[House Report 105-739]
[From the U.S. Government Publishing Office]



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     105-739
_______________________________________________________________________


 
                      TAXPAYER RELIEF ACT OF 1998

                                _______
                                

 September 23, 1998.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

_______________________________________________________________________


    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 4579]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 4579) to provide tax relief for individuals, 
families, and farming and other small businesses, to provide 
tax incentives for education, to extend certain expiring 
provisions, and for other purposes, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.


                                CONTENTS
                                                                   Page
  I. Summary and Background..........................................37
        A. Purpose and Summary...................................    37
        B. Background and Need for Legislation...................    42
        C. Legislative History...................................    42
 II. Explanation of the Bill.........................................43
        Title I. Individual and Family Tax Relief Provisions.....    43
            A. Marriage Penalty Tax Relief (sec. 101)............    43
            B. Partial Exclusion for Interest and Dividends (sec. 
                102).............................................    45
            C. Treatment of Personal Credits Under the Individual 
                Minimum Tax (sec. 103)...........................    46
            D. Increase Deduction for Health Insurance Expenses 
                of Self-Employed Individuals (sec. 104)..........    47
            E. Exclusion of Gain on the Sale of a Principal 
                Residence by a Member of the Uniformed Service or 
                the Foreign Service of the United States (sec. 
                105).............................................    48
            F. Acceleration of Increased Exemption From Estate 
                and Gift Tax (sec. 106)..........................    49
            G. Education Provisions..............................    50
              1. Permit private higher education institutions to 
                  establish qualified prepaid tuition programs 
                  (sec. 111).....................................    50
              2. Modification of arbitrage rebate rules 
                  application to public school construction bonds 
                  (sec. 112).....................................    51
            H. Social Security Provisions........................    53
              1. Increases in the Social Security earnings limit 
                  for individuals who have attained retirement 
                  age (sec. 121).................................    53
              2. Recomputations of benefits after normal 
                  retirement age (sec. 122)......................    54
        Title II. Small Business and Farmer Tax Relief Provisions    55
            A. Accelerate Increase in Expensing for Small 
                Businesses (sec. 201)............................    55
            B. Farm Provisions...................................    57
              1. Permanent extension of income averaging for 
                  farmers (sec. 211).............................    57
              2. Extend the net operating loss carryback period 
                  for farmers (sec. 212).........................    57
              3. Production flexibility contract payments (sec. 
                  213)...........................................    59
            C. Increase in Volume Cap on Private Activity Bonds 
                (sec. 221).......................................    59
        Title III. Extension of Expiring Provisions..............    61
            A. Extension of Research and Experimentation Credit 
                and Increase in the Rates for the Alternative 
                Incremental Research Credit (sec. 301)...........    61
            B. Extension of Work Opportunity Tax Credit (sec. 
                302).............................................    64
            C. Extension of the Welfare-to-Work Tax Credit (sec. 
                303).............................................    65
            D. Extend the Deduction Provided for Contributions of 
                Appreciated Stock to Private Foundations; Public 
                Inspection of Private Foundation Annual Returns..    66
              1. Extend the deduction for contributions of 
                  appreciated stock to private foundations (sec. 
                  304(a))........................................    66
              2. Public inspection of private foundation annual 
                  returns (sec. 304(b))..........................    67
            E. Exceptions under Subpart F for Certain Active 
                Financing Income (sec. 305)......................    69
            F. Extension of the Generalized System of Preferences 
                (sec. 311).......................................    91
        Title IV. Revenue Offset Provision.......................    91
            A. Treatment of Certain Deductible Liquidating 
                Distributions of Regulated Investment Companies 
                and Real Estate Investment Trusts (sec. 401).....    91
        Title V. Tax Technical Corrections.......................    93
            A. Technical Corrections to the 1998 Act.............    93
              1. Burden of proof (sec. 502(b))...................    93
              2. Relief for innocent spouses (sec. 502(c)).......    93
              3. Interest netting (sec. 502 (d)).................    93
              4. Effective date for elimination of 18-month 
                  holding period for capital gains (sec. 502 (h))    94
            B. Technical Corrections to the 1997 Act.............    95
              1. Treatment of interest on qualified education 
                  loans (sec. 503(a))............................    95
              2. Capital gain distributions of charitable 
                  remainder trusts (sec. 503(b)).................    96
              3. Gifts may not be revalued for estate tax 
                  purposes after expiration of statute of 
                  limitations (sec. 503(c))......................    96
              4. Coordinate Vaccine Injury Compensation Trust 
                  Fund expenditure purposes with list of taxable 
                  vaccines (sec. 503(d)).........................    98
              5. Abatement of interest by reason of 
                  Presidentially declared disasters (sec. 503(e))    98
              6. Treatment of certain corporate distributions 
                  (sec. 503(f))..................................    99
              7. Treatment of net operating losses arising from 
                  certain eligible losses (sec. 503(g))..........   100
              8. Determination of unborrowed cash value under 
                  COLI pro rata interest disallowance rules (sec. 
                  503(h))........................................   101
              9. Payment of taxes by commercially acceptable 
                  means (sec. 503 (i))...........................   101
            C. Technical Corrections to the 1984 Act.............   102
              1. Casualty loss deduction (sec. 504)..............   102
            D. Disclosure of Tax Return Information to Department 
                of Agriculture (sec. 505(a)).....................   103
            E. Technical Corrections to the Transportation Equity 
                Act for the 21st Century (sec. 505(b))...........   103
        Title VI. Renewal Community Provisions (secs. 601-606)...   104
III. Votes of the Committee.........................................114
 IV. Budget Effects of the Bill.....................................115
        A. Committee Estimates of Budgetary Effects..............   115
        B. Budget Authority and Tax Expenditures.................   118
        C. Cost Estimate Prepared by the Congressional Budget 
            Office...............................................   118
  V. Other Matters to be Discussed Under the Rules of the House.....126
        A. Committee Oversight Findings and Recommendations......   126
        B. Summary of Findings and Recommendations of the 
            Committee on Government Reform and Oversight.........   126
        C. Constitutional Authority Statement....................   126
        D. Information Relating to Unfunded Mandates.............   126
        E. Applicability of House Rule XXI5(c)...................   127
 VI. Changes in Existing Law Made by the Bill, as Reported..........127
VII. Dissenting Views...............................................211
  The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE, ETC.

  (a) Short Title.--This Act may be cited as the ``Taxpayer Relief Act 
of 1998''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly provided, 
whenever in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986.
  (c) Table of Contents.--
Sec. 1. Short title, etc.

    TITLE I--PROVISIONS PRIMARILY AFFECTING INDIVIDUALS AND FAMILIES

                     Subtitle A--General Provisions

Sec. 101. Elimination of marriage penalty in standard deduction.
Sec. 102. Exemption of certain interest and dividend income from tax.
Sec. 103. Nonrefundable personal credits allowed against alternative 
minimum tax.
Sec. 104. 100 percent deduction for health insurance costs of self-
employed individuals.
Sec. 105. Special rule for members of uniformed services and Foreign 
Service in determining exclusion of gain from sale of principal 
residence.
Sec. 106. $1,000,000 exemption from estate and gift taxes.

              Subtitle B--Provisions Relating to Education

Sec. 111. Eligible educational institutions permitted to maintain 
qualified tuition programs.
Sec. 112. Modification of arbitrage rebate rules applicable to public 
school construction bonds.

           Subtitle C--Provisions Relating to Social Security

Sec. 121. Increases in the social security earnings limit for 
individuals who have attained retirement age.
Sec. 122. Recomputation of benefits after normal retirement age.

