and destined for a 
nontaxable use.

                               House Bill

      The diesel fuel tax rules are extended to kerosene, with 
the following modifications:
      (1) Undyed kerosene can be removed from terminals without 
tax by registered aviation wholesalers;
      (2) Undyed kerosene can be removed from terminals by 
pipeline without tax for use as an industrial feedstock (and 
other than by pipeline as permitted in Treasury Department 
rules for such a use); and
      (3) Expedited refunds to ultimate vendors are allowed for 
tax-paid kerosene sold for use in space heaters.
      Effective date.--July 1, 1998.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill with 
modifications. First, registration as a terminal facility 
eligible to handle non-tax-paid diesel fuel and kerosene is 
conditional on the facility offering its customers dyeing for 
nontaxable sales of diesel fuel and kerosene. Second, the 
minimum amount for vendor refunds of tax paid on kerosene is 
reduced from $200 to $100. Third, the Treasury Department is 
given regulatory authority to allow tax-free sales of kerosene 
to wholesale dealers that (a) satisfy such registration and 
other compliance measures as Treasury may prescribe and (b) 
sell kerosene exclusively to retailers eligible for refunds 
with respect to undyed kerosene sold by them for a nontaxable 
use.
3. Reinstate Leaking Underground Storage Tank Trust Fund excise tax 
        (sec. 1043 of the House bill and sec. 842 of the Senate 
        amendment)

                              Present Law

      Before January 1, 1996, a 0.1-cent-per-gallon excise tax 
was imposed on gasoline, diesel fuel, special motor fuels, 
aviation fuels, and inland waterway fuels. Revenues were 
transferred to a Leaking Underground Storage Tank Trust Fund to 
finance cleanup of damage from leaking underground storage 
tanks.

                               House Bill

      The House bill reinstates the tax for approximately five 
years, from the date of enactment through September 30, 2002.
      Effective date.--Date of enactment.

                            Senate Amendment

      The Senate amendment reinstates the tax for 10 years, 
from October 1, 1997, through September 30, 2007.
      Effective date.--Date of enactment.

                          Conference Agreement

      The conference agreement follows the House bill and 
Senate amendment with a modification to the reinstatement 
period. The modified period is October 1, 1997, through March 
31, 2005.
4. Application of communications excise tax to prepaid telephone cards 
        (sec. 1044 of the House bill and sec. 843 of the Senate 
        amendment)

                              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).

                               House Bill

      Under the House bill, 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment with technical modifications. The conference 
agreement clarifies 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 telephone service 
(i.e., local or toll telephone service) are treated as amounts 
paid for taxable communication services, subject to the 3-
percent ad valorem tax rate.
      The conference agreement also clarifies that the base to 
which the communications tax applies in the case of prepaid 
telephone cards and similar arrangements is the retail value of 
the service provided by the use of the card or arrangement. The 
conferees understand that prepaid telephone cards are offered 
to the public in two forms. The first type of prepaid telephone 
card can be called a ``dollar value card.'' In this case, the 
final customer purchases a card or account which allows him to 
utilize $X worth of telephone service provided by an underlying 
telecommunications carrier. In this case, following the House 
bill and the Senate amendment, the conference agreement 
provides that the 3-percent communications excise tax apply to 
thevalue X at the time the prepaid telephone card is sold by a 
telecommunications carrier to a person who is not a telecommunications 
carrier.
      The second type of prepaid telephone card can be called a 
``unit card'' or a ``minute card.'' In this case the final 
customer purchases a card or account which allows him to use Y 
number of units or minutes of telephone service provided by an 
underlying telecommunications carrier. The conferees intend 
that the tax applicable to such cards be based on the retail 
value of the telephone service offered to a consumer and the 
conference agreement grants the Treasury Department regulatory 
authority to determine the appropriate retail value. Presently, 
the Federal Communications Commission generally requires 
telecommunications carriers to file a tariff listing the prices 
of their various service offerings including the price of units 
or minutes offered via prepaid telephone cards. In this case, 
following the House bill and the Senate amendment, the 
conference agreement provides that the 3-percent communications 
excise tax will apply to Y (the number of units or minutes) 
multiplied by the tariffed price of those units or minutes at 
the time the prepaid telephone card is sold by a 
telecommunications carrier to a person who is not a 
telecommunications carrier. The conferees recognize that such a 
tariffed value may not in all cases correspond to the over-the-
counter price that a final customer may pay for the card. 
However, the conferees believe that looking to the tariffed 
price, at present, is the best way to achieve neutral treatment 
of ``dollar cards'' and ``unit'' or ``minute cards.'' The 
conferees understand that not all prepaid telephone cards may 
have an underlying tariff that applies to that particular card. 
In such cases, the conferees intend that tariffs for comparable 
telephone service be applied if applicable. The conferees 
believe that tariffs should continue to be filed for service 
offered via prepaid telephone cards, but if, in the future, 
tariff filings are not generally filed the conference agreement 
authorizes the Treasury Department to determine the appropriate 
retail value of the units or minutes of service offered on such 
cards.
      The conferees understand that sometimes a communications 
service provider may require certain customers to prepay for 
their service as assurance that payment is made by the customer 
for services to be provided. The conferees do not consider such 
arrangements to constitute payment for communications services 
for the purposes of this provision if the customer is entitled 
to a full refund, in cash, for the value of any unused service. 
The conferees consider such arrangements to be deposits to 
assure payment of service to be provided in the future.
      No inference is intended from this provision as to the 
proper treatment of payments received by communications service 
providers for prepaid telephone cards and amounts received by 
communication service providers pursuant to joint venture 
credit card or other marketing arrangements under present law.
      Effective date.--The conference agreement modifies the 
effective date so that the provision is effective for cards 
sold on or after the first day of the month which commences 
more than 60 days after the date of enactment.
5. Modify treatment of tires under the heavy highway vehicle retail 
        excise tax (sec. 1402 of the House bill and sec. 845 of the 
        Senate amendment)

                              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.

                               House Bill

      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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
6. Increase tobacco excise taxes (sec. 846 of the Senate amendment)

                              Present Law

      The following excise taxes are imposed on tobacco 
products:

  Cigarettes--
        Small cigarettes--24 cents/pack of 20
        Large cigarettes--$25.20/1000
  Cigars--
        Large cigars--12.75% of mfgr. price, up to $30/1000
        Small cigars--$1.125/1000
  Cigarette papers--$0.0075/50 papers
  Cigarette tubes--$0.15/50 tubes
  Chewing tobacco--$0.12/lb.
  Snuff--$0.36/lb.
  Pipe tobacco--$0.675/lb.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment increases the small cigarette tax 
rate by 20 cents per pack of 20 (i.e., to 44 cents per pack), 
and increases the tax rates on other tobacco products 
proportionately. The Senate amendment also extends the tax to 
``roll-your-own'' cigarette tobacco at $0.66/lb., and includes 
compliance provisions for untaxed cigarettes destined for 
export.
      Floor stocks taxes are imposed on cigarettes and other 
currently taxed tobacco products held for sale on October 1, 
1997 (including articles held in foreign trade zones).
      Effective date.--October 1, 1997.

                          Conference Agreement

      The conference agreement on H.R. 2014 does not include 
the Senate amendment. However, the conference agreement on H.R. 
2015 follows the Senate amendment, with modifications. First, 
the tax rate on small cigarettes is increased by $5 per 
thousand (10 cents per pack of 20 cigarettes) and the tax rates 
on other currently taxed tobacco products are increased 
proportionately beginning on January 1, 2000. On January 1, 
2002, the small cigarette tax rate is increased by an 
additional $2.50 per thousand (5 cents per pack) with the tax 
rates on other currently taxed tobacco products also being 
increased proportionately at that time. Thus, the aggregate tax 
increase on small cigarettes is 15 cents per pack of 20 
cigarettes. The conference agreement imposes tax on ``roll-
your-own'' tobacco at the same rate as pipe tobacco.
      The conference agreement includes a technical amendment 
to H.R. 2015, which provides that an amount equal to the 
increase in tobacco excise taxes included in H.R. 2015 will be 
credited against total payments made by parties pursuant to 
future Federal legislation implementing the proposed tobacco 
industry settlement agreement of June 20, 1997.
      Effective date.--The conference agreement on H.R. 2015 is 
effective on the date of enactment for tobacco products removed 
after December 31, 1999, and December 31, 2001, respectively. 
Appropriate floor stocks taxes are imposed on January 1, 2000, 
and on January 1, 2002.

           F. Provisions Relating to Tax-Exempt Organizations

1. Extend UBIT rules to second-tier subsidiaries and amend control test 
        (sec. 1051 of the House bill and sec. 851 of the Senate 
        amendment)

                              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.31 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.32 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.33
---------------------------------------------------------------------------
    \31\ 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).
    \32\ Treas. reg. sec. 1.512(b)-1(l)(4)(I)(a).
    \33\ Treas. reg. sec. 1.512(b)-l(1)(4)(I)(b).
---------------------------------------------------------------------------
      The control test under section 512(b)(13) does not, 
however, incorporate any indirect ownership rules.34 
Consequently, rents, royalties, annuities and interest derived 
from second-tier subsidiaries generally do not constitute UBTI 
to the tax-exempt parent organization.35
---------------------------------------------------------------------------
    \34\ 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 percent 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.
    \35\ 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).
---------------------------------------------------------------------------

                               House Bill

      The House bill modifies the test for determining control 
for purposes of section 512(b)(13). Under the House 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 House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, except that the effective date is modified to 
provide temporary transition relief for certain payments. The 
provision does not apply to payments made during the first two 
taxable years beginning on or after the date of enactment if 
such payments are made pursuant to a binding written contract 
in effect as of June 8, 1997, and at all times thereafter 
before such payment. In addition, the conference agreement does 
not include the delayed application of the reduction of the 
ownership threshold for purposes of the control test from 80 
percent to more than 50 percent.
2. Limitation on increase in basis of property resulting from sale by 
        tax-exempt entity to related person (sec. 1052 of the House 
        bill and sec. 852 of the Senate amendment)

                              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). As another example, ordinary income 
treatment, rather than capital gain treatment, is required on a 
sale of depreciable property between related 
parties.(sec.1239).

                               House Bill

      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.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that it is clarified that the term ``tax-exempt entity'' 
for purposes of the provision is defined as in section 
168(h)(2)(A), without regard to section 168(h)(2)(A)(iii).

                          Conference Agreement

      The conference agreement does not include the House bill 
provision or the Senate amendment.
3. Reporting and proxy tax requirements for political and lobbying 
        expenditures of certain tax-exempt organizations (sec. 1053 of 
        the House bill)

                              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.\36\ 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 (1) members with annual dues 
of less than $50 or (2) 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.37
---------------------------------------------------------------------------
    \36\ 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)).
    \37\ 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 it 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.
---------------------------------------------------------------------------

                               House Bill

      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 $100,38 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.
---------------------------------------------------------------------------
    \38\ The $100 amount will be indexed for inflation after December 
31, 1997 (rounded to the nearest multiple of $5).
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
4. Repeal grandfather rule with respect to pension business of certain 
        insurers (sec. 1054 of the bill and sec. 853 of the Senate 
        amendment)

                              Present Law

      Present law provides that an organization described in 
section 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.

                               House Bill

      The House bill 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.--Taxable years beginning after December 
31, 1997.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that the Senate amendment repeals only the grandfather 
rule applicable to that portion of the business of Mutual of 
America which is attributable to pension business.
      Effective date.--Same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill.

                         G. Foreign Provisions

1. Inclusion of income from notional principal contracts and stock 
        lending transactions under subpart F (sec. 1171 of the House 
        bill and sec. 861 of the Senate amendment)

                              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.

                               House Bill

      The House 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 House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment. The conferees wish to clarify the treatment 
of notional principal contracts under the provision. Although 
net income from notional principal contracts is added as a new 
category of foreign personal holding company income, amounts 
with respect to a notional principal contract entered into to 
hedge an item described in another category of foreign personal 
holding company income are taken into account under the rules 
of such other category. In this regard, gains and losses from 
transactions in inventory property are covered by an exclusion 
from the category of personal holding company income for net 
gains from property transactions; income from a notional 
principal contract entered into to hedge inventory property is 
taken into account under such category and thus similarly is 
excluded from foreign personal holding company income.
2. Restrict like-kind exchange rules for certain personal property 
        (sec. 1172 of the House bill and sec. 862 of the Senate 
        amendment)

                              Present Law

      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 bothoutside 
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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Impose holding period requirement for claiming foreign tax credits 
        with respect to dividends (sec. 1173 of the House bill and sec. 
        863 of the Senate amendment)

                              Present Law

      A U.S. person that receives a dividend from a foreign 
corporation generally is entitled to a credit for foreign 
income taxes paid on the dividend, regardless of the 
shareholder's holding period for the stock. If a regulated 
investment company (``RIC'') elects, U.S. persons that receive 
dividends from the RIC generally are entitled to an indirect 
credit for foreign taxes paid by the RIC, regardless of the 
shareholder's holding period for the RIC stock. A U.S. 
corporation that receives a dividend from a foreign corporation 
in which it has a 10-percent or greater voting interest 
generally is entitled to an indirect credit for foreign taxes 
paid by the foreign corporation, also regardless of the 
shareholder's holding period.

                               House Bill

      The House bill disallows the foreign tax credits normally 
available with respect to a dividend from a corporation or RIC 
if the shareholder has not held the stock for 16 days in the 
case of common stock and 46 days in the case of preferred 
stock. The disallowance applies both to foreign tax credits for 
foreign withholding taxes that are paid on the dividend where 
the dividend-paying stock is held for less than these holding 
periods and to indirect foreign tax credits for taxes paid by a 
lower-tier foreign corporation or a RIC where any of the 
required stock in the chain of ownership is held for less than 
these holding periods. Periods during which a taxpayer is 
protected from risk of loss generally are not counted toward 
the holding period requirement. In the case of a bona fide 
contract to sell stock, a special rule applies for purposes of 
indirect foreign tax credits. The House bill also provides an 
exception for foreign active securities dealers.
      Effective date.--The provision is effective for dividends 
paid or accrued more than 30 days after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill with 
one modification. Under the Senate amendment, the special rule 
for contracts to sell stock does not apply to indirect foreign 
tax credits of a RIC shareholder.

                          Conference Agreement

      The conference agreement generally follows the Senate 
amendment with one modification. The conference agreement 
grants regulatory authority to the Secretary of the Treasury to 
treat certain foreign taxes as not subject to the provision. 
The conferees anticipate that this authority may be used to 
address internal withholding taxes imposed by a foreign country 
on persons that do business in the foreign country.
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 House bill)

                              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).

                               House Bill

      Under the House 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 placed 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 House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the provision 
in the House bill.
5. Limitation on treaty benefits for payments to hybrid entities (sec. 
        1175 of the House bill and sec. 742 of the Senate amendment)

                              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 anentity 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).
      Following the passage of the House bill and the Senate 
amendment, proposed and temporary regulations were issued 
addressing the application of the reduced rates of withholding 
tax provided under a treaty in cases involving a hybrid entity. 
Temp. Treas. reg. sec. 1.894-1T.

                               House Bill

      The House 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 House 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.
      The House 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 a corporation 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 House 
bill, withholding tax is imposed at the full statutory rate of 
30 percent in such case. The provision 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 provision would not apply if Canada were to 
impose tax on the Canadian parent on dividends received from 
the U.S. limited liability company.
      It is believed 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.

                            Senate Amendment

      The Senate amendment provides that the Secretary of the 
Treasury shall prescribe regulations to determine the extent to 
which a taxpayer shall be denied benefits under an income tax 
treaty of the United States with respect to any payment 
received by, or income attributable to activities of, an entity 
that is treated as a partnership for U.S. federal income tax 
purposes (or is otherwise treated as fiscally transparent for 
such purposes) but is treated as fiscally non-transparent for 
purposes of the tax laws of the jurisdiction of residence of 
the taxpayer.
      The Senate amendment addresses the potential tax-
avoidance opportunity that 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). Such a tax-
avoidance opportunity may arise, for example, for Canadian 
corporations with U.S. subsidiaries 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 a corporation 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. It is expected that the regulations will impose 
withholding tax at the full statutory rate of 30 percent in 
such case.
      Effective date.--The provision is effective upon date of 
enactment.

                          Conference Agreement

      The conference agreement generally follows the House bill 
with a modification to provide regulatory authority to address 
the availability of treaty benefits in situations that involve 
hybrid entities but that are not covered by the denial of 
benefits specifically provided by the provision.
      Under the conference agreement, a foreign person is not 
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 treated as a partnership (or is otherwise 
treated as fiscally transparent) for U.S. tax purposes if (i) 
such item is not treated for purposes of the taxation laws of 
such foreign country as an item of income of such person, (ii) 
the foreign country does not impose tax on an actual 
distribution of such item of income from such entity to such 
person, and (iii) the treaty itself does not contain a 
provision addressing the applicability of the treaty in the 
case of income derived through a partnership or other fiscally 
transparent entity. In addition, the conference agreement 
grants the Secretary of the Treasury authority to prescribe 
regulations to determine, in situations other than the 
situation specifically described in the statutory provision, 
the extent to which a taxpayer shall not be entitled to 
benefits under an income tax treaty of the United States with 
respect to any payment received by, or income attributable to 
activities of, an entity that is treated as a partnership for 
U.S. federal income tax purposes (or is otherwise treated as 
fiscally transparent for such purposes) but is treated as 
fiscally non-transparent for purposes of the tax laws of the 
jurisdiction of residence of the taxpayer.
      The conferees note that on June 30, 1997 the Secretary 
issued proposed and temporary regulations addressing the 
availability of treaty benefits in cases involving hybrid 
entities. The conferees believe that these regulations are 
consistent with the provision in the conference agreement. The 
conferees also believe that the provision in the conference 
agreement and the temporary and proposed regulations are 
consistent with U.S. treaty obligations. Such provision and 
such regulations represent interpretations of U.S. treaties 
clarifying those situations involving hybrid entities in which 
taxpayers are entitled to treaty benefits and those situations 
in which they are not.
6. Interest on underpayments that are reduced by foreign tax credit 
        carrybacks (sec. 1176 of the House bill and sec. 865 of the 
        Senate amendment)

                              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.

                               House Bill

      Under the House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
7. Determination of period of limitations relating to foreign tax 
        credits (sec. 1177 of the House bill and sec. 866 of the Senate 
        amendment)

                              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).

                               House Bill

      Under the House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
8. Treatment of income from certain sales of inventory as U.S. source 
        (sec. 864 of the Senate amendment)

                              Present Law

      U.S. persons are subject to U.S. tax on their worldwide 
income. A credit against U.S. tax on foreign source income is 
allowed for foreign taxes. 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. Specific rules apply in 
determining whether income is from U.S. or foreign sources. 
Income from the sale or exchange of inventory property 
generally is sourced where the sale occurs. In Liggett Group, 
Inc. v. Commissioner, 58 T.C.M. 1167 (1990), the court 
concluded that a sale of inventory property by a U.S. 
corporation to U.S. customers gave rise to foreign source 
income because the sale occurred outside the United States.

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, income from a sale of 
inventory property by a U.S. resident to another U.S. resident 
for use, consumption, or disposition in the United States is 
treated as U.S. source income, if the sale is not attributable 
to an office or other fixed place of business maintained by the 
seller outside the United States.
      Effective date.--The provision is effective for taxable 
years beginning after date of enactment.

                          Conference Agreement

      The conference agreement does not include the provision 
in the Senate amendment.
9. Modify foreign tax credit carryover rules (sec. 867 of the Senate 
        amendment)

                              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 foreign tax credit 
limitations are applied to specific categories of income.
      The amount of creditable taxes paid or accrued (or deemed 
paid) in any taxable year which exceeds the foreign tax credit 
limitation is permitted to be carried back two years and 
forward five years. The amount carried over may be used as a 
credit in a carryover year to the extent the taxpayer otherwise 
has excess foreign tax credit limitation for such year. The 
separate foreign tax credit limitations apply for purposes of 
the carryover rules.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment reduces the carryback period for 
excess foreign tax credits from two years to one year. The 
amendment also extends the excess foreign tax credit 
carryforward period from five years to seven years.
      Effective date.--The provision applies to foreign tax 
credits arising in taxable years beginning after December 31, 
1997.

                          Conference Agreement

      The conference agreement does not include the provision 
in the Senate amendment.
10. Repeal special exception to foreign tax credit limitation for 
        alternative minimum tax purposes (sec. 868 of the Senate 
        amendment)

                              Present Law

      Present law imposes a minimum tax on a corporation to the 
extent the taxpayer's minimum tax liability exceeds its regular 
tax liability. 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.
      The combination of the taxpayer's net operating loss 
carryover and foreign tax credits cannot reduce the taxpayer's 
alternative minimum tax liability by more than 90 percent of 
the amount determined without these items.
      The Omnibus Budget Reconciliation Act of 1989 (``1989 
Act'') provided a special exception to the limitation on the 
use of the foreign tax credit against the tentative minimum 
tax. In order to qualify for this exception, a corporation must 
meet four requirements. First, more than 50 percent of both the 
voting power and value of the stock of the corporation must be 
owned by U.S. persons who are not members of an affiliated 
group which includes such corporation. Second, all of the 
activities of the corporation must be conducted in one foreign 
country with which the United States has an income tax treaty 
in effect and such treaty must provide for the exchange of 
information between such country and the United States. Third, 
the corporation generally must distribute to its shareholders 
all current earnings and profits (except for certain amounts 
utilized for normal maintenance or capital expenditures related 
to its existing business). Fourth, all of such distributions 
which are received by U.S. persons must be utilized by such 
persons in a U.S. trade or business. This exception applies to 
taxable years beginning after March 31, 1990 (with a proration 
rule effective for certain taxable years which include March 
31, 1990).

                               House Bill

      No provision.

                            Senate Amendment

      The special exception regarding the use of foreign tax 
credits for purposes of the alternative minimum tax, as 
provided by the 1989 Act, is repealed.
    Effective date.--The provision is effective for taxable 
years beginning after the date of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

               H. Pension and Employee Benefit Provisions

1. Cashout of certain accrued benefits (sec. 917 of the House bill and 
        sec. 879 of the Senate amendment)

                              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.

                               House Bill

      The House bill increases the limit on involuntary cash 
outs from $3,500 to $5,000. The $5,000 amount is adjusted for 
inflation beginning after 1998 in $50 increments.
      Effective date.--The provision is effective for plan 
years beginning after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except the Senate amendment also makes a corresponding change 
to title I of ERISA and provides that the $5,000 amount is 
adjusted for inflation beginning after 1997 in $50 increments.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, except that the conference agreement does not 
increase the $5,000 limit for inflation.
2. Election to receive taxable cash compensation in lieu of nontaxable 
        parking benefits (sec. 880 of the Senate amendment)

                              Present Law

      Under present law, up to $165 per month of employer-
provided parking is excludable from gross income. In order for 
the exclusion to apply, the parking must be provided in 
addition to and not in lieu of any compensation that is 
otherwise payable to the employee. Employer-provided parking 
cannot be provided as part of a cafeteria plan.

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, no amount is includible in 
the income of an employee merely because the employer offers 
the employee a choice between cash and employer-provided 
parking. The amount of cash offered is includible in income 
only if the employee chooses the cash instead of parking.
      Effective date.--The provision is effective with respect 
to taxable years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
3. Repeal of excess distribution and excess retirement accumulation 
        taxes (sec. 882 of the Senate amendment)

                              Present Law

      Under present law, a 15-percent excise tax is imposed on 
excess distributions from qualified retirement plans, tax-
sheltered annuities, and individual retirement arrangements 
(``IRAs''). Excess distributions are generally the aggregate 
amount of retirement distributions from such plans during any 
calendar year in excess of $160,000 (for 1997) or 5 times that 
amount in the case of a lump-sum distribution. The 15-percent 
excise tax does not apply to distributions received in 1997, 
1998, and 1999.
      An additional 15-percent estate tax is imposed on an 
individual's excess retirement accumulations. Excess retirement 
accumulations are generally the balance in retirement plans in 
excess of the present value of a benefit that would not be 
subject to the 15-percent tax on excess distributions.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment repeals both the 15-percent excise 
tax on excess distributions and the 15-percent estate tax on 
excess retirement accumulations.
      Effective date.--The provision repealing the excess 
distribution tax is effective with respect to excess 
distributions received after December 31, 1996. The repeal of 
the excess accumulation tax is effective with respect to 
decedents dying after December 31, 1996.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
4. Tax on prohibited transactions (sec. 884 of the Senate amendment)

                              Present Law

      Present law prohibits certain transactions (prohibited 
transactions) between a qualified plan and a disqualified 
person in order to prevent persons with a close relationship to 
the qualified plan from using that relationship to the 
detriment of plan participants and beneficiaries. A two-tier 
excise tax is imposed on prohibited transactions. The initial 
level tax is equal to 10- percent of the amount involved with 
respect to the transaction. If the transaction is not corrected 
within a certain period, a tax equal to 100 percent of the 
amount involved may be imposed.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment increases the initial-level 
prohibited transaction tax from 10 percent to 15 percent.
      Effective date.--The provision is effective with respect 
to prohibited transactions occurring after the date of 
enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
5. Basis recovery rules (sec. 885 of the Senate amendment)

                              Present Law

      Under present law, amounts received as an annuity under a 
tax-qualified pension plan generally are includible in income 
in the year received, except to the extent the amount received 
represents return of the recipient's investment in the contract 
(i.e., basis). The portion of each annuity payment that 
represents a return of basis generally is determined by a 
simplified method. Under this method, the portion of each 
annuity payment that is a return to basis is equal to the 
employee's total basis as of the annuity starting date, divided 
by the number of anticipated payments under a specified table. 
The number of anticipated payments listed in the table is based 
on the age of the primary annuitant on the annuity starting 
date.

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, the present-law table applies 
to benefits based on the life of one annuitant. A separate 
table applies to benefits based on the life of more than one 
annuitant.
      Effective date.--The provision is effective with respect 
to annuity starting dates after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment. As 
under the Senate amendment, a separate table applies to 
benefits based on the life of more than one annuitant, as 
follows:

        Combined age of annuitants                    Number of payments
Not more than 110.............................................       410
More than 110 but not more than 120...........................       360
More than 120 but not more than 130...........................       310
More than 130 but not more than 140...........................       260
More than 140.................................................       210

      The conference agreement clarifies that the new table 
applies to benefits based on the life of more than one 
annuitant, even if the amount of the annuity varies by 
annuitant. Thus, for example, the new table applies to a 50-
percent joint and survivor annuity. The new table does not 
apply to an annuity paid on a single life merely because it has 
additional features, e.g., a term certain.
      Effective date.--Same as the Senate amendment.

                  I. Other Revenue-Increase Provisions

1. Phase out suspense accounts for certain large farm corporations 
        (sec. 1061 of the House bill and sec. 871 of the Senate 
        amendment)

                              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 least 50 percent 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 
required 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.

                               House Bill

      The House 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 
provision, 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 provision. 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.
      In addition, the Senate amendment repeals the present-law 
requirement to accelerate the recovery of suspense accounts 
when the gross receipts of the taxpayer decreases.

                          Conference Agreement

      The conference agreement follows the Senate amendment. In 
addition, the conferees wish to clarify that in the case of a 
family farm corporation that elects to be an S corporation for 
a taxable year, the net operating loss and 50 percent of 
taxable income limitations shall be determined by taking into 
account all the items of income, gain, deduction and loss of 
the corporation, whether or not such items are separately 
stated under section 1366.
2. Modify net operating loss carryback and carryforward rules (sec. 
        1062 of the House bill, and sec. 872 of the Senate amendment)

                              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).

                               House Bill

      The House bill limits the NOL carryback period to two 
years and extends the NOL carryforward period to 20 years. The 
House bill does not apply to the carryback rules relating to 
REITs, specified liability losses, excess interest losses, and 
corporate capital losses. In addition, the House 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.

                            Senate Amendment

      The Senate amendment follows the House bill. In addition, 
the Senate amendment preserves the 3-year carryback for NOLs of 
farmers and small businesses attributable to losses incurred in 
Presidentially declared disaster areas.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
3. Expand the limitations on deductibility of premiums and interest 
        with respect to life insurance, endowment and annuity contracts 
        (sec. 1063 of the House bill and sec. 873 of the Senate 
        amendment)

                              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''). 39 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)).
---------------------------------------------------------------------------
    \39\ This favorable tax treatment is available only if the 
policyholder has an insurable interest in the insured when the contract 
is issued and if the 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 by a viatical settlement provider 
for the sale or assignment of a life insurance contract on the life of 
a terminally ill or chronically ill individual, are treated as 
excludable as if paid of the death of the insured (sec. 101(g)).
---------------------------------------------------------------------------
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 
contracts.40
---------------------------------------------------------------------------
    \40\ 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.
---------------------------------------------------------------------------
      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.41
---------------------------------------------------------------------------
    \41\ 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) an 
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 
of 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(c)(1)). In addition to the 
specific disallowance rules of section 264, generally applicable 
principles of tax law apply.
---------------------------------------------------------------------------
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)).42
---------------------------------------------------------------------------
    \42\ Special rules apply for certain tax-exempt obligations of 
small issuers (sec. 265(b)(3)).
---------------------------------------------------------------------------

                               House Bill

Expansion of premium deduction limitation to individuals in whom 
        taxpayer has an insurable interest
      Under the House bill, 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 House bill, 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 the contract 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 theamount 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.
Senate Amendment
      The Senate amendment is the same as the House bill.
Conference Agreement
      The conference agreement follows the House bill and the 
Senate amendment, with modifications.
Expansion of premium deduction limitation to individuals in whom 
        taxpayer has an insurable interest
      The conference agreement provides that the premium 
deduction limitation does not apply to premiums with respect to 
any annuity contract described in section 72(s)(5) (relating to 
certain qualified pension plans, certain retirement annuities, 
individual retirement annuities, and qualified funding assets), 
nor to premiums with respect to any annuity to which section 
72(u) applies (relating to current taxation of income on the 
contract in the case of an annuity contract held by a person 
who is not a natural person).
Expansion of interest disallowance to individuals in whom taxpayer has 
        insurable interest
      The conference agreement specifies the treatment of 
certain interest to which the provision of the bill providing 
for expansion of interest disallowance to individuals in whom 
taxpayer has insurable interest otherwise would apply. The 
conference agreement provides that in the case of a transfer 
for valuable consideration of a life insurance contract or any 
interest therein described in section 101(a)(2), the amount of 
the death benefit excluded from gross income under section 
101(a) may not exceed an amount equal to the sum of the actual 
value of the consideration, premiums, interest disallowed as a 
deduction under new section 264(a)(4), and other amounts 
subsequently paid by the transferee. Thus, under the provision, 
in the case of the transfer for value of a life insurance 
contract, the interest with respect to the contract that 
otherwise would be disallowed under new section 264(a)(4) is 
capitalized, reducing the amount included in income by the 
transferee upon receipt by the transferee of the amounts paid 
by reason of the death of the insured.
Pro rata disallowance of interest on debt to fund life insurance
      Under the pro rata interest disallowance provision of the 
bill, the conference agreement provides that interest expense 
is allocable to unborrowed policy cash values 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 sum of (a) in 
the case of assets that are life insurance policies or annuity 
or endowment contracts, the average unborrowed policy cash 
values, and (b) in the case of other assets, the average 
adjusted bases for all such other assets of the taxpayer.
      Under the pro rata interest disallowance rule, the 
conference agreement expands the exception for any policy or 
contract owned by an entity engaged in a trade or business, 
covering an individual who is an employee, officer or director 
of the trade or business at the time first covered. Under the 
conference agreement, the exception applies to any policy or 
contract owned by an entity engaged in a trade or business, 
which covers one individual who (at the time first insured 
under the policy or contract) is (1) a 20-percent owner of the 
entity, or (2) an individual (who is not a 20-percent owner) 
who is an officer, director or employee of the trade or 
business. The exception also applies in the case of a joint-
life policy or contract under which the sole insureds are a 20-
percent owner and the spouse of the 20-percent owner. A joint-
life contract under which the sole insureds are a 20-percent 
owner and his or her spouse is the only type of policy or 
contract with more than one insured that comes within the 
exception. Thus, for example, if the insureds under a contract 
include an individual described in the exception (e.g., an 
employee, officer, director, or 20-percent owner) and any 
individual who is not described in the exception (e.g., a 
debtor of the entity), then the exception does not apply to the 
policy or contract. For purposes of this exception, a 20-
percent owner has the same meaning as under present-law section 
264(d)(4). In addition, the conference agreement provides that 
the pro rata interest disallowance rule does not apply to any 
annuity contract to which section 72(u) applies (relating to 
current taxation of income on the contract in the case of an 
annuity contract held by a person who is not a natural person). 
The conference agreement provides that any policy or contract 
that is not subject to the pro rata interest disallowance rule 
by reason of this exception (for 20-percent owners, their 
spouses, employees, officers and directors, and in the case of 
an annuity contract to which section 72(u) applies) is not 
taken into account in applying the ratio to determine the 
portion of the taxpayer's interest expense that is allocable to 
unborrowed policy cash values.
      The conferees wish to clarify that the aggregation rule 
(treating related persons as one for purposes of the provision) 
is intended to prevent taxpayers from avoiding the pro rata 
interest limitation by owning life insurance, endowment or 
annuity contracts, while incurring interest expense through a 
related person.
Treatment of insurance companies
      The conference agreement modifies the rules of the 
provision relating to the reduction of certain deductions of 
insurance companies. For purposes of those rules, an increase 
in the policy cash value for any policy or contract is (1) the 
amount of the increase in the adjusted cash value, reduced by 
(2) the gross premiums received with respect to the policy or 
contract during the taxable year, and increased by (3) 
distributions under the policy or contract to which section 
72(e) apply (other than amounts includable in the 
policyholder's gross income). For this purpose, the adjusted 
cash value means the cash surrender value of the policy or 
contract, increased by (1) commissions payable with respect to 
the policy or contract for the taxable year, and (2) asset 
management fees, surrender and mortality charges, and any other 
fees or charges, specified in regulations, which are imposed 
(or would be imposed if the policy or contract were surrendered 
or canceled) with respect to the policy or contract for the 
taxable year.
Effective date
      The conferees wish to clarify the rule under the 
effective date providing that the addition of covered lives is 
treated as a new contract only with respect to such additional 
covered lives. It is intended that this rule apply with respect 
to a master or group policy or contract, not with respect to a 
joint-life policy or contract (i.e., a policy or contract that 
insures more than one individual).
4. Allocation of basis of properties distributed to a partner by a 
        partnership (sec. 1064 of the House bill and sec. 874 of the 
        Senate amendment)

                              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).43 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).
---------------------------------------------------------------------------
    \43\ 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 a 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)).44 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.
---------------------------------------------------------------------------
    \44\ 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)). Treas. 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.
---------------------------------------------------------------------------

                               House Bill

      The House bill 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 A 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 adjusted bases 
(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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
5. Treatment of inventory items of a partnership (sec. 1065 of the 
        House bill and sec. 875 of the Senate amendment)

                              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)).

                               House Bill

      The House bill 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, with modifications. The conference agreement 
repeals the requirement that inventory be substantially 
appreciated only with respect to sales or exchanges of 
partnership interests under section 751(a) of the Code, but not 
with respect to distributions under section 751(b) of the Code. 
Thus, present law is retained with respect to distributions 
governed by section 751(b).
      Effective date.--The conference agreement follows the 
House bill and the Senate amendment, with a modification. The 
conference agreement provides that the provision is effective 
for sales, exchanges, and distributions after the date of 
enactment, except that the provision does not apply to any sale 
or exchange pursuant to a written binding contract in effect on 
June 8, 1997, and at all times thereafter before such sale or 
exchange.
      6. Treatment of appreciated property contributed to a 
partnership (sec. 1066 of the House bill)

                              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, the contributing 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).