 TITLE II--PROVISIONS PRIMARILY AFFECTING FARMING AND OTHER BUSINESSES

     Subtitle A--Increase in Expense Treatment for Small Businesses

Sec. 201. Increase in expense treatment for small businesses.

               Subtitle B--Provisions Relating to Farmers

Sec. 211. Income averaging for farmers made permanent.
Sec. 212. 5-year net operating loss carryback for farming losses.
Sec. 213. Production flexibility contract payments.

      Subtitle C--Increase in Volume Cap on Private Activity Bonds

Sec. 221. Increase in volume cap on private activity bonds.

  TITLE III--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS

                       Subtitle A--Tax Provisions

Sec. 301. Research credit.
Sec. 302. Work opportunity credit.
Sec. 303. Welfare-to-work credit.
Sec. 304. Contributions of stock to private foundations; expanded 
public inspection of private foundations' annual returns.
Sec. 305. Subpart F exemption for active financing income.

             Subtitle B--Generalized System of Preferences

Sec. 311. Extension of Generalized System of Preferences.

                        TITLE IV--REVENUE OFFSET

Sec. 401. Treatment of certain deductible liquidating distributions of 
regulated investment companies and real estate investment trusts.

                     TITLE V--TECHNICAL CORRECTIONS

Sec. 501. Definitions; coordination with other titles.
Sec. 502. Amendments related to Internal Revenue Service Restructuring 
and Reform Act of 1998.
Sec. 503. Amendments related to Taxpayer Relief Act of 1997.
Sec. 504. Amendments related to Tax Reform Act of 1984.
Sec. 505. Other amendments.

            TITLE VI--AMERICAN COMMUNITY RENEWAL ACT OF 1998

Sec. 601. Short title.
Sec. 602. Designation of and tax incentives for renewal communities.
Sec. 603. Extension of expensing of environmental remediation costs to 
renewal communities.
Sec. 604. Extension of work opportunity tax credit for renewal 
communities
Sec. 605. Conforming and clerical amendments.
Sec. 606. Evaluation and reporting requirements.

    TITLE I--PROVISIONS PRIMARILY AFFECTING INDIVIDUALS AND FAMILIES

                     Subtitle A--General Provisions

SEC. 101. ELIMINATION OF MARRIAGE PENALTY IN STANDARD DEDUCTION.

  (a) In General.--Paragraph (2) of section 63(c) (relating to standard 
deduction) is amended--
          (1) by striking ``$5,000'' in subparagraph (A) and inserting 
        ``twice the dollar amount in effect under subparagraph (C) for 
        the taxable year'',
          (2) by adding ``or'' at the end of subparagraph (B),
          (3) by striking ``in the case of'' and all that follows in 
        subparagraph (C) and inserting ``in any other case.'', and
          (4) by striking subparagraph (D).
  (b) Additional Standard Deduction for Aged and Blind To Be the Same 
for Married and Unmarried Individuals.--
          (1) Paragraphs (1) and (2) of section 63(f) are each amended 
        by striking ``$600'' and inserting ``$750''.
          (2) Subsection (f) of section 63 is amended by striking 
        paragraph (3) and by redesignating paragraph (4) as paragraph 
        (3).
  (c) Technical Amendments.--
          (1) Subparagraph (B) of section 1(f)(6) is amended by 
        striking ``(other than with'' and all that follows through 
        ``shall be applied'' and inserting ``(other than with respect 
        to sections 63(c)(4) and 151(d)(4)(A)) shall be applied''.
          (2) Paragraph (4) of section 63(c) is amended by adding at 
        the end the following flush sentence:
        ``The preceding sentence shall not apply to the amount referred 
        to in paragraph (2)(A).''
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1998.

SEC. 102. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND INCOME FROM TAX.

  (a) In General.--Part III of subchapter B of chapter 1 (relating to 
amounts specifically excluded from gross income) is amended by 
inserting after section 115 the following new section:

``SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTEREST RECEIVED BY 
                    INDIVIDUALS.

  ``(a) Exclusion From Gross Income.--Gross income does not include 
dividends and interest received during the taxable year by an 
individual.
  ``(b) Limitations.--
          ``(1) Maximum amount.--The aggregate amount excluded under 
        subsection (a) for any taxable year shall not exceed $200 ($400 
        in the case of a joint return).
          ``(2) Certain dividends excluded.--Subsection (a) shall not 
        apply to any dividend from a corporation which, for the taxable 
        year of the corporation in which the distribution is made, or 
        for the next preceding taxable year of the corporation, is a 
        corporation exempt from tax under section 501 (relating to 
        certain charitable, etc., organization) or section 521 
        (relating to farmers' cooperative associations).
  ``(c) Special Rules.--For purposes of this section--
          ``(1) Exclusion not to apply to capital gain dividends from 
        regulated investment companies and real estate investment 
        trusts.--

                  ``For treatment of capital gain dividends, see 
sections 854(a) and 857(c).

          ``(2) Certain nonresident aliens ineligible for exclusion.--
        In the case of a nonresident alien individual, subsection (a) 
        shall apply only--
                  ``(A) in determining the tax imposed for the taxable 
                year pursuant to section 871(b)(1) and only in respect 
                of dividends and interest which are effectively 
                connected with the conduct of a trade or business 
                within the United States, or
                  ``(B) in determining the tax imposed for the taxable 
                year pursuant to section 877(b).
          ``(3) Dividends from employee stock ownership plans.--
        Subsection (a) shall not apply to any dividend described in 
        section 404(k).''
  (b) Conforming Amendments.--
          (1)(A) Subparagraph (A) of section 135(c)(4) is amended by 
        inserting ``116,'' before ``137''.
          (B) Subsection (d) of section 135 is amended by redesignating 
        paragraph (4) as paragraph (5) and by inserting after paragraph 
        (3) the following new paragraph:
          ``(4) Coordination with section 116.--This section shall be 
        applied before section 116.''
          (2) Paragraph (2) of section 265(a) is amended by inserting 
        before the period ``, or to purchase or carry obligations or 
        shares, or to make deposits, to the extent the interest thereon 
        is excludable from gross income under section 116''.
          (3) Subsection (c) of section 584 is amended by adding at the 
        end thereof the following new flush sentence:
``The proportionate share of each participant in the amount of 
dividends or interest received by the common trust fund and to which 
section 116 applies shall be considered for purposes of such section as 
having been received by such participant.''
          (4) Subsection (a) of section 643 is amended by redesignating 
        paragraph (7) as paragraph (8) and by inserting after paragraph 
        (6) the following new paragraph:
          ``(7) Dividends or interest.--There shall be included the 
        amount of any dividends or interest excluded from gross income 
        pursuant to section 116.''
          (5) Section 854(a) is amended by inserting ``section 116 
        (relating to partial exclusion of dividends and interest 
        received by individuals) and'' after ``For purposes of''.
          (6) Section 857(c) is amended to read as follows:
  ``(c) Restrictions Applicable to Dividends Received From Real Estate 
Investment Trusts.--
          ``(1) Treatment for section 116.--For purposes of section 116 
        (relating to partial exclusion of dividends and interest 
        received by individuals), a capital gain dividend (as defined 
        in subsection (b)(3)(C)) received from a real estate investment 
        trust which meets the requirements of this part shall not be 
        considered as a dividend.
          ``(2) Treatment for section 243.--For purposes of section 243 
        (relating to deductions for dividends received by 
        corporations), a dividend received from a real estate 
        investment trust which meets the requirements of this part 
        shall not be considered as a dividend.''
          (7) The table of sections for part III of subchapter B of 
        chapter 1 is amended by inserting after the item relating to 
        section 115 the following new item:

                              ``Sec. 116. Partial exclusion of 
                                        dividends and interest received 
                                        by individuals.''