                               House Bill

      The House bill 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.--Effective for property contributed to a 
partnership after June 8, 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, with a 
modification. The conference agreement extends to 7 years the 
period in which a partner recognizes pre-contribution gain with 
respect to property contributed to a partnership. Thus, under 
the conference agreement, 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 7 years after the contribution to 
the partnership.
      Effective date.--The effective date is the same as the 
House bill, with a modification. The conference agreement is 
effective for property contributed to a partnership after June 
8, 1997, except that the provision does not apply to any 
property contributed to a partnership pursuant to a written 
binding contract in effect on June 8, 1997, and at all times 
thereafter before such contribution, if the contract provides 
for the contribution of a fixed amount of property.
7. Earned income credit compliance provisions (sec. 1067 of the House 
        bill and sec. 5851 of the Senate amendment to H.R. 2015 (``the 
        Balanced Budget Act of 1997''))

                                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 45 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.
---------------------------------------------------------------------------
    \45\ 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.
---------------------------------------------------------------------------
      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.
      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 House bill and sec. 5851 of 
                    the Senate amendment to H.R. 2015)

                              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.

                               House Bill

      Under the House bill, 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            b. Recertification required when taxpayer found to be 
                    ineligible for EIC in past (sec. 1067 of the House 
                    bill and sec. 5851 of the Senate amendment to H.R. 
                    2015)

                              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.

                               House Bill

      Under the House bill, 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 not 
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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            c. Due diligence requirements for paid preparers (sec. 1067 
                    of the House bill and sec. 5851 of the Senate 
                    amendment to H.R. 2015)

                              Present Law

      Several penalties 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 not imposed 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 
otherdocument 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.

                               House Bill

      Under the House bill, 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            d. Modify the definition of AGI used to phaseout the EIC

                              Present Law

      The EIC 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 the phase out of 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.

                               House Bill

      No provision.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement modifies the definition of AGI 
used for phasing out the credit by adding two items of 
nontaxable income and changing the percentage of certain losses 
disregarded. The two items added are: (1) tax-exempt interest, 
and (2) nontaxable distributions from pensions, annuities, and 
individual retirement arrangements (but only if not rolled over 
into similar vehicles during the applicable rollover period). 
The conference agreement also increases the amount of net 
losses from businesses, computed separately with respect to 
sole proprietorships (other than farming), sole proprietorships 
in farming, and other businesses disregarded from 50 percent to 
75 percent.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1997.
8. Eligibility for income forecast method (sec. 1068 of the House bill 
        and sec. 876 of the Senate amendment)

                              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. 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. 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 
deductionsfor motion picture films, television films and taped 
shows, books, patents, master sound recordings and video games. Most 
recently, the income forecast method has been held applicable to 
consumer durable property subject to short-term ``rent-to-own'' leases.

                               House Bill

      The House bill clarifies the types of property to which 
the income forecast method may be applied. Under the House 
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.
      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 are not 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement generally follows the House bill 
and the Senate amendment, with modifications to depreciation 
applicable to qualified rent-to-own property. First, the 
conference agreement provides that the special 3-year recovery 
period may apply to any property generally used in the home for 
personal, but not business, use. The conferees understand that 
certain rent-to-own property, including computer and peripheral 
equipment, may be used in the home for either personal or 
business purposes, and the taxpayer may not be aware of how its 
customers may use the property. So as not to increase the 
administrative burdens of taxpayers, the conferees intend that 
if such dual-use property does not represent a significant 
portion of a taxpayer's leasing property and if such other 
leasing property predominantly is qualified rent-to-own 
property, then such dual-use property generally also would be 
qualified rent-to-own property. However, if such dual-use 
property represents a significant portion of the taxpayer's 
leasing property, the conferees intend that the burden of proof 
be placed on the taxpayer to show that such property is 
qualified rent-to-own property.
      In addition, the conference agreement modifies the 
definition of ``rent-to-own contract'' to include leases that 
provide for decreasing regular periodic payments.
      Finally, the conferees wish to clarify that the 3-year 
recovery period provided under the provision only applies to 
property subject to leases and no inference is intended as to 
whether any arrangement constitutes a lease for tax purposes.
9. Require taxpayers to include rental value of residence in income 
        without regard to period of rental (sec. 1069 of the House 
        bill)

                              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.

                               House Bill

      The House bill repeals the 15-day rules of section 
280A(g). The House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
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 House bill and sec. 877 of the Senate 
        amendment)

                              Present Law

      Under section 1033, gain realized by a taxpayer from 
certain involuntary conversions of property is deferred to the 
extent the taxpayer purchases property similar or related in 
service 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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
11. Repeal of exception for certain sales by manufacturers to dealers 
        (sec. 1071 of the House bill and sec. 878 of the Senate 
        amendment)

                              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,46 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 9-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 ``50-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 50-percent test before the second consecutive year in 
which the taxpayer did not actually meet the test. 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.
---------------------------------------------------------------------------
    \46\ I.e., the sale of the property must be intended to be for 
resale or leasing by the dealer.
---------------------------------------------------------------------------

                               House Bill

      The House 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 taxable years beginning after 
that date.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except for the effective date.
      Effective date.--The provision is effective for taxable 
years beginning one year after the date of enactment. Any 
resulting adjustment from a required change in accounting will 
be includible ratably over the 4 taxable years beginning after 
that date.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
12. Extension of Federal unemployment surtax (sec. 881 of the Senate 
        amendment)

                              Present Law

      The Federal Unemployment Tax Act (FUTA) imposes a 6.2-
percent gross tax rate on the first $7,000 paid annually by 
covered employers to each employee. Employers in States with 
programs approved by the Federal Government and with no 
delinquent Federal loans may credit 5.4-percentage points 
against the 6.2-percent tax rate, making the minimum, net 
Federal unemployment tax rate 0.8 percent. Since all States 
have approved programs, 0.8 percent is the Federal tax rate 
that generally applies. This Federal revenue finances 
administration of the system, half of the Federal-State 
extended benefits program, and a Federal account for State 
loans. The States use the revenue turned back to them by the 
5.4-percent credit to finance their regular State programs and 
half of the Federal-State extended benefits program.
      In 1976, Congress passed a temporary surtax of 0.2 
percent of taxable wages to be added to the permanent FUTA tax 
rate. Thus, the current 0.8-percent FUTA tax rate has two 
components: a permanent tax rate of 0.6 percent, and a 
temporary surtax rate of 0.2 percent. The temporary surtax 
subsequently has been extended through 1998.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment extends the temporary surtax rate 
through December 31, 2007. It also increases the limit from 
0.25 percent to 0.50 percent of covered wages on the Federal 
Unemployment Account (FUA) in the Unemployment Trust Fund.
      Effective date.--The provision is effective for labor 
performed on or after January 1, 1999.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
13. Treatment of charitable remainder trusts (sec. 883 of the Senate 
        amendment)

                              Present Law

In general
      Sections 170(f), 2055(e)(2) and 2522(c)(2) disallow a 
charitable deduction for income, estate or gift tax purposes, 
respectively, where the donor transfers an interest in property 
to a charity (e.g., a remainder) while also either retaining an 
interest in that property (e.g., an income interest) or 
transferring an interest in that property to a noncharity for 
less than full and adequate consideration. Exceptions to this 
general rule are provided for: (1) remainder interests in 
charitable remainder annuity trusts, charitable remainder 
unitrusts, pooled income funds, farms, and personal residences; 
(2) present interests in the form of a guaranteed annuity or a 
fixed percentage of the annual value of the property; (3) an 
undivided portion of the donor's entire interest in the 
property; and (4) a qualified conservation easement.
Charitable remainder annuity trusts and charitable remainder unitrusts
      A charitable remainder annuity trust is a trust which is 
required to pay a fixed dollar amount, not less often than 
annually, of at least 5 percent of the initial value of the 
trust to a non-charity for the life of an individual or a 
period of years not to exceed 20 years, with the remainder 
passing to charity. A charitable remainder unitrust is a trust 
which generally isrequired to pay, at least annually, a fixed 
percentage of the fair market value of the trust's assets determined at 
least annually to a noncharity for the life of an individual or a 
period of years not to exceed 20 years, with the remainder passing to 
charity (sec. 664(d)).
      Distributions from a charitable remainder annuity trust 
or charitable remainder unitrust are treated first as ordinary 
income to the extent of the trust's current and previously 
undistributed ordinary income for the trust's year in which the 
distribution occurred; second, as capital gains to the extent 
of the trust's current capital gain and previously 
undistributed capital gain for the trust's year in which the 
distribution occurred; third, as other income (e.g., tax-exempt 
income) to the extent of the trust's current and previously 
undistributed other income for the trust's year in which the 
distribution occurred; and, fourth, as corpus (sec. 664(b)).
      Distributions are includible in the income of the 
beneficiary for the year that the annuity or unitrust amount is 
required to be distributed even though the annuity or unitrust 
amount is not distributed until after the close of the trust's 
taxable year. Treas. reg. sec. 1.664-1(d)(4).
      On April 18, 1997, the Treasury Department proposed 
regulations providing additional rules under sections 664 and 
2702 to address perceived abuses involving distributions from 
charitable remainder trusts. One of those proposed rules would 
require that payment of any required annuity or unitrust amount 
by a charitable remainder trust (other than an ``income only'' 
unitrust) be made by the close of the trust's taxable year in 
which such payments are due. See Prop. Treas. reg. secs. 1.664-
2(a)(1)(i) and 1.664-3(a)(1)(i).

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, a trust cannot be a 
charitable remainder annuity trust if the annuity for any year 
is greater than 50 percent of the initial fair market value of 
the trust's assets or be a charitable remainder unitrust if the 
percentage of assets that are required to be distributed at 
least annually is greater than 50 percent. Any trust that fails 
this 50-percent rule will not be a charitable remainder trust 
whose taxation is governed under section 664, but will be 
treated as a complex trust and, accordingly, all its income 
will be taxed to its beneficiaries or to the trust.
      Effective date.--The provision applies to transfers to a 
trust made after June 18, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with a modification that requires that the value of the 
charitable remainder with respect to any transfer to a 
qualified charitable remainder annuity trust or charitable 
remainder unitrust be at least 10 percent of the net fair 
market value of such property transferred in trust on the date 
of the contribution to the trust. The 10-percent test is 
measured on each transfer to the charitable remainder trust 
and, consequently, a charitable remainder trust which meets the 
10-percent test on the date of transfer will not subsequently 
fail to meet that test if interest rates have declined between 
the trust's creation and the death of a measuring life. 
Similarly, where a charitable remainder trust is created for 
the joint lives of two individuals with a remainder to charity, 
the trust will not cease to qualify as a charitable remainder 
trust because the value of the charitable remainder was less 
than 10 percent of the trust's assets at the first death of 
those two individuals. The conference agreement provides 
several additional rules in order to provide relief for trusts 
that do not meet the 10-percent rule.
      First, where a transfer is made after July 28, 1997, to a 
charitable remainder trust that fails the 10-percent test, the 
trust is treated as meeting the 10-percent requirement if the 
governing instrument of the trust is changed by reformation, 
amendment, construction, or otherwise to meet such requirement 
by reducing the payout rate or duration (or both) of any 
noncharitable beneficiary's interest to the extent necessary to 
satisfy such requirement so long as the reformation is 
commenced within the period permitted for reformations of 
charitable remainder trusts under section 2055(e)(3). The 
statute of limitations applicable to a deficiency of any tax 
resulting from reformation of the trust shall not expire before 
the date one year after the Treasury Department is notified 
that the trust has been reformed. In substance, this rule 
relaxes the requirements of section 2055(e)(3)(B) to the extent 
necessary for the reformation for the trust to meet the 10-
percent requirement.
      Second, a transfer to a trust will be treated as if the 
transfer never had been made where a court having jurisdiction 
over the trust subsequently declares the trust void (because, 
e.g., the application of the 10 percent rule frustrates the 
purposes for which the trust was created) and judicial 
proceedings to revoke the trust are commenced within the period 
permitted for reformations of charitable remainder trusts under 
section 2055(e)(3). Under this provision, the effect of 
``unwinding'' the trust is that any transactions made by the 
trust with respect to the property transferred (e.g., income 
earned on the assets transferred to the trust and capital gains 
generated by the sales of the property transferred) would be 
income and capital gain of the donor (or the donor's estate if 
the trust was testamentary), and the donor (or the donor's 
estate if the trust was testamentary) would not be permitted a 
charitable deduction with respect to the transfer. The statute 
of limitations applicable to a deficiency of any tax resulting 
from ``unwinding'' the trust shall not expire before the date 
one year after the Treasury Department is notified that the 
trust has been revoked.
      Third, where an additional contribution is made after 
July 28, 1997, to a charitable remainder unitrust created 
before July 29, 1997, and that unitrust would not meet the 10-
percent requirement with respect to the additional 
contribution, the conference agreement provides that such 
additional contribution will be treated, under regulations to 
be issued by the Secretary of the Treasury, as if it had been 
made to a new trust that does not meet the 10-percent 
requirement, but which does not affect the status of the 
original unitrust as a charitable remainder trust.
      The conferees intend that this provision of the 
conference agreement not limit or alter the validity of 
regulations proposed by the Treasury Department on April 18, 
1997, or the Treasury Department's authority to address abuses 
of the rules governing the taxation of charitable remainder 
trusts or their beneficiaries.
      Effective date.--The requirement that the payout rate not 
exceed 50 percent applies to transfers to a trust made after 
June 18, 1997.
      The requirement that the value of the charitable 
remainder with respect to any transfer to a qualified remainder 
trust be at least 10 percent of the fair market value of the 
assets transferred in trust applies to transfers to a trust 
made after July 28, 1997. However, the 10-percent requirement 
does not apply to a charitable remainder trust created by a 
testamentary instrument (e.g., a will or revocable trust) 
executed before July 29, 1997, if the instrument is not 
modified after that date and the settlor dies before January 1, 
1999, or could not be modified after July 28, 1997, because the 
settlor was under a mental disability on that date (i.e., July 
28, 1997) and all times thereafter.
14. Modify general business credit carryback and carryforward rules 
        (sec. 788(b) of the Senate amendment)

                              Present Law

      A qualified taxpayer is allowed to claim the 
rehabilitation credit, the energy credit, the reforestation 
credit, the work opportunity credit, the alcohol fuels credit, 
the research credit, the low-income housing credit, the 
enhanced oil recovery credit, the disabled access credit, the 
renewable electricity production credit, the empowerment zone 
employment credit, the Indian employment credit, the employer 
social security credit, and the orphan drug credit 
(collectively, known as the general business credit), subject 
to certain limitations based on tax liability for the year. 
Unused general business credits generally may be carried back 
three years and carried forward 15 years to offset tax 
liability of such years, subject to the same limitations.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment limits the carryback period for the 
general business credit to one year and extends the 
carryforward period to 20 years.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement includes the Senate amendment 
with a clarification that the provision is effective for 
credits arising in taxable years beginning after December 31, 
1997.
15. Using Federal case registry of child support orders for tax 
        enforcement purposes

                              Present Law

      The Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 mandated the creation of a Federal 
Case Registry of Child Support Orders (the FCR) by October 1, 
1998. Although HHS has not yet issued final regulations, the 
FCR is required to include the names, and the State case 
identification numbers of individuals who are owed or who owe 
child support or for whom paternity is being established. It 
may also include the social security numbers (SSNs) of these 
individuals.

                               House Bill

      No provision.

                            Senate Amendment

      No provision.

                          Conference Agreement

      Not later than October 1, 1999, the Secretary of the 
Treasury will have access to the Federal Case Registry of Child 
Support Orders. Also, by October 1, 1999, the data elements on 
the State Case Registry will include the SSNs of children 
covered by cases in the Registry, and the States will provide 
the SSNs of these children to the FCR.
      Effective date.-- The provision is effective on October 
1, 1999.
16. Expanded SSA records for tax enforcement

                              Present Law

      Under the Family Support Act of 1988, States must require 
each parent to furnish their social security number (SSN) for 
birth records. Parents can apply directly to the Social 
Security Administration (SSA) for an SSN for their child; or, 
in most states, they may apply for the child's SSN when 
obtaining a birth certificate. On an individual's SSN 
application, the SSA currently requires the mother's maiden 
name but not her SSN.

                               House Bill

      No provision.

                            Senate Amendment

      No provision.

                          Conference Agreement

      SSA is required to obtain social security numbers (SSNs) 
of both parents on minor children's applications for SSNs. The 
SSA will provide this information to the IRS as part of the 
Data Master File (``DM-1 file'). The conferees anticipate that 
the IRS will use the information to identify questionable 
claims for the earned income credit, the dependent exemption, 
and other tax benefits, before tax refunds are paid out.
      Effective date.--The provision is effective on the date 
of enactment.
17. Treatment of amounts received under the work requirements of the 
        Personal Responsibility and Work Opportunity Act of 1996

                              Present Law

Workfare payments
      Generally under the Personal Responsibility and Work 
Opportunity Act of 1996, the receipt of certain government 
assistance payments is denied unless the recipient meets 
certain work requirements. The tax treatment of payments 
received with respect to these work requirements (``workfare 
payments'') was not specified in that legislation.
Earned income credit
      Certain eligible low-income workers are entitled to claim 
a refundable earned income credit on their income tax return. 
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 generally determined by 
multiplying the credit rate by the individual's 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. For these purposes, both earned income and AGI are 
defined to include wages. There is no explicit provision 
whether workfare payments are wages for purposes of the earned 
income credit.

                               House Bill

      No provision.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement provides that workfare payments 
are not wages for purposes of the earned income credit. There 
is no inference intended with respect to whether workfare 
payments otherwise qualify as wages for purposes of income and 
employment taxes or as wages for purposes of an employer's 
eligibility for the work opportunity tax credit and the 
welfare-to-work tax credit. Also, there is no inference 
intended with respect to whether workfare payments are wages 
for purposes of the earned income credit before enactment of 
this provision.
      Effective date.--The provision is effective on the date 
of enactment.

                       XI. FOREIGN TAX PROVISIONS

                         A. General Provisions

1. Simplify foreign tax credit limitation for individuals (sec. 1103 of 
        the House bill and sec. 901 of the Senate amendment)

                              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.

                               House Bill

      The House 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. (It is intended 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Simplify translation of foreign taxes (sec. 1104 of the House bill 
        and sec. 902 of the Senate amendment)

                              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, which taxes 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 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.

                               House Bill

Translation of foreign taxes
            Translation of certain accrued foreign taxes
      With respect to taxpayers that take foreign income taxes 
into account when accrued, the House 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 House 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 House 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 House 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 House 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 House 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 House 
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 1,000 units 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill with 
one modification with respect to the treatment of accrued taxes 
that are paid more than two years after the close of the 
taxable year to which such taxes relate. In the case of the 
indirect foreign tax credit, any such taxes are taken into 
account for the taxable year in which paid, and are translated 
into U.S. dollar amounts using the exchange rates as of the 
time such taxes are paid. In the case of the direct foreign tax 
credit, as under the House bill, any such taxes are taken into 
account for the taxable year to which such taxes relate, but 
are translated into U.S. dollar amounts using the exchange 
rates in effect as of the time such taxes are paid.

                          Conference Agreement

      The conference agreement follows the Senate amendment 
with one modification. The conference agreement clarifies that 
the regulatory authority applicable in the case of indirect 
foreign tax credits allows, in lieu of a redetermination of 
taxes, appropriate adjustments to the pools of post-1986 
foreign income taxes and the pools of post-1986 undistributed 
earnings.
3. Election to use simplified foreign tax credit limitation for 
        alternative minimum tax purposes (sec. 1105 of the House bill 
        and sec. 903 of the Senate amendment)

                              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.

                               House Bill

      The House 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. 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, it is intended 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. It is intended 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
4. Simplify treatment of personal transactions in foreign currency 
        (sec. 1106 of the House bill and sec. 904 of the Senate 
        amendment)

                              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.

                               House Bill

      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 
House bill 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.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 1997.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment with one modification. The conference 
agreement clarifies that transactions entered into in 
connection with a business trip constitute personal 
transactions for purposes of this provision. Exchange gain 
resulting from such transactions is eligible for nonrecognition 
treatment under this provision.
5. Simplify foreign tax credit limitation for dividends from 10/50 
        companies (sec. 1107 of the House bill)

                              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.

                               House Bill

      Under the House bill, a single foreign tax credit 
limitation generally applies to dividends received by the 
taxpayer from all 10/50 companies. However, separate foreign 
tax creditlimitations 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 earnings 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement generally provides for look-
through treatment to apply in characterizing dividends from 10/
50 companies for foreign tax credit limitation purposes. Under 
the conference agreement, any dividend from a 10/50 company 
paid out of earnings and profits accumulated in a taxable year 
beginning after December 31, 2002 is treated as income in a 
foreign tax credit limitation category in proportion to the 
ratio of the earnings and profits attributable to income in 
such foreign tax credit limitation category to the total 
earnings and profits. 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.
      In the case of dividends from a 10/50 company paid out of 
earnings and profits accumulated in a taxable year beginning 
before January 1, 2003, the conference agreement provides that 
a single foreign tax credit limitation generally applies to all 
such dividends from all 10/50 companies. However, separate 
foreign tax credit limitations continue to apply to any such 
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.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2002.

    B. General Provisions Affecting Treatment of Controlled Foreign 
 Corporations (secs. 1111-1113 of the House bill and secs. 911-913 of 
                         the Senate amendment)

                              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.

                               House Bill

Lower-tier CFCs
            Characterization of gain on stock disposition
      Under the House 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 
House 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 House bill provision, 
is not excluded from foreign personal holding company income 
under the same-country exception that applies to actual 
dividends.
      Under the House 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 House bill 
makes clear that, for purposes of this rule, the CFC is treated 
as having sold or exchanged the stock.
      The House 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 House 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 House 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 House 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 House 
bill provision 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 House 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 House 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 House 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 House 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 House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

  C. Modification of Passive Foreign Investment Company Provisions to 
Eliminate Overlap with Subpart F, to Allow Mark-to-Market Election, and 
 to Require Measurement Based on Value for PFIC Asset Test (secs. 1121-
   1123 of the House bill and secs. 751-753 of the Senate amendment)

                              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. For purposes of applying the 
PFIC asset test, the assets of a CFC are required to be 
measured using adjusted basis; the assets of a foreign 
corporation that is not a CFC are measured using fair market 
value unless the corporation elects to use adjusted basis.
      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).

                               House Bill

Elimination of overlap between subpart F and the PFIC provisions
      In the case of a PFIC that is also a CFC, the House 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 beforebecoming 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 House 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 House 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 House 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 House 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 House 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 
the person 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 aPFIC 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 the House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment with one modification to the rules regarding 
the measurement of assets for purposes of applying the PFIC 
asset test. Under the conference agreement, if the stock of a 
foreign corporation is publicly traded for the taxable year, 
the PFIC asset test is applied using fair market value for 
purposes of measuring the PFIC's assets. For this purpose, the 
stock of a foreign corporation is treated as publicly traded if 
such stock is readily tradeable on a national securities 
exchange that is registered with the Securities and Exchange 
Commission, the national market system established pursuant to 
section 11A of the Securities and Exchange Act of 1934, or any 
other exchange or market that the Secretary of the Treasury 
determines has rules sufficient to ensure that the market price 
represents a sound fair market value. Because the PFIC asset 
test is applied based on quarterly measurements of the 
corporation's assets, it is intended that a corporation the 
stock of which is publicly traded on each such quarterly 
measurement date during the taxable year will be eligible for 
this asset measurement rule for such taxable year. In applying 
the PFIC asset test, it is intended that the total value of a 
publicly-traded foreign corporation's assets generally will be 
treated as equal to the sum of the aggregate value of its 
outstanding stock plus its liabilities.
      The conference agreement does not change the rules 
applicable to non-publicly-traded foreign corporations for 
purposes of the measurement of assets in applying the PFIC 
asset test. Accordingly, CFCs that are not publicly traded 
continue to be required to measure their assets using adjusted 
basis, and any other foreign corporations that are not publicly 
traded continue to measure their assets using fair market value 
unless they elect to use adjusted basis.

  D. Simplify Formation and Operation of International Joint Ventures 
 (secs. 1131, 1141-1145, and 1151 of the House bill and secs. 921, 931-
                 935, and 941 of the Senate amendment)

                              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.

                               House Bill

Transfers of foreign entities
      The House bill repeals the sections 1491-1494 excise tax 
and information reporting 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 House bill repeals the rule that treats as U.S. 
source income any deemed royalty arising under section 367(d). 
Under the House 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.
Information reporting
      The House 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 House 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 
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. The penalties 
for failure to report information with respect to a controlled 
foreign corporation are conformed with these penalties.
      Under the House 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. The penalties for failure 
to report information with respect to a foreign corporation are 
conformed with these penalties.
      Under the House 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 foreign partnerships. 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. 
Apenalty equal to 10 percent of the value of the property transferred 
applies to a failure to comply with these reporting requirements. 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 House 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 does 
not expire before the date that is three years after the date 
on which such information is provided.
Foreign or domestic partnership determination
      Under the House 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 
recharacterization 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.

                            Senate Amendment

      The Senate amendment generally follows the House bill 
with several modifications.
      Under the Senate amendment, gain recognition is required 
upon a transfer of appreciated property by a U.S. person to a 
foreign estate or trust, except as provided in regulations. 
This rule does not apply to a transfer to a trust to the extent 
that any person is treated as the owner of the trust under 
section 679.
      Under the Senate amendment, the penalty equal to 10 
percent of the value of the transferred property that applies 
to a failure to comply with the information reporting 
requirements with respect to a transfer of property to a 
foreign corporation or partnership may not exceed $100,000 
except in cases of intentional disregard for such reporting 
requirements.
      Under the Senate amendment, regulatory authority is 
granted to provide rules treating a partnership as a domestic 
or foreign partnership, where such treatment is more 
appropriate, without regard to where the partnership is created 
or organized. It is expected that a recharacterization of a 
partnership 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.

                          Conference Agreement

      The conference agreement generally follows the Senate 
amendment with modifications.
      The conference agreement clarifies that, for purposes of 
the requirement of gain recognition upon a transfer of 
appreciated property by a U.S. person to a foreign estate or 
trust, a U.S. trust that becomes a foreign trust is treated as 
having transferred all of its assets to a foreign trust.
      The conference agreement further clarifies that, in the 
case of a transfer by a U.S. person to a foreign corporation as 
paid-in surplus or as a contribution to capital in a 
transaction not otherwise described in section 367 (e.g., a 
capital contribution by a non-shareholder), regulatory 
authority is granted under section 367 to treat such transfer 
as a fair market value sale and to require gain recognition 
thereon.
      For purposes of the information reporting rules 
applicable to a U.S. partner that controls a foreign 
partnership, the conference agreement clarifies that a 
partner's interest in a partnership is determined with 
application of constructive ownership rules similar to those 
provided in section 267(c) (other than paragraph (3)).
      Finally, the conference agreement provides that 
regulations issued under the grant of regulatory authority to 
provide rules treating a partnership as a domestic or foreign 
partnership will apply only to partnerships created or 
organized after the date such regulations are filed with the 
Federal Register (or, if earlier, the date of a public notice 
substantially describing the expected contents of the 
regulations). Accordingly, regulations issued under this grant 
of regulatory authority will not be applied to reclassify pre-
existing partnerships. In connection with this regulatory 
authority, the conferees wish to make clear that it is intended 
that the general rule for classifying a partnership as domestic 
or foreign will continue to be the place where the partnership 
is created or organized (or the laws under which it is created 
or organized), and that the regulations are expected to provide 
a different classification result only in unusual cases. The 
conferees also expect that any regulations will avoid period-
by-period reclassifications of partnerships.

E. Modification of Reporting Threshold for Stock Ownership of a Foreign 
  Corporation (sec. 1146 of the House bill and sec. 936 of the Senate 
                               amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

               F. Other Foreign Simplification Provisions

1. Transition rule for certain trusts (sec. 1161 of the House bill and 
        sec. 951 of the Senate amendment)

                              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.

                               House Bill

      Under the House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Simplify stock and securities trading safe harbor (sec. 1162 of the 
        House bill and sec. 952 of the Senate amendment)

                              Present Law

      A nonresident 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 that 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) (ii) and (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.

                               House Bill

      The House 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 accounts 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Clarification of determination of foreign taxes deemed paid (sec. 
        1178(a) of the House bill and sec. 953(a) of the Senate 
        amendment)

                              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).

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
4. Clarification of foreign tax credit limitation for financial 
        services income (sec. 1178(b) of the House bill and sec. 953(b) 
        of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

                      G. Other Foreign Provisions

1. Eligibility of licenses of computer software for foreign sales 
        corporation benefits (sec. 1101 of the House bill and sec. 741 
        of the Senate amendment)

                              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 a FSC that is attributable to foreign trading gross 
receipts. The term ``foreign trading gross receipts'' includes 
the gross receipts of a 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 a FSC; 
(2) which is held primarily for sale, lease, or rental in the 
ordinary conduct of a trade or business by or to a 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)).

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
a modification to the effective date.
      Effective date.--The provision 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.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
2. Increase dollar limitation on section 911 exclusion (sec. 1102 of 
        the House bill)

                              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 of the credit that is attributable to excluded income.

                               House Bill

      Under the House 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. The $80,000 
limitation on the exclusion for foreign earned income 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
3. Treatment of certain securities positions under the subpart F 
        investment in U.S. property rules (sec. 743 of the Senate 
        amendment)

                              Present Law

      Under the rules of subpart F (secs. 951-964), the U.S. 
10-percent shareholders of a controlled foreign corporation 
(CFC) are required to include in income currently for U.S. tax 
purposes certain earnings of the CFC, whether or not such 
earnings are distributed currently to the shareholders. The 
U.S. 10-percent shareholders of a CFC are subject to current 
U.S. tax on their shares of certain income earned by the CFC 
(referred to as ``subpart F income'). The U.S. 10-percent 
shareholders also are subject to current U.S. tax on their 
shares of the CFC's earnings to the extent invested by the CFC 
in certain U.S. property.
      A shareholder's current income inclusion with respect to 
a CFC's investment in U.S. property for a taxable year is based 
on the CFC's average investment in U.S. property for such year. 
For this purpose, the U.S. property held by the CFC must be 
measured as of the close of each quarter in the taxable year. 
U.S. property generally is defined to include tangible property 
located in the United States, stock of a U.S. corporation, 
obligations of a U.S. person, and the right to use certain 
intellectual property in the United States. Exceptions are 
provided for, among other things, obligations of the United 
States, U.S. bank deposits, certain trade or business 
obligations, and stock or debts of certain unrelated U.S. 
corporations.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides two additional exceptions 
from the definition of U.S. property for purposes of the 
subpart F rules. Both exceptions relate to transactions entered 
into by a securities or commodities dealer in the ordinary 
course of its business as a securities or commodities dealer.
      The first exception covers the deposit of collateral or 
margin by a securities or commodities dealer, or the receipt of 
such a deposit by a securities or commodities dealer, if such 
deposit is made or received on commercial terms in the ordinary 
course of the dealer's business as a securities or commodities 
dealer. This exception applies to deposits of margin or 
collateral for securities loans, notional principal contracts, 
options contracts, forward contracts, futures contracts, and 
any other financial transaction with respect to which the 
Secretary of the Treasury determines that the posting of 
collateral or margin is customary.
      The second exception covers repurchase agreement 
transactions and reverse repurchase agreement transactions 
entered into by or with a securities or commodities dealer in 
the ordinary course of its business as a securities or 
commodities dealer. The exception applies only to the extent 
that the obligation under the transaction does not exceed the 
fair market value of readily marketable securities transferred 
or otherwise posted as collateral.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
1997, and taxable years of U.S. shareholders with or within 
which such taxable years of foreign corporations end.

                          Conference Agreement

      The conference agreement generally follows the Senate 
amendment. Under the conference agreement, for purposes of 
these two additional exceptions under section 956, the term 
``dealer in commodities'' means futures commission merchants 
and dealers in commodities within the meaning of the new 
definition that is added to section 475 by the conference 
agreement. In addition, the conferees wish to clarify that the 
addition of these two exceptions under section 956 is not 
intended to create any inference regarding the treatment of an 
obligation of a U.S. person to return stock that is borrowed 
pursuant to a securities loan.
4. Exception from foreign personal holding company income under subpart 
        F for active financing income (sec. 744 of the Senate 
        amendment)

                              Present Law

      Under the subpart F rules, certain U.S. shareholders of a 
controlled foreign corporation (``CFC'') are subject to U.S. 
tax currently on certain income earned by the CFC, whether or 
notsuch 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'' and insurance 
income. The U.S. 10-percent shareholders of a CFC also are subject to 
current inclusion with respect to their shares of the CFC's foreign 
base company services income (i.e., income derived from services 
performed for a related person outside the country in which the CFC is 
organized).
      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 preceding 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.
      Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization and related person insurance 
income. Subpart F insurance income also includes income 
attributable to an insurance contract in connection with risks 
located within the CFC's country of organization, as the result 
of an arrangement under which another corporation receives a 
substantially equal amount of consideration for insurance of 
other-country risks. Investment income of a CFC that is 
allocable to any insurance or annuity contract related to risks 
located outside the CFC's country of organization is taxable as 
subpart F insurance income (Prop. Treas. reg. sec. 1.953-1(a)). 
Investment income allocable to risks located within the CFC's 
country of organization generally is taxable as foreign 
personal holding company income.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides a temporary exception from 
foreign personal holding company income for subpart F purposes 
for certain income that is derived in the active conduct of an 
insurance, banking, financing or similar business. Such 
exception is applicable only for taxable years beginning in 
1998.
      Under the Senate amendment, foreign personal holding 
company income does not include income that is derived in or 
incident to the active conduct of a banking, financing or 
similar business by a CFC that is predominantly engaged in the 
active conduct of such business. For this purpose, income 
derived in the active conduct of a banking, financing, or 
similar business generally is determined under the principles 
applicable in determining financial services income for foreign 
tax credit limitation purposes. Moreover, the Secretary of the 
Treasury shall prescribe regulations applying look-through 
treatment in characterizing for this purpose dividends, 
interest, income equivalent to interest, rents, and royalties 
from related persons. A CFC is considered to be predominantly 
engaged in the active conduct of a banking, financing, or 
similar business if (1) more than 70 percent of its gross 
income is derived from transactions with unrelated persons and 
more than 20 percent of its gross income from that business is 
derived from transactions with unrelated persons located within 
the country in which the CFC is organized or incorporated, or 
(2) the CFC is predominantly engaged in the active conduct of a 
banking or securities business, or is a qualified bank or 
securities affiliate, as defined for purposes of the passive 
foreign investment company provisions.
      Under the Senate amendment, foreign personal holding 
company income also does not include certain investment income 
of a qualifying insurance company with respect to risks located 
within the CFC's country of organization. These exceptions 
apply to income derived from investments of assets equal to the 
total of (1) unearned premiums and reserves ordinary and 
necessary for the proper conduct of the CFC's insurance 
business, (2) one-third of premiums earned during the taxable 
year on insurance contracts regulated in the country in which 
sold as property, casualty, or health insurance contracts, and 
(3) the greater of $10 million or 10 percent of reserves for 
insurance contracts regulated in the country in which sold as 
life insurance or annuity contracts. For this purpose, a 
qualifying insurance company is an entity that is subject to 
regulation as an insurance company under the laws of its 
country of incorporation and that realizes at least 50 percent 
of its gross income (other than income from investments) from 
premiums related to risks located within such country. These 
exceptions for insurance investment income do not apply to 
investment income which is received by the CFC from a related 
person. Similarly, the exceptions do not apply to investment 
income that is attributable directly or indirectly to the 
insurance or reinsurance of risks of related persons. The 
Senate amendment does not change the rule of present law that 
investment income of a CFC that is attributable to the issuing 
or reinsuring of any insurance or annuity contract related to 
risks outside of its country of organization is taxable as 
Subpart F insurance income.
      The Senate amendment also provides an exception from 
foreign base company services income for income derived from 
services performed in connection with the active conduct of a 
banking, financing, insurance or similar business by a CFC that 
is predominantly engaged in the active conduct of such 
business.
      Effective date.--The provision applies only to taxable 
years of foreign corporations beginning in 1998, and to taxable 
years of United States shareholders with or within which such 
taxable years of foreign corporations end.

                          Conference Agreement

      The conference agreement generally follows the Senate 
amendment with modifications.
      Under the conference agreement, the temporary exception 
from foreign personal holding company income applies to income 
that is derived in the active conduct of a banking, financing 
or similar business by a CFC that is predominantly engaged in 
the active conduct of such business. For this purpose, income 
derived in the active conduct of a banking, financing, 
orsimilar business generally is determined under the principles 
applicable in determining financial services income for foreign tax 
credit limitation purposes. However, in the case of a corporation that 
is engaged in the active conduct of a banking or securities business, 
the income that is eligible for this exception is determined under the 
principles applicable in determining the income which is treated as 
nonpassive income for purposes of the passive foreign investment 
company provisions. The conferees generally intend that the income of a 
corporation engaged in the active conduct of a banking or securities 
business that is eligible for this exception is the income that is 
treated as nonpassive under the regulations proposed under section 
1296(b). See Prop. Treas. Reg. secs. 1.1296-4 and 1.1296-6. In this 
regard, the conferees intend that eligible income will include income 
or gains with respect to foreclosed property which is incident to the 
active conduct of a banking business.
      For purposes of the temporary exception, a corporation is 
considered to be predominantly engaged in the active conduct of 
a banking, financing, or similar business if it is engaged in 
the active conduct of a banking or securities business or is a 
qualified bank affiliate or qualified securities affiliate. In 
this regard, the conferees intend that a corporation will be 
considered to be engaged in the active conduct of a banking or 
securities business if the corporation would be treated as so 
engaged under the regulations proposed under section 1296(b); 
the conferees further intend that qualified bank affiliates and 
qualified securities affiliates will be as determined under 
such proposed regulations. See Prop. Treas. Reg. secs. 1.1296-4 
and 1.1296-6.
      Alternatively, a corporation is considered to be engaged 
in the active conduct of a banking, financing or similar 
business if more than 70 percent of its gross income is derived 
from such business from transactions with unrelated persons 
located within the country under the laws of which the 
corporation is created or organized. For this purpose, income 
derived by a qualified business unit of a corporation from 
transactions with unrelated persons located in the country in 
which the qualified business unit maintains its principal 
office and conducts substantial business activity is treated as 
derived by the corporation from transactions with unrelated 
persons located within the country in which the corporation is 
created or organized. A person other than a natural person is 
considered to be located within the country in which it 
maintains an office through which it engages in a trade or 
business and by which the transaction is effected. A natural 
person is treated as located within the country in which such 
person is physically located when such person enters into the 
transaction.
      The conference agreement provides a temporary exception 
from foreign personal holding company income for certain 
investment income of a qualifying insurance company with 
respect to risks located within the CFC's country of creation 
or organization. The rules of this provision of the conference 
agreement differ from the rules of present-law section 953 of 
the Code, which determines the subpart F inclusions of a U.S. 
shareholder relating to insurance income of a CFC. Such 
insurance income under section 953 generally is computed in 
accordance with the rules of subchapter L of the Code. The 
conferees believe that review of the rules of this provision 
would be appropriate when final guidance under section 953 is 
published by the Treasury Department.
      The conference agreement provides a temporary exception 
for income (received from a person other than a related person) 
from investments made by a qualifying insurance company of its 
reserves or 80 percent of its unearned premiums (as defined for 
purposes of the provision). For this purpose, in the case of 
contracts regulated in the country in which sold as property, 
casualty, or health insurance contracts, unearned premiums and 
reserves mean unearned premiums and reserves for losses 
incurred determined using the methods and interest rates that 
would be used if the qualifying insurance company were subject 
to tax under subchapter L of the Code. Thus, for this purpose, 
unearned premiums are determined in accordance with section 
832(b)(4), and reserves for losses incurred are determined in 
accordance with section 832(b)(5) and 846 of the Code (as well 
as any other rules applicable to a U.S. property and casualty 
insurance company with respect to such amounts).
      In the case of a contract regulated in the country in 
which sold as a life insurance or annuity contract, the 
following three alternative rules for determining reserves are 
provided under the conference agreement. It is intended that 
any one of the three rules may be elected with respect to a 
particular line of business.
      First, reserves for such contracts may be determined 
generally under the rules applicable to domestic life insurance 
companies under subchapter L of the Code, using the methods 
there specified, but substituting for the interest rates in 
Code section 807(d)(2)(B) an interest rate determined for the 
country in which the qualifying insurance company was created 
or organized, calculated in the same manner as the mid-term 
applicable Federal interest rate (``AFR'') (within the meaning 
of section 1274(d)).
      Second, the reserves for such contracts may be determined 
generally using a preliminary term foreign reserve method, 
except that the interest rate to be used is the interest rate 
determined for the country in which the qualifying insurance 
company was created or organized, calculated in the same manner 
as the mid-term AFR. If a qualifying insurance company uses 
such a preliminary term method with respect to contracts 
insuring risks located in the country in which the company is 
created or organized, then such method is the method that 
applies for purposes of this election.
      Third, reserves for such contracts may be determined to 
be equal to the net surrender value of the contract (as defined 
in section 807(e)(1)(A)).
      In no event may the reserve for any contract at any time 
exceed the foreign statement reserve for the contract, reduced 
by any catastrophe or deficiency reserve. This rule applies 
whether the contract is regulated as a property, casualty, 
health, life insurance, annuity, or any other type of contract.
      The conference agreement also provides a temporary 
exception for income from investment of assets equal to (1) 
one-third of premiums earned during the taxable year on 
insurance contracts regulated in the country in which sold as 
property, casualty, or health insurance contracts, and (2) the 
greater of 10 percent of reserves, or, in the case of a 
qualifying insurance company that is a startup company, $10 
million. For this purpose, a startup companyis a company 
(including any predecessor) that has not been engaged in the active 
conduct of an insurance business for more than 5 years. It is intended 
that the 5-year period commences when the foreign company first is 
engaged in the active conduct of an insurance business. If the foreign 
company was formed before being acquired by the U.S. shareholder, the 
5-year period commences when the acquired company first was engaged in 
the active conduct of an insurance business. The conferees intend that 
in the event of the acquisition of a book of business from another 
company through an assumption or indemnity reinsurance transaction, the 
period commences when the acquiring company first engaged in the active 
conduct of an insurance business, except that if more than a 
substantial part (e.g., 80 percent) of the business of the ceding 
company is acquired, then the 5-year period commences when the ceding 
company first engaged in the active conduct of an insurance business. 
In addition, it is not intended that reinsurance transactions among 
related persons be used to multiply the number of 5-year periods.
      To prevent the shifting of relatively high-yielding 
assets to generate investment income that qualifies under this 
temporary exception, the conference agreement provides that, 
under rules prescribed by the Secretary, income is allocated to 
contracts as follows. In the case of contracts that are 
separate-account-type contracts (including variable contracts 
not meeting the requirements of section 817), only the income 
specifically allocable to such contracts is taken into account. 
In the case of other contracts, income not specifically 
allocable is allocated ratably among such contracts.
      The conference agreement modifies the definition of a 
qualifying insurance company. Under the conference agreement, a 
qualifying insurance company means any entity which: (1) is 
regulated as an insurance company under the laws of the country 
in which it is incorporated; (2) derives at least 50 percent of 
its net written premiums from the insurance or reinsurance of 
risks situated within its country of incorporation; and (3) is 
engaged in the active conduct of an insurance business and 
would be subject to tax under subchapter L if it were a 
domestic corporation.
      The conference agreement clarifies that this provision 
does not apply to investment income (includable in the income 
of a U.S. shareholder of a CFC pursuant to section 953) 
allocable to contracts that insure related party risks or risks 
located in a country other than the country in which the 
qualifying insurance company is created or organized.
      Finally, the conference agreement provides an anti-abuse 
rule applicable for purposes of these temporary exceptions from 
foreign personal holding company income. For purposes of 
applying these exceptions, items with respect to a transaction 
or series of transactions shall be disregarded if one of the 
principal purposes of the transaction or transactions is to 
qualify income or gain for these exceptions, including any 
change in the method of computing reserves or any other 
transaction or transactions one of the principal purposes of 
which is the acceleration or deferral of any item in order to 
claim the benefits of these exceptions.
      The conferees recognize that insurance, banking, 
financing, and similar businesses are businesses the active 
conduct of which involves the generation of income, such as 
interest anddividends, of a type that generally is treated as 
passive for purposes of subpart F. For purposes of this temporary 
provision, the conferees intend to delineate the income derived in the 
active conduct of such businesses, while retaining the present-law 
anti-deferral rules of subpart F with respect to income not derived in 
the active conduct of these financial services businesses. However, the 
conferees recognize that the line between income derived in the active 
conduct of such businesses and income otherwise derived by entities so 
engaged can be difficult to draw. The conferees believe that the issues 
of the determination of income derived in the active conduct of such 
businesses and the potential mobility of the business activity and 
income recognition of insurance, banking, financing, and similar 
businesses require further study. In the event that it becomes 
necessary to consider a possible extension of the provision in the 
future, the conferees would invite the comments of taxpayers and the 
Treasury Department regarding these issues.

  5. Treat service income of nonresident alien individuals earned on 
foreign ships as foreign source income and disregard the U.S. presence 
         of such individuals (sec. 745 of the Senate amendment)

                              Present Law

      Nonresident alien individuals generally are subject to 
U.S. taxation and withholding on their U.S. source income. 
Compensation for labor and personal services performed within 
the United States is considered U.S. source unless such income 
qualifies for a de minimis exception. To qualify for the 
exception, the compensation paid to a nonresident alien 
individual must not exceed $3,000, the compensation must 
reflect services performed on behalf of a foreign employer, and 
the individual must be present in the United Sates for not more 
than 90 days during the taxable year. Special rules apply to 
exclude certain items from the gross income of a nonresident 
alien. An exclusion applies to gross income derived by a 
nonresident alien individual from the international operation 
of a ship if the country in which such individual is resident 
provides a reciprocal exemption for U.S. residents. However, 
this exclusion does not apply to income from personal services 
performed by an individual crew member on board a ship. 
Consequently, wages exceeding $3,000 in a taxable year that are 
earned by nonresident alien individual crew members of a 
foreign ship while the vessel is within U.S. territory are 
subject to income taxation by the United States.
      U.S. residents are subject to U.S. tax on their worldwide 
income. In general, a non-U.S. citizen is considered to be a 
resident of the United States if the individual (1) has entered 
the United States as a lawful permanent U.S. resident or (2) is 
present in the United States for 31 or more days during the 
current calendar year and has been present in the United States 
for a substantial period of time--183 or more days--during a 
three-year period computed by weighting toward the present year 
(the ``substantial presence test''). An individual generally is 
treated as present in the United States on any day if such 
individual is physically present in the United States at any 
time during the day. Certain categories of individuals (e.g., 
foreign government employees and certain students) are not 
treated as U.S. residents even if they are present in the 
United States for the requisite period of time. Crew members of 
a foreign vessel who are on board the vessel while it is 
stationed within U.S. territorial waters are treated as present 
in the United States.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment treats gross income of a nonresident 
alien individual, who is present in the United States as a 
member of the regular crew of a foreign vessel, from the 
performance of personal services in connection with the 
international operation of a ship as income from foreign 
sources. Thus, such income is exempt from U.S. income and 
withholding tax. However, such persons are not excluded for 
purposes of applying the minimum participation standards of 
section 410 to a plan of the employer. In addition, for 
purposes of determining whether an individual is a U.S. 
resident under the substantial presence test, the Senate 
amendment provides that the days that such individual is 
present as a member of the regular crew of a foreign vessel are 
disregarded.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement generally follows the Senate 
amendment with modifications. The conference agreement provides 
that the treatment of income of a nonresident alien crew member 
of a foreign vessel as foreign source income will not apply for 
purposes of the pension rules and certain employee benefit 
provisions. The conference agreement further provides that, for 
purposes of determining whether an individual is a U.S. 
resident under the substantial presence test, any day that such 
individual is present as a member of the regular crew of a 
foreign vessel is disregarded only if the individual does not 
otherwise engage in trade or business within the United States 
on such day.

 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 House bill and sec. 1001 of 
                         the Senate amendment)

                              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)).
---------------------------------------------------------------------------
    \2\  Projected to be $700 for 1998.
    \3\  Projected to be $700 for 1998.
---------------------------------------------------------------------------
      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)).

                               House Bill

      Standard deduction of dependents.--The House 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.
---------------------------------------------------------------------------
    \4\  Projected to be $700 for 1998.
---------------------------------------------------------------------------
      Alternative minimum tax exemption for children under age 
14.--The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Increase de minimis threshold for estimated tax to $1,000 for 
        individuals (sec. 1202 of the House bill and sec. 1002 of the 
        Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Optional methods for computing SECA tax combined (sec. 1203 of the 
        House bill)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
4. Treatment of certain reimbursed expenses of rural letter carriers' 
        vehicles (sec. 1204 of the House bill and sec. 1003 of the 
        Senate amendment)

                              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.

                               House Bill

      The House bill repeals the special rate for Postal 
Service employees of 150 percent of the standard mileage rate. 
In its place, the House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
5. Travel expenses of Federal employees participating in a Federal 
        criminal investigation (sec. 1205 of the House bill and sec. 
        1004 of the Senate amendment)

                              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.

                               House Bill

      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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
6. Payment of taxes by commercially acceptable means (sec. 1206 of the 
        House bill)

                              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).

                               House Bill

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 House 
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 House 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 tax liability, 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 House bill excludes credit card, debit card, and 
charge card issuers and processing mechanisms from the 
resolution (such as through the ``billing error'' resolution 
process) 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 House 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 House 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 House bill generally provides an exception to 
creditor status for the IRS.
Privacy protections
      The House 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 House 
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, theIRS 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 ``billing dispute'' 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 
House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, except 
that the requirement that a separate appropriation be made for 
payment by the IRS of credit card fees is deleted, and a 
prohibition on the payment by the IRS of any fee or the 
provision of any other consideration is added.

             B. Provisions Relating to Businesses Generally

1. Modifications to look-back method for long-term contracts (sec. 1211 
        of the House bill, and sec. 1011 of the Senate amendment)

                              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.
---------------------------------------------------------------------------

                               House Bill

Election not to apply the look-back method for de minimis amounts
      The House bill 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.
      The House bill also 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).
      Further, the House bill 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Minimum tax treatment of certain property and casualty insurance 
        companies (sec. 1212 of the House bill and sec. 1012 of the 
        Senate amendment)

                              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).

                               House Bill

      The House 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.--Taxable years beginning after December 
31, 1997.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Treatment of construction allowances provided to lessees (sec. 961 
        of the House bill and sec. 1014 of the Senate amendment)

                              Present Law

      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''). In general, incentive payments are includible in 
income as accessions to wealth. 6 A coordinated 
issue paper issued by the Internal Revenue Service (``IRS'') on 
October 7, 1996, states the IRS position that construction 
allowances should generally be included in income in the year 
received. However, the paper does recognize 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 that includes an examination of several factors.
---------------------------------------------------------------------------
    \6\ 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). 
However, see, e.g., Federated Department Stores v. Comm., 51 T.C. 500 
(1968) aff'd 426 F. 2d 417 (6th Cir. 1970) and The May Department 
Stores Co. v. Comm., 33 TCM 1128 (1974), aff'd 519 F. 2d 1154 (8th Cir. 
1975) with respect to the application of section 118 to certain 
payments.
---------------------------------------------------------------------------

                               House Bill

      The House bill provides that the gross income of a lessee 
does not include amountsreceived 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.
      The House bill provides that the lessor must treat the 
amounts expended on the construction allowance as 
nonresidential real property owned by the lessor.
      The House bill contains reporting requirements to ensure 
that both the lessor and lessee treat such amounts in 
accordance with the provision. 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 provision.
      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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement generally follows the House bill 
and the Senate amendment, with a clarification of the 
coordination of the provision and present-law rule that allows 
lessors to take losses with respect to certain leasehold 
improvements abandoned at the end of the term of the lease 
(sec. 168(i)(8)). In addition, the conferees wish to emphasize 
that no inference is intended as to the treatment of amounts 
that are not subject to the provision, and that the provisions 
of the IRS issue paper and present law (including case law) 
will continue to apply where applicable.

                C. Partnership Simplification Provisions

1. General provisions
            a. Simplified flow-through for electing large partnerships 
                    (sec. 1221 of the House bill and sec. 1021 of the 
                    Senate amendment)

                              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 
adjustedgross 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 not so 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) 7. 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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    \7\ 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.
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      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 inwhich 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).

                               House Bill

In general
      The House 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. 8 Separate treatment may be 
appropriate, for example, should changes in the law necessitate 
such treatment for any items.
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    \8\ 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.
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      Under the House 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. 9 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.
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    \9\ 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 House 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. 10 Such net capital gain or loss is treated as 
long-term capital gain or loss.
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    \10\ 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.
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      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 House 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; 
11 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.
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    \11\ 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 2-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 House 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. 12 In addition, the 
credit for producing fuel from a nonconventional source is 
separately reported.
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    \12\ 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 House 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 House bill, the transfer of an interest in an 
electing large partnership does not trigger recapture.
Foreign taxes
      The House 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 House 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 House 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 House 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 House 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 House 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 House 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 House 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 House 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 House 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 House 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 House 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 House 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 
House 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 
House 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 House bill.
      Consistent with the general reporting regime for electing 
large partnerships, the House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            b. Simplified audit procedures for electing large 
                    partnerships (sec. 1222 of the House bill and sec. 
                    1022 of the Senate amendment)

                              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.

                               House Bill

      The House 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'' is 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; currently, the top individual rate of 
39.6 percent). 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 House 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 courtwith 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 
the filing 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, with technical modifications.
            c. Due date for furnishing information to partners of 
                    electing large partnerships (sec. 1223 of the House 
                    bill and sec. 1023 of the Senate amendment)

                              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.

                               House Bill

      The House 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 House bill 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            d. Partnership returns required on magnetic media (sec. 
                    1224 of the House bill and sec. 1024 of the Senate 
                    amendment)

                              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 
InternalRevenue Service on magnetic media.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            e. Treatment of partnership items of individual retirement 
                    arrangements (sec. 1225 of the House bill and sec. 
                    1025 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Other partnership audit rules
            a. Treatment of partnership items in deficiency proceedings 
                    (sec. 1231 of the House bill and sec. 1031 of the 
                    Senate amendment)

                              Present Law

      Partnership proceedings under rules enacted in TEFRA 
13 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.
---------------------------------------------------------------------------
    \13\ 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.

                               House Bill

      The House bill overrules Munro and allows 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 House 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 House 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 are 
controlling.
      Effective date.--The provision is effective for 
partnership taxable years ending after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            b. Partnership return to be determinative of audit 
                    procedures to be followed (sec. 1232 of the House 
                    bill and sec. 1032 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

    The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            c. Provisions relating to statute of limitations
            i. Suspend statute when an untimely petition is filed (sec. 
                    1233(a) of the House bill and sec. 1033(a) of the 
                    Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            ii. Suspend statute of limitations during bankruptcy 
                    proceedings (sec. 1233(b) of the House bill and 
                    sec. 1033(b) of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            iii. Extend statute of limitations for bankrupt TMPs (sec. 
                    1233(c) of the House bill and sec. 1033(c) of the 
                    Senate amendment)

                              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(1)(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 that at 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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            d. Expansion of small partnership exception (sec. 1234 of 
                    the House bill and sec. 1034 of the Senate 
                    amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            e. Exclusion of partial settlements from 1-year limitation 
                    on assessment (sec. 1235 of the House bill and sec. 
                    1035 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            f. Extension of time for filing a request for 
                    administrative adjustment (sec. 1236 of the House 
                    bill and sec. 1036 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            g. Availability of innocent spouse relief in context of 
                    partnership proceedings (sec. 1237 of the House 
                    bill and sec. 1037 of the Senate amendment)

                              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.

                               House Bill

      The House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            h. Determination of penalties at partnership level (sec. 
                    1238 of the House bill and sec. 1038 of the Senate 
                    amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, with technical modifications.
            i. Provisions relating to Tax Court jurisdiction (sec. 1239 
                    of the House bill and sec. 1039 of the Senate 
                    amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, with technical modifications.
            j. Treatment of premature petitions filed by notice 
                    partners or 5-percent groups (sec. 1240 of the 
                    House bill and sec. 1040 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            k. Bonds in case of appeals from certain proceedings (sec. 
                    1241 of the House bill and sec. 1041 of the Senate 
                    amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            l. Suspension of interest where delay in computational 
                    adjustment resulting from certain settlements (sec. 
                    1242 of the House bill and sec. 1042 of the Senate 
                    amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
            m. Special rules for administrative adjustment requests 
                    with respect to bad debts or worthless securities 
                    (sec. 1243 of the House bill and sec. 1043 of the 
                    Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Closing of partnership taxable year with respect to deceased partner 
        (sec. 1246 of the House bill and sec. 1046 of the Senate 
        amendment)

                              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).

                               House Bill

      The House 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 provision 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.--Partnership taxable years beginning 
after December 31, 1997.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

  D. Modifications of Rules for Real Estate Investment Trusts (secs. 
     1251-1263 of the House bill and secs. 1051-1063 of the Senate 
                               amendment)

                              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 receivecapital gain dividends treat the amount 
of such dividends as long-term capital gain regardless of the holding 
period of their 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 or fewer 
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. Treasury regulations require that the 
entity request information from certain shareholders regarding 
shares directly or indirectly owned by them.
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 gainfrom 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 from real property
      For purposes of the income requirements, rents from real 
property generally include: (1) rents from interests in real 
property; (2) charges for services customarily rendered or 
furnished in connection with the rental of real property, 
whether or not such charges are separately stated; and (3) 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)).
            Exclusion of rents from related tenants
      Amounts are not treated as qualified rent if they are 
received from corporate or noncorporate tenants in which the 
REIT, directly or indirectly, has an ownership interest of 10 
percent or more (sec. 856(d)(2)(B)).
            Exclusion of rents where services to tenants are performed 
                    by related contractors
      Where a REIT furnishes or renders services to the 
tenants, 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 (sec. 856(d)(3)(A)), 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)(B)).
            Constructive ownership rules involving corporations
      For purposes of determining the REIT's ownership interest 
in a tenant and whether a contractor is independent, 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)). Thus, 
under section 318(a)(2)(C) (as so modified), if 10 or more 
percent of a REIT or other corporation is owned, directly or 
indirectly, by or for a person, that person is treated as 
owning that person's proportionate share of any stock owned 
directly or indirectly by that corporation.
            Constructive ownership rules involving partnerships
      Under section 318, stock owned, directly or indirectly, 
by or for a partnership is considered owned proportionately by 
its partners (sec. 318(a)(2)(A)). In addition, stock owned, 
directly or indirectly, by or for a partner is considered owned 
by the partnership (sec. 318(a)(3)(A)). However, stock 
constructively owned by a partnership is not considered as 
owned for purposes of being constructively owned by partners 
(sec. 318(a)(5)(C)). The following examples illustrate the 
application of these provisions for purposes of the related 
tenant and independent contractor rules.
            Constructive ownership of tenant
      If a REIT owns a 10 percent or greater interest in a 
person that is a tenant of the REIT, rents paid by that person 
to the REIT are not qualifying rents to the REIT (sec. 
856(d)(2)(B)). Example #1.--If 10 percent or more of a REIT's 
shares are owned by a partnership and a partner owning a one-
percent interest in that partnership also owns a 10-percent or 
greater interest in a person that is a tenant of the REIT, 
rents paid by the tenant to the REIT are not qualifying rents 
to the REIT; the 10-percent or greater interest in the tenant 
is considered owned by the partnership (sec. 318(a)(3)(A)) and 
in turn by the REIT (secs. 318(a)(3)(C) and 856(d)(5)). Example 
#2.--If a REIT owns a 30-percent interest in a partnership that 
in turn owns a 40-percent interest in a person that is a tenant 
of the REIT, rents paid by that person to the REIT are not 
qualifying rents to the REIT because the REIT is considered to 
own more than 10 percent of the tenant (sec. 318(a)(2)(A)). 
Example #3.--If 10 percent or more of a REIT's shares are owned 
by persons who are 50-percent partners in a partnership whose 
other partners own the entirety of the interests in a tenant of 
the REIT, none of the interests in the tenant are considered 
owned by the partners who own interests in the REIT (sec. 
318(a)(5)(C)).
            Constructive ownership of contractor
      If a person providing services to tenants of the REIT 
owns a greater-than-35-percent interest in the REIT, or if 
another person owns a greater-than-35-percent interest in both 
the REIT and a person providing services, amounts received or 
accrued by the REIT with respect to the property are not 
qualifying rents because the service provider does not qualify 
as an independent contractor (sec. 856(d)(3)). Example #4.--If 
more than 35 percent of a REIT's shares are owned by a 
partnership and a partner owning a one-percent interest in that 
partnership also owns a greater-than-35-percent interest in a 
contractor, that person will not be considered an independent 
contractor because the partnership owns more than 35 percent of 
the REIT's sharesand will also be considered to own a greater-
than-35-percent interest in the contractor (sec. 318(a)(3)A)). Example 
#5.--If more than 35 percent of a REIT's shares are owned by a person 
who owns a one-percent interest in a partnership and another one-
percent partner in that partnership owns more than 35 percent of the 
interests in a contractor, the independent contractor definition will 
not be met because the partnership will be considered to own more than 
35 percent interests in both the REIT and the contractor (sec. 318 
(a)(3)(A)).
            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 
a specified 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. Excess noncash items include (1) 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.

                               House Bill

Overview
      The House 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.
Alternative penalty for failure to make requests of shareholders (sec. 
        1251 of the House bill)
      The House 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 is $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 House bill)
      The House 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 
        House bill)
      The House bill modifies the application the rule 
attributing ownership from partners to partnerships (sec. 
318(a)(3)(A)) for purposes of defining non-qualifying rent from 
related persons (sec. 856(d)(2)), so that attribution occurs 
only when a partner owns directly or indirectly a 25-percent or 
greater interest in the partnership. Thus, a REIT and a tenant 
will not be treated as related (and, therefore, rents paid by 
the tenant to the REIT will not be treated as non-qualifying 
rents) if the REIT's shares are owned by a partnership and a 
partner owning a directly and indirectly less-than-25-percent 
interest in that partnership also owns an interest in the 
tenant. The related tenant rule (sec. 856(d)(2)(B)) also will 
not be violated where owners of the REIT and owners of the 
tenant are partners in a partnership and either the owners of 
the REIT or the owners of the tenant are directly and 
indirectly less-than-25-percent partners in the partnership.
Credit for tax paid by REIT on retained capital gains (sec. 1254 of the 
        House bill)
      The House 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 House 
        bill)
      The House 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 House 
        bill)
      The House 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. 
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 House bill)
      The House 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. 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 House 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 House bill)
      The House 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 House bill)
      The House 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 House bill)
      The House bill excludes from the prohibited sales rules 
property that was involuntarily converted.
Shared appreciation mortgages (sec. 1261 of the House bill)
      The House 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 four 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 House bill)
      The House 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, any such 
corporation is treated 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 sec. 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 House bill is effective for taxable years beginning 
after the date of enactment.

                            Senate Amendment

      The Senate amendment is identical to the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment. In addition, the conference agreement 
extends, to the definition of an independent contractor under 
section 856(d)(3), the modification to the attribution to 
partnerships of section 318(a)(3)(A) so that attribution occurs 
only when a partner owns a 25-percent or greater interest in 
the partnership. Thus, a person providing services will not 
fail to be an independent contractor (and, therefore, amounts 
received or accrued by the REIT with respect to the property 
will not be treated as non-qualifying rents) where the REIT's 
shares are owned by a partnership and a partner owning a 
directly and indirectly a less-than-25-percent interest in the 
partnership also owns an interest in a contractor. Similarly, a 
contractor will not fail to be an independent contractor where 
owners of the REIT and owners of the contractor are partners in 
a partnership and either the owners of the REIT or owners of 
the tenant are directly and indirectly less-than-25-percent 
partners in the partnership.
      Effective date.--The conference agreement is effective 
for taxable years beginning after the date of enactment.

 E. Repeal the ``Short-Short'' Test for Regulated Investment Companies 
  (sec. 1271 of the House bill and sec. 1071 of the Senate amendment)

                              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'').

                               House Bill

      The 30-percent test (or short-short rule) is repealed 
effective for taxable years ending after the date of enactment.

                            Senate Amendment

      The 30-percent test (or short-short rule) is repealed 
effective for taxable years beginning after the December 31, 
1997.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment effective for taxable years beginning after 
the date of enactment.

                        F. Taxpayer Protections

1. Provide reasonable cause exception for additional penalties (sec. 
        1281 of the House bill and sec. 1081 of the Senate amendment)

                              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)).

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Clarification of period for filing claims for refunds (sec. 1282 of 
        the House bill and sec. 1082 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Repeal of authority to disclose whether a prospective juror has been 
        audited (sec. 1283 of the House bill and sec. 1083 of the 
        Senate amendment)

                              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)).
      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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
4. Clarify statute of limitations for items from pass-through entities 
        (sec. 1284 of the House bill and sec. 1084 of the Senate 
        amendment)

                              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 pass-through 
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)).

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
5. Awarding of administrative costs and attorneys fees (sec. 1285 of 
        the House bill)

                              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.

                               House Bill

      The House 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 
aprevailing party. The House 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 House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.

 6. Prohibition on browsing (secs. 1286 and 1287 of the House bill and 
              secs. 1085 and 1086 of the Senate amendment)

                              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'').14 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.15 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 1996.16 This provision 
does not apply to unauthorized inspection of paper documents.
---------------------------------------------------------------------------
    \14\ IRS Declaration of Privacy Principles, May 9, 1994.
    \15\ U.S. v. Czubinski, DTR 2/25/97, p. K-2.
    \16\ P.L. 104-294, sec. 201 (October 11, 1996).
---------------------------------------------------------------------------

                               House Bill

                           Criminal penalties

      The House 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 tax return or return information under 
specific provisions of section 6103. Upon conviction, the 
penalty is a fine in any amount not exceeding 
$1,000,17 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.
---------------------------------------------------------------------------
    \17\ 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 House 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 House bill also provides that no 
damages are available to a taxpayer if that taxpayer requested 
the inspection or disclosure.
      The House 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 U.S.C. section 1030(a)(2)(B), the Secretary 
notify that taxpayer as soon as practicable of the inspection 
or disclosure.
      Effective date.--The provision is effective for 
violations occurring on or after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement does not include these 
provisions, because they are identical to the provisions of 
H.R. 1226, which passed the House on April 15, 1997, and which 
passed the Senate on July 23, 1997, clearing the measure for 
the President's signature.

        XIII. ESTATE, GIFT, AND TRUST SIMPLIFICATION PROVISIONS

1. Eliminate gift tax filing requirements for gifts to charities (sec. 
        1301 of the House bill and sec. 1101 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, with a technical clarification that the 
property given to charity must be the donor's entire interest 
in the property.
2. Clarification of waiver of certain rights of recovery (sec. 1302 of 
        the House bill and sec. 1102 of the Senate amendment)

                              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 tax attributable 
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.

                               House Bill

      The House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Transitional rule under section 2056A (sec. 1303 of the House bill 
        and sec. 1103 of the Senate amendment)

                              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'').

                               House Bill

      The House bill provides that 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
4. Clarifications relating to disclaimers (sec. 1304 of the House bill)

                              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 (sec. 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 currently 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.

                               House Bill

      The House 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 House 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). Further, the House bill provides that a 
qualified disclaimer for transfer tax purposes under section 
2518 also is 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.

        5. Amend ``5 or 5 power'' (sec. 1305 of the House bill)

                              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 (``5 or 5 power'') 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)).

                               House Bill

      The House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
6. Treatment for estate tax purposes of short-term obligations held by 
        nonresident aliens (sec. 1306 of the House bill and sec. 1104 
        of the Senate amendment)

                              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)).

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
7. Certain revocable trusts treated as part of estate (sec. 1307 of the 
        House bill)

                              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 (but not revocable 
trusts) can qualify for section 194 amortization of 
reforestation expenditures.

                               House Bill

      The House 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).
      The separate share rule (described below) generally will 
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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
8. Distributions during first 65 days of taxable year of estate (sec. 
        1308 of the House bill and sec. 1105 of the Senate amendment)

                              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.

                               House Bill

      The House bill extends application of the 65-day rule to 
distributions by estates. Thus, an executor can elect to treat 
distributions paid by the estate 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
9. Separate share rules available to estates (sec. 1309 of the House 
        bill and sec. 1106 of the Senate amendment)

                              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. 18 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.
---------------------------------------------------------------------------
    \18\ Application of the separate share rule is not elective; it is 
mandatory if there are separate shares in the trust.
---------------------------------------------------------------------------

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
10. Executor of estate and beneficiaries treated as related persons for 
        disallowance of losses (sec. 1310 of the House bill and sec. 
        1107 of the Senate amendment)

                              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.

                               House Bill

      Under the House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
11. Limitation on taxable year of estates (sec. 1311 of the House bill)

                              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.

                               House Bill

      The House bill limits the taxable year of an estate to a 
year ending on October 31, November 30, or December 31. 
19 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.
---------------------------------------------------------------------------
    \19\  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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
12. Simplified taxation of earnings of pre-need funeral trusts (sec. 
        1312 of the House bill and sec. 1108 of the Senate amendment)

                              Present Law

      A pre-need funeral trust is an arrangement where an 
individual purchases funeral services or merchandise from a 
funeral home for the benefit of a specified person in advance 
of that person's death. (The beneficiary may be either the 
purchaser or another person.) The purchaser enters into a 
contract with the provider of such services or merchandise 
whereby the purchaser selects the services or merchandise to be 
provided upon the death of the beneficiary, and agrees to pay 
for them in advance of the beneficiary's death. Such amounts 
(or a portion thereof) are held in trust during the 
beneficiary's lifetime and are paid to the seller upon the 
beneficiary'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.

                               House Bill

      The House 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.

                            Senate Agreement

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment with modifications that would (1) allow the 
provision to be applied to contracts purchased by one 
individual to have funeral or burial services or merchandise 
provided for another individual upon that individual's death 
(to the extent that such arrangements would otherwise be 
treated as grantor trusts), and (2) allow the election to be 
made for taxable years ending after the date of enactment.
      Effective date.--The provision is effective for taxable 
years ending after the date of enactment.
13. Adjustments for gifts within 3 years of decedent's death (sec. 1313 
        of the House bill and sec. 1109 of the Senate amendment)

                              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).

                               House Bill

      The House bill 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 House bill also revises section 2035 to improve its 
clarity.
      Effective date.--The provision applies to decedents dying 
after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment. The provision is not intended to modify the 
result reached in the Kisling case.
14. Clarify relationship between community property rights and 
        retirement benefits (sec. 1314 of the House bill and sec. 1110 
        of the Senate amendment)

                              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.

                               House Bill

      The House 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 House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment. The provision is not intended to modify the 
result of the Supreme Court's decision in Boggs v. Boggs, 117 
S.Ct. 1754 (1997).
15. Treatment under qualified domestic trust rules of forms of 
        ownership which are not trusts (sec. 1315 of the House bill and 
        sec. 1111 of the Senate amendment)

                              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). 20 As a result, it is not 
possible to create a QDT in those countries.
---------------------------------------------------------------------------
    \20\ Note that in some civil law States (e.g., Louisiana), an 
entity similar to a trust, called a usufruct, exists.
---------------------------------------------------------------------------

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
16. Opportunity to correct certain failures under section 2032A (sec. 
        1316 of the House bill and sec. 1112 of the Senate amendment)

                              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.

                               House Bill

      The House 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 House bill 
allows the current use valuation election if the executor 
supplies the required information within a reasonable period of 
time (not exceeding 90 days) after notification by the IRS. 
During that time period, the House bill also allows the 
addition of signatures to a previously filed agreement.
      The Committee report on the House bill indicates 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 House bill 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
17. Authority to waive requirement of U.S. trustee for qualified 
        domestic trusts (sec. 1317 of the House bill and sec. 1113 of 
        the Senate amendment)

                              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.