  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1998.

SEC. 103. NONREFUNDABLE PERSONAL CREDITS ALLOWED AGAINST ALTERNATIVE 
                    MINIMUM TAX.

  (a) In General.--Subsection (a) of section 26 is amended to read as 
follows:
  ``(a) Limitation Based on Amount of Tax.--The aggregate amount of 
credits allowed by this subpart for the taxable year shall not exceed 
the sum of--
          ``(1) the taxpayer's regular tax liability for the taxable 
        year, and
          ``(2) the tax imposed for the taxable year by section 55(a).
For purposes of applying the preceding sentence, paragraph (2) shall be 
treated as being zero for any taxable year beginning during 1998.''.
  (b) Conforming Amendments.--
          (1) Subsection (d) of section 24 is amended by striking 
        paragraph (2) and by redesignating paragraph (3) as paragraph 
        (2).
          (2) Section 32 is amended by striking subsection (h).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1997.

SEC. 104. 100 PERCENT DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
                    EMPLOYED INDIVIDUALS.

  (a) In General.--Paragraph (1) of section 162(l) (relating to special 
rules for health insurance costs of self-employed individuals) is 
amended to read as follows:
          ``(1) Allowance of deduction.--In the case of an individual 
        who is an employee within the meaning of section 401(c)(1), 
        there shall be allowed as a deduction under this section an 
        amount equal to 100 percent of the amount paid during the 
        taxable year for insurance which constitutes medical care for 
        the taxpayer, his spouse, and dependents.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1998.

SEC. 105. SPECIAL RULE FOR MEMBERS OF UNIFORMED SERVICES AND FOREIGN 
                    SERVICE IN DETERMINING EXCLUSION OF GAIN FROM SALE 
                    OF PRINCIPAL RESIDENCE.

  (a) In General.--Subsection (d) of section 121 (relating to exclusion 
of gain from sale of principal residence) is amended by adding at the 
end the following new paragraph:
          ``(9) Members of uniformed services and foreign service.--
                  ``(A) In general.--The running of the 5-year period 
                described in subsection (a) shall be suspended with 
                respect to an individual during any time that such 
                individual or such individual's spouse is serving on 
                qualified official extended duty as a member of the 
                uniformed services or of the Foreign Service.
                  ``(B) Qualified official extended duty.--For purposes 
                of this paragraph--
                          ``(i) In general.--The term `qualified 
                        official extended duty' means any period of 
                        extended duty as a member of the uniformed 
                        services or a member of the Foreign Service 
                        during which the member serves at a duty 
                        station which is at least 50 miles from such 
                        property or is under Government orders to 
                        reside in Government quarters.
                          ``(ii) Uniformed services.--The term 
                        `uniformed services' has the meaning given such 
                        term by section 101(a)(5) of title 10, United 
                        States Code, as in effect on the date of the 
                        enactment of the Taxpayer Relief Act of 1998.
                          ``(iii) Foreign service of the united 
                        states.--The term `member of the Foreign 
                        Service' has the meaning given the term `member 
                        of the Service' by paragraph (1), (2), (3), 
                        (4), or (5) of section 103 of the Foreign 
                        Service Act of 1980, as in effect on the date 
                        of the enactment of the Taxpayer Relief Act of 
                        1998.
                          ``(iv) Extended duty.--The term `extended 
                        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.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to sales and exchanges after the date of the enactment of this Act.

SEC. 106. $1,000,000 EXEMPTION FROM ESTATE AND GIFT TAXES.

  (a) In General.--Subsection (c) of section 2010 (relating to 
applicable credit amount) is amended to read as follows:
  ``(c) Applicable Credit Amount.--
          ``(1) In general.--For purposes of this section, the 
        applicable credit amount is $345,800.
          ``(2) Applicable exclusion amount.--For purposes of the 
        provisions of this title which refer to this subsection, the 
        applicable exclusion amount is $1,000,000.''
  (b) Effective Date.--The amendment made by this section shall apply 
to estates of decedents dying, and gifts made, after December 31, 1998.

              Subtitle B--Provisions Relating to Education

SEC. 111. ELIGIBLE EDUCATIONAL INSTITUTIONS PERMITTED TO MAINTAIN 
                    QUALIFIED TUITION PROGRAMS.

  (a) In General.--Paragraph (1) of section 529(b) (defining qualified 
State tuition program) is amended by inserting ``or by 1 or more 
eligible educational institutions'' after ``maintained by a State or 
agency or instrumentality thereof''.
  (b) Technical Amendments.--
          (1) The texts of sections 72(e)(9), 135(c)(2)(C), 
        135(d)(1)(D), 529, 530, and 4973(e)(1)(B) are each amended by 
        striking ``qualified State tuition program'' each place it 
        appears and inserting ``qualified tuition program''.
          (2) The paragraph heading for paragraph (9) of section 72(e) 
        and the subparagraph heading for subparagraph (B) of section 
        530(b)(2) are each amended by striking ``state''.
          (3) The subparagraph heading for subparagraph (C) of section 
        135(c)(2) is amended by striking ``qualified state tuition 
        program'' and inserting ``qualified tuition programs''.
          (4) Sections 529(c)(3)(D)(i) and 6693(a)(2)(C) are each 
        amended by striking ``qualified State tuition programs'' and 
        inserting ``qualified tuition programs''.
          (5)(A) The section heading of section 529 is amended to read 
        as follows:

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

          (B) The item relating to section 529 in the table of sections 
        for part VIII of subchapter F of chapter 1 is amended by 
        striking ``State''.
  (c) Effective Date.--The amendments made by this section shall take 
effect on January 1, 1999.

SEC. 112. MODIFICATION OF ARBITRAGE REBATE RULES APPLICABLE TO PUBLIC 
                    SCHOOL CONSTRUCTION BONDS.

  (a) In General.--Subparagraph (C) of section 148(f)(4) is amended by 
adding at the end the following new clause:
                          ``(xviii) 4-year spending requirement for 
                        public school construction issue.--
                                  ``(I) In general.--In the case of a 
                                public school construction issue, the 
                                spending requirements of clause (ii) 
                                shall be treated as met if at least 10 
                                percent of the available construction 
                                proceeds of the construction issue are 
                                spent for the governmental purposes of 
                                the issue within the 1-year period 
                                beginning on the date the bonds are 
                                issued, 30 percent of such proceeds are 
                                spent for such purposes within the 2-
                                year period beginning on such date, 50 
                                percent of such proceeds are spent for 
                                such purposes within the 3-year period 
                                beginning on such date, and 100 percent 
                                of such proceeds are spent for such 
                                purposes within the 4-year period 
                                beginning on such date.
                                  ``(II) Public school construction 
                                issue.--For purposes of this clause, 
                                the term `public school construction 
                                issue' means any construction issue if 
                                no bond which is part of such issue is 
                                a private activity bond and all of the 
                                available construction proceeds of such 
                                issue are to be used for the 
                                construction (as defined in clause 
                                (iv)) of public school facilities to 
                                provide education or training below the 
                                postsecondary level or for the 
                                acquisition of land that is 
                                functionally related and subordinate to 
                                such facilities.
                                  ``(III) Other rules to apply.--Rules 
                                similar to the rules of the preceding 
                                provisions of this subparagraph which 
                                apply to clause (ii) also apply to this 
                                clause.''
  (b) Effective Date.--The amendment made by this section shall apply 
to obligations issued after December 31, 1998.