                               House Bill

      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 House 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.
      Effective date.--The provision applies to decedents dying 
after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

          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 House bill and sec. 1201 of the Senate amendment)

                              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 base. (The 
rate is 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).

                               House Bill

      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 are not to 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Simplification of excise taxes on distilled spirits, wine, and beer 
        (secs. 1411-1422 of the House bill and secs. 1211-1222 of the 
        Senate amendment)

                              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 may subject the wholesaler dealer 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 forcertain 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.

                               House Bill

      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 
requirements are 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 and wine imported in bulk may be withdrawn 
from customs custody and transferred in bulk to a brewery 
(beer) or a winery (wine) 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 is liable for 
the tax imposed on the withdrawal from customs custody and the 
importer is 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, with a modification delaying the effective 
date of certain provisions from the first day of the calendar 
quarter that begins at least 90 days after the date of 
enactment to the first day of the quarter beginning at least 
180 days after such date.
3. Authority for Internal Revenue Service to grant exemptions from 
        excise tax registration requirements (sec. 1431 of the House 
        bill and sec. 1231 of the Senate amendment)

                              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.

                               House Bill

      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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
4. Repeal of expired excise tax provisions (sec. 1432 of the House bill 
        and sec. 1232 of the Senate amendment)

                              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)).

                               House Bill

      These provisions are repealed, as ``deadwood''.
      Effective date.--The provisions are effective on the date 
of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
5. Modifications to excise tax on certain arrows (sec. 1233 of the 
        Senate amendment)

                              Present Law

      An 11-percent manufacturer's excise tax is imposed on 
bows having a draw weight of more than 10 pounds and on arrows 
that either are greater than 18 inches in length or are 
suitable for use with a taxable bow. The tax is imposed on the 
manufacturer's sales price of the completed arrow.

                               House Bill

      No provision.

                            Senate Amendment

      The current excise tax on arrows tax is replaced with a 
manufacturer's excise tax on the four component parts of the 
arrow: shafts, points, nocks, and vanes. The tax rate is 
increased to 12.4 percent of the value of each of these four 
components to offset the reduction in aggregate value subjected 
to tax compared to present-law valuation of the completed 
arrow.
      Effective date.--The provision is to be effective for 
arrow components sold after September 30, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
6. Modifications to heavy highway vehicle retail excise tax (sec. 1234 
        of the Senate amendment)

                              Present Law

      A 12-percent retail excise tax is imposed on certain 
heavy highway trucks and trailers, and on highway tractors. 
Small trucks (those with a gross vehicle weight not over 33,000 
pounds) and lighter trailers (those with a gross vehicle weight 
not over 26,000 pounds) are exempt from the tax. The tax 
applies to the first retail sale of a new or remanufactured 
vehicle. The determination under present law of whether a 
particular modification to an existing vehicle constitutes 
remanufacture (taxable) or a repair (nontaxable) is factual and 
generally is based on whether the function of the vehicle is 
changed or, in the case of worn vehicles, whether the cost of 
the modification exceeds 75 percent of the value of the 
modified vehicle.
      No tax is imposed on trucks, tractors, and trailers when 
they are sold for resale or long-term lease, if the purchaser 
is registered with the Treasury Department. In such cases, 
purchasers are liable for the tax when the vehicle is sold or 
leased. The tax is based on the sales price in the transaction 
to which it applies.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment makes two changes to the heavy 
vehicle excise tax:
            (1) Clarification is provided that the 75-percent-
        of-value threshold applies in determining whether 
        repairs to a wrecked vehicle constitute remanufacture; 
        and
            (2) The registration requirement currently 
        applicable to certain sales of trucks, tractors, and 
        trailers for resale is replaced with a certification 
        requirement.
      Effective date.--The provision is effective after 
December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
7. Treatment of skydiving flights as noncommercial aviation (sec. 1235 
        of the Senate amendment)

                              Present Law

      Commercial passenger aviation, or air transportation for 
which a fare is charged, is subject to a 10-percent ad valorem 
excise tax for the Airport and Airway Trust Fund. Noncommercial 
aviation, or air transportation which is not ``for hire,'' is 
subject to a fuels tax for the Trust Fund. In the case of 
skydiving flights, questions have arisen as to when the flight 
is commercial aviation subject to the ticket tax and when it is 
noncommercial aviation subject to the fuels tax. In general, if 
instruction is offered, the flight is noncommercial aviation. 
Otherwise, the flight is treated as commercial aviation. Many 
skydiving flights carry both persons receiving instruction and 
others not receiving instruction.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment specifies that flights which are 
exclusively dedicated to skydiving are taxed as noncommercial 
aviation flights, regardless of whether instruction is offered 
to any of the passengers.
      Effective date.--The provision is effective for flights 
beginning after September 30, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
8. Eliminate double taxation of certain aviation fuels sold to 
        producers by ``fixed base operators'' (sec. 1236 of the Senate 
        amendment)

                              Present Law

      Section 4091 imposes a tax on the sale of aviation fuel 
by any producer (defined to include a wholesale distributor). 
Fuel sold at many rural airports is sold by retail dealers who 
do not qualify as wholesale distributors. This fuel is 
purchased by the retailers tax-paid. In certain instances, fuel 
which has been purchased tax-paid by a retailer will be re-sold 
to a producer, e.g., to enable the producer to serve one of its 
customers at the airport. When this fuel is resold at retail by 
the producer, a second tax is imposed. The Code contains no 
provision allowing a refund of the first tax in such cases.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment permits a refund of the tax 
previously paid on aviation fuel when a registered producer 
acquires the fuel.
      Effective date.--The provision is effective for fuel sold 
after September 30, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with a clarification that the provision applies to tax-paid 
fuel purchased by registered producers after September 30, 
1997.

                     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 House bill and sec. 
        1241 of the Senate amendment)

                              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 5 
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.

                               House Bill

      Under the House bill, 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Exception from rebate for earnings on bona fide debt service fund 
        under construction bond rules (sec. 1442 of the House bill and 
        sec. 1242 of the Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Repeal of debt service-based limitation on investment in certain 
        nonpurpose investments (sec. 1443 of the House bill and sec. 
        1243 of the Senate amendment)

                              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).

                               House Bill

      The House bill repeals the 150-percent of debt service 
yield restriction.
      Effective date.-- The provision applies to bonds issued 
after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
4. Repeal of expired provisions relating to student loan bonds (sec. 
        1444 of the House bill and sec. 1244 of the Senate amendment)

                              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.

                               House Bill

      These special exceptions are deleted as ``deadwood.''
      Effective date.--The provision applies to bonds issued 
after the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

                        C. Tax Court Procedures

1. Overpayment determinations of Tax Court (sec. 1451 of the House bill 
                 and sec. 1251 of the Senate amendment)

                              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.

                               House Bill

      The House bill clarifies that an order to refund an 
overpayment is appealable in the same manner as a decision of 
the Tax Court. The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Redetermination of interest pursuant to motion (sec. 1452 of the 
        House bill and sec. 1252 of the Senate amendment)

                              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. 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.

                               House Bill

      The House bill provides that a taxpayer must file a 
``motion'' (rather than a ``petition'') to seek a 
redetermination of interest in the Tax Court. The House bill 
also clarifies that the Tax Court's jurisdiction to redetermine 
the amount of interest under section 7481(c) does not depend on 
whether the interest is underpayment interest or overpayment 
interest.
      Effective date.--The provision is effective on the date 
of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment. In clarifying the Tax Court's jurisdiction 
over interest determinations, the conferees do not intend to 
limit any other remedies that taxpayers may currently have with 
respect to such determinations, including in particular refund 
proceedings relating solely to the amount of interest due.
3. Application of net worth requirement for awards of litigation costs 
        (sec. 1453 of the House bill and sec. 1253 of the Senate 
        amendment)

                              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.)

                               House Bill

      The House bill provides that the net worth limitations 
currently applicable to individuals also apply to estates and 
trusts. The House 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. Anexception 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill with 
respect to estates and trusts. The Senate amendment provides 
that individuals who file a joint return are treated as 
separate individuals (resulting in a net worth limitation of 
$4,000,000 for individuals who file a joint return).

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment with respect to estates and trusts. The 
conference agreement follows the Senate amendment with respect 
to individuals.
4. Tax Court jurisdiction for determination of employment status (sec. 
        1454 of the House bill and sec. 1254 of the Senate amendment)

                              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).

                               House Bill

      The House 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 (1) one or more individuals performing services for that 
person are employees of that person or (2) 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. 21
---------------------------------------------------------------------------
    \21\ See Announcement 96-13 and Announcement 97-52.
---------------------------------------------------------------------------
      The House 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 sec. 
7430) would be available to eligible taxpayers with respect to 
Tax Court determinations pursuant to this proposal. The House 
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 is effective on the date 
of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill, with 
technical modifications.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment, with additional technical modifications.

                          D. Other Provisions

1. Due date for first quarter estimated tax payments by private 
        foundations (sec. 1461 of the House bill and sec. 1261 of the 
        Senate amendment)

                              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).22 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.
---------------------------------------------------------------------------
    \22\ 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 the foundation's Form 990-PF, or (2) 95 percent 
of the foundation's current-year tax liability.
---------------------------------------------------------------------------

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
2. Withholding of Commonwealth income taxes from the wages of Federal 
        employees (sec. 1462 of the House bill and sec. 1262 of the 
        Senate amendment)

                              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.

                               House Bill

      The House 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.
3. Certain notices disregarded under provision increasing interest rate 
        on large corporate underpayments (sec. 1463 of the House bill 
        and sec. 1263 of the Senate amendment)

                              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.

                               House Bill

      The House bill provides that, 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment.

              XV. PENSION AND EMPLOYEE BENEFIT PROVISIONS

  A. Miscellaneous Provisions Relating to Pensions and Other Benefits

1. Cash or deferred arrangements for irrigation and drainage entities 
        (sec. 911 of the House bill)

                              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.

                               House Bill

      Under the House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
2. Permanent moratorium on application of nondiscrimination rules to 
        State and local governmental plans (sec. 912 of the House bill 
        and sec. 1308 of the Senate amendment)

                              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. 
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). Elective deferrals under 
section 401(k) plans are required to satisfy a special 
nondiscrimination test called the average deferral percentage 
(``ADP'') test. Employer matching and after-tax employee 
contributions are subject to a similar test called the average 
contribution percentage (``ACP'') test.
      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.

                               House Bill

      The House bill provides that State and local governmental 
plans are exempt from the nondiscrimination and minimum 
participation rules.
      Effective date.--Taxable years beginning on or after the 
date of enactment. A governmental plan is treated as satisfying 
the coverage and nondiscrimination tests for taxable years 
beginning before the date of enactment.

                            Senate Amendment

      The Senate amendment is the same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment and clarifies that the exemption from the 
nondiscrimination and participation rules includes exemption 
from the ACP and ADP tests. The conference agreement provides 
that a cash or deferred arrangement under a governmental plan 
is treated as a qualified cash or deferred arrangement even 
though the ADP test is not in fact satisfied. Thus, for 
example, elective contributions made by a government employer 
on behalf of an employee are not treated as distributed or made 
available to the employee (in accordance with section 402(e)(3) 
of the Code).
      Effective date.--Same as the House bill and Senate 
amendment.
3. Treatment of certain disability payments to public safety employees 
        (sec. 913 of the House bill and sec. 785 of the Senate 
        amendment)

                              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.

                               House Bill

      Under the House 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 
House 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. Claims for refund or credit 
for overpayment of tax resulting from the provision may 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.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that the provision applies to amounts payable under a 
State law (as in existence on July 1, 1992) which irrebuttably 
presumed that heart disease and hypertension are work-related 
illnesses, but only for employees separating from service 
before such date.
      Effective date.--Same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill.
4. Portability of permissive service credit under governmental pension 
        plans (sec. 914 of the House bill)

                              Present Law

      Under present law, limits are imposed on the 
contributions and benefits under qualified pension plans (Code 
sec. 415). 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) $125,000 (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.

                               House Bill

      Under the House 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 House 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.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, with 
modifications. Under the conference agreement, contributions by 
a participant in a State or local governmental plan to purchase 
permissive service credits are subject to one of two limits. 
Either (1) the accrued benefit derived from all contributions 
to purchase permissive service credit must be taken into 
account in determining whether the defined benefit pension plan 
limit is satisfied, or (2) all such contributions must be taken 
into account in determining whether the $30,000 limit on annual 
additions is met for the year (taking into account any other 
annual additions of the participant).Under the first 
alternative, a plan will not fail to satisfy the reduced defined 
benefit pension plan limit that applies in the case of early retirement 
due to the accrued benefit derived from the purchase of permissive 
service credits. These limits may be applied on a participant-by-
participant basis. That is, contributions to purchase permissive 
service credits by all participants in the same plan do not have to 
satisfy the same limit.
      Under the conference agreement, permissive service credit 
is defined as under the House bill. Thus, it is credit for a 
period of service that is recognized by the governmental plan 
only if the employee voluntarily contributes to the plan an 
amount (as determined by the plan) which does not exceed the 
amount necessary to fund the benefit attributable to the period 
of service and which is in addition to the regular employee 
contributions, if any, under the plan. Section 415 is violated 
if more than 5 years of permissive service credit is purchased 
for ``nonqualified service''. In addition, section 415 is 
violated if nonqualified service is taken into account for an 
employee who has less than 5 years of participation under the 
plan. Nonqualified service is service other than service (1) as 
a Federal, State, or local government employee, (2) as an 
employee of an association representing Federal, State or local 
government employees, (3) as an employee of an educational 
institution which provides elementary or secondary education, 
or (4) for military service. Service under (1), (2) or (3) is 
not qualified if it enables a participant to receive a 
retirement benefit for the same service under more than one 
plan.
      The conference agreement provides that in the case of any 
repayment of contributions and earnings to a governmental plan 
with respect to an amount previously refunded upon a forfeiture 
of service credit under the plan (or another plan maintained by 
a State or local government employer within the same State) any 
such repayment shall not be taken into account for purposes of 
section 415 and service credit obtained as a result of the 
repayment shall not be considered permissive service credit.
      The provision is not intended to affect the application 
of ``pick up'' contributions to purchase permissive service 
credit or the treatment of pick up contributions under section 
415. The provision does not apply to purchases of service 
credit for qualified military service under the rules relating 
to veterans' reemployment rights (sec. 414(u)).
      Effective date.--In general, the conference agreement is 
effective with respect to contributions to purchase permissive 
service credits made in years beginning after December 31, 
1997.
      The conference agreement provides a transition rule for 
plans that provided for the purchase of permissive service 
credit prior to enactment of this Act. Under this rule, the 
defined contribution limits will not reduce the amount of 
permissive service credit of an eligible participant allowed 
under the terms of the plan as in effect on the date of 
enactment. For this purpose an eligible participant is an 
individual who first became a participant in the plan before 
the first plan year beginning after the last day of the 
calendar year in which the next regular session (following the 
date of the enactment of this Act) of the governing body with 
authority to amend the plan ends.
5. Gratuitous transfers for the benefit of employees (sec. 915 of the 
        House bill)

                              Present Law

      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.
      A deduction is allowed for Federal estate tax purposes 
for transfers by a decedent to charitable, religious, 
scientific, etc. organizations. In the case of a transfer of a 
remainder interest to a charity, the remainder interest must be 
in a charitable remainder trust. 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 fixed percentage 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.

                               House Bill

      The House 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. 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.
      In order for a transfer of securities to be a qualified 
gratuitous transfer, a number of requirements must be 
satisfied, including the following: (1) the securities 
transferred to the ESOP 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 of 
the value of outstanding stock of the company; and (4) the plan 
meets certain requirements. The provision applies in cases in 
which the ESOPs was in existence on August 1, 1996 and the 
decedent dies on or before December 31, 1998.
      Effective date.--The provision is effective with respect 
to transfers to an ESOP after the date of enactment.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill.
6. Treatment of certain transportation on noncommercially operated 
        aircraft as a fringe benefit (sec. 916 of the House bill)

                              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).

                               House Bill

      Under the House bill, 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, 1997.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.
7. Clarification of certain rules relating to ESOPs of S corporations 
        (sec. 918 of the House bill and sec. 1309 of the Senate 
        amendment)

                              Present Law

      Under present law, an S corporation can have no more than 
75 shareholders. For taxable years beginning after December 31, 
1997, 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. If the employer securities are not 
readily tradable, the employee has a right to require the 
employer to buy the securities. In the case of an employer 
whose bylaws or charter restricts ownership of substantially 
all employer securities to employees or a pension plan, the 
plan may provide that benefits are distributed in the form of 
cash. Such a plan may distribute employer securities, if the 
employee has a right to require the employer to purchase the 
securities.
      ESOPs are subject to certain prohibited transaction rules 
under the Internal Revenue Code and title I of the Employee 
Retirement Income Security Act (``ERISA'') which are 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. These statutory 
exceptions do not apply to any transaction in which a plan 
(directly or indirectly) (1) lends any part of the assets of 
the plan to, (2) pays any compensation for personal services 
rendered to the plan to, or (3) acquires for the plan any 
property from or sells any property to a shareholder employee 
of an S corporation, a member of the family of such a 
shareholder employee, or a corporation controlled by the 
shareholder employee. An administrative exception from the 
prohibited transactions rules may be obtained from the 
Secretary of Labor, even if a statutory exception does not 
apply.

                               House Bill

      The House bill provides that ESOPs of S corporations may 
distribute cash to plan participants as long as the employee 
has a right to require the employer to purchase employer 
securities (as under the present-law rules). In addition, the 
House bill extends the Code's statutory exceptions to certain 
prohibited transactions rules to shareholder employees of S 
corporations.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 1997.

                            Senate Amendment

      The Senate amendment is the same as the House bill with 
respect to the provision that permits ESOPs of S corporations 
to distribute stock in certain cases.
      The Senate amendment provides that the sale of stock by a 
shareholder employee of an S corporation is not a prohibited 
transaction under the Code or ERISA.
      Effective date.--Same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment with respect to the provision permitting ESOPs 
maintained by S corporations to distribute employer securities 
in certain circumstances.
      The conference agreement follows the Senate amendment 
with respect to the provision relating to prohibited 
transaction rules, as modified. Under the conference agreement, 
the statutory exceptions do not fail to apply merely because a 
transaction involves the sale of employer securities to an ESOP 
maintained by an S corporation by a shareholder employee, a 
family member of the shareholder employee, or a corporation 
controlled by the shareholder employee. Thus, the statutory 
exemptions for such a transaction (including the exemption for 
a loan to the ESOP to acquire employer securities in connection 
with such a sale or a guarantee of such a loan) apply.
      Effective date.--Same as the House bill and the Senate 
amendment.
8. Repeal application of UBIT to ESOPs of S corporations (sec. 716 of 
        the Senate amendment)

                              Present Law

      Under present law, for taxable years beginning after 
December 31, 1997, certain tax-exempt organizations, including 
employee stock ownership plans (``ESOPs'') can be a shareholder 
of an S corporation. Items of income or loss of the S 
corporation will flow through to qualified tax-exempt 
shareholders as unrelated business taxable income (``UBTI''), 
regardless of the source of the income.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment repeals the provision treating items 
of income or loss of an S corporation as unrelated business 
taxable income in the case of an employee stock ownership plan 
that is an S corporation shareholder.
      Effective date.--Taxable years beginning after December 
31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
and clarifies that the repeal of the provision treating items 
of income or loss of an S corporation as unrelated business 
taxable income applies only with respect to employer securities 
held by an employee stock ownership plan (as defined in section 
4975(e)(7) of the Code) maintained by an S corporation.
9. Treatment of multiemployer plans under section 415 (sec. 711 of the 
        Senate amendment)

                              Present Law

      Present law imposes limits on contributions and benefits 
under qualified plans based on the type of plan. In the case of 
defined benefit pension plans, the limit on the annual 
retirement benefit is the lesser of (1) 100 percent of 
compensation or (2) $125,000 (indexed for inflation).

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment eliminates the application of the 
100 percent of compensation limitation for multiemployer 
defined benefit pension plans. Such plans would only be subject 
to the dollar limitation.
      Effective date.--The provision is effective for years 
beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
10. Modification of partial termination rules (sec. 712 of the Senate 
        amendment)

                              Present Law

      Under the Internal Revenue Code, pension plan benefits 
are required to become fully vested upon termination or partial 
termination of the plan. The plan document is required to 
contain a provision reflecting this rule. Under section 552 of 
the Deficit Reduction Act of 1984 (``DEFRA''), for purposes of 
this rule, a partial termination is treated as not occurring if 
(1) the partial termination is a result of a decline in plan 
participation which occurs by reason of the completion of the 
Trans-Alaska Oil Pipeline construction project and occurred 
after December 31, 1975, and before January 1, 1980, with 
respect to participants employed in Alaska; (2) no 
discrimination occurred with respect to the partial 
termination; and (3) it is established to the satisfaction of 
the Secretary of the Treasury that the benefits of the 
provision will not accrue to the employers under the plan.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment clarifies that section 552 of DEFRA 
applies for the Code, any other provision of law, and any plan 
or trust provision.
      Effective date.--The provision is effective as if 
included in section 552 of DEFRA.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
11. Increase in full funding limit (sec. 713 of the Senate amendment)

                              Present Law

      Under present law, defined benefit pension plans are 
subject to minimum funding requirements. In addition, there is 
a maximum limit on contributions that can be made to a plan, 
called the full funding limit. The full funding limit is the 
lesser of a plan's accrued liability and 150 percent of current 
liability. In general, current liability is all liabilities to 
plan participants and beneficiaries. Current liability 
represents benefits accrued to date, whereas the accrued 
liability full funding limit is based on projected benefits. 
Under IRS rules, amounts that cannot be contributed because of 
the current liability full funding limit are amortized over 10 
years.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment increases the 150-percent of full 
funding limit as follows: 155 percent for plan years beginning 
in 1999 or 2000, 160 percent for plan years beginning in 2001 
or 2002, 165 percent for plan years beginning in 2003 and 2004, 
and 170 percent for plan years beginning in 2005 and 
thereafter.
      In addition, under the provision, amounts that cannot be 
contributed due to the current liability full funding limit are 
amortized over 20 years. Amounts that could not be contributed 
because of such full funding limit and that have not been 
amortized as of the last day of the plan year beginning in 1998 
are amortized over this 20-year period.
      Effective date.--Plan years beginning after December 31, 
1998.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with the modification that, with respect to amortization bases 
remaining at the end of the 1998 plan year, the 20-year 
amortization period is reduced by the number of years since the 
amortization base had been established. The conference 
agreement also clarifies that no amortization is required with 
respect to funding methods that do not provide for amortization 
bases.
12. Spousal consent required for distributions from section 401(k) 
        plans (sec. 714 of the Senate amendment)

                              Present Law

      Under present law, pension plans that provide automatic 
survivor benefits (i.e., joint and survivor annuities and 
preretirement survivor annuities) require spousal consent to 
the payment of a participant's benefit in a form other than a 
survivor annuity. A qualified cash or deferred arrangement (a 
``section 401(k) plan'') is not subject to the automatic 
survivor benefit rules if the plan provides that the spouse of 
a participant is the beneficiary of the participant's entire 
account under the plan, the participant's benefit is not paid 
in the form of an annuity, and the participant's account does 
not include amounts transferred from another plan that was 
subject to the automatic survivor benefit rules. In general, 
spousal consent is not required for an involuntary cash-out of 
a participant's benefit or distributions made to satisfy the 
minimum distribution rules.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that written spousal 
consent is required for all distributions, including plan 
loans, from plans containing a qualified cash or deferred 
arrangement. As under present law, spousal consent is not 
required for an involuntary cash-out or a participant's benefit 
or for the payment of distributions required under the minimum 
distribution rules. If spousal consent is not obtained, the 
benefit must be distributed in equal periodic payments over the 
life (or life expectancy) of the participant, the lives (or 
life expectancies) of the participant and beneficiary, or over 
a period of 10 years or more. A plan which complies with the 
spousal consent requirement will not be treated as failing to 
satisfy the anti-cutback rules related to optional forms of 
benefit.
      Effective date.--The provision is effective for plan 
years beginning after December 31, 1998.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.
13. Contributions on behalf of a minister to a church plan (sec. 715 of 
        the Senate amendment)

                              Present Law

      Under present law, contributions made to retirement plans 
by ministers who are self-employed are deductible to the extent 
such contributions do not exceed certain limitations applicable 
to retirement plans. These limitations include the limit on 
elective deferrals, the exclusion allowance, and the limit on 
annual additions to a retirement plan.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that in the case of a 
contribution made on behalf of a minister who is self-employed 
to a church plan, the contribution is excludable from the 
income of the minister to the extent that the contribution 
would be excludable if the minister were an employee of a 
church and the contribution were made to the plan.
      Effective date.--The provision is effective for years 
beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment. 
The provision does not alter present law under which amounts 
contributed for a minister in connection with section 403(b), 
either by the minister's actual employer or by any church or 
convention or association of churches that is treated as the 
minister's employer under section 414(e), are excluded from the 
minister's income, and amounts contributed in accordance with 
section 403(b) by the minister (whether the minister is an 
employee or is self employed) are deductible by the minister as 
provided in section 404 taking into account the other special 
rules of section 414(e).
14. Exclusion of ministers from discrimination testing of certain non-
        church retirement plans (sec. 715 of the Senate amendment)

                              Present Law

      Under present law, ministers who are employed by an 
organization other than a church are treated as if employed by 
the church and may participate in the retirement plan sponsored 
by the church. If the organization also sponsors a retirement 
plan, such plan does not have to include the ministers as 
employees for purposes of satisfying the nondiscrimination 
rules applicable to qualified plans provided the organization 
is not eligible to participate in the church plan.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that if a minister is 
employed by an organization other than a church and the 
organization is not otherwise participating in the church plan, 
then the minister does not have to be included as an employee 
under the retirement plan of the organization for purposes of 
the nondiscrimination rules.
      Effective date.--The provision is effective for years 
beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
15. Diversification in section 401(k) plan investments (sec. 717 of the 
        Senate amendment)

                              Present Law

      The Employee Retirement Income Security Act of 1974, as 
amended (``ERISA'') prohibits certain employee benefit plans 
from investing more than 10 percent of the plan's assets in the 
securities and real property of the employer who sponsors the 
plan. The 10-percent limitation does not apply to ``eligible 
individual account plans'' that specifically authorize such 
investments. Generally, eligible individual account plans are 
defined contribution plans, including plans containing a cash 
or deferred arrangement (``401(k) plans''). The assets of such 
plans may be invested in employer securities and real property 
without regard to the 10-percent limitation.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that the term ``eligible 
individual account plan'' does not include the portion of a 
plan that consists of elective deferrals (and earnings on the 
elective deferrals) made under section 401(k) if elective 
deferrals equal to more than 1 percent of a participant's 
compensation are required to be invested in employer securities 
at the direction of a person other than the participant. Such 
portion of the plan is treated as a separate plan subject to 
the 10-percent limitation on investment in employer securities 
and real property.
      The Senate amendment does not apply to an individual 
account plan if the value of the assets of all individual 
account plans maintained by the employer does not exceed 10 
percent of the value of the assets of all pension plans 
maintained by the employer. The Senate amendment does not apply 
to an employee stock ownership plan as defined in sections 
409(a) and 4975(e)(7) of the Internal Revenue Code.
      Effective date.--The provision is effective with respect 
to employer securities and employer real property acquired 
after the beginning of the first plan year beginning after the 
90th day after the date of enactment. The provision does not 
apply to employer securities and real property acquired 
pursuant to a binding written contract to acquire such 
securities or real property in effect on the date of enactment 
and at all times thereafter.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with modifications. The conference agreement clarifies that the 
provision applies if elective deferrals equal to more than 1 
percent of an employee's eligible compensation are required to 
be invested in employer securities and employer real property. 
Eligible compensation is compensation that is eligible to be 
deferred. As under the Senate amendment, if the 1 percent 
threshold is exceeded, then the portion of the plan that 
consists of elective deferrals (and earnings thereon) is still 
treated as an individual account plan as long as elective 
deferrals (and earnings thereon) are not required to be 
invested in employer securities and employer real property.
      The conference agreement provides that multiemployer 
plans are not taken into account in determining whether the 
value of the assets of all individual account plans maintained 
by the employer does not exceed 10 percent of the value of the 
assets of all pension plans maintained by the employer. The 
conference agreement provides that the provision does not apply 
to an employee stock ownership plan as defined in section 
4975(e)(7) of the Internal Revenue Code.
      Effective date.--Under the conference agreement, the 
provision is effective with respect to elective deferrals in 
plan years beginning after December 31, 1998 (and earnings 
thereon). The provision does not apply with respect to earnings 
on elective deferrals for years beginning before January 1, 
1999.
16. Removal of dollar limitation on benefit payments from a defined 
        benefit plan for police and fire employees (sec. 786 of the 
        Senate amendment)

                              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 benefit pension plan, the limit 
on the annual retirement benefit is the lesser of (1) 100 
percent of compensation or (2) $125,000 (for 1997, indexed for 
inflation). The 100 percent of compensation limitation does not 
apply in the case of State and local governmental pension 
plans. In general, the dollar limit is reduced if benefits 
begin before social security retirement age and increased if 
benefits begin after social security retirement age. In the 
case of State and local government plans, the dollar limit is 
not reduced unless benefits begin before age 62 and in any case 
is not less than $75,000, and the dollar limit is increased if 
benefits begin after age 65. In the case of certain police and 
fire department employees, the dollar limit cannot be reduced 
below $50,000 (indexed), regardless of the age at which 
benefits commence.1
---------------------------------------------------------------------------
    \1\ This special rule applies to participants (1) in a defined 
benefit plan of a State or local government plan, and (2) with respect 
to whom the period of service taken into account in determining the 
amount of the benefit under such plan includes at least 15 years of 
service of the participant as (a) a full-time employee of a police or 
fire department organized by a State or political subdivision to 
provide police protection, firefighting services, or emergency medical 
services or (b) as a member of the Armed Services of the United States.
---------------------------------------------------------------------------

                               House Bill

      No provision.

                            Senate Amendment

      The dollar limit on defined benefit plans does not apply 
to individuals who receive the special rule for certain police 
and fire department employees under present law.
      Effective date.--Years beginning after December 31, 1996.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with the clarification that the exception from the dollar limit 
for police and fire department employees only applies to the 
reduction for early retirement benefits. Thus, the defined 
benefit plan dollar limit continues to apply, but is not 
reduced in the case of early retirement. As under present law, 
the dollar limit is increased for such employees if benefits 
begin after age 65.
      Effective date.--Same as the Senate amendment.
17. Church plan exception to prohibition on discrimination against 
        individuals based on health status

                              Present Law

      Under the Health Insurance Portability and Accountability 
Act (``HIPAA''), group health plans generally may not establish 
rules for eligibility based on any of the following factors 
relating to an individual or a dependent of the individual: (1) 
health status, (2) medical condition, (3) claims experience, 
(4) receipt of health care, (5) medical history, (6) genetic 
information, (7) evidence of insurability, or (8) disability. 
In addition, a group health plan may not charge an individual a 
greater premium based on any of such factors.
      A excise tax is imposed on the failure of a group plan to 
satisfy the nondiscriminationrule. In general, the excise tax 
is imposed on the employer sponsoring the plan and is equal to $100 per 
day per individual as long as the plan is not in compliance.

                               House Bill

      No provision.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement provides that certain church 
plans are not treated as violating the nondiscrimination 
requirement merely because the plan requires evidence of good 
health in order for an individual to enroll in the plan for (1) 
individuals who are employees of employers with 10 or fewer and 
for self-employed individuals or (2) any individual who enrolls 
after the first 90 days of eligibility under the plan. The 
provision applies to a church plan for a year if the plan 
included such provisions requiring evidence of good health on 
July 15, 1997, and at all times thereafter before the beginning 
of the year.
      Effective date.--The provision is effective as if 
included in HIPAA.
18. Newborns' and mothers' health protection; mental health parity

                              Present Law

      The Newborns' and Mothers' Health Protection Act of 1996 
amended the Employee Retirement Income Security Act (``ERISA'') 
and the Public Health Service Act to impose certain 
requirements on group health plans with respect to coverage of 
newborns and mothers, including a requirement that a group 
health plan cannot restrict benefits for a hospital stay in 
connection with childbirth for the mother or newborn to less 
than 48 hours following a normal vaginal delivery or less than 
96 hours following a cesarean section. These provisions are 
effective with respect to plan years beginning on or after 
January 1, 1998.
      The Mental Health Parity Act of 1996 amended ERISA and 
the Public Health Service Act to provide that group health 
plans that provide both medical and surgical benefits and 
mental health benefits cannot impose limits on mental health 
benefits that are not imposed on substantially all medical and 
surgical benefits. The provisions of the Mental Health Parity 
Act are effective with respect to plan years beginning on or 
after January 1, 1998, but do not apply to benefits for 
services furnished on or after September 30, 2001.
      The Internal Revenue Code requires that group health 
plans meet certain requirements with respect to limitations on 
exclusions of preexisting conditions and that group health 
plans not discriminate against individuals based on health 
status. An excise tax of $100 per day during the period of 
noncompliance is imposed on the employer sponsoring the plan if 
the plan fails to meet these requirements. The maximum tax that 
can be imposed during a taxable year cannot exceed the lesser 
of 10 percent of the employer's group health plan expenses for 
the prior year or $500,000. No tax is imposed if the Secretary 
determines that the employer did not know, and exercising 
reasonable diligence would not have known, that the failure 
existed.

                               House Bill

      No provision.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement incorporates into the Internal 
Revenue Code the provisions of the Newborns' and Mothers' 
Health Protection Act of 1996 and the Mental Health Parity Act 
of 1996 relating to group health plans. Failures to comply with 
such provisions are subject to the present-law excise tax 
applicable to failures to comply with present-law group health 
plan requirements.
      Effective date.--The provisions are effective with 
respect to plan years beginning on or after January 1, 1998.