           Subtitle C--Provisions Relating to Social Security

SEC. 121. INCREASES IN THE SOCIAL SECURITY EARNINGS LIMIT FOR 
                    INDIVIDUALS WHO HAVE ATTAINED RETIREMENT AGE.

  (a) In General.--Section 203(f)(8)(D) of the Social Security Act (42 
U.S.C. 403(f)(8)(D)) is amended by striking clauses (iv) through (vii) 
and inserting the following new clauses:
                  ``(iv) for each month of any taxable year ending 
                after 1998 and before 2000, $1,416.66\2/3\,
                  ``(v) for each month of any taxable year ending after 
                1999 and before 2001, $1,541.66\2/3\,
                  ``(vi) for each month of any taxable year ending 
                after 2000 and before 2002, $2,166.66\2/3\,
                  ``(vii) for each month of any taxable year ending 
                after 2001 and before 2003, $2,500.00,
                  ``(viii) for each month of any taxable year ending 
                after 2002 and before 2004, $2,608.33\1/3\,
                  ``(ix) for each month of any taxable year ending 
                after 2003 and before 2005, $2,833.33\1/3\,
                  ``(x) for each month of any taxable year ending after 
                2004 and before 2006, $2,950.00,
                  ``(xi) for each month of any taxable year ending 
                after 2005 and before 2007, $3,066.66\2/3\,
                  ``(xii) for each month of any taxable year ending 
                after 2006 and before 2008, $3,195.83\1/3\, and
                  ``(xiii) for each month of any taxable year ending 
                after 2007 and before 2009, $3,312.50.''.
  (b) Conforming Amendments.--
          (1) Section 203(f)(8)(B)(ii) of such Act (42 U.S.C. 
        403(f)(8)(B)(ii)) is amended--
                  (A) by striking ``after 2001 and before 2003'' and 
                inserting ``after 2007 and before 2009''; and
                  (B) in subclause (II), by striking ``2000'' and 
                inserting ``2006''.
          (2) The second sentence of section 223(d)(4)(A) of such Act 
        (42 U.S.C. 423(d)(4)(A)) is amended by inserting ``and section 
        121 of the Taxpayer Relief Act of 1998'' after ``1996''.
  (c) Effective Date.--The amendments made by this section shall apply 
with respect to taxable years ending after 1998.

SEC. 122. RECOMPUTATION OF BENEFITS AFTER NORMAL RETIREMENT AGE.

  (a) In General.--Section 215(f)(2)(D)(i) of the Social Security Act 
(42 U.S.C. 415(f)(2)(D)(i)) is amended to read as follows:
          ``(i) in the case of an individual who did not die in the 
        year with respect to which the recomputation is made, for 
        monthly benefits beginning with benefits for January of--
                  ``(I) the second year following the year with respect 
                to which the recomputation is made, in any such case in 
                which the individual is entitled to old-age insurance 
                benefits, the individual has attained retirement age 
                (as defined in section 216(l)) as of the end of the 
                year preceding the year with respect to which the 
                recomputation is made, and the year with respect to 
                which the recomputation is made would not be 
                substituted in recomputation under this subsection for 
                a benefit computation year in which no wages or self-
                employment income have been credited previously to such 
                individual, or
                  ``(II) the first year following the year with respect 
                to which the recomputation is made, in any other such 
                case; or''.
  (b) Conforming Amendments.--
          (1) Section 215(f)(7) of such Act (42 U.S.C. 415(f)(7)) is 
        amended by inserting ``, and as amended by section 122(b)(2) of 
        the Taxpayer Relief Act of 1998,'' after ``This subsection as 
        in effect in December 1978''.
          (2) Subparagraph (A) of section 215(f)(2) of the Social 
        Security Act as in effect in December 1978 and applied in 
        certain cases under the provisions of such Act as in effect 
        after December 1978 is amended--
                  (A) by striking ``in the case of an individual who 
                did not die'' and all that follows and inserting ``in 
                the case of an individual who did not die in the year 
                with respect to which the recomputation is made, for 
                monthly benefits beginning with benefits for January 
                of--''; and
                  (B) by adding at the end the following:
                  ``(i) the second year following the year with respect 
                to which the recomputation is made, in any such case in 
                which the individual is entitled to old-age insurance 
                benefits, the individual has attained age 65 as of the 
                end of the year preceding the year with respect to 
                which the recomputation is made, and the year with 
                respect to which the recomputation is made would not be 
                substituted in recomputation under this subsection for 
                a benefit computation year in which no wages or self-
                employment income have been credited previously to such 
                individual, or
                  ``(ii) the first year following the year with respect 
                to which the recomputation is made, in any other such 
                case; or''.
  (c) Effective Date.--The amendments made by this section shall apply 
with respect to recomputations of primary insurance amounts based on 
wages paid and self employment income derived after 1997 and with 
respect to benefits payable after December 31, 1998.

 TITLE II--PROVISIONS PRIMARILY AFFECTING FARMING AND OTHER BUSINESSES

     Subtitle A--Increase in Expense Treatment for Small Businesses

SEC. 201. INCREASE IN EXPENSE TREATMENT FOR SMALL BUSINESSES.

  (a) General Rule.--Paragraph (1) of section 179(b) (relating to 
dollar limitation) is amended to read as follows:
          ``(1) Dollar limitation.--The aggregate cost which may be 
        taken into account under subsection (a) for any taxable year 
        shall not exceed $25,000.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1998.

               Subtitle B--Provisions Relating to Farmers

SEC. 211. INCOME AVERAGING FOR FARMERS MADE PERMANENT.

  Subsection (c) of section 933 of the Taxpayer Relief Act of 1997 is 
amended by striking ``, and before January 1, 2001''.

SEC. 212. 5-YEAR NET OPERATING LOSS CARRYBACK FOR FARMING LOSSES.

  (a) In General.--Paragraph (1) of section 172(b) (relating to net 
operating loss deduction) is amended by adding at the end the following 
new subparagraph:
                  ``(G) Farming losses.--In the case of a taxpayer 
                which has a farming loss (as defined in subsection (i)) 
                for a taxable year, such farming loss shall be a net 
                operating loss carryback to each of the 5 taxable years 
                preceding the taxable year of such loss.''
  (b) Farming loss.--Section 172 is amended by redesignating subsection 
(i) as subsection (j) and by inserting after subsection (h) the 
following new subsection:
  ``(i) Rules Relating to Farming Losses.--For purposes of this 
section--
          ``(1) In general.--The term `farming loss' means the lesser 
        of--
                  ``(A) the amount which would be the net operating 
                loss for the taxable year if only income and deductions 
                attributable to farming businesses (as defined in 
                section 263A(e)(4)) are taken into account, or
                  ``(B) the amount of the net operating loss for such 
                taxable year.
          ``(2) Coordination with subsection (b)(2).--For purposes of 
        applying subsection (b)(2), a farming loss for any taxable year 
        shall be treated in a manner similar to the manner in which a 
        specified liability loss is treated.
          ``(3) Election.--Any taxpayer entitled to a 5-year carryback 
        under subsection (b)(1)(G) from any loss year may elect to have 
        the carryback period with respect to such loss year determined 
        without regard to subsection (b)(1)(G). Such election shall be 
        made in such manner as may be prescribed by the Secretary and 
        shall be made by the due date (including extensions of time) 
        for filing the taxpayer's return for the taxable year of the 
        net operating loss. Such election, once made for any taxable 
        year, shall be irrevocable for such taxable year.''
  (c) Coordination With Farm Disaster Losses.--Clause (ii) of section 
172(b)(1)(F) is amended by adding at the end the following flush 
sentence:
                        ``Such term shall not include any farming loss 
                        (as defined in subsection (i)).''
  (d) Effective Date.--The amendments made by this section shall apply 
to net operating losses for taxable years beginning after December 31, 
1997.

SEC. 213. PRODUCTION FLEXIBILITY CONTRACT PAYMENTS.

  The option under section 112(d)(3) of the Federal Agriculture 
Improvement and Reform Act of 1996 (7 U.S.C. 7212(d)(3)) shall be 
disregarded in determining the taxable year for which the payment for 
fiscal year 1999 under a production flexibility contract under subtitle 
B of title I of such Act is properly includible in gross income for 
purposes of the Internal Revenue Code of 1986.

      Subtitle C--Increase in Volume Cap on Private Activity Bonds

SEC. 221. INCREASE IN VOLUME CAP ON PRIVATE ACTIVITY BONDS.

  (a) In General.--Subsection (d) of section 146 (relating to volume 
cap) is amended by striking paragraph (2), by redesignating paragraphs 
(3) and (4) as paragraphs (2) and (3), respectively, and by striking 
paragraph (1) and inserting the following new paragraph:
          ``(1) In general.--The State ceiling applicable to any State 
        for any calendar year shall be the greater of--
                  ``(A) an amount equal to $75 multiplied by the State 
                population, or
                  ``(B) $225,000,000.
        Subparagraph (B) shall not apply to any possession of the 
        United States.''
  (b) Conforming Amendment.--Sections 25(f)(3) and 42(h)(3)(E)(iii) are 
each amended by striking ``section 146(d)(3)(C)'' and inserting 
``section 146(d)(2)(C)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to calendar years after 1998.

  TITLE III--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS

                       Subtitle A--Tax Provisions

SEC. 301. RESEARCH CREDIT.

  (a) Temporary Extension.--
          (1) In general.--Paragraph (1) of section 41(h) (relating to 
        termination) is amended--
                  (A) by striking ``June 30, 1998'' and inserting 
                ``February 29, 2000'',
                  (B) by striking ``24-month'' and inserting ``44-
                month'', and
                  (C) by striking ``24 months'' and inserting ``44 
                months''.
          (2) Technical amendment.--Subparagraph (D) of section 
        45C(b)(1) is amended by striking ``June 30, 1998'' and 
        inserting ``February 29, 2000''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply to amounts paid or incurred after June 30, 1998.
  (b) Increase in Percentages Under Alternative Incremental Credit.--
          (1) In general.--Subparagraph (A) of section 41(c)(4) is 
        amended--
                  (A) by striking ``1.65 percent'' and inserting ``2.65 
                percent'',
                  (B) by striking ``2.2 percent'' and inserting ``3.2 
                percent'', and
                  (C) by striking ``2.75 percent'' and inserting ``3.75 
                percent''.
          (2) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after June 30, 1998.

SEC. 302. WORK OPPORTUNITY CREDIT.

  (a) Temporary Extension.--Subparagraph (B) of section 51(c)(4) 
(relating to termination) is amended by striking ``June 30, 1998'' and 
inserting ``February 29, 2000''.
  (b) Effective Date.--The amendment made by this section shall apply 
to individuals who begin work for the employer after June 30, 1998.

SEC. 303. WELFARE-TO-WORK CREDIT.

  Subsection (f) of section 51A (relating to termination) is amended by 
striking ``April 30, 1999'' and inserting ``February 29, 2000''.

SEC. 304. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS; EXPANDED 
                    PUBLIC INSPECTION OF PRIVATE FOUNDATIONS' ANNUAL 
                    RETURNS.

  (a) Special Rule for Contributions of Stock Made Permanent.--
          (1) In general.--Paragraph (5) of section 170(e) is amended 
        by striking subparagraph (D) (relating to termination).
          (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to contributions made after June 30, 1998.
  (b) Expanded Public Inspection of Private Foundations' Annual 
Returns, Etc.--
          (1) In general.--Section 6104 (relating to publicity of 
        information required from certain exempt organizations and 
        certain trusts) is amended by striking subsections (d) and (e) 
        and inserting after subsection (c) the following new 
        subsection:
  ``(d) Public Inspection of Certain Annual Returns and Applications 
for Exemption.--
          ``(1) In general.--In the case of an organization described 
        in subsection (c) or (d) of section 501 and exempt from 
        taxation under section 501(a)--
                  ``(A) a copy of--
                          ``(i) the annual return filed under section 
                        6033 (relating to returns by exempt 
                        organizations) by such organization, and
                          ``(ii) if the organization filed an 
                        application for recognition of exemption under 
                        section 501, the exempt status application 
                        materials of such organization,
                shall be made available by such organization for 
                inspection during regular business hours by any 
                individual at the principal office of such organization 
                and, if such organization regularly maintains 1 or more 
                regional or district offices having 3 or more 
                employees, at each such regional or district office, 
                and
                  ``(B) upon request of an individual made at such 
                principal office or such a regional or district office, 
                a copy of such annual return and exempt status 
                application materials shall be provided to such 
                individual without charge other than a reasonable fee 
                for any reproduction and mailing costs.
        The request described in subparagraph (B) must be made in 
        person or in writing. If such request is made in person, such 
        copy shall be provided immediately and, if made in writing, 
        shall be provided within 30 days.
          ``(2) 3-year limitation on inspection of returns.--Paragraph 
        (1) shall apply to an annual return filed under section 6033 
        only during the 3-year period beginning on the last day 
        prescribed for filing such return (determined with regard to 
        any extension of time for filing).
          ``(3) Exceptions from disclosure requirement.--
                  ``(A) Nondisclosure of contributors, etc.--Paragraph 
                (1) shall not require the disclosure of the name or 
                address of any contributor to the organization. In the 
                case of an organization described in section 501(d), 
                subparagraph (A) shall not require the disclosure of 
                the copies referred to in section 6031(b) with respect 
                to such organization.
                  ``(B) Nondisclosure of certain other information.--
                Paragraph (1) shall not require the disclosure of any 
                information if the Secretary withheld such information 
                from public inspection under subsection (a)(1)(D).
          ``(4) Limitation on providing copies.--Paragraph (1)(B) shall 
        not apply to any request if, in accordance with regulations 
        promulgated by the Secretary, the organization has made the 
        requested documents widely available, or the Secretary 
        determines, upon application by an organization, that such 
        request is part of a harassment campaign and that compliance 
        with such request is not in the public interest.
          ``(5) Exempt status application materials.--For purposes of 
        paragraph (1), the term `exempt status applicable materials' 
        means the application for recognition of exemption under 
        section 501 and any papers submitted in support of such 
        application and any letter or other document issued by the 
        Internal Revenue Service with respect to such application.''
          (2) Conforming amendments.--
                  (A) Subsection (c) of section 6033 is amended by 
                adding ``and'' at the end of paragraph (1), by striking 
                paragraph (2), and by redesignating paragraph (3) as 
                paragraph (2).
                  (B) Subparagraph (C) of section 6652(c)(1) is amended 
                by striking ``subsection (d) or (e)(1) of section 6104 
                (relating to public inspection of annual returns)'' and 
                inserting ``section 6104(d) with respect to any annual 
                return''.
                  (C) Subparagraph (D) of section 6652(c)(1) is amended 
                by striking ``section 6104(e)(2) (relating to public 
                inspection of applications for exemption)'' and 
                inserting ``section 6104(d) with respect to any exempt 
                status application materials (as defined in such 
                section)''.
                  (D) Section 6685 is amended by striking ``or (e)''.
                  (E) Section 7207 is amended by striking ``or (e)''.
          (3) Effective date.--
                  (A) In general.--Except as provided in subparagraph 
                (B), the amendments made by this subsection shall apply 
                to requests made after the later of December 31, 1998, 
                or the 60th day after the Secretary of the Treasury 
                first issues the regulations referred to such section 
                6104(d)(4) of the Internal Revenue Code of 1986, as 
                amended by this section.
                  (B) Publication of annual returns.--Section 6104(d) 
                of such Code, as in effect before the amendments made 
                by this subsection, shall not apply to any return the 
                due date for which is after the date such amendments 
                take effect under subparagraph (A).