                  B. Pension Simplification Provisions

1. Matching contributions of self-employed individuals not treated as 
        elective deferrals (sec. 1301 of the Senate amendment)

                              Present Law

      A qualified cash or deferred arrangement (a ``section 
401(k) plan'') is a type of tax-qualified pension plan under 
which employees can elect to make pre-tax contributions. An 
employee's annual elective contributions are subject to a 
dollar limit ($9,500 for 1997). Employers may make matching 
contributions based on employees' elective contributions. In 
the case of employees, such matching contributions are not 
subject to the $9,500 limit on elective contributions. Elective 
contributions are subject to a special nondiscrimination test 
called the average deferral percentage (``ADP'') test. Matching 
contributions are subject to a similar nondiscrimination test 
called the average contributions percentage (``ACP'') test. The 
employer may elect to treat certain matching contributions as 
elective contributions for purposes of the ACP test.
      Under present law, matching contributions made for a 
self-employed individual are generally treated as additional 
elective contributions by the self-employed individual who 
receives the matching contribution. Accordingly, matching 
contributions for a self-employed individual are subject to the 
dollar limit on elective contributions (along with the 
individual's other elective deferrals) and are subject to the 
ACP test.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that matching contributions 
for self-employed individuals are treated the same as matching 
contributions for employees, i.e., they are not treated as 
elective contributions and are not subject to the elective 
contribution limits.
      Effective date.--The provision is effective for years 
beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
and clarifies that the provision does not apply to qualified 
matching contributions that are treated as elective 
contributions for purposes of satisfying the ADP test.
      Effective date.--Same as the Senate amendment, except 
that the conference agreement provides that the provision is 
effective for years beginning after December 31, 1996, in the 
case of SIMPLE retirement plans.
2. Contributions to IRAs through payroll deductions (sec. 1302 of the 
        Senate amendment)

                              Present Law

      Under present law, employer involvement in the 
establishment or maintenance of individual retirement 
arrangements (``IRAs'') of its employees can result in the 
employer being considered to maintain a retirement plan for 
purposes of title I of the Employee Retirement Income Security 
Act of 1974, as amended (``ERISA''), thus subjecting the 
employer to ERISA's fiduciary rules.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides that an employer that 
facilitates IRA contributions by its employees by establishing 
a system under which employees, through employer payroll 
deductions, may make contributions to IRAs will not be 
considered to sponsor a retirement plan subject to ERISA. Under 
the system, employees would be required to provide their 
employer with a contribution certificate which establishes the 
IRA and specifies the contribution amount to be deducted from 
the employee's wages and remitted to the employee's IRA. As 
under present law, the amount contributed through payroll 
deduction would be includible in the employee's gross income 
and wages for employment tax purposes, and deductible by the 
employee in accordance with the rules relating to IRAs.
      The provision does not apply to an employee employed by 
an employer who maintains a tax-qualified retirement plan.
      Effective date.--The Senate amendment is effective for 
taxable years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment. The conference agreement provides that employers 
that choose not to sponsor a retirement plan should be 
encouraged to set up a payroll deduction system to help 
employees save for retirement by making payroll deduction 
contributions to their IRAs. The Secretary of Treasury is 
encouraged to continue his efforts to publicize the 
availability of these payroll deduction IRAs.
3. Plans not disqualified merely by accepting rollover contributions 
        (sec. 1303 of the Senate amendment)

                              Present Law

      Under present law, a qualified retirement plan that 
accepts rollover contributions from other plans will not be 
disqualified because the plan making the distribution is, in 
fact, not qualified at the time of the distribution, if, prior 
to accepting the rollover, the receiving plan reasonably 
concluded that the distributing plan was qualified. The 
receiving plan can reasonably conclude that the distributing 
plan was qualified if, for example, prior to accepting the 
rollover, the distributing plan provided a statement that the 
distributing plan had a favorable determination letter issued 
by the Internal Revenue Service (``IRS''). The receiving plan 
is not required to verify this information.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment clarifies the circumstances under 
which a qualified plan could accept rollover contributions 
without jeopardizing its qualified status. Under the provision, 
if the trustee of the plan making the distribution verifies 
that the distributing plan is intended to be a qualified plan, 
the plan receiving the rollover will not be disqualified if the 
distributing plan was not in fact a qualified plan.
      Effective date.--The Senate amendment is effective for 
rollover contributions made after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment, as 
modified. Under the conference agreement, the Secretary of the 
Treasury is directed to clarify that, under its regulations 
protecting plans from disqualification because they receive 
invalid rollover contributions, it is not necessary for a 
distributing plan to have a determination letter in order for 
the administrator of the receiving plan to reasonably conclude 
that a contribution is a valid rollover.
4. Modification of prohibition on assignment or alienation (sec. 1304 
        of the Senate amendment)

                              Present Law

      Under present law, amounts held in a qualified retirement 
plan for the benefit of a participant are not, except in very 
limited circumstances, assignable or available to personal 
creditors of the participant. A plan may permit a participant, 
at such time as benefits under the plan are in pay status, to 
make a voluntary revocable assignment of an amount not in 
excess of 10-percent of any benefit payment, provided the 
purpose is not to defray plan administration costs. In 
addition, a plan may comply with a qualified domestic relations 
order issued by a state court requiring benefit pay-
ments to former spouses or other ``alternate payees'' even if 
the participant is not in pay status.
      There is no specific exception from the Employee 
Retirement Income Security Act of 1974, as amended (``ERISA'') 
or the Internal Revenue Code which would permit the offset of a 
participant's benefit against the amount owed to a plan by the 
participant as a result of a breach of fiduciary duty to the 
plan or criminality involving the plan. Courts have been 
divided in their interpretation of the prohibition on 
assignment or alienation in these cases. Some courts have ruled 
that there is no exception in ERISA for the offset of a 
participant's benefit to make a plan whole in the case of a 
fiduciary breach. Other courts have reached a different result 
and permitted an offset of a participant's benefit for breach 
of fiduciary duties.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment permits a participant's benefit in a 
qualified plan to be reduced to satisfy liabilities of the 
participant to the plan due to (1) the participant is being 
convicted of committing a crime involving the plan, (2) a civil 
judgment (or consent order or decree) entered by a court in an 
action brought in connection with a violation of the fiduciary 
provisions of title I of ERISA, or (3) a settlement agreement 
between the Secretary of Labor or the Pension Benefit Guaranty 
Corporation and the participant in connection with a violation 
of the fiduciary provisions of ERISA. The court order 
establishing such liability must require that the participant's 
benefit in the plan be applied to satisfy the liability. If the 
participant is married at the time his or her benefit under the 
plan is offset to satisfy the liability, spousal consent to 
such offset would be required unless the spouse is also 
required to pay an amount to the plan in the judgment, order, 
decree or settlement or the judgment, order, decree or 
settlement provides a 50-percent survivor annuity for the 
spouse.
      Effective date.--The Senate amendment is effective for 
judgments, orders, and decrees issued, and settlement 
agreements entered into, on or after the date of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment. 
The conference agreement clarifies that an offset is includible 
in income on the date of the offset.
5. Elimination of paperwork burdens on plans (sec. 1305 of the Senate 
        amendment)

                              Present Law

      Under present law, employers are required to prepare 
summary plan descriptions of employee benefit plans (``SPDs''), 
and summaries of material modifications to such plans 
(``SMMs''). The SPDs and SMMs generally provide information 
concerning the ben-
efits provided by the plan and the participants' rights and 
obligations under the plan. The SPDs and SMMs must be furnished 
to plan participants and beneficiaries and filed with the 
Secretary of Labor.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment eliminates the requirement that SPDs 
and SMMs be filed with the Secretary of Labor. Employers would 
be required to furnish these documents to the Secretary of 
Labor upon request. A civil penalty could be imposed by the 
Secretary of Labor on the plan administrator for failure to 
comply with such requests. The penalty would be up to $100 per 
day of failure, up to a maximum of $1,000 per request. No 
penalty would be imposed if the failure was due to matters 
reasonably outside the control of the plan administrator.
      Effective date.--The provision is effective on the date 
of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
6. Modification of section 403(b) exclusion allowance to conform to 
        section 415 modifications (sec. 1306 of the Senate amendment)

                              Present Law

      Under present law, annual contributions to a section 
403(b) annuity cannot exceed the exclusion allowance. In 
general, the exclusion allowance for a taxable year is the 
excess, if any, of (1) 20 percent of the employee's includible 
compensation multiplied by his or her years of service, over 
(2) the aggregate employer contributions for an annuity 
excludable for any prior taxable years.
      Alternatively, an employee may elect to have the 
exclusion allowance determined under the rules relating to tax-
qualified defined contribution plans (sec. 415). Tax-qualified 
defined contributions plans are subject to limitations on 
annual additions. In addition, for years beginning before 
January 1, 2000, an overall limit applies if an employee is a 
participant in both a defined contribution plan and defined 
benefit plan of the same employer (sec. 415(e)).

                               House Bill

      No provision.

                            Senate Amendment

      The provision conforms the section 403(b) exclusion 
allowance to the section 415 limits by providing that 
includible compensation includes elective deferrals (and 
similar pre-tax contributions) of the employee.
      The Secretary of the Treasury is directed to revise the 
regulations regarding the exclusion allowance to reflect the 
fact that the overall limit on benefits and contributions is 
repealed (sec. 415(e)). The revised regulations are to be 
effective for limitation years beginning after December 31, 
1999.
      Effective date.--The modification to the definition of 
includible compensation is effective for years beginning after 
December 31, 1997. The direction to the Secretary is effective 
on the date of enactment.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
with the clarification that the revised Treasury regulations 
are to be effective for years (rather than limitation years) 
beginning after December 31, 1999. In addition, the conference 
agreement clarifies that the revised regulations are to relate 
to the election to have the exclusion allowance determined 
under section 415.
7. New technologies in retirement plans (sec. 1307 of the Senate 
        amendment)

                              Present Law

      Under present law, it is not clear if sponsors of 
employee benefit plans may use new technologies (telephonic 
response systems, computers, E-mail) to satisfy the various 
ERISA requirements for notice, election, consent, 
recordkeeping, and participant disclosure.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment directs the Secretaries of the 
Treasury and Labor to issue guidance facilitating the use of 
new technology for plan purposes. The guidance is to be 
designed to (1) interpret the notice, election, consent, 
disclosure, and time requirements (and related recordkeeping 
requirements) under the Internal Revenue Code of 1986 (``IRC'') 
and the Employee Retirement Income Security Act of 1974, as 
amended (``ERISA'') relating toretirement plans as applied to 
the use of new technologies by plan sponsors and administrators while 
maintaining the protection of the rights of participants and 
beneficiaries, and (2) clarify the extent to which writing requirements 
under the IRC shall be interpreted to permit paperless transactions.
      Effective date.--The provision is effective on the date 
of enactment and requires that the guidance be issued not later 
than December 31, 1998.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
8. Modification of 10-percent tax on nondeductible contributions (sec. 
        1310 of the Senate amendment)

                              Present Law

      Under present law, if an employer sponsors both a defined 
benefit plan and a defined contribution plan that covers some 
of the same employees, the total deduction for all plans for a 
plan year is generally limited to the greater of (1) 25 percent 
of compensation or (2) the contribution necessary to meet the 
minimum funding requirements of the defined benefit plan for 
the year.
      A 10-percent nondeductible excise tax is imposed on 
contributions that are not deductible. This excise tax does not 
apply to contributions to one or more defined contribution 
plans that are nondeductible because they exceed the combined 
plan deduction limit to the extent such contributions do not 
exceed 6 percent of compensation in the year for which the 
contribution is made.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment adds an additional exception to the 
10-percent excise tax on nondeductible contributions. Under the 
provision, the excise tax does not apply to contributions to 
one or more defined contribution plans that are not deductible 
because they exceed the combined plan deduction limit to the 
extent such contributions do not exceed the amount of the 
employer's matching contributions plus the elective deferral 
contributions to a section 401(k) plan.
      Effective date.--The provision is effective with respect 
to taxable years beginning after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
9. Modify funding requirements for certain plans (sec. 1311 of the 
        Senate amendment)

                              Present Law

      Under present law, defined benefit pension plans are 
required to meet certain minimum funding rules. Underfunded 
plans are required to satisfy certain faster funding 
requirements. In general, these additional requirements do not 
apply in the case of plans with a funded current liability 
percentage of at least 90 percent.
      The Pension Benefit Guaranty Corporation (``PBGC'') 
insures benefits under most defined benefit pension plans in 
the event the plan is terminated with insufficient assets to 
pay for plan benefits. The PBGC is funded in part by a flat-
rate premium per plan participant, and a variable rate premium 
based on plan underfunding.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment modifies the minimum funding 
requirements in the case of certain plans. The provision 
applies in the case of plans that (1) were not required to pay 
a variable rate PBGC premium for the plan year beginning in 
1996, (2) do not, in plan years beginning after 1995 and before 
2009, merge with another plan (other than a plan sponsored by 
an employer that was a member of the controlled group of the 
employer in 1996), and (3) are sponsored by a company that is 
engaged primarily in the interurban or interstate passenger bus 
service.
      The provision treats a plan to which it applies as having 
a funded current liability percentage of at least 90 percent 
for plan years beginning after 1996 and before 2005. For plan 
years beginning after 2004, the funded current liability 
percentage will be deemed to be at least 90 percent if the 
actual funded current liability percentage is at least at 
certain specified levels.
      The relief from the minimum funding requirements applies 
for the plan year beginning in 2005, 2006, 2007, and 2008 only 
if contributions to the plan equal at least the expected 
increase in current liability due to benefits accruing during 
the plan year.
      Effective date.--The provision is effective with respect 
to contributions due after December 31, 1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment.
      Effective date.--The provision is effective with respect 
to plan years beginning after December 31, 1996.
10. Date for adoption of plan amendments

                              Present Law

      Plan amendments to reflect amendments to the law 
generally must be made by the time prescribed by law for filing 
the income tax return of the employer for the employer's 
taxable year in which the change in law occurs.

                               House Bill

      No provision.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement provides that any amendments to 
a plan or annuity contract required to be made by the Act are 
not required to be made before the first day of the first plan 
year beginning on or after January 1, 1999. In the case of a 
governmental plan, the date for amendments is extended to the 
first plan year beginning on or after January 1, 2001. The 
conference agreement also provides that if an amendment is made 
pursuant to the Act (whether or not the amendment is required) 
before the date for required plan amendments, the plan or 
contract is operated in a manner consistent with the amendment 
during a period and the amendment is effective retroactively to 
such period (1) the plan or contract will not fail to be 
treated as operated in accordance with its terms for such 
period merely because it is operated in a manner consistent 
with the amendment, and (2) the plan will not fail to meet the 
anti-cutback provisions applicable to qualified retirement 
plans by reason of such a plan amendment.

                  XVI. SENSE OF THE SENATE RESOLUTIONS

A. Sense of the Senate Regarding Reform of the Internal Revenue Code of 
        1986 (sec. 780 of the Senate amendment)

                              Present Law

      The Federal Government imposes an individual income tax, 
a corporate income tax, a payroll tax collected from both 
employees and employers, certain excise taxes, and transfer 
taxes on certain transfers of wealth by gift or from an estate.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides a Sense of the Senate 
resolution that the Internal Revenue Code of 1986 needs broad-
based reform, and that the President should submit a 
comprehensive proposal for reform.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

 B. Sense of the Senate Regarding Tax Treatment of Stock Options (sec. 
                      781 of the Senate amendment)

                              Present Law

      Under present law, an employer is generally entitled to a 
deduction with respect to stock options when the options are 
exercised by the employee. The deduction is generally the 
difference between the option price and the fair market value 
of the stock when the option is exercised.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment includes a Sense of the Senate 
resolution that finds that businesses can deduct the value of 
stock options as a business expense even though the options are 
not treated as an expense on the books of the business. It is 
the sense of the Senate that the Committee on Finance should 
hold hearings on the tax treatment of stock options.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

 C. Sense of the Senate Resolution Regarding Estate Taxes (sec. 782 of 
                         the Senate amendment)

                              Present Law

      A gift tax is imposed on lifetime transfers by gift and 
an estate tax is imposed on transfers at death under a single 
unified graduated rate schedule that effectively begins at 37 
percent and reaches 55 percent on cumulative taxable transfers 
over $3 million. A unified credit effectively exempts the first 
$600,000 in cumulative taxable transfers from estate and gift 
tax (sec. 2010).
      An executor may elect to value certain qualified real 
property used in farming or another qualifying closely-held 
trade or business at its current use value, rather than its 
highest and best use value (up to a maximum reduction of 
$750,000). In addition, an executor may elect to pay the 
Federal estate tax attributable to a qualified closely-held 
business in installments over, at most, a 14-year period with a 
portion bearing 4-percent interest.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment provides a Sense of the Senate 
resolution that (1) estate tax relief provided by this bill is 
an important step that will enable more family-owned farms and 
small businesses to survive and continue to provide economic 
security and job creation in American communities and (2) 
Congress should eliminate the Federal estate tax liability for 
family-owned businesses by the end of 2002 on a deficit-neutral 
basis.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

D. Sense of the Senate Regarding Who Should Benefit from Tax Cuts (sec. 
                      791 of the Senate amendment)

                              Present Law

      No provision.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment includes a Sense of the Senate 
resolution that only those who pay Federal income taxes should 
benefit from the tax reduction provisions of the Act.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

   E. Sense of the Senate Regarding Self-Employment Taxes of Limited 
              Partners (sec. 734 of the Senate amendment)

                              Present Law

      Under the Self-Employment Contributions Act, taxes are 
imposed on an individual's net earnings from self employment. A 
limited partner's net earnings from self employment include 
guaranteed payments made to the individual for services 
actually rendered and do not include a limited partner's 
distributive share of the income or loss of the partnership. 
The Department of the Treasury has issued proposed regulations 
defining a limited partner for this purpose. These regulations 
provide, among other things, that an individual is not a 
limited partner if the individual participates in the 
partnership business for more than 500 hours during the taxable 
year. The regulations are proposed to be effective beginning 
with the individual's first taxable year beginning on or after 
the date the regulations are published as final regulations in 
the Federal Register.

                               House Bill

      No provision.

                            Senate Amendment

      It is the Sense of the Senate that the Department of the 
Treasury should withdraw the proposed regulations defining 
limited partner, and that the Congress should determine the tax 
law governing self-employment income.

                          Conference Agreement

      The conference agreement provides that any regulations 
relating to the definition of a limited partner for self-
employment tax purposes shall not be issued or effective before 
July 1, 1998.

                 XVII. TECHNICAL CORRECTIONS PROVISIONS

                               House Bill

      The House bill contains technical, clerical, and 
conforming amendments to the Small Business Job Protection Act 
of 1996, the Health Insurance Portability and Accountability 
Act of 1996, the Taxpayer Bill of Rights 2, and other recently 
enacted tax legislation.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that the Senate amendment (1) does not contain the 
provision that defines the term ``former reservations in 
Oklahoma'' for purposes of section 168(j)(6) (relating to 
certain tax benefits provided with reference to activities 
occurring on Indian reservations) and (2) makes certain 
clarifications to the provisions relating to church plans 
included in the Small Business Job Protection Act of 1996.

                          Conference Agreement

      The conference agreement follows the House bill and the 
Senate amendment. Thus, the conference agreement contains both 
the provision in the House bill relating to the definition of 
the term ``former reservations in Oklahoma'' and the provisions 
in the Senate amendment relating to church plans.
      In addition, the conference agreement makes the following 
additions, modifications, and clarifications relating to 
technical correction provisions.
      (1) The conference agreement amends section 205(c) of the 
Employee Retirement Income Security Act (as amended by the 
Small Business Job Protection Act of 1996) to clarify that the 
reference to ``the Secretary'' is to the Secretary of the 
Treasury.
      (2) The conference agreement clarifies that, for purposes 
of the section 833 deduction, liabilities incurred during the 
taxable year under cost-plus contracts are added to claims 
incurred under section 833(b)(1)(A)(i). Similarly, for purposes 
of the section 833 deduction, expenses incurred during the 
taxable year in connection with cost-plus contracts are added 
to expenses incurred under section 833(b)(1)(A)(ii). The 
provision is effective as if included in the Tax Reform Act of 
1986.
      (3) The conference agreement provides that the technical 
correction provisions clarifying the phased reduction in luxury 
excise tax rates for automobiles will be effective for sales 
after the date of enactment of this Act.
      (4) The conference agreement clarifies that, under the 
transition relief provided under the company-owned life 
insurance 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 after October 13, 1995, by reason of no additional 
premiums being received under the contract.

                       XVIII. OTHER TAX PROVISION

A. Estimated Tax Requirements of Individuals (sec. 311(d) of the House 
                                 bill)

      Under present law, an individual taxpayer generally is 
subject to an addition to tax for any underpayment of estimated 
tax. 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.

                               House Bill

      The House bill changes the 110 percent of last year's 
liability safe harbor to be a 109 percent of last year's 
liability safe harbor for taxable years beginning in 1997 and a 
105 percent of last year's liability safe harbor for taxable 
years beginning in 1998.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement changes the 110 percent of last 
year's liability safe harbor to be a 100 percent of last year's 
liability safe harbor for taxable years beginning in 1998, a 
105 percent of last year's liability safe harbor for taxable 
years beginning in 1990, 2000, and 2001, and a 112 percent of 
last year's liability safe harbor for taxable years beginning 
in 2002. In addition, no estimated tax penalties will be 
imposed under section 6654 or 6655 for any period before 
January 1, 1998, for any payment the due date of which is 
before January 16, 1998, with respect to an underpayment to the 
extent the underpayment is created or increased by a provision 
of the Act.

                         XIX. TRADE PROVISIONS

  A. Extension of Duty-Free Treatment Under the Generalized System of 
                Preferences (sec. 971 of the House bill)

                              Present Law

      Title V of the Trade Act of 1974, as amended (Generalized 
System of Preferences (``GSP'')), 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.

                               House Bill

      Under the House bill, the GSP program is reauthorized for 
two years, to expire on May 31, 1999. Refunds of any duty paid 
between May 31, 1997 and the date of enactment are provided 
upon request of the importer.
      Effective date.--The provision is effective upon date of 
enactment.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement follows the House bill, with a 
modification to extend the GSP reauthorization through June 30, 
1998.

 B. Temporary Suspension of Vessel Repair Duty (sec. 972 of the House 
                                 bill)

                              Present Law

      Section 466 of the Tariff Act of 1930 establishes a 50-
percent duty on repairs made outside the United States to U.S. 
flag vessels.

                               House Bill

      The current 50-percent duty on repairs to U.S. flag 
vessels made in countries that are signatories to the OECD 
Shipbuilding Agreement is suspended for a one-year period.
      Effective date.--The provision is effective with respect 
to repair activities occurring for a one-year period beginning 
on the date of enactment.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.

 C. United States-Caribbean Basin Trade Partnership Act (secs. 981-988 
                           of the House bill)

                              Present Law

      The Caribbean Basin Initiative (``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 
countries in the Caribbean Basin region. Certain products 
(textiles, apparel, canned tuna, petroleum and petroleum 
products, footwear, handbags, luggage, flatgoods, work gloves, 
leather wearing apparel, watches and watch parts) were excluded 
under the statute from eligibility for duty-free treatment.
      CBI trade benefits were made permanent in 1990.

                               House Bill

      The House bill amends the Caribbean Basin Economic 
Recovery Act to provide additional temporary transitional trade 
benefits to products that are excluded from eligibility for 
duty-free treatment under CBI. These products are provided 
tariff and quota treatment which is comparable to treatment 
accorded to like articles imported from Mexico under the North 
American Free Trade Agreement (``NAFTA'') subject to certain 
rule-of-origin and customs requirements and other limitations. 
The President must review periodically country adherence to 
eligibility criteria, and consult with beneficiary countries 
about free trade agreement negotiations.
      Effective date.--The provision is effective for one year 
beginning January 1, 1998.

                            Senate Amendment

      No provision.

                          Conference Agreement

      The conference agreement does not include the House bill 
provision.

       XX. LIMITED TAX BENEFITS SUBJECT TO THE LINE ITEM VETO ACT

      The Line Item Veto Act amended the Congressional Budget 
and Impoundment Act of 1974 to grant the President the limited 
authority to cancel specific dollar amounts of discretionary 
budget authority, certain new direct spending, and limited tax 
benefits. The Line Item Veto Act provides that the Joint 
Committee on Taxation is required to examine any revenue or 
reconciliation bill or joint resolution that amends the 
Internal Revenue Code of 1986 prior to its filing by a 
conference committee in order to determine whether or not the 
bill or joint resolution contains any limited tax benefits and 
to provide a statement to the conference committee that either 
(1) identifies each limited tax benefit contained in the bill 
or resolution, or (2) states that the bill or resolution 
contains no limited tax benefits. The conferees determine 
whether or not to include the Joint Committee's statement in 
the conference report. If the conference report includes the 
information from the Joint Committee on Taxation identifying 
provisions that are limited tax benefits, then the President 
may cancel one or more of those, but only those, provisions 
that have been identified. If such a conference report contains 
a statement from the Joint Committee on Taxation that none of 
the provisions in the conference report are limited tax 
benefits, then the President has no authority to cancel any of 
the specific tax provisions, because there are no tax 
provisions that are eligible for cancellation under the Line 
Item Veto Act.
      The conference report contains a list of provisions that 
have been identified by the Joint Committee on Taxation as 
limited tax benefits within the meaning of the Line Item Veto 
Act. These provisions are listed below
      (1) Sec. 101(c) (relating to high risk pools permitted to 
cover dependents of high risk individuals)
      (2) Sec. 222 (relating to limitation on qualified 
501(c)(3) bonds other than hospital bonds)
      (3) Sec. 224 (relating to contributions of computer 
technology and equipment for elementary or secondary school 
purposes)
      (4) Sec. 312(a) (relating to treatment of remainder 
interests for purposes of provision relating to gain from sale 
of principal residence)
      (5) Sec. 501(b) (relating to indexing of alternative 
valuation of certain farm, etc., real property)
      (6) Sec. 504 (relating to extension of treatment of 
certain rents under section 2032A to lineal descendants)
      (7) Sec. 505 (relating to clarification of judicial 
review of eligibility for extension of time for payment of 
estate tax)
      (8) Sec. 508 (relating to treatment of land subject to 
qualified conservation easement)
      (9) Sec. 511 (relating to expansion of exception from 
generation-skipping transfer tax for transfers to individuals 
with deceased parents)
      (10) Sec. 601 (relating to the research tax credit)
      (11) Sec. 602 (relating to contributions of stock to 
private foundations)
      (12) Sec. 603 (relating to the work opportunity tax 
credit)
      (13) Sec. 604 (relating to orphan drug tax credit)
      (14) Sec. 701 (relating to incentives for revitalization 
of the District of Columbia) to the extent it amends the 
Internal Revenue Code of 1986 to create sections 1400 and 1400A 
(relating to tax-exempt economic development bonds)
      (15) Sec. 701 (relating to incentives for revitalization 
of the District of Columbia) to the extent it amends the 
Internal Revenue Code of 1986 to create section 1400C (relating 
to first-time homebuyer credit for District of Columbia)
      (16) Sec. 801 (relating to incentives for employing long-
term family assistance recipients)
      (17) Sec. 904(b) (relating to uniform rate of tax on 
vaccines) as it relates to any vaccine containing pertussis 
bacteria, extracted or partial cell bacteria, or specific 
pertussis antigens
      (18) Sec. 904(b) (relating to uniform rate of tax on 
vaccines) as it relates to any vaccine against measles
      (19) Sec. 904(b) (relating to uniform rate of tax on 
vaccines) as it relates to any vaccine against mumps
      (20) Sec. 904(b) (relating to uniform rate of tax on 
vaccines) as it relates to any vaccine against rubella
      (21) Sec. 905 (relating to operators of multiple retail 
gasoline outlets treated as wholesale distributors for refund 
purposes)
      (22) Sec. 906 (relating to exemption of electric and 
other clean-fuel motor vehicles from luxury automobile 
classification)
      (23) Sec. 907(a) (relating to rate of tax on liquified 
natural gas determined on basis of BTU equivalency with 
gasoline)
      (24) Sec. 907(b) (relating to rate of tax on methanol 
from natural gas determined on basis of BTU equivalency with 
gasoline)
      (25) Sec. 908 (relating to modification of tax treatment 
of hard cider)
      (26) Sec. 914 (relating to mortgage financing for 
residences located in disaster areas)
      (27) Sec. 962 (relating to assignment of workmen's 
compensation liability eligible for exclusion relating to 
personal injury liability assignments)
      (28) Sec. 963 (relating to tax-exempt status for certain 
State worker's compensation act companies)
      (29) Sec. 967 (relating to additional advance refunding 
of certain Virgin Island bonds)
      (30) Sec. 968 (relating to nonrecognition of gain on sale 
of stock to certain farmers' cooperatives)
      (31) Sec. 971 (relating to exemption of the incremental 
cost of a clean fuel vehicle from the limits on depreciation 
for vehicles)
      (32) Sec. 974 (relating to clarification of treatment of 
certain receivables purchased by cooperative hospital service 
organizations)
      (33) Sec. 975 (relating to deduction in computing 
adjusted gross income for expenses in connection with service 
performed by certain officials) with respect to taxable years 
beginning before 1991
      (34) Sec. 977 (relating to elective carryback of existing 
carryovers of National Railroad Passenger Corporation)
      (35) Sec. 1005(b)(2)(B) (relating to transition rule for 
instruments described in a rulingrequest submitted to the 
Internal Revenue Service on or before June 8, 1997)
      (36) Sec. 1005(b)(2)(C) (relating to transition rule for 
instruments described on or before June 8, 1997, in a public 
announcement or in a filing with the Securities and Exchange 
Commission) as it relates to a public announcement
      (37) Sec. 1005(b)(2)(C) (relating to transition rule for 
instruments described on or before June 8, 1997, in a public 
announcement or in a filing with the Securities and Exchange 
Commission) as it relates to a filing with the Securities and 
Exchange Commission
      (38) Sec. 1011(d)(2)(B) (relating to transition rule for 
distributions made pursuant to the terms of a tender offer 
outstanding on May 3, 1995)
      (39) Sec. 1011(d)(3) (relating to transition rule for 
distributions made pursuant to the terms of a tender offer 
outstanding on September 13, 1995)
      (40) Sec. 1012(d)(3)(B) (relating to transition rule for 
distributions pursuant to an acquisition described in section 
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described 
in a ruling request submitted to the Internal Revenue Service 
on or before April 16, 1997)
      (41) Sec. 1012(d)(3)(C) (relating to transition rule for 
distributions pursuant to an acquisition described in section 
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described 
in a public announcement or filing with the Securities and 
Exchange Commission) as it relates to a public announcement
      (42) Sec. 1012(d)(3)(C) (relating to transition rule for 
distributions pursuant to an acquisition described in section 
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described 
in a public announcement or filing with the Securities and 
Exchange Commission) as it relates to a filing with the 
Securities and Exchange Commission
      (43) Sec. 1013(d)(2)(B) (relating to transition rule for 
distributions or acquisitions after June 8, 1997, described in 
a ruling request submitted to the Internal Revenue Service 
submitted on or before June 8, 1997)
      (44) Sec. 1013(d)(2)(C) (relating to transition rule for 
distributions or acquisitions after June 8, 1997, described in 
a public announcement or filing with the Securities and 
Exchange Commission on or before June 8, 1997) as it relates to 
a public announcement
      (45) Sec. 1013(d)(2)(C) (relating to transition rule for 
distributions or acquisitions after June 8, 1997, described in 
a public announcement or filing with the Securities and 
Exchange Commission on or before June 8, 1997) as it relates to 
a filing with the Securities and Exchange Commission
      (46) Sec. 1014(f)(2)(B) (relating to transition rule for 
any transaction after June 8, 1997, if such transaction is 
described in a ruling request submitted to the Internal Revenue 
Service on or before June 8, 1997)
      (47) Sec. 1014(f)(2)(C) (relating to transition rule for 
any transaction after June 8, 1997, if such transaction is 
described in a public announcement or filing with the 
Securities and Exchange Commission on or before June 8, 1997) 
as it relates to a public announcement
      (48) Sec. 1014(f)(2)(C) (relating to transition rule for 
any transaction after June 8, 1997, if such transaction is 
described in a public announcement or filing with the 
Securities and Exchange Commission on or before June 8, 1997) 
as it relates to a filing with the Securities and Exchange 
Commission
      (49) Sec. 1042(b) (relating to special rules for 
provision terminating certain exceptions from rules relating to 
exempt organizations which provide commercial-type insurance)
      (50) Sec. 1081(a) (relating to termination of suspense 
accounts for family corporations required to use accrual 
accounting) as it relates to the repeal of Internal Revenue 
Code section 447(i)(3)
      (51) Sec. 1089(b)(3) (relating to reformations)
      (52) Sec. 1089(b)(5)(B)(i) (relating to persons under a 
mental disability)
      (53) Sec.1171 (relating to treatment of computer software 
as FSC export property)
      (54) Sec. 1175 (relating to exemption for active 
financing income)
      (55) Sec. 1204 (relating to travel expenses of Federal 
employees doing criminal investigations)
      (56) Sec. 1236 (relating to extension of time for filing 
a request for administrative adjustment)
      (57) Sec. 1243 (relating to special rules for 
administrative adjustment request with respect to bad debts or 
worthless securities)
      (58) Sec. 1251 (relating to clarification on limitation 
on maximum number of shareholders)
      (59) Sec. 1253 (relating to attribution rules applicable 
to tenant ownership)
      (60) Sec. 1256 relating to modification of earnings and 
profits rules for determining whether REIT has earnings and 
profits from non-REIT years)
      (61) Sec. 1257 (relating to treatment of foreclosure 
property)
      (62) Sec. 1261 (relating to shared appreciation 
mortgages)
      (63) Sec. 1302 (relating to clarification of waiver of 
certain rights of recovery)
      (64) Sec. 1303 (relating to transitional rule under 
section 2056A)
      (65) Sec. 1304 (relating to treatment for estate tax 
purposes of short-term obligations held by nonresident alien)
      (66) Sec. 1311 (relating to clarification of treatment of 
survivor annuities under qualified terminable interest rules)
      (67) Sec. 1312 (relating to treatment of qualified 
domestic trust rules of forms of ownership which are not 
trusts)
      (68) Sec. 1313 (relating to opportunity to correct 
failures under section 2032A)
      (69) Sec. 1414 (relating to fermented material from any 
brewery may be received at a distilled spirits plant)
      (70) Sec. 1417 (relating to use of additional 
ameliorating material in certain wines)
      (71) Sec. 1418 (relating to domestically produced beer 
may be withdrawn free of tax for use of foreign embassies, 
legations, etc.)
      (72) Sec. 1421 (relating to transfer to brewery of beer 
imported in bulk without payment of tax)
      (73) Sec. 1422 (relating to transfer to bonded wine 
cellars of wine imported in bulk without payment of tax)
      (74) Sec. 1506 (relating to clarification of certain 
rules relating to employee stock ownership plans of S 
corporations)
      (75) Sec. 1507 (relating to modification of 10 percent 
tax for nondeductible contributions)
      (76) Sec. 1523 (relating to repeal of application of 
unrelated business income tax to ESOPs)
      (77) Sec. 1530 (relating to gratuitous transfers for the 
benefit of employees)
      (78) Sec. 1532 (relating to special rules relating to 
church plans)
      (79) Sec. 1604(c)(2) (relating to amendment related to 
Omnibus Budget Reconciliation Act of 1993)

                                ESTIMATED BUDGET EFFECTS OF THE CONFERENCE AGREEMENT ON THE REVENUE PROVISIONS OF H.R. 2014, THE ``TAXPAYER RELIEF ACT OF 1997''                                
                                                                        [Fiscal Years 1997-2007, in millions of dollars]                                                                        
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
          Provision                Effective        1997       1998       1999       2000       2001       2002       2003       2004       2005       2006       2007     1997-2002   1997-2007
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  I. Child and Dependent Care                                                                                                                                                                   
 Tax Credits; Health Care for                                                                                                                                                                   
 Children                                                                                                                                                                                       
    1. Tax credit for          1/1/98..........  .........     -2,710    -18,119    -21,549    -21,401    -21,258    -20,901    -20,430    -19,702    -18,997    -18,317     -85,037    -183,384
     children under age 17                                                                                                                                                                      
     ($400 in 1998, and $500                                                                                                                                                                    
     thereafter; $75,000/                                                                                                                                                                       
     $110,000 AGI phaseout                                                                                                                                                                      
     for credit;                                                                                                                                                                                
     nonrefundable for small                                                                                                                                                                    
     families, refundable and                                                                                                                                                                   
     limited to tax plus                                                                                                                                                                        
     employee FICA minus EIC                                                                                                                                                                    
     for large families \1\                                                                                                                                                                     
     \2\.                                                                                                                                                                                       
    2. Expand State high-risk  tyba 12/31/97...  .........         -1         -2         -2         -2         -2         -2         -2         -2         -2         -2          -8         -17
     pools to include spouses                                                                                                                                                                   
     and children of high-                                                                                                                                                                      
     risk individuals.                                                                                                                                                                          
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Child and    ................  .........      2,711    -18,121    -21,551    -21,403    -21,260    -20,903    -20,432    -19,704    -18,999    -18,319     -85,045    -183,401
       Dependent Care Tax                                                                                                                                                                       
       Credits; Health Care                                                                                                                                                                     
       for Children.                                                                                                                                                                            
                                                ================================================================================================================================================
  II. Education Tax                                                                                                                                                                             
 Incentives                                                                                                                                                                                     
    A. Tax Benefits Relating                                                                                                                                                                    
     to Education Expenses:                                                                                                                                                                     
        1. Administration's    pma & tyba 12/31/ .........     -2,083     -6,469     -7,393     -7,907     -7,707     -8,620     -8,754     -8,893     -9,035     -9,180     -31,559     -76,041
         HOPE credit for        97.                                                                                                                                                             
         first 2 years; 100%                                                                                                                                                                    
         credit for first                                                                                                                                                                       
         $1,000 of eligible                                                                                                                                                                     
         expenses; 50% credit                                                                                                                                                                   
         for next $1,000; 20%                                                                                                                                                                   
         credit for third and                                                                                                                                                                   
         fourth year students                                                                                                                                                                   
         for up to $5,000 of                                                                                                                                                                    
         expenses; for years                                                                                                                                                                    
         after 2002, expenses                                                                                                                                                                   
         are increased to                                                                                                                                                                       
         $10,000 (effective                                                                                                                                                                     
         date of the 20%                                                                                                                                                                        
         credit is 7/1/98);                                                                                                                                                                     
         eligible expenses                                                                                                                                                                      
         for HOPE credit are                                                                                                                                                                    
         indexed in 2001;                                                                                                                                                                       
         income limits for                                                                                                                                                                      
         both credits indexed                                                                                                                                                                   
         in 2001.                                                                                                                                                                               
        2. Expand State-       tyba 12/31/97...  .........        -36       -107       -118       -130       -143       -157       -173       -190       -209       -230        -533      -1,491
         sponsored prepaid                                                                                                                                                                      
         tuition and State                                                                                                                                                                      
         savings programs to                                                                                                                                                                    
         include room and                                                                                                                                                                       
         board\3\.                                                                                                                                                                              
        3. Student loan        poida 12/31/97..  .........        -18        -69       -122       -204       -277       -308       -326       -346       -368       -391        -690      -2,429
         interest deduction:                                                                                                                                                                    
         $1,000 above-the-                                                                                                                                                                      
         line deduction in                                                                                                                                                                      
         1998, $1,500 in                                                                                                                                                                        
         1999, $2,000 in                                                                                                                                                                        
         2000, $2,500 in 2001                                                                                                                                                                   
         and thereafter;                                                                                                                                                                        
         phaseout $40,000-                                                                                                                                                                      
         $55,000 single                                                                                                                                                                         
         filers ($60,000-                                                                                                                                                                       
         $75,000 joint                                                                                                                                                                          
         filers); income                                                                                                                                                                        
         limits indexed                                                                                                                                                                         
         beginning in 2003.                                                                                                                                                                     
        4. Penalty-free        tyba 12/31/97...  .........        -78       -201       -181       -175       -177       -179       -182       -184       -186       -189        -812      -1,732
         withdrawals from all                                                                                                                                                                   
         IRAs for                                                                                                                                                                               
         undergraduate, post-                                                                                                                                                                   
         secondary                                                                                                                                                                              
         vocational, and                                                                                                                                                                        
         graduate education                                                                                                                                                                     
         expenses.                                                                                                                                                                              
        5. Education IRA--     tyba 12/31/97...  .........       -156       -644       -912     -1,060     -1,126     -1,448     -1,752     -2,054     -2,360     -2,680      -3,899     -14,193
         permit contributions                                                                                                                                                                   
         to Education IRA for                                                                                                                                                                   
         a child under age                                                                                                                                                                      
         18; annual                                                                                                                                                                             
         contributions                                                                                                                                                                          
         limited to $500 per                                                                                                                                                                    
         child; impose                                                                                                                                                                          
         phaseout range of                                                                                                                                                                      
         $95,000-$110,000 for                                                                                                                                                                   
         single filers and                                                                                                                                                                      
         $150,000-$160,000                                                                                                                                                                      
         for joint filers \4\.                                                                                                                                                                  
    B. Other Education-                                                                                                                                                                         
     Related Tax Provisions:                                                                                                                                                                    
        1. Extend employer-    tyba 12/31/96...  .........       -534       -369       -250  .........  .........  .........  .........  .........  .........  .........      -1,153      -1,153
         provided education                                                                                                                                                                     
         assistance for                                                                                                                                                                         
         undergraduates                                                                                                                                                                         
         through 5/31/00                                                                                                                                                                        
         [\1\].                                                                                                                                                                                 
        2. Repeal $150         1/1/98..........  .........         -6        -45        -75        -89        -99       -106       -115       -125       -138       -162        -315        -962
         million limit on tax-                                                                                                                                                                  
         exempt section                                                                                                                                                                         
         501(c)(3) bonds for                                                                                                                                                                    
         new capital                                                                                                                                                                            
         expenditures.                                                                                                                                                                          
        3. Enhanced deduction  tyba 12/31/97...  .........        -46        -48        -77        -49         -5         -1  .........  .........  .........  .........        -225        -227
         for corporate                                                                                                                                                                          
         contributions of                                                                                                                                                                       
         computer technology                                                                                                                                                                    
         and equipment for                                                                                                                                                                      
         grades K-12; sunset                                                                                                                                                                    
         after 3 years.                                                                                                                                                                         
        4. Raise small issuer  bia 12/31/97....  .........         -1         -4         -7        -11        -14        -27        -30        -33        -36        -38         -36        -199
         arbitrage rebate                                                                                                                                                                       
         exception for                                                                                                                                                                          
         governmental bonds                                                                                                                                                                     
         used to finance                                                                                                                                                                        
         education facilities                                                                                                                                                                   
         from $5 million to                                                                                                                                                                     
         $10 million.                                                                                                                                                                           
        5. Treatment of        Da DOE..........  .........                                                                                                                                      
         cancellation of                                                                                                                                                                        
         certain student                                                                                                                                                                        
         loans; with                                                                                                                                                                            
         modification.                                                                                                                                                                          
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        6. Tax credit for      oia 12/31/97....  .........         -8        -27        -43        -47        -47        -47        -47        -47        -47        -47        -172        -408
         holders of qualified                                                                                                                                                                   
         education bonds                                                                                                                                                                        
         (limited to $400                                                                                                                                                                       
         million per year in                                                                                                                                                                    
         loans; 2-year                                                                                                                                                                          
         sunset..                                                                                                                                                                               
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of          ................  .........     -2,966     -7,983     -9,178     -9,672     -9,595    -10,893    -11,379    -11,872    -12,379    -12,917     -39,394     -98,835
           Education Tax                                                                                                                                                                        
           Incentives.                                                                                                                                                                          
                                                ================================================================================================================================================
  III. Savings and Investment                                                                                                                                                                   
 Tax Incentives                                                                                                                                                                                 
    A. Individual Retirement                                                                                                                                                                    
     Arrangements:                                                                                                                                                                              
        1. IRA--Increase       tyba 12/31/97...  .........       -367       -345         86       -346       -860     -1,830     -3,292     -3,842     -4,424     -5,004      -1,832     -20,225
         deductible IRA                                                                                                                                                                         
         income limits by                                                                                                                                                                       
         $10,000 for joint                                                                                                                                                                      
         filers in 1998                                                                                                                                                                         
         ($5,000 for single                                                                                                                                                                     
         filers in 1998) and                                                                                                                                                                    
         by $1,000 per year                                                                                                                                                                     
         through 2002; in                                                                                                                                                                       
         2003 increase to                                                                                                                                                                       
         $40,000 for single                                                                                                                                                                     
         filers and $60,000                                                                                                                                                                     
         for joint filers and                                                                                                                                                                   
         by $5,000 per year                                                                                                                                                                     
         thereafter until                                                                                                                                                                       
         limits are $50,000-                                                                                                                                                                    
         $60,000 for single                                                                                                                                                                     
         filers and $80,000-                                                                                                                                                                    
         $100,000 for joint                                                                                                                                                                     
         filers (phase out                                                                                                                                                                      
         range increases to                                                                                                                                                                     
         $20,000 when lower                                                                                                                                                                     
         limit reaches                                                                                                                                                                          
         $100,000); penalty-                                                                                                                                                                    
         free withdrawals for                                                                                                                                                                   
         educational purposes                                                                                                                                                                   
         and first-time home                                                                                                                                                                    
         purchase only;                                                                                                                                                                         
         create IRA PLUS;                                                                                                                                                                       
         impose phase-out                                                                                                                                                                       
         range of $95,000-                                                                                                                                                                      
         $110,000 for single                                                                                                                                                                    
         filers and $150,000-                                                                                                                                                                   
         $160,000 for joint                                                                                                                                                                     
         filers; impose                                                                                                                                                                         
         $150,000-$160,000                                                                                                                                                                      
         income phase-out for                                                                                                                                                                   
         spousal IRAs;                                                                                                                                                                          
         provide that                                                                                                                                                                           
         aggregate                                                                                                                                                                              
         contributions to                                                                                                                                                                       
         deductible and                                                                                                                                                                         
         nondeductible                                                                                                                                                                          
         retirement IRAs may                                                                                                                                                                    
         not exceed $2,000.                                                                                                                                                                     
    B. Capital Gains                                                                                                                                                                            
     Provisions:                                                                                                                                                                                
        1. Capital gains: (a)  various.........      1,254      6,371        171     -2,954     -2,934     -1,785     -3,742     -3,981     -4,179     -4,424     -4,958         123     -21,161
         20%/10% rate                                                                                                                                                                           
         structure; (b)                                                                                                                                                                         
         retain maximum 28%                                                                                                                                                                     
         for collectibles;                                                                                                                                                                      
         (c) section 1250                                                                                                                                                                       
         recapture at maximum                                                                                                                                                                   
         of 25%; (d)                                                                                                                                                                            
         symmetric AMT                                                                                                                                                                          
         treatment; (e)                                                                                                                                                                         
         exclusion for gain                                                                                                                                                                     
         on personal                                                                                                                                                                            
         residence (including                                                                                                                                                                   
         remainder                                                                                                                                                                              
         interests); (f)                                                                                                                                                                        
         capital gains rate                                                                                                                                                                     
         structure of 18%/8%                                                                                                                                                                    
         for assets held more                                                                                                                                                                   
         than 5 years after                                                                                                                                                                     
         2000, with mark-to-                                                                                                                                                                    
         market in 2001;                                                                                                                                                                        
         assets qualify for                                                                                                                                                                     
         8% in 2001 if held                                                                                                                                                                     
         for 5 years                                                                                                                                                                            
         regardless of when                                                                                                                                                                     
         asset was acquired;                                                                                                                                                                    
         (g) permit rollover                                                                                                                                                                    
         of qualified small                                                                                                                                                                     
         business stock if                                                                                                                                                                      
         rolled over into                                                                                                                                                                       
         another qualified                                                                                                                                                                      
         small business stock                                                                                                                                                                   
         within 60 days; and                                                                                                                                                                    
         (h) retain 28%/15%                                                                                                                                                                     
         rate structure for                                                                                                                                                                     
         capital assets held                                                                                                                                                                    
         more than 12 months                                                                                                                                                                    
         but less than 18                                                                                                                                                                       
         months.                                                                                                                                                                                
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
        Subtotal of Savings    ................      1,254      6,004       -174     -2,868     -3,280     -2,645     -5,572     -7,273     -8,021     -8,848     -9,962      -1,709     -41,386
         and Investment Tax                                                                                                                                                                     
         Incentives.                                                                                                                                                                            
  IV. Alternative Minimum Tax                                                                                                                                                                   
 Provisions                                                                                                                                                                                     
    1. Exemption from          tyba 12/31/97...  .........        -97       -171       -131       -100        -77        -59        -45        -34        -26        -20        -577        -762
     alternative minimum tax                                                                                                                                                                    
     for small corporations.                                                                                                                                                                    
    2. Conform AMT             ppisa 12/31/98..  .........  .........       -580     -1,653     -2,230     -2,358     -2,561     -2,622     -2,350     -2,044     -1,920      -6,821     -18,317
     depreciation lives to                                                                                                                                                                      
     the regular tax.                                                                                                                                                                           
    3. Reverse IRS position    di tyba 12/31/87         -8       -157       -158       -167       -164       -157       -148         22         22         21         21        -811        -872
     on AMT treatment of                                                                                                                                                                        
     certain installment                                                                                                                                                                        
     sales by farmers.                                                                                                                                                                          
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Alternative  ................         -8       -254       -909     -1,951     -2,494     -2,592     -2,768     -2,645     -2,362     -2,049     -1,919      -8,209     -19,951
       Minimum Tax Provisions.                                                                                                                                                                  
                                                ================================================================================================================================================
  V. Estate, Gift and                                                                                                                                                                           
 Generation-Skipping Tax                                                                                                                                                                        
 Provisions                                                                                                                                                                                     
    A. Estate and Gift Tax                                                                                                                                                                      
     Provisions:                                                                                                                                                                                
        1. Increase unified    dda 12/31/97....  .........  .........       -843     -1,259     -1,816     -2,013     -2,596     -2,997     -5,656     -7,279     -8,638      -5,931     -33,097
         estate and gift tax                                                                                                                                                                    
         credit to $625,000                                                                                                                                                                     
         in 1998; $650,000 in                                                                                                                                                                   
         1999; $675,000 in                                                                                                                                                                      
         2000 and 2001;                                                                                                                                                                         
         $700,000 in 2002 and                                                                                                                                                                   
         2003, $850,000 in                                                                                                                                                                      
         2004, $950,000 in                                                                                                                                                                      
         2005; $1 million in                                                                                                                                                                    
         2006 and thereafter;                                                                                                                                                                   
         and index other                                                                                                                                                                        
         provisions beginning                                                                                                                                                                   
         in 1999; cap family                                                                                                                                                                    
         owned business                                                                                                                                                                         
         exclusion with                                                                                                                                                                         
         unified credit at                                                                                                                                                                      
         $1.3 million                                                                                                                                                                           
         annually (exclude                                                                                                                                                                      
         $675,000 in 1998,                                                                                                                                                                      
         $650,000 in 1999,                                                                                                                                                                      
         $625,000 in 2000,                                                                                                                                                                      
         $625,000 in 2001,                                                                                                                                                                      
         $600,000 in 2002 and                                                                                                                                                                   
         2003, $450,000 in                                                                                                                                                                      
         2004, $350,000 in                                                                                                                                                                      
         2005; $300,000 in                                                                                                                                                                      
         2006 and thereafter).                                                                                                                                                                  
        2. Reduce section      dda 12/31/97....  .........  .........         -9        -17        -25        -33        -41        -47        -53        -58        -65         -84        -349
         6601(j) interest                                                                                                                                                                       
         rate to 2% for first                                                                                                                                                                   
         $1 million of                                                                                                                                                                          
         taxable closely-held                                                                                                                                                                   
         business interests,                                                                                                                                                                    
         remainder subject to                                                                                                                                                                   
         tax at 45% of                                                                                                                                                                          
         present-law interest                                                                                                                                                                   
         rates, and all                                                                                                                                                                         
         interest under                                                                                                                                                                         
         section 6166 made                                                                                                                                                                      
         nondeductible.                                                                                                                                                                         
        3. Provide up to       dda 12/31/97....  .........  .........         -7        -15        -25        -35        -48        -51        -56        -60        -64         -82        -361
         $500,000 estate tax                                                                                                                                                                    
         exclusion (phasein                                                                                                                                                                     
         by $100,000 annually                                                                                                                                                                   
         beginning in 1998)                                                                                                                                                                     
         for treatment of                                                                                                                                                                       
         land subject to a                                                                                                                                                                      
         qualified                                                                                                                                                                              
         conservation                                                                                                                                                                           
         easement coordinated                                                                                                                                                                   
         with exclusion of                                                                                                                                                                      
         family farms                                                                                                                                                                           
         (expanded treatment                                                                                                                                                                    
         of land with severed                                                                                                                                                                   
         mineral rights) and                                                                                                                                                                    
         business relief used.                                                                                                                                                                  
        4. Extension of        roa 12/31/76....  .........        -25         -2         -2         -2         -2         -2         -2         -2         -2         -2         -33         -43
         treatment of certain                                                                                                                                                                   
         rents under section                                                                                                                                                                    
         2032A to lineal                                                                                                                                                                        
         descendants.                                                                                                                                                                           
        5. Clarification of    dda DOE.........  .........  .........        -15        -15        -15        -15        -15        -15        -14        -12        -11         -60        -127
         judicial review of                                                                                                                                                                     
         eligibility for                                                                                                                                                                        
         extension of time                                                                                                                                                                      
         for payment of                                                                                                                                                                         
         estate tax.                                                                                                                                                                            
        6. Gifts may not be    gma DOE.........  .........  .........        -16        -18        -21        -26        -32        -38        -45        -53        -61         -81        -310
         revalued for estate                                                                                                                                                                    
         tax purposes after                                                                                                                                                                     
         expiration of                                                                                                                                                                          
         statute of                                                                                                                                                                             
         limitations.                                                                                                                                                                           
        7. Repeal certain      tyba 12/31/97...  .........  .........        -11        -11        -11        -11        -11        -11        -11        -11        -11         -44         -99
         throwback rules                                                                                                                                                                        
         applicable to                                                                                                                                                                          
         domestic trusts;                                                                                                                                                                       
         exclude pre-1984                                                                                                                                                                       
         multiple trusts from                                                                                                                                                                   
         repeal.                                                                                                                                                                                
        8. Estate tax relief   DOE.............  .........         -8        -15  .........  .........  .........  .........  .........  .........  .........  .........         -23         -23
         for money going to                                                                                                                                                                     
         ESOPs in existence                                                                                                                                                                     
         on 8/1/96 and                                                                                                                                                                          
         decedents dying                                                                                                                                                                        
         before 1/1/99.                                                                                                                                                                         
    B. Generation-Skipping                                                                                                                                                                      
     Tax Provision:                                                                                                                                                                             
        1. Expand exception    gsta 12/31/97...  .........  .........         -4         -4         -4         -4         -4         -5         -5         -5         -6         -16         -41
         from generation-                                                                                                                                                                       
         skipping transfer                                                                                                                                                                      
         tax for transfers to                                                                                                                                                                   
         individuals with                                                                                                                                                                       
         deceased parents.                                                                                                                                                                      
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Estate,  ................  .........        -33       -922      -1341      -1919      -2139      -2749      -3166      -5842      -7480      -8858       -6354      -34450
           Gift and                                                                                                                                                                             
           Generation-                                                                                                                                                                          
           Skipping Tax                                                                                                                                                                         
           Provisions.                                                                                                                                                                          
                                                ================================================================================================================================================
  VI. Expiring Tax Provisions                                                                                                                                                                   
    1. Research tax credit     6/1/97..........       -161       -820       -639       -294       -204       -123        -33  .........  .........  .........  .........      -2,241      -2,274
     through 6/30/98..                                                                                                                                                                          
    2. Contributions of        6/1/97..........  .........        -99         -9         -4  .........  .........  .........  .........  .........  .........  .........        -112        -112
     appreciated stock to                                                                                                                                                                       
     private foundations                                                                                                                                                                        
     through 6/30/98.                                                                                                                                                                           
    3. Extend a modified work  wpoifhma 9/30/97  .........       -140       -131        -73        -28        -11         -2  .........  .........  .........  .........        -383        -385
     opportunity tax credit                                                                                                                                                                     
     through 6/30/98 \5\;                                                                                                                                                                       
     include SSI recipients.                                                                                                                                                                    
    4. Orphan drug tax credit  6/1/97..........  .........        -29        -28        -30        -32        -34        -35        -37        -39        -40        -42        -152        -346
     (permanent).                                                                                                                                                                               
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Expiring     ................       -161     -1,088       -807       -401       -264       -168        -70        -37        -39        -40        -42      -2,888      -3,117
       Tax Provisions.                                                                                                                                                                          
                                                ================================================================================================================================================
  VII. District of Columbia                                                                                                                                                                     
 Tax Incentives                                                                                                                                                                                 
    1. Designate existing      1/1/98..........  .........        -71       -110       -113       -118       -127        -45          3          2      (\6\)         -2        -539        -582
     D.C. enterprise                                                                                                                                                                            
     community and census                                                                                                                                                                       
     tracts with greater than                                                                                                                                                                   
     20% poverty (with                                                                                                                                                                          
     revised residency                                                                                                                                                                          
     requirement) as the D.C.                                                                                                                                                                   
     Enterprise Zone,                                                                                                                                                                           
     eligible for modified                                                                                                                                                                      
     present-law empowerment                                                                                                                                                                    
     zone incentives (20%                                                                                                                                                                       
     wage credit, increased                                                                                                                                                                     
     179 expensing, and                                                                                                                                                                         
     expanded tax-exempt                                                                                                                                                                        
     financing); sunset 12/31/                                                                                                                                                                  
     02.                                                                                                                                                                                        
    2. Provide 0% capital      1/1/98..........  .........         -1         -5        -12        -21        -33        -48        -85        -90        -99       -107         -73        -502
     gains rate on enterprise                                                                                                                                                                   
     zone business property                                                                                                                                                                     
     in D.C. census tracts                                                                                                                                                                      
     with greater than 10%                                                                                                                                                                      
     poverty held for at                                                                                                                                                                        
     least 5 years; sunset 12/                                                                                                                                                                  
     31/02.                                                                                                                                                                                     
    3. $5,000 tax credit for   po/a DOE........  .........        -10        -21        -27        -16      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)         -74         -74
     first-time homebuyer in                                                                                                                                                                    
     D.C., with phaseout of                                                                                                                                                                     
     $110,000-$130,000 for                                                                                                                                                                      
     joint filers ($70,000-                                                                                                                                                                     
     $90,000 for single                                                                                                                                                                         
     filers), and sunset 12/                                                                                                                                                                    
     31/00.                                                                                                                                                                                     
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of District of  ................  .........        -82       -136       -152       -155       -160        -93        -82        -88        -99       -109        -686      -1,158
       Columbia Tax                                                                                                                                                                             
       Incentives.                                                                                                                                                                              
                                                ================================================================================================================================================
  VIII. Welfare-to-Work Tax                                                                                                                                                                     
 Credit                                                                                                                                                                                         
    Administration's welfare-  wpoifhma 12/31/   .........        -13        -31        -29        -15        -10         -4         -2         -1  .........  .........         -99        -106
     to-work tax credit, as     97.                                                                                                                                                             
     modified: (a) wage                                                                                                                                                                         
     credit is 35% on first                                                                                                                                                                     
     $10,000 of wages in the                                                                                                                                                                    
     first year of                                                                                                                                                                              
     employment, and 50% on                                                                                                                                                                     
     $10,000 of wages in the                                                                                                                                                                    
     second year of                                                                                                                                                                             
     employment; (b)                                                                                                                                                                            
     effective for hires made                                                                                                                                                                   
     through 4/30/99.                                                                                                                                                                           
                                                ================================================================================================================================================
  IX. Miscellaneous                                                                                                                                                                             
 Provisions                                                                                                                                                                                     
    A. Excise Tax Provisions:                                                                                                                                                                   
        1. Repeal excise tax   1/1/98..........  .........         -4         -5         -5         -1         -1         -1         -1         -1         -1         -1         -16         -22
         on recreational                                                                                                                                                                        
         motorboat diesel                                                                                                                                                                       
         fuel.                                                                                                                                                                                  
        2. Modify excise tax   DOE.............      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)      (\7\)           1           1
         on imported halons.                                                                                                                                                                    
        3. Transfer the 4.3    10/1/97.........                                                                                                                                                 
         cents/gallon                                                                                                                                                                           
         transportation motor                                                                                                                                                                   
         fuels tax on highway                                                                                                                                                                   
         motor fuels to the                                                                                                                                                                     
         Highway Trust Fund.                                                                                                                                                                    
(12)No Revenue Effect                                                                                                                                                                           
        4. Modify excise tax   DOE.............  .........     -6,359      6,359  .........  .........  .........  .........  .........  .........  .........  .........  ..........  ..........
         deposit rules for                                                                                                                                                                      
         gasoline and special                                                                                                                                                                   
         motor fuels, diesel                                                                                                                                                                    
         fuel and kerosene,                                                                                                                                                                     
         aviation fuels, and                                                                                                                                                                    
         air cargo taxes to                                                                                                                                                                     
         suspend deposits due                                                                                                                                                                   
         8/1/98 to 9/30/98                                                                                                                                                                      
         until 10/5/98.                                                                                                                                                                         
        5. Equalize the        DOE.............         -2        -15        -16        -16        -17        -18        -19        -20        -21        -22        -23         -82        -186
         excise tax rates                                                                                                                                                                       
         among alternative                                                                                                                                                                      
         motor fuels except                                                                                                                                                                     
         CNG.                                                                                                                                                                                   
        6. Treat certain       DOE.............                                                                                                                                                 
         gasoline retailers                                                                                                                                                                     
         as wholesale                                                                                                                                                                           
         distributors under                                                                                                                                                                     
         gasoline tax refund                                                                                                                                                                    
         rules.                                                                                                                                                                                 
(12)Negligible Revenue Effect                                                                                                                                                                   
        7. Reduce excise tax   10/1/97.........  .........         -1         -1         -1         -1         -1         -1         -1         -1         -1         -1          -3          -7
         rate on draft cider                                                                                                                                                                    
         to the small                                                                                                                                                                           
         producer beer rate.                                                                                                                                                                    
        8. Require study on    ................                                                                                                                                                 
         simplified                                                                                                                                                                             
         collection of                                                                                                                                                                          
         distilled spirits                                                                                                                                                                      
         taxes.                                                                                                                                                                                 
(12) No Revenue Effect                                                                                                                                                                          
                                                                                                                                                                                                