SEC. 305. SUBPART F EXEMPTION FOR ACTIVE FINANCING INCOME.

  (a) Income Derived From Banking, Financing or Similar Businesses.--
Section 954(h) (relating to income derived in the active conduct of 
banking, financing, or similar businesses) is amended to read as 
follows:
  ``(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 qualified 
        banking or financing income of an eligible controlled foreign 
        corporation.
          ``(2) Eligible controlled foreign corporation.--For purposes 
        of this subsection--
                  ``(A) In general.--The term `eligible controlled 
                foreign corporation' means a controlled foreign 
                corporation which--
                          ``(i) is predominantly engaged in the active 
                        conduct of a banking, financing, or similar 
                        business, and
                          ``(ii) conducts substantial activity with 
                        respect to such business.
                  ``(B) Predominantly engaged.--A controlled foreign 
                corporation shall be treated as predominantly engaged 
                in the active conduct of a banking, financing, or 
                similar business if--
                          ``(i) more than 70 percent of the gross 
                        income of the controlled foreign corporation is 
                        derived directly from the active and regular 
                        conduct of a lending or finance business from 
                        transactions with customers which are not 
                        related persons,
                          ``(ii) it is engaged in the active conduct of 
                        a banking business and is an institution 
                        licensed to do business as a bank in the United 
                        States (or is any other corporation not so 
                        licensed which is specified by the Secretary in 
                        regulations), or
                          ``(iii) it is engaged in the active conduct 
                        of a securities business and is registered as a 
                        securities broker or dealer under section 15(a) 
                        of the Securities Exchange Act of 1934 or is 
                        registered as a Government securities broker or 
                        dealer under section 15C(a) of such Act (or is 
                        any other corporation not so registered which 
                        is specified by the Secretary in regulations).
          ``(3) Qualified banking or financing income.--For purposes of 
        this subsection--
                  ``(A) In general.--The term `qualified banking or 
                financing income' means income of an eligible 
                controlled foreign corporation which--
                          ``(i) is derived in the active conduct of a 
                        banking, financing, or similar business by--
                                  ``(I) such eligible controlled 
                                foreign corporation, or
                                  ``(II) a qualified business unit of 
                                such eligible controlled foreign 
                                corporation,
                          ``(ii) is derived from 1 or more 
                        transactions--
                                  ``(I) with customers located in a 
                                country other than the United States, 
                                and
                                  ``(II) substantially all of the 
                                activities in connection with which are 
                                conducted directly by the corporation 
                                or unit in its home country, and
                          ``(iii) is treated as earned by such 
                        corporation or unit in its home country for 
                        purposes of such country's tax laws.
                  ``(B) Limitation on nonbanking and nonsecurities 
                businesses.--No income of an eligible controlled 
                foreign corporation not described in clause (ii) or 
                (iii) of paragraph (2)(B) (or of a qualified business 
                unit of such corporation) shall be treated as qualified 
                banking or financing income unless more than 30 percent 
                of such corporation's or unit's gross income is derived 
                directly from the active and regular conduct of a 
                lending or finance business from transactions with 
                customers which are not related persons and which are 
                located within such corporation's or unit's home 
                country.
                  ``(C) Substantial activity requirement for cross 
                border income.--The term `qualified banking or 
                financing income' shall not include income derived from 
                1 or more transactions with customers located in a 
                country other than the home country of the eligible 
                controlled foreign corporation or a qualified business 
                unit of such corporation unless such corporation or 
                unit conducts substantial activity with respect to a 
                banking, financing, or similar business in its home 
                country.
                  ``(D) Determinations made separately.--For purposes 
                of this paragraph, the qualified banking or financing 
                income of an eligible controlled foreign corporation 
                and each qualified business unit of such corporation 
                shall be determined separately for such corporation and 
                each such unit by taking into account--
                          ``(i) in the case of the eligible controlled 
                        foreign corporation, only items of income, 
                        deduction, gain, or loss and activities of such 
                        corporation not properly allocable or 
                        attributable to any qualified business unit of 
                        such corporation, and
                          ``(ii) in the case of a qualified business 
                        unit, only items of income, deduction, gain, or 
                        loss and activities properly allocable or 
                        attributable to such unit.
          ``(4) Lending or finance business.--For purposes of this 
        subsection, the term `lending or finance business' means the 
        business of--
                  ``(A) making loans,
                  ``(B) purchasing or discounting accounts receivable, 
                notes, or installment obligations,
                  ``(C) engaging in leasing (including entering into 
                leases and purchasing, servicing, and disposing of 
                leases and leased assets),
                  ``(D) issuing letters of credit or providing 
                guarantees,
                  ``(E) providing charge and credit card services, or
                  ``(F) rendering services or making facilities 
                available in connection with activities described in 
                subparagraphs (A) through (E) carried on by--
                          ``(i) the corporation (or qualified business 
                        unit) rendering services or making facilities 
                        available, or
                          ``(ii) another corporation (or qualified 
                        business unit of a corporation) which is a 
                        member of the same affiliated group (as defined 
                        in section 1504, but determined without regard 
                        to section 1504(b)(3)).
          ``(5) Other definitions.--For purposes of this subsection--
                  ``(A) Customer.--The term `customer' means, with 
                respect to any controlled foreign corporation or 
                qualified business unit, any person which has a 
                customer relationship with such corporation or unit and 
                which is acting in its capacity as such.
                  ``(B) Home country.--Except as provided in 
                regulations--
                          ``(i) Controlled foreign corporation.--The 
                        term `home country' means, with respect to any 
                        controlled foreign corporation, the country 
                        under the laws of which the corporation was 
                        created or organized.
                          ``(ii) Qualified business unit.--The term 
                        `home country' means, with respect to any 
                        qualified business unit, the country in which 
                        such unit maintains its principal office.
                  ``(C) Located.--The determination of where a customer 
                is located shall be made under rules prescribed by the 
                Secretary.
                  ``(D) Qualified business unit.--The term `qualified 
                business unit' has the meaning given such term by 
                section 989(a).
                  ``(E) Related person.--The term `related person' has 
                the meaning given such term by subsection (d)(3).
          ``(6) Coordination with exception for dealers.--Paragraph (1) 
        shall not apply to income described in subsection (c)(2)(C)(ii) 
        of a dealer in securities (within the meaning of section 475) 
        which is an eligible controlled foreign corporation described 
        in paragraph (2)(B)(iii).
          ``(7) Anti-abuse rules.--For purposes of applying this 
        subsection and subsection (c)(2)(C)(ii)--
                  ``(A) 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 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,
                  ``(B) there shall be disregarded any item of income, 
                gain, loss, or deduction of an entity which is not 
                engaged in regular and continuous transactions with 
                customers which are not related persons,
                  ``(C) there shall be disregarded any item of income, 
                gain, loss, or deduction with respect to any 
                transaction or series of transactions utilizing, or 
                doing business with--
                          ``(i) one or more entities in order to 
                        satisfy any home country requirement under this 
                        subsection, or
                          ``(ii) a special purpose entity or 
                        arrangement, including a securitization, 
                        financing, or similar entity or arrangement,
                if one of the principal purposes of such transaction or 
                series of transactions is qualifying income or gain for 
                the exclusion under this subsection, and
                  ``(D) a related person, an officer, a director, or an 
                employee with respect to any controlled foreign 
                corporation (or qualified business unit) which would 
                otherwise be treated as a customer of such corporation 
                or unit with respect to any transaction shall not be so 
                treated if a principal purpose of such transaction is 
                to satisfy any requirement of this subsection.
          ``(8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection, subsection (c)(1)(B)(i), 
        subsection (c)(2)(C)(ii), and the last sentence of subsection 
        (e)(2).
          ``(9) Application.--This subsection, subsection 
        (c)(2)(C)(ii), and the last sentence of subsection (e)(2) shall 
        apply only to the first taxable year of a foreign corporation 
        beginning after December 31, 1998, and before January 1, 2000, 
        and to taxable years of United States shareholders with or 
        within which such taxable year of such foreign corporation 
        ends.''
  (b) Income Derived From Insurance Business.--
          (1) Income attributable to issuance or reinsurance.--
                  (A) In general.--Section 953(a) (defining insurance 
                income) is amended to read as follows:
  ``(a) Insurance Income.--
          ``(1) In general.--For purposes of section 952(a)(1), the 
        term `insurance income' means any income which--
                  ``(A) is attributable to the issuing (or reinsuring) 
                of an insurance or annuity contract, and
                  ``(B) would (subject to the modifications provided by 
                subsection (b)) be taxed under subchapter L of this 
                chapter if such income were the income of a domestic 
                insurance company.
          ``(2) Exception.--Such term shall not include any exempt 
        insurance income (as defined in subsection (e)).''
                  (B) Exempt insurance income.--Section 953 (relating 
                to insurance income) is amended by adding at the end 
                the following new subsection:
  ``(e) Exempt Insurance Income.--For purposes of this section--
          ``(1) Exempt insurance income defined.--
                  ``(A) In general.--The term `exempt insurance income' 
                means income derived by a qualifying insurance company 
                which--
                          ``(i) is attributable to the issuing (or 
                        reinsuring) of an exempt contract by such 
                        company or a qualifying insurance company 
                        branch of such company, and
                          ``(ii) is treated as earned by such company 
                        or branch in its home country for purposes of 
                        such country's tax laws.
                  ``(B) Exception for certain arrangements.--Such term 
                shall not include income attributable to the issuing 
                (or reinsuring) of an exempt contract as the result of 
                any arrangement whereby another corporation receives a 
                substantially equal amount of premiums or other 
                consideration in respect of issuing (or reinsuring) a 
                contract which is not an exempt contract.
                  ``(C) Determinations made separately.--For purposes 
                of this subsection and section 954(i), the exempt 
                insurance income and exempt contracts of a qualifying 
                insurance company or any qualifying insurance company 
                branch of such company shall be determined separately 
                for such company and each such branch by taking into 
                account--
                          ``(i) in the case of the qualifying insurance 
                        company, only items of income, deduction, gain, 
                        or loss, and activities of such company not 
                        properly allocable or attributable to any 
                        qualifying insurance company branch of such 
                        company, and
                          ``(ii) in the case of a qualifying insurance 
                        company branch, only items of income, 
                        deduction, gain, or loss and activities 
                        properly allocable or attributable to such 
                        unit.
          ``(2) Exempt contract.--
                  ``(A) In general.--The term `exempt contract' means 
                an insurance or annuity contract issued or reinsured by 
                a qualifying insurance company or qualifying insurance 
                company branch in connection with property in, 
                liability arising out of activity in, or the lives or 
                health of residents of, a country other than the United 
                States.
                  ``(B) Minimum home country income required.--
                          ``(i) In general.--No contract of a 
                        qualifying insurance company or of a qualifying 
                        insurance company branch shall be treated as an 
                        exempt contract unless such company or branch 
                        derives more than 30 percent of its net written 
                        premiums from exempt contracts (determined 
                        without regard to this subparagraph)--
                                  ``(I) which cover applicable home 
                                country risks, and
                                  ``(II) with respect to which no 
                                policyholder, insured, annuitant, or 
                                beneficiary is a related person (as 
                                defined in section 954(d)(3)).
                          ``(ii) Applicable home country risks.--The 
                        term `applicable home country risks' means 
                        risks in connection with property in, liability 
                        arising out of activity in, or the lives or 
                        health of residents of, the home country of the 
                        qualifying insurance company or qualifying 
                        insurance company branch, as the case may be, 
                        issuing or reinsuring the contract covering the 
                        risks.
                  ``(C) Substantial activity requirements for cross 
                border risks.--A contract issued by a qualifying 
                insurance company or qualifying insurance company 
                branch which covers risks other than applicable home 
                country risks (as defined in subparagraph (B)(ii)) 
                shall not be treated as an exempt contract unless such 
                company or branch, as the case may be--
                          ``(i) conducts substantial activity with 
                        respect to an insurance business in its home 
                        country, and
                          ``(ii) performs in its home country 
                        substantially all of the activities necessary 
                        to give rise to the income generated by such 
                        contract.
          ``(3) Qualifying insurance company.--The term `qualifying 
        insurance company' means any controlled foreign corporation 
        which--
                  ``(A) is subject to regulation as an insurance (or 
                reinsurance) company by its home country, and is 
                licensed, authorized, or regulated by the applicable 
                insurance regulatory body for its home country to sell 
                insurance, reinsurance, or annuity contracts to persons 
                other than related persons (within the meaning of 
                section 954(d)(3)) in such home country,
                  ``(B) derives more than 50 percent of its aggregate 
                net written premiums from the issuance or reinsurance 
                by such controlled foreign corporation and each of its 
                qualifying insurance company branches of contracts--
                          ``(i) covering applicable home country risks 
                        (as defined in paragraph (2)) of such 
                        corporation or branch, as the case may be, and
                          ``(ii) with respect to which no policyholder, 
                        insured, annuitant, or beneficiary is a related 
                        person (as defined in section 954(d)(3)),
                except that in the case of a branch, such premiums 
                shall only be taken into account to the extent such 
                premiums are treated as earned by such branch in its 
                home country for purposes of such country's tax laws, 
                and
                  ``(C) is engaged in the insurance business and would 
                be subject to tax under subchapter L if it were a 
                domestic corporation.
          ``(4) Qualifying insurance company branch.--The term 
        `qualifying insurance company branch' means a qualified 
        business unit (within the meaning of section 989(a)) of a 
        controlled foreign corporation if--
                  ``(A) such unit is licensed, authorized, or regulated 
                by the applicable insurance regulatory body for its 
                home country to sell insurance, reinsurance, or annuity 
                contracts to persons other than related persons (within 
                the meaning of section 954(d)(3)) in such home country, 
                and
                  ``(B) such controlled foreign corporation is a 
                qualifying insurance company, determined under 
                paragraph (3) as if such unit were a qualifying 
                insurance company branch.
          ``(5) Life insurance or annuity contract.--For purposes of 
        this section and section 954, the determination of whether a 
        contract issued by a controlled foreign corporation or a 
        qualified business unit (within the meaning of section 989(a)) 
        is a life insurance contract or an annuity contract shall be 
        made without regard to sections 72(s), 101(f), 817(h), and 7702 
        if--
                  ``(A) such contract is regulated as a life insurance 
                or annuity contract by the corporation's or unit's home 
                country, and
                  ``(B) no policyholder, insured, annuitant, or 
                beneficiary with respect to the contract is a United 
                States person.
          ``(6) Home country.--For purposes of this subsection, except 
        as provided in regulations--
                  ``(A) Controlled foreign corporation.--The term `home 
                country' means, with respect to a controlled foreign 
                corporation, the country in which such corporation is 
                created or organized.
                  ``(B) Qualified business unit.--The term `home 
                country' means, with respect to a qualified business 
                unit (as defined in section 989(a)), the country in 
                which the principal office of such unit is located and 
                in which such unit is licensed, authorized, or 
                regulated by the applicable insurance regulatory body 
                to sell insurance, reinsurance, or annuity contracts to 
                persons other than related persons (as defined in 
                section 954(d)(3)) in such country.
          ``(7) Anti-abuse rules.--For purposes of applying this 
        subsection and section 954(i)--
                  ``(A) the rules of section 954(h)(7) (other than 
                subparagraph (B) thereof) shall apply,
                  ``(B) there shall be disregarded any item of income, 
                gain, loss, or deduction of, or derived from, an entity 
                which is not engaged in regular and continuous 
                transactions with persons which are not related 
                persons,
                  ``(C) there shall be disregarded any change in the 
                method of computing reserves a principal purpose of 
                which is the acceleration or deferral of any item in 
                order to claim the benefits of this subsection or 
                section 954(i),
                  ``(D) a contract of insurance or reinsurance shall 
                not be treated as an exempt contract (and premiums from 
                such contract shall not be taken into account for 
                purposes of paragraph (2)(B) or (3)) if--
                          ``(i) any policyholder, insured, annuitant, 
                        or beneficiary is a resident of the United 
                        States and such contract was marketed to such 
                        resident and was written to cover a risk 
                        outside the United States, or
                          ``(ii) the contract covers risks located 
                        within and without the United States and the 
                        qualifying insurance company or qualifying 
                        insurance company branch does not maintain such 
                        contemporaneous records, and file such reports, 
                        with respect to such contract as the Secretary 
                        may require,
                  ``(E) the Secretary may prescribe rules for the 
                allocation of contracts (and income from contracts) 
                among 2 or more qualifying insurance company branches 
                of a qualifying insurance company in order to clearly 
                reflect the income of such branches, and
                  ``(F) premiums from a contract shall not be taken 
                into account for purposes of paragraph (2)(B) or (3) if 
                such contract reinsures a contract issued or reinsured 
                by a related person (as defined in section 954(d)(3)).
        For purposes of subparagraph (D), the determination of where 
        risks are located shall be made under the principles of section 
        953.
          ``(8) Coordination with subsection (c).--In determining 
        insurance income for purposes of subsection (c), exempt 
        insurance income shall not include income derived from exempt 
        contracts which cover risks other than applicable home country 
        risks.
          ``(9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection and section 954(i).
          ``(10) Application.--This subsection and section 954(i) shall 
        apply only to the first taxable year of a foreign corporation 
        beginning after December 31, 1998, and before January 1, 2000, 
        and to taxable years of United States shareholders with or 
        within which such taxable year of such foreign corporation 
        ends.
          ``(11) Cross reference.--