        9. Codify Bureau of    DOE.............                                                                                                                                                 
         Alcohol, Tobacco,                                                                                                                                                                      
         and Firearms                                                                                                                                                                           
         regulations on wine                                                                                                                                                                    
         labeling; with                                                                                                                                                                         
         modification.                                                                                                                                                                          
(12)No Revenue Effect                                                                                                                                                                           
        10. Uniform excise     10/1/97.........  .........        -16        -15        -15        -15        -14        -14        -14        -14        -14        -14         -74        -146
         tax on vaccines; add                                                                                                                                                                   
         3 new vaccines                                                                                                                                                                         
         ($0.75 per dose).                                                                                                                                                                      
     B. Disaster Relief                                                                                                                                                                         
     Provisions:                                                                                                                                                                                
        1. Disaster losses--   aoty............                                                                                                                                                 
         postponement of IRS                                                                                                                                                                    
         deadlines and loss                                                                                                                                                                     
         valuation; permit                                                                                                                                                                      
         extension of statute                                                                                                                                                                   
         of limitations.                                                                                                                                                                        
(12)Negligible Revenue Effect                                                                                                                                                                   
        2. Modify tax          sea 12/31/96....  .........        -12         -2         -2         -2         -1         -1         -1         -1         -1         -1         -18         -23
         treatment of                                                                                                                                                                           
         livestock sold on                                                                                                                                                                      
         account of certain                                                                                                                                                                     
         weather-related                                                                                                                                                                        
         conditions.                                                                                                                                                                            
        3. Loosen mortgage     (\8\)...........  .........         -3         -7         -8         -8         -7         -6         -6         -5         -4         -4         -33         -58
         revenue bond                                                                                                                                                                           
         requirements in                                                                                                                                                                        
         Presidentially                                                                                                                                                                         
         declared disaster                                                                                                                                                                      
         areas for 2 years;                                                                                                                                                                     
         permit 2-year period                                                                                                                                                                   
         to place mortgages.                                                                                                                                                                    
        4. Abatement of        1/1/97..........         -5  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........          -5          -5
         interest on                                                                                                                                                                            
         underpayments by                                                                                                                                                                       
         taxpayers in                                                                                                                                                                           
         Presidentially                                                                                                                                                                         
         declared disaster                                                                                                                                                                      
         areas (1997 disaster                                                                                                                                                                   
         areas only).                                                                                                                                                                           
     C. Provisions Relating                                                                                                                                                                     
     to Employment Taxes:                                                                                                                                                                       
        1. Worker              spa 12/31/97....                                                                                                                                                 
         classification of                                                                                                                                                                      
         securities brokers                                                                                                                                                                     
         for income and                                                                                                                                                                         
         employment tax                                                                                                                                                                         
         purposes.                                                                                                                                                                              
(12) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        2. Impose moratorium   DOE.............                                                                                                                                                 
         on issuance of                                                                                                                                                                         
         Treasury regulation                                                                                                                                                                    
         relating to self-                                                                                                                                                                      
         employment tax                                                                                                                                                                         
         (SECA) through 6/30/                                                                                                                                                                   
         98.                                                                                                                                                                                    
(12) No Revenue Effect                                                                                                                                                                          
        3. SECA for insurance  pa 12/31/97.....                                                                                                                                                 
         agents.                                                                                                                                                                                
(12) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
    D. Provisions Relating to                                                                                                                                                                   
     Small Businesses:                                                                                                                                                                          
        1. Delay penalties     DOE.............                                                                                                                                                 
         for failure to make                                                                                                                                                                    
         payments through                                                                                                                                                                       
         EFTPS until after 6/                                                                                                                                                                   
         30/98.                                                                                                                                                                                 
(12) No Revenue Effect                                                                                                                                                                          
        2. Definition of       tyba 12/31/98...  .........  .........       -119       -244       -253       -263       -274       -285       -295       -306       -318        -880      -2,358
         principal place of                                                                                                                                                                     
         business for home                                                                                                                                                                      
         office deduction.                                                                                                                                                                      
        3. Increase deduction  tyba 12/31/96...  .........  .........  .........        -39       -120       -224       -605       -882       -601       -404       -604        -383      -3,479
         for health insurance                                                                                                                                                                   
         expenses of self-                                                                                                                                                                      
         employed                                                                                                                                                                               
         individuals: 50% in                                                                                                                                                                    
         2000 and 2001, 60%                                                                                                                                                                     
         in 2002, 80% in 2003                                                                                                                                                                   
         through 2005; 90% in                                                                                                                                                                   
         2006, and 100% in                                                                                                                                                                      
         2007 and thereafter.                                                                                                                                                                   
     E. Other Provisions:                                                                                                                                                                       
        1. Shrinkage           ................  .........         -7        -21        -23        -25        -27        -29        -31        -33        -35        -37        -103        -268
         allowance for                                                                                                                                                                          
         inventory account.                                                                                                                                                                     
        2. Include liability   cfa DOE.........  .........         -1         -2         -5         -8        -12        -17        -23        -29        -32        -36         -27        -164
         to pay compensation                                                                                                                                                                    
         under workmen's                                                                                                                                                                        
         compensation acts                                                                                                                                                                      
         within rules                                                                                                                                                                           
         relating to certain                                                                                                                                                                    
         personal liability                                                                                                                                                                     
         assignments.                                                                                                                                                                           
        3. Clarify tax-exempt  tyba 12/31/97...  .........      (\6\)      (\6\)         -1         -1         -1         -1         -1         -1         -1         -1          -2          -6
         status of certain                                                                                                                                                                      
         State workmen's                                                                                                                                                                        
         compensation funds.                                                                                                                                                                    
        4. Allow               tyba 12/31/97...                                                                                                                                                 
         grandfathered                                                                                                                                                                          
         publicly traded                                                                                                                                                                        
         partnerships to                                                                                                                                                                        
         elect to pay a                                                                                                                                                                         
         publicly traded                                                                                                                                                                        
         partnership tax;                                                                                                                                                                       
         with technical                                                                                                                                                                         
         modifications.                                                                                                                                                                         
(12) Revenue Neutral                                                                                                                                                                            
        5. Exclusion from      psora 12/31/97..                                                                                                                                                 
         UBTI for certain                                                                                                                                                                       
         corporate                                                                                                                                                                              
         sponsorship                                                                                                                                                                            
         payments, with                                                                                                                                                                         
         technical                                                                                                                                                                              
         clarification.                                                                                                                                                                         
(12)Negligible Revenue Effect                                                                                                                                                                   
        6. Allow timeshare     tyba 12/31/96...  .........         -1         -1         -1         -1         -2         -2         -2         -2         -2         -2          -7         -17
         associations to                                                                                                                                                                        
         elect to be taxed as                                                                                                                                                                   
         homeowner                                                                                                                                                                              
         associations at 32%                                                                                                                                                                    
         rate and modify                                                                                                                                                                        
         definition of                                                                                                                                                                          
         property for                                                                                                                                                                           
         timeshares.                                                                                                                                                                            
        7. Deferral of gain    sea 12/31/97....  .........         -2        -68         -5         -5         -4         -4         -4         -4         -4         -4         -84        -104
         on sales of stock in                                                                                                                                                                   
         farm product                                                                                                                                                                           
         refining firms to                                                                                                                                                                      
         farm coops which                                                                                                                                                                       
         supply the firm with                                                                                                                                                                   
         raw farm products                                                                                                                                                                      
         for refining.                                                                                                                                                                          
        8. No information      DOE.............  .........                                                                                                                                      
         reporting on sales                                                                                                                                                                     
         of principal                                                                                                                                                                           
         residences less than                                                                                                                                                                   
         $250,000 or $500,000                                                                                                                                                                   
         (married filing                                                                                                                                                                        
         joint return).                                                                                                                                                                         
(11)Negligible Revenue Effect                                                                                                                                                                   
        9. Increase the        tyba 12/31/97...  .........         -8        -17        -27        -37        -49        -62        -76        -91       -108       -125        -138        -600
         business meals                                                                                                                                                                         
         deduction to 80% in                                                                                                                                                                    
         5% increments every                                                                                                                                                                    
         other year for                                                                                                                                                                         
         persons subject to                                                                                                                                                                     
         Federal hours of                                                                                                                                                                       
         service limitation,                                                                                                                                                                    
         with clarification                                                                                                                                                                     
         of section 119 meals.                                                                                                                                                                  
        10. Provide an above-  1/1/87..........  .........        -10         -4         -4         -4         -5         -5         -6         -6         -7         -7         -27         -58
         the-line deduction                                                                                                                                                                     
         for certain State                                                                                                                                                                      
         and local official's                                                                                                                                                                   
         expenses.                                                                                                                                                                              
        11. Raise the          tyba 12/31/97...  .........         -8        -56        -58        -61        -64        -68        -71        -75        -78        -82        -247        -621
         charitable mileage                                                                                                                                                                     
         rate from 12 cents/                                                                                                                                                                    
         mile to 14 cents/                                                                                                                                                                      
         mile; no indexing.                                                                                                                                                                     
        12. Expense            (\9\)...........  .........        -57       -132       -165        -63      (\7\)          2          9         17         19         18        -417        -352
         ``Brownfields''                                                                                                                                                                        
         redevelopment costs                                                                                                                                                                    
         in empowerment                                                                                                                                                                         
         zones, enterprise                                                                                                                                                                      
         communities and EPA                                                                                                                                                                    
         demonstration sites;                                                                                                                                                                   
         add census tracts                                                                                                                                                                      
         with greater than                                                                                                                                                                      
         20% poverty, 3-year                                                                                                                                                                    
         sunset.                                                                                                                                                                                
        13. Administration's   DOE.............  .........        -82       -121       -121        -99        -79        -56        -44        -41        -38        -25        -502        -706
         proposal to add 20                                                                                                                                                                     
         urban empowerment                                                                                                                                                                      
         zones with modified                                                                                                                                                                    
         incentives                                                                                                                                                                             
         (including                                                                                                                                                                             
         interaction with                                                                                                                                                                       
         Conference                                                                                                                                                                             
         Brownfields                                                                                                                                                                            
         proposal).                                                                                                                                                                             
        14. Designate 2        1/1/00..........  .........  .........  .........        -38        -86        -92        -98        -78        -53        -26        -13        -215        -483
         supplemental                                                                                                                                                                           
         empowerment zones as                                                                                                                                                                   
         regular empowerment                                                                                                                                                                    
         zones, with present-                                                                                                                                                                   
         law incentives                                                                                                                                                                         
         (phaseout of wage                                                                                                                                                                      
         credit beginning in                                                                                                                                                                    
         2004).                                                                                                                                                                                 
        15. Exemption for      DOE.............      (\6\)         -1         -1      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -2          -2
         incremental cost of                                                                                                                                                                    
         clean-fuel vehicle                                                                                                                                                                     
         from luxury tax and                                                                                                                                                                    
         limits on                                                                                                                                                                              
         depreciation.                                                                                                                                                                          
        16. Exclude from       (\10\)..........  .........      (\6\)         -1         -1         -1         -1         -1         -1         -1         -2         -2          -4         -12
         gross income certain                                                                                                                                                                   
         survivor benefits                                                                                                                                                                      
         attributable to a                                                                                                                                                                      
         public safety                                                                                                                                                                          
         officer who is                                                                                                                                                                         
         killed in the line                                                                                                                                                                     
         of duty.                                                                                                                                                                               
        17. Suspend 100% net   tyba DOE........  .........        -21        -35        -14  .........  .........  .........  .........  .........  .........  .........         -70         -70
         income limitation                                                                                                                                                                      
         with respect to                                                                                                                                                                        
         percentage depletion                                                                                                                                                                   
         on oil and gas                                                                                                                                                                         
         property for                                                                                                                                                                           
         marginal producers                                                                                                                                                                     
         for 2 years.                                                                                                                                                                           
        18. Allow refunding    bia DOE.........  .........         -2         -4         -5         -5         -5         -3         -1         -3         -4         -4         -21         -37
         of certain tax-                                                                                                                                                                        
         exempt Virgin                                                                                                                                                                          
         Islands bonds.                                                                                                                                                                         
        19. Purchasing of      tyba 12/31/96...                                                                                                                                                 
         receivables by tax-                                                                                                                                                                    
         exempt hospital                                                                                                                                                                        
         cooperative service                                                                                                                                                                    
         organizations.                                                                                                                                                                         
(12)Negligible Revenue Effect                                                                                                                                                                   
        20. Modification of    DOE.............                                                                                                                                                 
         empowerment zone and                                                                                                                                                                   
         enterprise community                                                                                                                                                                   
         criteria in the                                                                                                                                                                        
         event of future                                                                                                                                                                        
         designations of                                                                                                                                                                        
         additional zones and                                                                                                                                                                   
         communities.                                                                                                                                                                           
(12) No Revenue Effect                                                                                                                                                                          
        21. 3-year income      tyba DOE ab 1/1/         -1        -10        -53        -54        -50  .........  .........  .........  .........  .........  .........        -168        -168
         averaging for          01.                                                                                                                                                             
         farmers.                                                                                                                                                                               
        22. Prior year         ................  .........     -7,400      4,000  .........  .........      4,400     -1,000  .........  .........  .........  .........       1,000  ..........
         estimated tax safe                                                                                                                                                                     
         harbor (100% in                                                                                                                                                                        
         1998, 105% in 1999                                                                                                                                                                     
         through 2001, and                                                                                                                                                                      
         112% in 2002).                                                                                                                                                                         
        23. Montana                                                                                                                                                                             
         simplified tax and                                                                                                                                                                     
         wage reporting                                                                                                                                                                         
         system (5-year                                                                                                                                                                         
         demonstration).                                                                                                                                                                        
(12) No Revenue Effect                                                                                                                                                                          
        24. National           DOE.............  .........     -1,162     -1,162  .........  .........  .........  .........  .........  .........  .........  .........      -2,323      -2,323
         Passenger Rail                                                                                                                                                                         
         (Amtrak) NOL                                                                                                                                                                           
         provision.                                                                                                                                                                             
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
          SUBTOTAL OF          ................         -8    -15,182      8,516       -852       -863      3,530     -2,265     -1,539     -1,261     -1,071     -1,286      -4,850     -12,274
           MISCELLANEOUS                                                                                                                                                                        
           PROVISIONS.                                                                                                                                                                          
                                                ================================================================================================================================================
  X. Revenue-Increase                                                                                                                                                                           
 Provisions                                                                                                                                                                                     
    A. Financial Products:                                                                                                                                                                      
        1. Require             csa 6/8/97......  .........        367        121         68         73         79         85         94        111        118        127         708       1,243
         recognition of gain                                                                                                                                                                    
         on certain                                                                                                                                                                             
         appreciated                                                                                                                                                                            
         positions in                                                                                                                                                                           
         personal property,                                                                                                                                                                     
         with technical                                                                                                                                                                         
         modifications.                                                                                                                                                                         
        2. Gains or losses     30da DOE........  .........         15         27         25         25         25         25         25         25         25         25         117         242
         from certain                                                                                                                                                                           
         terminations with                                                                                                                                                                      
         respect to property;                                                                                                                                                                   
         with technical                                                                                                                                                                         
         modification and                                                                                                                                                                       
         effective date with                                                                                                                                                                    
         modifications.                                                                                                                                                                         
        3. Determination of    tyba DOE........  .........         76        275        358        319        283        100        105        109        114        118       1,311       1,857
         original issue                                                                                                                                                                         
         discount where                                                                                                                                                                         
         pooled debt                                                                                                                                                                            
         obligations subject                                                                                                                                                                    
         to acceleration.                                                                                                                                                                       
        4. Denial of interest  iia 6/8/97......  .........          5         16         29         43         55         62         63         64         65         67         148         469
         deduction on certain                                                                                                                                                                   
         debt instruments.                                                                                                                                                                      
    B. Corporate                                                                                                                                                                                
     Organizations and                                                                                                                                                                          
     Reorganizations:                                                                                                                                                                           
        1. Tax treatment of    da 9/13/95......  .........         44        -93        -54        -10         45         77         81         89         95        101         -68         375
         certain                                                                                                                                                                                
         extraordinary                                                                                                                                                                          
         dividends.                                                                                                                                                                             
        2. Require gain        da 4/16/97......  .........        301        243        216        187        158        130        101         73         46         10       1,105       1,465
         recognition on                                                                                                                                                                         
         certain                                                                                                                                                                                
         distributions of                                                                                                                                                                       
         controlled                                                                                                                                                                             
         corporation stock                                                                                                                                                                      
         (with modifications                                                                                                                                                                    
         for intragroup                                                                                                                                                                         
         distributions); with                                                                                                                                                                   
         binding contract                                                                                                                                                                       
         modification.                                                                                                                                                                          
        3. Tax treatment of    da/a 6/8/97.....  .........         10         10          5          5          5          5          5          5          5          5          35          60
         redemptions                                                                                                                                                                            
         involving related                                                                                                                                                                      
         corporations.                                                                                                                                                                          
        4. Modify holding      droaa 30da DOE..  .........         11         13         15         16         16         16         17         17         17         18          71         156
         period for dividends-                                                                                                                                                                  
         received deduction                                                                                                                                                                     
         with 2-year                                                                                                                                                                            
         transition period.                                                                                                                                                                     
    C. Other Corporate                                                                                                                                                                          
     Provisions:                                                                                                                                                                                
        1. Registration and    tsoaiTg.........  .........         15         37         38         39         41         42         43         44         46         47         170         392
         other provisions                                                                                                                                                                       
         relating to                                                                                                                                                                            
         confidential                                                                                                                                                                           
         corporate tax                                                                                                                                                                          
         shelters.                                                                                                                                                                              
        2. Certain preferred   ta 6/8/97.......  .........         35         37         39         41         43         10         10         11         11         12         194         248
         stock treated as                                                                                                                                                                       
         ``boot,'' with                                                                                                                                                                         
         clarification.                                                                                                                                                                         
    D. Administrative                                                                                                                                                                           
     Provisions:                                                                                                                                                                                
        1. Reporting of        pma 12/31/97....  .........  .........          3          3          3          3          3          4          4          4          4          12          31
         certain payments                                                                                                                                                                       
         made to attorneys.                                                                                                                                                                     
        2. Decrease of         rd 90da DOE.....  .........  .........          7          8          9         10         11         11         12         12         13          34          93
         threshold for                                                                                                                                                                          
         reporting payments                                                                                                                                                                     
         to corporations                                                                                                                                                                        
         performing services                                                                                                                                                                    
         for Federal agencies.                                                                                                                                                                  
        3. Extend disclosure   dma 9/30/98.....  .........  .........         22         27         31         36         36  .........  .........  .........  .........         116         152
         of tax return                                                                                                                                                                          
         information for                                                                                                                                                                        
         administration of                                                                                                                                                                      
         certain Veterans'                                                                                                                                                                      
         programs \12\.                                                                                                                                                                         
        4. Modify levy         lia DOE.........  .........        332        327        256        213        157        117        102         86         82         78       1,285       1,750
         exemption and                                                                                                                                                                          
         provide continuous                                                                                                                                                                     
         levy on certain                                                                                                                                                                        
         payments.                                                                                                                                                                              
        5. Consistency         rfa DOE.........  .........          3          3          3          3          3          3          4          4          4          4          15          34
         requirement for                                                                                                                                                                        
         returns of                                                                                                                                                                             
         beneficiaries of                                                                                                                                                                       
         estates and trusts.                                                                                                                                                                    
    E. Excise Tax Provisions:                                                                                                                                                                   
        1. Extend and modify                                                                                                                                                                    
         Airport Trust Fund                                                                                                                                                                     
         excise taxes:.                                                                                                                                                                         
            a. Extend          10/1/97.........  .........      4,633      4,859      5,031      5,433      5,870      6,275      6,684      7,117      7,580      8,059      25,826      61,542
             domestic air                                                                                                                                                                       
             passenger ticket                                                                                                                                                                   
             tax: reduce tax                                                                                                                                                                    
             rate from 10% to                                                                                                                                                                   
             9% of ticket                                                                                                                                                                       
             price and impose                                                                                                                                                                   
             an additional                                                                                                                                                                      
             tax of $1.00 per                                                                                                                                                                   
             flight segment                                                                                                                                                                     
             for 10/1/97                                                                                                                                                                        
             through 9/30/98;                                                                                                                                                                   
             8% and $2.00/                                                                                                                                                                      
             segment for 10/1/                                                                                                                                                                  
             98 through 9/30/                                                                                                                                                                   
             99; and 7.5%                                                                                                                                                                       
             after 9/30/99                                                                                                                                                                      
             with additional                                                                                                                                                                    
             tax of $2.25/                                                                                                                                                                      
             segment for 10/1/                                                                                                                                                                  
             99 through 12/31/                                                                                                                                                                  
             99, $2.50/                                                                                                                                                                         
             segment in 2000,                                                                                                                                                                   
             $2.75/segment in                                                                                                                                                                   
             2001, and $3.00/                                                                                                                                                                   
             segment in 2002,                                                                                                                                                                   
             and in years                                                                                                                                                                       
             thereafter index                                                                                                                                                                   
             the $3.00/                                                                                                                                                                         
             segment tax to                                                                                                                                                                     
             changes in the                                                                                                                                                                     
             CPI (first                                                                                                                                                                         
             indexing                                                                                                                                                                           
             adjustment on 1/                                                                                                                                                                   
             1/03).                                                                                                                                                                             
            b. Modify airline  DOE.............     -1,017       -199      1,216  .........  .........  .........  .........  .........  .........  .........  .........  ..........  ..........
             ticket tax                                                                                                                                                                         
             deposit rule to                                                                                                                                                                    
             suspend deposits                                                                                                                                                                   
             due 8/15/97 to 9/                                                                                                                                                                  
             30/97 until 10/                                                                                                                                                                    
             10/97, and                                                                                                                                                                         
             suspend deposits                                                                                                                                                                   
             due 8/15/98 to 9/                                                                                                                                                                  
             30/98 until 10/5/                                                                                                                                                                  
             98.                                                                                                                                                                                
            c. Reduce air      10/1/97.........  .........        -26        -27        -26        -27        -27        -28        -30        -31        -32        -33        -133        -289
             passenger ticket                                                                                                                                                                   
             tax to 7.5% of                                                                                                                                                                     
             ticket price                                                                                                                                                                       
             (and omit                                                                                                                                                                          
             segment tax) for                                                                                                                                                                   
             flight segments                                                                                                                                                                    
             to/from certain                                                                                                                                                                    
             rural airports                                                                                                                                                                     
             \13\.                                                                                                                                                                              
            d. Extend          10/1/97.........  .........        788        879        948      1,026      1,114      1,209      1,307      1,411      1,526      1,653       4,754      11,859
             international                                                                                                                                                                      
             departure tax:                                                                                                                                                                     
             increase tax                                                                                                                                                                       
             from $6.00 to                                                                                                                                                                      
             $12/passenger,                                                                                                                                                                     
             tax arrivals at                                                                                                                                                                    
             the same rate,                                                                                                                                                                     
             and index the                                                                                                                                                                      
             $12 tax to                                                                                                                                                                         
             changes in the                                                                                                                                                                     
             CPI (first                                                                                                                                                                         
             indexing                                                                                                                                                                           
             adjustment on 1/                                                                                                                                                                   
             1/99), but                                                                                                                                                                         
             retain present-                                                                                                                                                                    
             law $6.00/                                                                                                                                                                         
             passenger                                                                                                                                                                          
             departure tax                                                                                                                                                                      
             for domestic                                                                                                                                                                       
             flights to/from                                                                                                                                                                    
             Alaska and                                                                                                                                                                         
             Hawaii, and                                                                                                                                                                        
             index the $6.00                                                                                                                                                                    
             departure tax to                                                                                                                                                                   
             changes in the                                                                                                                                                                     
             CPI (first                                                                                                                                                                         
             indexing                                                                                                                                                                           
             adjustment on 1/                                                                                                                                                                   
             1/99).                                                                                                                                                                             
            e. Impose 7.5%     10/1/97.........  .........         65         73         77         82         87         92         98        104        110        116         384         904
             tax rate on cash                                                                                                                                                                   
             payments to                                                                                                                                                                        
             airlines for air                                                                                                                                                                   
             travel under                                                                                                                                                                       
             credit card and                                                                                                                                                                    
             similar programs.                                                                                                                                                                  
            f. Extend current  10/1/97.........  .........        304        347        377        409        443        481        522        567        615        667       1,880       4,732
             air cargo excise                                                                                                                                                                   
             tax.                                                                                                                                                                               
            g. Extend current  10/1/97.........  .........         84         87         89         91         93         95         97         99        102        104         446         943
             taxes on                                                                                                                                                                           
             noncommercial                                                                                                                                                                      
             aviation                                                                                                                                                                           
             gasoline and                                                                                                                                                                       
             noncommercial                                                                                                                                                                      
             jet fuel.                                                                                                                                                                          
            h. Dedicate 4.3    10/1/97.........  .........                                                                                                                                      
             cents/gallon of                                                                                                                                                                    
             tax on aviation                                                                                                                                                                    
             fuel to the                                                                                                                                                                        
             Airport and                                                                                                                                                                        
             Airway Trust                                                                                                                                                                       
             Fund.                                                                                                                                                                              
(11)No Revenue Effect                                                                                                                                                                           
        2. Tax kerosene in     7/1/98..........  .........         44         43         49         46         44         43         44         47         49         52         226         461
         the same manner as                                                                                                                                                                     
         diesel fuel; modify                                                                                                                                                                    
         to address home                                                                                                                                                                        
         heating in Alaska.                                                                                                                                                                     
        3. Reinstate LUST      10/1/97.........  .........        129        129        128        129        131        134        136         67  .........  .........         645         983
         excise tax and                                                                                                                                                                         
         extend through 3/31/                                                                                                                                                                   
         05.                                                                                                                                                                                    
        4. Apply 3% telephone  DOE.............  .........         19         28         38         49         60         71         83        101        113        124         193         684
         excise tax to                                                                                                                                                                          
         certain prepaid                                                                                                                                                                        
         phone cards, with                                                                                                                                                                      
         technical                                                                                                                                                                              
         modification.                                                                                                                                                                          
        5. Replace truck       Sa 12/31/97.....  .........         66         94         96         97         99        101        102        105        108        110         452         979
         excise tax deduction                                                                                                                                                                   
         for tire value with                                                                                                                                                                    
         tax credit for                                                                                                                                                                         
         excise tax paid on                                                                                                                                                                     
         tires.                                                                                                                                                                                 
    F. Provisions Relating to                                                                                                                                                                   
     Tax-Exempt                                                                                                                                                                                 
     Organizations:                                                                                                                                                                             
        1. Modify control      tyba 12/31/98 &   .........      (\7\)      (\7\)      (\7\)          3          5          5          4          4          4          4           8          29
         test and include       tyba 2ya DOE.                                                                                                                                                   
         attribution rules to                                                                                                                                                                   
         determine UBIT                                                                                                                                                                         
         consequences of                                                                                                                                                                        
         certain payments                                                                                                                                                                       
         from subsidiaries of                                                                                                                                                                   
         tax-exempt                                                                                                                                                                             
         organizations.                                                                                                                                                                         
        2. Repeal 1986 Act     tyba 12/31/97...  .........      (\7\)         82        116        124        128        133        140        149        160        174         450       1,208
         grandfather rules                                                                                                                                                                      
         for pension business                                                                                                                                                                   
         of TIAA-CREF and                                                                                                                                                                       
         Mutual of America.                                                                                                                                                                     
    G. Foreign Provisions:                                                                                                                                                                      
        1. Inclusion of        tyba DOE........  .........          9         20         21         21         21         21         22         22         22         23          92         202
         income from notional                                                                                                                                                                   
         principal contracts                                                                                                                                                                    
         and stock lending                                                                                                                                                                      
         transactions under                                                                                                                                                                     
         subpart F.                                                                                                                                                                             
        2. Further restrict    Ta dofca........  .........          4          8         11         13         15         17         19         21         23         25          51         156
         like-kind exchanges                                                                                                                                                                    
         involving foreign                                                                                                                                                                      
         personal property.                                                                                                                                                                     
        3. Impose holding      dpoaa 30da DOE..  .........         23         48         50         53         56         58         61         64         68         71         230         552
         period requirement                                                                                                                                                                     
         for claiming foreign                                                                                                                                                                   
         tax credits with                                                                                                                                                                       
         respect to dividends.                                                                                                                                                                  
        4. Limitation on       DOE.............  .........          1          1          1          1          1          1          1          1          1          1           5          10
         treaty benefits for                                                                                                                                                                    
         payments to hybrid                                                                                                                                                                     
         entities.                                                                                                                                                                              
        5. Interest on         ftpoa tyba DOE..  .........          8         10          2          1          1          1          1          1          1          1          22          27
         underpayment reduced                                                                                                                                                                   
         by foreign tax                                                                                                                                                                         
         credit carryback.                                                                                                                                                                      
        6. Determination of    ftpoa tyba DOE..  .........          1          2          1          1          1          1          1          1          1          1           6          11
         period of                                                                                                                                                                              
         limitations relating                                                                                                                                                                   
         to foreign tax                                                                                                                                                                         
         credits.                                                                                                                                                                               
        7. Repeal special      tyba DOE........  .........          2          5          5          5          5          5          5          5          5          5          22          47
         rule which permits                                                                                                                                                                     
         certain companies to                                                                                                                                                                   
         eliminate their AMT                                                                                                                                                                    
         liability.                                                                                                                                                                             
    H. Pension and Employee                                                                                                                                                                     
     Benefit Provisions:                                                                                                                                                                        
        1. Provide employers   tyba 12/31/97...  .........          3          8         11         12         12         13         14         14         15         16          46         118
         the option to offer                                                                                                                                                                    
         tax-free employee                                                                                                                                                                      
         parking or taxable                                                                                                                                                                     
         cash compensation                                                                                                                                                                      
         (\14\).                                                                                                                                                                                
        2. Repeal of 15%       tyba & dda 12/31/ .........        -18        -19         -7         18         18         16         16         14         13         11          -8          62
         excess distribution    96.                                                                                                                                                             
         and excess                                                                                                                                                                             
         accumulation taxes.                                                                                                                                                                    
        3. Increase in         ptoa DOE........  .........          2          4          4          4          4          4          4          4          4          4          14          34
         prohibited                                                                                                                                                                             
         transactions excise                                                                                                                                                                    
         tax.                                                                                                                                                                                   
        4. Basis recovery      aba 12/31/97....  .........          1          3          6          9         11         15         18         21         24         27          30         133
         method.                                                                                                                                                                                
    I. Other Revenue-Increase                                                                                                                                                                   
     Provisions:                                                                                                                                                                                
        1. Termination of      (\16\)..........  .........         29         33         35         36         37         39         40         41         43         44         170         377
         suspense accounts                                                                                                                                                                      
         for family farm                                                                                                                                                                        
         corporations                                                                                                                                                                           
         required to use                                                                                                                                                                        
         accrual method of                                                                                                                                                                      
         accounting (\15\).                                                                                                                                                                     
        2. 2-year carryback    NOLgi tyba DOE..  .........         42        303        361        256        179        136        112        100         93         90       1,141       1,672
         and 20-year                                                                                                                                                                            
         carryforward for net                                                                                                                                                                   
         operating losses                                                                                                                                                                       
         with an exception                                                                                                                                                                      
         related to                                                                                                                                                                             
         Presidentially                                                                                                                                                                         
         declared disaster                                                                                                                                                                      
         areas.                                                                                                                                                                                 
        3. Modification of     cia 6/8/97......  .........         20         53         93        140        193        247        299        349        399        447         500       2,240
         treatment of company-                                                                                                                                                                  
         owned life                                                                                                                                                                             
         insurance--pro rata                                                                                                                                                                    
         disallowance of                                                                                                                                                                        
         interest on debt to                                                                                                                                                                    
         fund life insurance.                                                                                                                                                                   
        4. Modify the basis    pda DOE.........  .........         26         52         55         57         59         61         64         66         69         72         249         581
         allocation rules for                                                                                                                                                                   
         distributee                                                                                                                                                                            
         partners, with                                                                                                                                                                         
         technical                                                                                                                                                                              
         modifications.                                                                                                                                                                         
        5. Eliminate the        sepda DOE &      .........         30         66         69         73         77         80         84         89         93         98         316         760
         substantial            efbcieo 6/8/97.                                                                                                                                                 
         appreciation                                                                                                                                                                           
         requirement for                                                                                                                                                                        
         inventory of a                                                                                                                                                                         
         partnership, with                                                                                                                                                                      
         technical                                                                                                                                                                              
         modification and                                                                                                                                                                       
         binding contract                                                                                                                                                                       
         exception.                                                                                                                                                                             
        6. Earned income       tyba 12/31/96...  .........      (\7\)         18         25         24         21         21         21         21         21         21          88         193
         credit compliance                                                                                                                                                                      
         provisions: deny                                                                                                                                                                       
         eligibility for                                                                                                                                                                        
         prior acts of                                                                                                                                                                          
         recklessness;                                                                                                                                                                          
         recertification                                                                                                                                                                        
         required when EIC                                                                                                                                                                      
         denied in past; and                                                                                                                                                                    
         due diligence                                                                                                                                                                          
         requirement for paid                                                                                                                                                                   
         preparers.                                                                                                                                                                             
        7. For the purpose of  tyba 12/31/97...  .........      (\7\)         72         75         79         85         89         92         94         99        102         312         788
         the Earned Income                                                                                                                                                                      
         Credit (EIC)                                                                                                                                                                           
         phaseout, include in                                                                                                                                                                   
         AGI nontaxable                                                                                                                                                                         
         distributions of                                                                                                                                                                       
         IRA, pensions, and                                                                                                                                                                     
         annuities, and tax-                                                                                                                                                                    
         exempt interest; and                                                                                                                                                                   
         addback 75% of                                                                                                                                                                         
         business losses                                                                                                                                                                        
         (\17\).                                                                                                                                                                                
        8. Provide that        DOE.............                                                                                                                                                 
         workfare payments do                                                                                                                                                                   
         not qualify as                                                                                                                                                                         
         earned income for                                                                                                                                                                      
         the purposes of the                                                                                                                                                                    
         earned income credit.                                                                                                                                                                  
(12) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        9. New EIC compliance                                                                                                                                                                   
         proposals (\18\):                                                                                                                                                                      
            a. Federal case    10/1/99.........  .........  .........  .........  .........         10         20         30         40         60         85        105          30         350
             register data.                                                                                                                                                                     
            b. SSA parent      180da DOE.......  .........  .........         10         10         10         10         10         10         10         10         10          40          90
             SSNs.                                                                                                                                                                              
                                                                                                                                                                                                
            c. Additional      DOE.............                                                                                                                                                 
             appropriation                                                                                                                                                                      
             for EIC                                                                                                                                                                            
             enforcement.                                                                                                                                                                       
(12) No Revenue Effect                                                                                                                                                                          
        10. Restrict income    tyba DOE........  .........         29         41         62         78         38         27         25         17         17         18         248         352
         forecast method and                                                                                                                                                                    
         allow 3-year MACRS                                                                                                                                                                     
         for rent-to-own                                                                                                                                                                        
         property; with                                                                                                                                                                         
         clarification for                                                                                                                                                                      
         home computers and                                                                                                                                                                     
         cellular phones.                                                                                                                                                                       
        11. Extend FUTA        lpo/a 1/1/99....  .........  .........      1,063      1,763      1,797      1,733        661        -73        -71        -74        -73       6,356       6,726
         surtax and increase                                                                                                                                                                    
         the statutory limit                                                                                                                                                                    
         on the FUA Trust                                                                                                                                                                       
         Fund from .25% of                                                                                                                                                                      
         covered wages to                                                                                                                                                                       
         .50% (\12\).                                                                                                                                                                           
        12. Limitation on      Ta 6/18/97......  .........          6          6          6          6          6          6          6          6          6          6          30          60
         charitable remainder                                                                                                                                                                   
         trust annual                                                                                                                                                                           
         payouts; require                                                                                                                                                                       
         charitable                                                                                                                                                                             
         remainders to have a                                                                                                                                                                   
         minimum value of 10%                                                                                                                                                                   
         of trust.                                                                                                                                                                              
        13. Limit carryback    cai tyba 12/31/   .........        182        300         81        -60        -32         -9          5         15         21         25         471         527
         period for general     97.                                                                                                                                                             
         business credits to                                                                                                                                                                    
         1 year; extend                                                                                                                                                                         
         carryforward period                                                                                                                                                                    
         to 20 years.                                                                                                                                                                           
        14. Extend the 5-year  pcpa dofca......  .........  .........  .........  .........  .........          2         10         11         11         12         12           2          58
         time limit for                                                                                                                                                                         
         taxing pre-                                                                                                                                                                            
         contribution gain to                                                                                                                                                                   
         7 years and                                                                                                                                                                            
         grandfather binding                                                                                                                                                                    
         contracts in effect                                                                                                                                                                    
         on 6/8/97.                                                                                                                                                                             
        15. Expansion of       icoa dofca......  .........          1          4          6          8         11         13         15         17         19         21          30         115
         requirement that                                                                                                                                                                       
         involuntarily                                                                                                                                                                          
         converted property                                                                                                                                                                     
         be replaced with                                                                                                                                                                       
         property acquired                                                                                                                                                                      
         from an unrelated                                                                                                                                                                      
         person.                                                                                                                                                                                
        16. Repeal             tyb1ya DOE......  .........  .........         44         97        106        106         64         21         22         23         24         353         507
         installment sales                                                                                                                                                                      
         grandfather rules of                                                                                                                                                                   
         1986 Act.                                                                                                                                                                              
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Revenue- ................  .........      7,522     11,013     10,802     11,217     11,696     10,970     10,786     11,409     12,092     12,866      51,230     109,350
           Increase                                                                                                                                                                             
           Provisions.                                                                                                                                                                          
                                                ================================================================================================================================================
  XI. Foreign Tax Provisions                                                                                                                                                                    
    A. General Provisions:                                                                                                                                                                      
        1. Simplify foreign    tyba 12/31/97...  .........     (\19\)         -1         -1         -1         -1         -1         -1         -1         -1         -1          -4          -9
         tax credit                                                                                                                                                                             
         limitation for                                                                                                                                                                         
         individuals.                                                                                                                                                                           
        2. Simplify            ................  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)      (\19\)      (\19\)
         translation of                                                                                                                                                                         
         foreign taxes.                                                                                                                                                                         
        3. Election to use     tyba 12/31/97...  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)          -1          -2
         simplified foreign                                                                                                                                                                     
         tax credit                                                                                                                                                                             
         limitation for                                                                                                                                                                         
         alternative minimum                                                                                                                                                                    
         tax purposes.                                                                                                                                                                          
        4. Simplify treatment  tyba 12/31/97...  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)          -1          -2
         of personal                                                                                                                                                                            
         transactions in                                                                                                                                                                        
         foreign currency.                                                                                                                                                                      
        5. Simplify foreign    tyba 12/31/02...  .........  .........  .........  .........  .........  .........        -57       -241       -215       -227       -242  ..........        -982
         tax credit                                                                                                                                                                             
         limitation for                                                                                                                                                                         
         dividends from 10/50                                                                                                                                                                   
         companies to provide                                                                                                                                                                   
         look-through                                                                                                                                                                           
         starting in 2003.                                                                                                                                                                      
    B. General Provisions      various.........  .........         -2         -5         -7         -9        -10        -10        -11        -12        -13        -14         -33         -93
     Affecting Treatment of                                                                                                                                                                     
     Controlled Foreign                                                                                                                                                                         
     Corporations.                                                                                                                                                                              
    C. Modification of         tyba 12/31/97...  .........        -24        -23        -24        -26        -27        -28        -29        -31        -33        -35        -124        -280
     Passive Foreign                                                                                                                                                                            
     Investment Company                                                                                                                                                                         
     Provisions to Eliminate                                                                                                                                                                    
     Overlap With Subpart F                                                                                                                                                                     
     and to Allow Mark-to-                                                                                                                                                                      
     Market Election, and to                                                                                                                                                                    
     Modify Asset Measurement                                                                                                                                                                   
     Rule.                                                                                                                                                                                      
    D. Simplify Formation and  various.........  .........      (\6\)      (\6\)         -1         -1         -1         -1         -1         -1         -1         -2          -3          -9
     Operation of                                                                                                                                                                               
     International Joint                                                                                                                                                                        
     Ventures, with Technical                                                                                                                                                                   
     Modifications.                                                                                                                                                                             
    E. Modification of         1/1/98..........  .........     (\19\)         -1         -2         -2         -2         -2         -2         -3         -3         -3          -7         -20
     Reporting Threshold for                                                                                                                                                                    
     Stock Ownership of a                                                                                                                                                                       
     Foreign Corporation.                                                                                                                                                                       
    F. Other Foreign                                                                                                                                                                            
     Simplification                                                                                                                                                                             
     Provisions:                                                                                                                                                                                
        1. Transition rule     aiii SBJPA......  .........         -1         -3         -5         -5         -5         -5         -5         -5         -5         -5         -19         -44
         for certain trusts.                                                                                                                                                                    
        2. Simplify            tyba 12/31/97...  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)       (\6\)       (\6\)
         application of the                                                                                                                                                                     
         stock and securities                                                                                                                                                                   
         trading safe harbor.                                                                                                                                                                   
        3. Clarification of    DOE.............  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)       (\6\)       (\6\)
         determination of                                                                                                                                                                       
         foreign taxes deemed                                                                                                                                                                   
         paid.                                                                                                                                                                                  
        4. Clarification of    DOE.............  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)       (\6\)       (\6\)
         foreign tax credit                                                                                                                                                                     
         limitation for                                                                                                                                                                         
         financial services                                                                                                                                                                     
         income.                                                                                                                                                                                
    G. Other Foreign                                                                                                                                                                            
     Provisions:                                                                                                                                                                                
        1. Foreign sales       gra 12/31/97....  .........        -27        -42       -146       -173       -180       -191       -202       -227       -252       -277        -568      -1,717
         corporation benefits                                                                                                                                                                   
         for computer                                                                                                                                                                           
         software.                                                                                                                                                                              
        2. Increase dollar     1/1/98..........  .........        -15        -30        -50        -67        -82        -97       -103       -111       -119       -127        -244        -801
         limitation on                                                                                                                                                                          
         section 911                                                                                                                                                                            
         exclusion and index                                                                                                                                                                    
         after 2007.                                                                                                                                                                            
        3. Exception from      tyba 12/31/97...  .........         -1         -2         -2         -2         -2         -2         -2         -2         -2         -2          -9         -19
         U.S. property                                                                                                                                                                          
         definition under                                                                                                                                                                       
         subpart F for                                                                                                                                                                          
         certain securities                                                                                                                                                                     
         positions.                                                                                                                                                                             
        4. Exemption from      tybi 1998.......  .........        -23        -68         -3  .........  .........  .........  .........  .........  .........  .........         -94         -94
         subpart F for active                                                                                                                                                                   
         financing income.                                                                                                                                                                      
        5. Treat service       tyba 12/31/97...  .........         -2         -4         -3         -3         -3         -3         -3         -3         -3         -3         -15         -30
         income of                                                                                                                                                                              
         nonresident alien                                                                                                                                                                      
         individuals earned                                                                                                                                                                     
         on foreign ships as                                                                                                                                                                    
         foreign source                                                                                                                                                                         
         income and disregard                                                                                                                                                                   
         the U.S. presence of                                                                                                                                                                   
         such individuals;                                                                                                                                                                      
         with amendment to                                                                                                                                                                      
         rule disregarding                                                                                                                                                                      
         U.S. presence.                                                                                                                                                                         
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Foreign  ................  .........        -95       -179       -244       -289       -313       -397       -600       -611       -659       -711      -1,122      -4,102
           Tax Provisions.                                                                                                                                                                      
                                                ================================================================================================================================================
  XII Simplification                                                                                                                                                                            
 Provisions Relating to                                                                                                                                                                         
 Individuals and Businesses                                                                                                                                                                     
    A. Provisions Relating to                                                                                                                                                                   
     Individuals:                                                                                                                                                                               
        1. Deduction           1/1/98..........  .........         -2        -38        -35        -35        -35        -35        -35        -38        -37        -36        -146        -327
         attributable to                                                                                                                                                                        
         unearned income of                                                                                                                                                                     
         dependent filers:                                                                                                                                                                      
         greater of (a)                                                                                                                                                                         
         present law; or (b)                                                                                                                                                                    
         earned income plus                                                                                                                                                                     
         $250; delink                                                                                                                                                                           
         dependent AMT from                                                                                                                                                                     
         parent's AMT                                                                                                                                                                           
         position.                                                                                                                                                                              
        2. Increase de         tyba 12/31/97...  .........       -134        -17        -18        -19        -20        -21        -22        -24        -25        -26        -208        -326
         minimis threshold                                                                                                                                                                      
         for estimated tax to                                                                                                                                                                   
         $1,000.                                                                                                                                                                                
        3. Treatment of        tyba 12/31/97...  .........      (\6\)         -1         -1         -1         -1         -1         -1         -1         -1         -1          -5         -11
         certain reimbursed                                                                                                                                                                     
         expenses of rural                                                                                                                                                                      
         mail carriers.                                                                                                                                                                         
        4. Treatment of        eii tyea DOE....  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -1          -2
         travel expenses of                                                                                                                                                                     
         certain Federal                                                                                                                                                                        
         employees engaged in                                                                                                                                                                   
         criminal                                                                                                                                                                               
         investigations.                                                                                                                                                                        
        5. Permit payment of   DOE.............                                                                                                                                                 
         taxes by any                                                                                                                                                                           
         commercially                                                                                                                                                                           
         acceptable means;                                                                                                                                                                      
         and prohibit payment                                                                                                                                                                   
         of fees by Treasury.                                                                                                                                                                   
(12) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
    B. Provisions Relating to                                                                                                                                                                   
     Businesses Generally:                                                                                                                                                                      
        1. Modify look-back    cci tyea DOE....  .........         -1         -2         -3         -4         -4         -4         -4         -5         -5         -5         -14         -37
         method for long-term                                                                                                                                                                   
         contracts.                                                                                                                                                                             
        2. Minimum tax         tyba 12/31/97...  .........         -1         -2         -3         -3         -3         -3         -3         -3         -3         -3         -12         -27
         treatment of certain                                                                                                                                                                   
         property and                                                                                                                                                                           
         casualty insurance                                                                                                                                                                     
         companies.                                                                                                                                                                             
        3. Provide for         leia DOE........  .........                                                                                                                                      
         exclusion for                                                                                                                                                                          
         construction                                                                                                                                                                           
         allowances provided                                                                                                                                                                    
         to lessees, with                                                                                                                                                                       
         technical                                                                                                                                                                              
         modification.                                                                                                                                                                          
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
    C. Partnership                                                                                                                                                                              
     Simplification                                                                                                                                                                             
     Provisions:                                                                                                                                                                                
        1. Simplified          tyba 12/31/97...  .........          6          8          8          8          8          9          9          9          9          9          38          83
         reporting to                                                                                                                                                                           
         partners.                                                                                                                                                                              
        2. Simplified audit    tyba 12/31/97...  .........      (\7\)      (\7\)      (\7\)          1          1          1          1          1          1          1           2           8
         procedure for large                                                                                                                                                                    
         partnerships.                                                                                                                                                                          
        3. Due date for        tyba 12/31/97...  .........                                                                                                                                      
         furnishing                                                                                                                                                                             
         information to                                                                                                                                                                         
         partners of large                                                                                                                                                                      
         partnerships.                                                                                                                                                                          
(11)No Revenue Effect                                                                                                                                                                           
        4. Returns required    tyba 12/31/97...  .........                                                                                                                                      
         on magnetic media                                                                                                                                                                      
         for partnerships                                                                                                                                                                       
         with 100 partners or                                                                                                                                                                   
         more.                                                                                                                                                                                  
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        5. Other partnership   tyba 12/31/97...  .........         -2      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -3          -5
         audit rules.                                                                                                                                                                           
        6. Closing             tyba 12/31/97...  .........      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -1          -1
         partnership taxable                                                                                                                                                                    
         year with respect to                                                                                                                                                                   
         deceased partner.                                                                                                                                                                      
    D. Provisions Relating to                                                                                                                                                                   
     Real Estate Investment                                                                                                                                                                     
     Trusts:                                                                                                                                                                                    
        1. Alternative         tyba DOE........  .........                                                                                                                                      
         penalty for failure                                                                                                                                                                    
         to request                                                                                                                                                                             
         information from                                                                                                                                                                       
         shareholders.                                                                                                                                                                          
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        2. De minimis rule     tyba DOE........  .........                                                                                                                                      
         for tenant services                                                                                                                                                                    
         income.                                                                                                                                                                                
(11)Negligible Revenue Effect                                                                                                                                                                   
        3. Attribution rules   tyba DOE........  .........                                                                                                                                      
         applicable to tenant                                                                                                                                                                   
         services.                                                                                                                                                                              
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        4. Credit for tax      tyba DOE........  .........                                                                                                                                      
         paid by REIT on                                                                                                                                                                        
         retained capital                                                                                                                                                                       
         gains.                                                                                                                                                                                 
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        5. Repeal 30% gross    tyba DOE........  .........         -4         -5         -5         -6         -7         -7         -8         -9        -10        -11         -26         -72
         income requirement.                                                                                                                                                                    
        6. Modification of     tyba DOE........  .........                                                                                                                                      
         earnings and profits                                                                                                                                                                   
         rules for                                                                                                                                                                              
         determining whether                                                                                                                                                                    
         REIT has earnings                                                                                                                                                                      
         and profits from non-                                                                                                                                                                  
         REIT year.                                                                                                                                                                             
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        7. Treatment of        tyba DOE........  .........                                                                                                                                      
         foreclosure property.                                                                                                                                                                  
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        8. Payments under      tyba DOE........  .........                                                                                                                                      
         hedging instruments.                                                                                                                                                                   
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        9. Excess noncash      tyba DOE........  .........                                                                                                                                      
         income.                                                                                                                                                                                
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        10. Prohibited         tyba DOE........  .........                                                                                                                                      
         transaction safe                                                                                                                                                                       
         harbor.                                                                                                                                                                                
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        11. Shared             tyba DOE........  .........                                                                                                                                      
         appreciation                                                                                                                                                                           
         mortgages.                                                                                                                                                                             
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        12. Wholly owned       tyba DOE........  .........                                                                                                                                      
         subsidiaries.                                                                                                                                                                          
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
    E. Provision Relating to                                                                                                                                                                    
     Regulated Investment                                                                                                                                                                       
     Companies:                                                                                                                                                                                 
        1. Repeal 30% gross    tyba DOE........  .........        -17        -23        -27        -33        -38        -45        -53        -61        -71        -82        -138        -450
         income limitation                                                                                                                                                                      
         for regulated                                                                                                                                                                          
         investment companies.                                                                                                                                                                  
    F. Taxpayer Protections:                                                                                                                                                                    
        1. Provide             tyba DOE........  .........                                                                                                                                      
         ``reasonable cause''                                                                                                                                                                   
         exception for filing                                                                                                                                                                   
         claims for refunds.                                                                                                                                                                    
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        2. Clarification of    tyea DOE........  .........                                                                                                                                      
         period for filing                                                                                                                                                                      
         claims for refunds.                                                                                                                                                                    
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        3. Repeal authority    pca DOE.........  .........                                                                                                                                      
         to disclose whether                                                                                                                                                                    
         a prospective juror                                                                                                                                                                    
         has been audited.                                                                                                                                                                      
(11) No Revenue Effect                                                                                                                                                                          
        4. Clarify statute of  tyba DOE........  .........                                                                                                                                      
         limitations for pass-                                                                                                                                                                  
         through entities.                                                                                                                                                                      
(11) No Revenue Effect                                                                                                                                                                          
        5. Clarify procedure   aca DOE.........  .........                                                                                                                                      
         for administrative                                                                                                                                                                     
         cost awards.                                                                                                                                                                           
(11) No Revenue Effect                                                                                                                                                                          
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of            ..............                  -155        -80        -84        -92        -99       -106       -116       -131       -142       -154        -514      -1,167
           Simplification                                                                                                                                                                       
           Provisions                                                                                                                                                                           
           Relating to                                                                                                                                                                          
           Individuals and                                                                                                                                                                      
           Businesses.                                                                                                                                                                          
                                                ================================================================================================================================================
    XIII. Estate, Gift and                                                                                                                                                                      
     Trust Simplification                                                                                                                                                                       
     Provisions                                                                                                                                                                                 
        1. Gifts to charities  gma DOE.........                                                                                                                                                 
         of over $10,000                                                                                                                                                                        
         exempt from gift tax                                                                                                                                                                   
         filing requirements.                                                                                                                                                                   
(12) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         2. Clarification of   dda DOE.........                                                                                                                                                 
         waiver of certain                                                                                                                                                                      
         rights of recovery                                                                                                                                                                     
         of estate tax from                                                                                                                                                                     
         QTIP trust.                                                                                                                                                                            
(12) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         3. Transitional       aiii OBRA'90....  .........                                                                                                                                      
         rules under section                                                                                                                                                                    
         2056A.                                                                                                                                                                                 
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         4. Estate and gift    dda DOE.........  .........                                                                                                                                      
         tax treatment of                                                                                                                                                                       
         short-term OID                                                                                                                                                                         
         instruments.                                                                                                                                                                           
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         5. Certain revocable  dda DOE.........  .........         -3         -3         -3         -3         -3         -3         -3         -3         -3         -3         -15         -30
         trusts treated as                                                                                                                                                                      
         part of estate.                                                                                                                                                                        
         6. Distributions      tyba DOE........  .........                                                                                                                                      
         during first 65 days                                                                                                                                                                   
         of taxable year of                                                                                                                                                                     
         estate.                                                                                                                                                                                
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         7. Separate share     dda DOE.........  .........                                                                                                                                      
         rules available to                                                                                                                                                                     
         estates.                                                                                                                                                                               
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         8. Executor of        tyba DOE........  .........                                                                                                                                      
         estate and                                                                                                                                                                             
         beneficiaries                                                                                                                                                                          
         treated as related                                                                                                                                                                     
         persons for                                                                                                                                                                            
         disallowance of                                                                                                                                                                        
         losses.                                                                                                                                                                                
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         9. Treatment of       tyea DOE........  .........          2          2          2          2          2          2          2          2          2          2          10          20
         funeral trusts.                                                                                                                                                                        
        10. Adjustments for    dda DOE.........  .........                                                                                                                                      
         certain gifts within                                                                                                                                                                   
         3 years of                                                                                                                                                                             
         decedent's death.                                                                                                                                                                      
(11) No Revenue Effect                                                                                                                                                                          
        11. Clarification of   dda DOE.........  .........                                                                                                                                      
         treatment of                                                                                                                                                                           
         survivor annuities                                                                                                                                                                     
         under qualified                                                                                                                                                                        
         terminable interest                                                                                                                                                                    
         rules.                                                                                                                                                                                 
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        12. Treatment under    dda DOE.........  .........                                                                                                                                      
         qualified domestic                                                                                                                                                                     
         trust rules of forms                                                                                                                                                                   
         of ownership which                                                                                                                                                                     
         are not trusts.                                                                                                                                                                        
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        13. Opportunity to     DOE.............  .........                                                                                                                                      
         correct certain                                                                                                                                                                        
         failures under                                                                                                                                                                         
         section 2032A.                                                                                                                                                                         
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        14. Authority to       dda DOE.........  .........                                                                                                                                      
         waive requirement of                                                                                                                                                                   
         United States                                                                                                                                                                          
         trustee for                                                                                                                                                                            
         qualified domestic                                                                                                                                                                     
         trusts.                                                                                                                                                                                
(11) No Revenue Effect                                                                                                                                                                          
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Estate,      ................  .........         -1         -1         -1         -1         -1         -1         -1         -1         -1         -1          -5         -10
       Gift and Trust                                                                                                                                                                           
       Simplification                                                                                                                                                                           
       Provisions.                                                                                                                                                                              
                                                ================================================================================================================================================
  XIV. Excise Tax and Other                                                                                                                                                                     
 Simplification Provisions                                                                                                                                                                      
    A. Excise Tax                                                                                                                                                                               
     Simplification:                                                                                                                                                                            
         1. Increase de        DOE.............  .........                                                                                                                                      
         minimis limit for                                                                                                                                                                      
         aftermarket                                                                                                                                                                            
         alterations for                                                                                                                                                                        
         heavy truck and                                                                                                                                                                        
         luxury car excises.                                                                                                                                                                    
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         2. Credit or refund   fcq DOE+180 days  .........                                                                                                                                      
         for imported bottled                                                                                                                                                                   
         distilled spirits                                                                                                                                                                      
         returned to                                                                                                                                                                            
         distilled spirits                                                                                                                                                                      
         plant.                                                                                                                                                                                 
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         3. Authority to       fcq DOE+180 days  .........                                                                                                                                      
         cancel or credit                                                                                                                                                                       
         export bonds without                                                                                                                                                                   
         submission of                                                                                                                                                                          
         records.                                                                                                                                                                               
(11) No Revenue Effect                                                                                                                                                                          
         4. Repeal of          fcq DOE+180 days  .........                                                                                                                                      
         required maintenance                                                                                                                                                                   
         of records on                                                                                                                                                                          
         premises of                                                                                                                                                                            
         distilled spirits                                                                                                                                                                      
         plant.                                                                                                                                                                                 
(11) No Revenue Effect                                                                                                                                                                          
         5. Fermented          fcq DOE+180 days  .........                                                                                                                                      
         material from any                                                                                                                                                                      
         brewery may be                                                                                                                                                                         
         received at a                                                                                                                                                                          
         distilled spirits                                                                                                                                                                      
         plant.                                                                                                                                                                                 
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         6. Repeal of          DOE.............  .........                                                                                                                                      
         requirement for                                                                                                                                                                        
         wholesale dealers in                                                                                                                                                                   
         liquors to post sign.                                                                                                                                                                  
(11) No Revenue Effect                                                                                                                                                                          
         7. Refund of tax to   fcq DOE+180 days  .........                                                                                                                                      
         wine returned to                                                                                                                                                                       
         bond not limited to                                                                                                                                                                    
         unmerchantable wine.                                                                                                                                                                   
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
         8. Use of additional  fcq DOE+180 days  .........                                                                                                                                      
         ameliorating                                                                                                                                                                           
         material in certain                                                                                                                                                                    
         wines.                                                                                                                                                                                 
(11) No Revenue Effect                                                                                                                                                                          
         9. Domestically       fcq DOE+180 days  .........                                                                                                                                      
         produced beer may be                                                                                                                                                                   
         withdrawn free of                                                                                                                                                                      
         tax for use of                                                                                                                                                                         
         foreign embassies,                                                                                                                                                                     
         legations, etc.                                                                                                                                                                        
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        10. Beer may be        fcq DOE+180 days  .........                                                                                                                                      
         withdrawn free of                                                                                                                                                                      
         tax for destruction.                                                                                                                                                                   
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        11. Authority to       fcq DOE+180 days  .........                                                                                                                                      
         allow drawback on                                                                                                                                                                      
         exported beer                                                                                                                                                                          
         without submission                                                                                                                                                                     
         of records.                                                                                                                                                                            
(11) No Revenue Effect                                                                                                                                                                          
        12. Imported beer or   fcq DOE+180 days  .........                                                                                                                                      
         wine transferred in                                                                                                                                                                    
         bulk to brewery or                                                                                                                                                                     
         winery without                                                                                                                                                                         
         payment of tax.                                                                                                                                                                        
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        13. Authority for IRS  DOE.............  .........                                                                                                                                      
         to grant exemption                                                                                                                                                                     
         from excise tax                                                                                                                                                                        
         registration                                                                                                                                                                           
         requirements.                                                                                                                                                                          
(11) No Revenue Effect                                                                                                                                                                          
        14. Exemption from     1/1/98..........  .........         -5         -8         -8         -8         -9         -9        -10        -10        -11        -11         -38         -89
         truck excise tax for                                                                                                                                                                   
         certain wrecked                                                                                                                                                                        
         truck fixups and                                                                                                                                                                       
         truck modifications.                                                                                                                                                                   
        15. Repeal             1/1/98..........  .........                                                                                                                                      
         registration                                                                                                                                                                           
         requirement for tax-                                                                                                                                                                   
         free sales of trucks                                                                                                                                                                   
         for resale.                                                                                                                                                                            
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        16. Repeal of excise   DOE.............  .........                                                                                                                                      
         tax ``deadwood''                                                                                                                                                                       
         provision.                                                                                                                                                                             
(11)No Revenue Effect                                                                                                                                                                           
        17. Move taxation of   1/1/98..........  .........                                                                                                                                      
         arrows from tax on                                                                                                                                                                     
         assembled arrows to                                                                                                                                                                    
         tax on component                                                                                                                                                                       
         parts of 12.4%.                                                                                                                                                                        
(11)Negligible Revenue Effect                                                                                                                                                                   
        18. Clarify tax        10/1/97.........  .........                                                                                                                                      
         treatment of                                                                                                                                                                           
         skydiving flights as                                                                                                                                                                   
         noncommercial                                                                                                                                                                          
         aviation; with                                                                                                                                                                         
         technical                                                                                                                                                                              
         modifications.                                                                                                                                                                         
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        19. Eliminate double   10/1/97.........  .........                                                                                                                                      
         taxation for certain                                                                                                                                                                   
         purchases of                                                                                                                                                                           
         aviation fuel from                                                                                                                                                                     
         fixed-based                                                                                                                                                                            
         operators; with                                                                                                                                                                        
         technical                                                                                                                                                                              
         modifications.                                                                                                                                                                         
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
    B. Tax Exempt Bond                                                                                                                                                                          
     Provisions:                                                                                                                                                                                
        1. Repeal $100,000     bia DOE.........  .........      (\6\)         -2         -3         -5         -6         -8         -9        -10        -11        -12         -17         -65
         limitation on                                                                                                                                                                          
         unspent proceeds                                                                                                                                                                       
         from tax-exempt bond                                                                                                                                                                   
         issues under year                                                                                                                                                                      
         exception from                                                                                                                                                                         
         rebate.                                                                                                                                                                                
        2. Exclusion from      bia DOE.........  .........      (\6\)         -1         -2         -3         -3         -4         -5         -6         -6         -7          -9         -37
         arbitrage rebate for                                                                                                                                                                   
         earnings on bona                                                                                                                                                                       
         fide debt service                                                                                                                                                                      
         fund under                                                                                                                                                                             
         construction bond                                                                                                                                                                      
         rules.                                                                                                                                                                                 
        3. Repeal of debt      bia DOE.........  .........                                                                                                                                      
         service based                                                                                                                                                                          
         limitation on                                                                                                                                                                          
         investment in                                                                                                                                                                          
         certain nonpurpose                                                                                                                                                                     
         investments.                                                                                                                                                                           
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        4. Repeal of expired   DOE.............  .........                                                                                                                                      
         student loan bond                                                                                                                                                                      
         arbitrage rebate                                                                                                                                                                       
         provisions.                                                                                                                                                                            
(11)No Revenue Effect                                                                                                                                                                           
    C. Tax Court Procedures:                                                                                                                                                                    
        1. Clarify             DOE.............  .........         -3         -3         -3         -3         -3         -3         -3         -3         -3         -3         -15         -30
         jurisdiction of Tax                                                                                                                                                                    
         Court with respect                                                                                                                                                                     
         to overpayment                                                                                                                                                                         
         determinations.                                                                                                                                                                        
        2. Clarify Tax Court   DOE.............  .........                                                                                                                                      
         jurisdiction over                                                                                                                                                                      
         interest                                                                                                                                                                               
         determinations.                                                                                                                                                                        
(11) No Revenue Effect                                                                                                                                                                          
        3. Clarify net worth   DOE.............  .........         -1         -2         -2         -2         -2         -2         -2         -2         -2         -2          -9         -19
         requirements for                                                                                                                                                                       
         awards of                                                                                                                                                                              
         administrative or                                                                                                                                                                      
         litigation costs; $4                                                                                                                                                                   
         million for joint                                                                                                                                                                      
         returns.                                                                                                                                                                               
        4. Clarify Tax Court   DOE.............  .........                                                                                                                                      
         jurisdiction for                                                                                                                                                                       
         independent                                                                                                                                                                            
         contractors with                                                                                                                                                                       
         technical                                                                                                                                                                              
         modification.                                                                                                                                                                          
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
    D. Other Provisions:                                                                                                                                                                        
        1. Extend due date     tyba DOE........  .........         -2      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)          -2          -3
         for first quarter                                                                                                                                                                      
         estimated tax by                                                                                                                                                                       
         private foundations.                                                                                                                                                                   
        2. Clarification of    1/1/98..........  .........         -2         -3         -1         -1         -1         -1         -1         -1         -1         -1          -8         -13
         authority to                                                                                                                                                                           
         withhold Puerto Rico                                                                                                                                                                   
         income taxes from                                                                                                                                                                      
         salaries of Federal                                                                                                                                                                    
         employees..                                                                                                                                                                            
        3. Certain notices     1/1/98..........  .........         -1         -1         -1         -1         -1         -1         -1         -1         -1         -1          -5         -10
         disregarded under                                                                                                                                                                      
         provision increasing                                                                                                                                                                   
         interest rate on                                                                                                                                                                       
         large corporate                                                                                                                                                                        
         underpayments.                                                                                                                                                                         
                              ------------------------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Excise   ................  .........        -14        -20        -20        -23        -25        -28        -31        -33        -35        -37        -103        -266
           Tax and Other                                                                                                                                                                        
           Simplification                                                                                                                                                                       
           Provisions.                                                                                                                                                                          
                              ==================================================================================================================================================================
  XV. Pension Simplification                                                                                                                                                                    
 Provisions                                                                                                                                                                                     
    A. Miscellaneous                                                                                                                                                                            
     Provisions Relating to                                                                                                                                                                     
     Pensions and Other                                                                                                                                                                         
     Provisions:                                                                                                                                                                                
        1. Water districts     1/1/98..........  .........     (\19\)         -1         -1         -1         -2         -2         -2         -2         -2         -3          -6         -15
         made eligible for                                                                                                                                                                      
         401(k) plans even if                                                                                                                                                                   
         State or local                                                                                                                                                                         
         entity.                                                                                                                                                                                
        2. Extend moratorium   DOE.............  .........                                                                                                                                      
         on nondiscrimination                                                                                                                                                                   
         rules for public                                                                                                                                                                       
         pension plans                                                                                                                                                                          
         (permanent), with                                                                                                                                                                      
         technical                                                                                                                                                                              
         modification.                                                                                                                                                                          
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        3. Treatment of        DOE.............  .........  .........        -10         -1  .........  .........  .........  .........  .........  .........  .........         -11         -11
         certain disability                                                                                                                                                                     
         benefits received by                                                                                                                                                                   
         former police                                                                                                                                                                          
         officers or                                                                                                                                                                            
         firefighters.                                                                                                                                                                          
        4. ESOP provision--    tyba 12/31/97...  .........                                                                                                                                      
         Modify prohibited                                                                                                                                                                      
         transaction rules                                                                                                                                                                      
         relating to employee                                                                                                                                                                   
         stock ownership                                                                                                                                                                        
         plans of S                                                                                                                                                                             
         corporation; with                                                                                                                                                                      
         modifications.                                                                                                                                                                         
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        5. Repeal UBIT on      tyba 12/31/97...  .........         -8        -23        -34        -41        -44        -46        -48        -50        -52        -54        -149        -400
         income from an S                                                                                                                                                                       
         corporation to an                                                                                                                                                                      
         ESOP; with technical                                                                                                                                                                   
         modification.                                                                                                                                                                          
        6. Pension provision-- pyba 12/31/98...  .........  .........         -4        -12        -14        -18        -19        -23        -23        -25        -25         -48        -164
         increase in full                                                                                                                                                                       
         funding limit with                                                                                                                                                                     
         20-year                                                                                                                                                                                
         amortization; with                                                                                                                                                                     
         technical                                                                                                                                                                              
         modification.                                                                                                                                                                          
        7. Deduction for       tyba 12/31/97...  .........                                                                                                                                      
         contributions made                                                                                                                                                                     
         by ministers to                                                                                                                                                                        
         retirement plans.                                                                                                                                                                      
(11) Negligible Revenue                                                                                                                                                                         
 Effect                                                                                                                                                                                         
        8. Exclusion of        tyba 12/31/97...  .........                                                                                                                                      
         ministers from                                                                                                                                                                         
         discrimination                                                                                                                                                                         
         testing of                                                                                                                                                                             
         nondenominational                                                                                                                                                                      
         retirement plans.                                                                                                                                                                      
(11)Negligible Revenue Effect                                                                                                                                                                   
        9. Diversification of  DOE.............  .........                                                                                                                                      
         401(k) investments;                                                                                                                                                                    
         with 1-year delay of                                                                                                                                                                   
         effective date.                                                                                                                                                                        
(11)Negligible Revenue Effect                                                                                                                                                                   
        10. Exempt police and  yba 12/31/96....  .........                                                                                                                                      
         firefighters from                                                                                                                                                                      
         section 415 dollar                                                                                                                                                                     
         limitation; with                                                                                                                                                                       
         clarification.                                                                                                                                                                         
(11)Negligible Revenue Effect                                                                                                                                                                   
        11. Modify section     tyba 12/31/97...  .........         -9        -25        -25        -26        -26        -26        -27        -27        -27        -28        -111        -246
         415 limits for State                                                                                                                                                                   
         and local plans;                                                                                                                                                                       
         with modifications.                                                                                                                                                                    
        12. ESOP provision--   tyba 12/31/97...  .........                                                                                                                                      
         permit cash                                                                                                                                                                            
         distributions in                                                                                                                                                                       
         lieu of stock in the                                                                                                                                                                   
         S corporation.                                                                                                                                                                         
(11)Negligible Revenue Effect                                                                                                                                                                   
        13. Increase the       dma DOE.........      (\7\)          2          6          7          7          7          8          8          9          9         10          29          73
         amount from $3,500                                                                                                                                                                     
         to $5,000 on                                                                                                                                                                           
         involuntary cash out                                                                                                                                                                   
         from pension plans                                                                                                                                                                     
         with no indexing of                                                                                                                                                                    
         dollar amount.                                                                                                                                                                         
        14. Treatment for      tyba 12/31/97...  .........                                                                                                                                      
         partnership items of                                                                                                                                                                   
         individual                                                                                                                                                                             
         retirement accounts.                                                                                                                                                                   
(11)No Revenue Effect                                                                                                                                                                           
        15. Church plan        DOE.............  .........                                                                                                                                      
         exception to                                                                                                                                                                           
         prohibition on                                                                                                                                                                         
         discrimination                                                                                                                                                                         
         against individuals                                                                                                                                                                    
         based on health                                                                                                                                                                        
         status.                                                                                                                                                                                
(11)Negligible Revenue Effect                                                                                                                                                                   
        16. Excise tax         pybo/a 1/1/98...  .........                                                                                                                                      
         penalties for                                                                                                                                                                          
         failure of group                                                                                                                                                                       
         health plan to                                                                                                                                                                         
         provide certain                                                                                                                                                                        
         maternity and mental                                                                                                                                                                   
         health benefits.                                                                                                                                                                       
(11)Negligible Revenue Effect                                                                                                                                                                   
        17. Date for adoption  DOE.............  .........                                                                                                                                      
         of plan amendments.                                                                                                                                                                    
(11)No Revenue Effect                                                                                                                                                                           
    B. Pension Simplification                                                                                                                                                                   
     Provisions:                                                                                                                                                                                
        1. Matching            tyba 12/31/97...  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)      (\20\)      (\21\)
         contributions for                                                                                                                                                                      
         self-employed                                                                                                                                                                          
         individuals not                                                                                                                                                                        
         treated as elective                                                                                                                                                                    
         deferrals.                                                                                                                                                                             
        2. Contributions to    tyba 12/31/97...  .........                                                                                                                                      
         IRAs through payroll                                                                                                                                                                   
         deductions.                                                                                                                                                                            
(11)No Revenue Effect                                                                                                                                                                           
        3. Plans not           tyba 12/31/97...  .........                                                                                                                                      
         disqualified merely                                                                                                                                                                    
         by accepting                                                                                                                                                                           
         rollover                                                                                                                                                                               
         contributions; with                                                                                                                                                                    
         modification.                                                                                                                                                                          
(11)Negligible Revenue Effect                                                                                                                                                                   
        4. Modification of     DOE.............  .........                                                                                                                                      
         prohibition on                                                                                                                                                                         
         assignment or                                                                                                                                                                          
         alienation.                                                                                                                                                                            
(11)Negligible Revenue Effect                                                                                                                                                                   
        5. Eliminate           tyba DOE........  .........                                                                                                                                      
         paperwork burdens on                                                                                                                                                                   
         plans.                                                                                                                                                                                 
(11)No Revenue Effect                                                                                                                                                                           
        6. Modifications to    tyba 12/31/98...  .........  .........     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)     (\19\)      (\20\)      (\21\)
         section 403(b)                                                                                                                                                                         
         exclusion allowance                                                                                                                                                                    
         to conform to                                                                                                                                                                          
         section 415                                                                                                                                                                            
         modifications.                                                                                                                                                                         
        7. New technologies    DOE.............  .........                                                                                                                                      
         in retirement plans.                                                                                                                                                                   
(11)No Revenue Effect                                                                                                                                                                           
        8. Modification of     tyba 12/31/97...  .........         -2         -3         -3         -3         -3         -3         -3         -3         -3         -3         -14         -29
         10% tax on                                                                                                                                                                             
         nondeductible                                                                                                                                                                          
         contributions.                                                                                                                                                                         
        9. Modify funding      cda 12/31/97....  .........                                                                                                                                      
         rules for certain                                                                                                                                                                      
         plans.                                                                                                                                                                                 
(11)Negligible Revenue Effect                                                                                                                                                                   
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
          Subtotal of Pension  ................  .........        -27        -51        -68        -78        -86        -88        -95        -96       -100       -103        -310        -792
           Simplification                                                                                                                                                                       
           Provisions.                                                                                                                                                                          
                                                ================================================================================================================================================
  XVI. Technical Corrections                                                                                                                                                                    
 Provisions                                                                                                                                                                                     
    1. Oklahoma technical on   dwcorfpt 3/18/97  .........        -10         -2          1          2          2          1          1          1          1          1          -8          -2
     Indian wage credits and                                                                                                                                                                    
     development incentives                                                                                                                                                                     
     for property with 10-                                                                                                                                                                      
     year lives or less, with                                                                                                                                                                   
     modification.                                                                                                                                                                              
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Technical    ................        -10         -2          1          2          2          1          1          1          1          1         -8          -2            
       Corrections Provisions.                                                                                                                                                                  
                                                ================================================================================================================================================
  XVII. TRADE PROVISION--GSP   6/1/97..........  .........       -378  .........  .........  .........  .........  .........  .........  .........  .........  .........        -378        -378
 extension through 6/30/98                                                                                                                                                                      
 [\12\]......................                                                                                                                                                                   
 ..........                                                                                                                                                                                     
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
      Total Revenue Effect of  ................         60     -9,483     -9,887    -27,937    -29,329    -23,865    -34,966    -36,611    -38,652    -39,809    -41,551    -100,444    -292,045
       H.R. 2014.                                                                                                                                                                               
                                                ================================================================================================================================================
  XVIII. REVENUE PROVISIONS                                                                                                                                                                     
 IN H.R. 2015                                                                                                                                                                                   
    1. Increase small          10/1/97.........  .........  .........  .........      1,175      1,720      2,272      2,280      2,290      2,300      2,310      2,320       5,167      16,667
     cigarettes tax by $0.10                                                                                                                                                                    
     per pack in 2000 and                                                                                                                                                                       
     2001, and $0.15 per pack                                                                                                                                                                   
     in 2002 and thereafter                                                                                                                                                                     
     with proportionate                                                                                                                                                                         
     increase in other                                                                                                                                                                          
     tobacco products excise                                                                                                                                                                    
     taxes.                                                                                                                                                                                     
    2. Miscellaneous FUTA      various.........  .........          3      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)      (\6\)           1  ..........
     provisions [\12\].                                                                                                                                                                         
    3. Medicare Plus MSAs....  tyba 12/31/97...  .........                                                                                                                                      
(11)Negligible Revenue Effect                                                                                                                                                                   
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
      Total Revenue Effect of  ................  .........          3        [6]      1,175      1,720      2,272      2,280      2,290      2,300      2,310      2,320       5,168      16,667
       H.R. 2015.                                                                                                                                                                               
                                                ================================================================================================================================================
      Grand Total:             ................         60     -9,480     -9,887    -26,762    -27,609    -21,593    -32,686    -34,321    -36,352    -37,499    -39,231     -95,276   -275,378 
       Reconciliation Revenue                                                                                                                                                                   
       Provisions.                                                                                                                                                                              
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimate considers interaction with HOPE tax credit proposal.                                                                                                                               
\2\ The refundable portion of the child credit is equal to $4,281 million for fiscal years 1998-2002 and $10,022 million for fiscal years 1998-2007.                                            
\3\ Estimate includes interaction with estate and gift taxes.                                                                                                                                   
\4\ Considers interaction with IRA PLUS proposal.                                                                                                                                               
\5\ Estimate includes interaction with welfare-to-work tax credit.                                                                                                                              
\6\ Loss of less than $500,000.                                                                                                                                                                 
\7\ Gain of less than $500,000.                                                                                                                                                                 
\8\ Effective for bonds issued after 12/31/96 and bonds issued before 1/1/99.                                                                                                                   
\9\ Effective for expenses in taxable years ending after date of enactment and before 1/1/01.                                                                                                   
\10\ Effective for payments received in taxable years beginning after 12/31/96 with respect to individuals dying after such date.                                                               
\11\ Assumes prior or concurrent passage of legislation to allow Virgin Island financing on parity basis.                                                                                       
\12\ Estimate provided by the Congressional Budget Office.                                                                                                                                      
\13\ Rural airports would be defined as (1) airports receiving ``essential air service'' assistance on date of enactment and having fewer than 100,000 enplanements in the previous calendar    
  year, and (2) other airports having fewer than 100,000 passenger enplanements in the previous calendar year, excluding those within 75 miles of airports having more than 100,000 passenger   
  enplanements in the previous year.                                                                                                                                                            
\14\ Estimate does not include increase in receipts to Social Security trust fund ($21 million for fiscal years 1997-2002; $51 million for fiscal years 1997-2007).                             
\15\ The provision would eliminate the present-law requirement that a portion of the suspense account be restored to income whenever the gross receipts of the corporation decline.             
\16\ Provision would be effective for taxable years ending after 6/8/97 for new suspense accounts, and taxable years beginning after that date for existing accounts. Balances in new accounts  
  would be included in income over a 10-year period, and balances in existing accounts over a 20-year period. For existing accounts, the amounts included in income in any year would not exceed
  50% of the taxable income of the taxpayer before the inclusion.                                                                                                                               
\17\ Estimate includes outlay reductions of $254 million for 1997-2002 and $650 million for 1997-2007.                                                                                          
\18\ Estimate does not include effect on outlays. Outlays will be provided by the Congressional Budget Office.                                                                                  
\19\ Loss of less than $1 million.                                                                                                                                                              
\20\  Loss of less than $5 million.                                                                                                                                                             
\21\ Loss of less than $10 million.                                                                                                                                                             
                                                                                                                                                                                                
 Legend for ``Effective'' column: ab=and before; aba=annuities beginning after; aca=actions commenced after; aiii OBRA'90=as if included in the Omnibus Budget Reconciliation Act of 1990; aiii 
  SBJPA=as if included in the Small Business Job Protection Act of 1996; aoty=all open taxable years; bia=bonds issued after; cai=credits arising in; cci=contracts completed in;               
  cda=contributions due after; cfa=claims filed after; cia=contracts issued after; csa=constructive sales after; da=distributions after; Da=discharges after; da/a=distributions and            
  acquisitions after; dda=decedents dying after; di=dispositions in; dma=disclosures made after; DOE=date of enactment; dofca=date of first committee action; dpoaa=dividends paid or accrued   
  after; droaa=dividends received or accrued after; dwcorfpt=depreciation and wages claimed on returns filed prior to; efbcieo=exception for binding contracts in effect on; eia=expenses       
  incurred after; eii=expenses incurred in; fcq DOE + 180 days=first day of the calendar quarter that begins at least 180 days after date of enactment; ftpoa=foreign taxes paid or accrued in; 
  gma=gifts made after; gra=gross receipts after; gsta=generation skipping transfers after; icoa=involuntary conversions occurring after; lia=instruments issued after; leia=leases entered into
  after; lia=levies issued after; Ipo/a=labor performed on or after; NOLgi=net operating losses generated in; oia=obligations issued after; pca=proceedings commenced after; pcpa=property      
  contributed to partnership after; pda=partnership distributions after; pma=payments made after; po/a=purchases on or after; poida=payments of interest due after; ppisa=property placed in    
  service after; psora=payments solicited or received after; ptoa=prohibited transactions occurring after; pyba=plans years beginning after; phybo/a=plans years beginning on or after;         
  rd=returns due; rfa=returns filed after; roa=rentals occurring after (for returns open on date of first committee action); Sa=sales after; sea=sales or exchanges after; sepda=sales and      
  exchanges, and certain partnership distributions after; spa=services performed after; ta=transactions after; Ta=transfers after; tyba=taxable years beginning after; tybo/a=taxable years     
  beginning on or after; tyb1ya=taxable years beginning 1 year after; tybi=taxable years beginning in; tyea=tax years ending after; tsoaiTg=tax shelters offered after issuance of Treasury     
  guidance; wpoifhma=wages paid or incurred for hires made after; yba=years beginning after; 30da=30 days after; 90da=90 days after; 180da=180 days after; 2ya=2 years after.                   
                                                                                                                                                                                                
 Note.--Details may not add to totals due to rounding. Enactment date is assumed to be August 15, 1997.                                                                                         
                                                                                                                                                                                                
 Source: Joint Committee on Taxation.                                                                                                                                                           

        For consideration of the House bill, and the Senate 
        amendment, and modifications committed to conference:
                                   John R. Kasich,
                                   Bill Archer,
                                   Phil Crane,
                                   William M. Thomas,
                                   Dick Armey,
                                   Tom DeLay,
                                   Charles B. Rangel,
                As additional conferees from the Committee on 
                Transportation and Infrastructure, for 
                consideration of secs. 702 and 704 of the 
                Senate amendment, and modifications committed 
                to conference:
                                   Bud Shuster,
                                   Susan Molinari,
                                   James L. Oberstar,
                As additional conferees from the Committee on 
                Education and the Workforce, for consideration 
                of secs. 713-14, 717, 879, 1302, 1304-5, and 
                1311 of the Senate amendment, and modifications 
                committed to conference:
                                   Bill Goodling,
                                   Harris W. Fawell,
                                   Donald M. Payne,
                                 Managers on the Part of the House.

                From the Committee on Finance:
                                   Bill Roth,
                                   Trent Lott,
                                   Daniel P. Moynihan,
                From the Committee on the Budget:
                                   Pete Domenici,
                                   Don Nickles,
                                   Frank R. Lautenberg,
                                Managers on the Part of the Senate.

                                

  
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