                  ``For income exempt from foreign personal holding 
company income, see section 954(i).''

          (2) Exemption from foreign personal holding company income.--
        Section 954 (defining foreign base company income) is amended 
        by adding at the end the following new subsection:
  ``(i) Special Rule for Income Derived in the Active Conduct of 
Insurance Business.--
          ``(1) In general.--For purposes of subsection (c)(1), foreign 
        personal holding company income shall not include qualified 
        insurance income of a qualifying insurance company.
          ``(2) Qualified insurance income.--The term `qualified 
        insurance income' means income of a qualifying insurance 
        company which is--
                  ``(A) 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 or a qualifying insurance company 
                branch of its reserves allocable to exempt contracts or 
                of 80 percent of its unearned premiums from exempt 
                contracts (as both are determined in the manner 
                prescribed under paragraph (4)), or
                  ``(B) 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 or a qualifying insurance company branch of an 
                amount of its assets allocable to exempt contracts 
                equal to--
                          ``(i) in the case of 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 life insurance or 
                        annuity contracts, 10 percent of the reserves 
                        described in subparagraph (A) for such 
                        contracts.
          ``(3) Principles for determining insurance income.--Except as 
        provided by the Secretary, for purposes of subparagraphs (A) 
        and (B) of paragraph (2)--
                  ``(A) in the case of any contract which is a separate 
                account-type contract (including any variable contract 
                not meeting the requirements of section 817), income 
                credited under such contract shall be allocable only to 
                such contract, and
                  ``(B) income not allocable under subparagraph (A) 
                shall be allocated ratably among contracts not 
                described in subparagraph (A).
          ``(4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (2)(A)--
                  ``(A) Property and casualty contracts.--The unearned 
                premiums and reserves of a qualifying insurance company 
                or a qualifying insurance company branch with respect 
                to property, casualty, or health insurance contracts 
                shall be determined using the same methods and interest 
                rates which would be used if such company or branch 
                were subject to tax under subchapter L, except that--
                          ``(i) the interest rate determined for the 
                        functional currency of the company or branch, 
                        and which, except as provided by the Secretary, 
                        is calculated in the same manner as the Federal 
                        mid-term rate under section 1274(d), shall be 
                        substituted for the applicable Federal interest 
                        rate, and
                          ``(ii) such company or branch shall use the 
                        appropriate foreign loss payment pattern.
                  ``(B) Life insurance and annuity contracts.--The 
                amount of the reserve of a qualifying insurance company 
                or qualifying insurance company branch for any life 
                insurance or annuity contract shall be equal to the 
                greater of--
                          ``(i) the net surrender value of such 
                        contract (as defined in section 807(e)(1)(A)), 
                        or
                          ``(ii) the reserve determined under paragraph 
                        (5).
                  ``(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 statement reserves 
                (less any catastrophe, deficiency, equalization, or 
                similar reserves).
          ``(5) Amount of reserve.--The amount of the reserve 
        determined under this paragraph with respect to any contract 
        shall be determined in the same manner as it would be 
        determined if the qualifying insurance company or qualifying 
        insurance company branch were subject to tax under subchapter 
        L, except that in applying such subchapter--
                  ``(A) the interest rate determined for the functional 
                currency of the company or branch, and which, except as 
                provided by the Secretary, is calculated in the same 
                manner as the Federal mid-term rate under section 
                1274(d), shall be substituted for the applicable 
                Federal interest rate,
                  ``(B) the highest assumed interest rate permitted to 
                be used in determining foreign statement reserves shall 
                be substituted for the prevailing State assumed 
                interest rate, and
                  ``(C) tables for mortality and morbidity which 
                reasonably reflect the current mortality and morbidity 
                risks in the company's or branch's home country shall 
                be substituted for the mortality and morbidity tables 
                otherwise used for such subchapter.
        The Secretary may provide that the interest rate and mortality 
        and morbidity tables of a qualifying insurance company may be 
        used for 1 or more of its qualifying insurance company branches 
        when appropriate.
          ``(6) Definitions.--For purposes of this subsection, any term 
        used in this subsection which is also used in section 953(e) 
        shall have the meaning given such term by section 953.''
          (3) Reserves.--Section 953(b) is amended by redesignating 
        paragraph (3) as paragraph (4) and by inserting after paragraph 
        (2) the following new paragraph:
          ``(3) Reserves for any insurance or annuity contract shall be 
        determined in the same manner as under section 954(i).''
  (c) Special Rules for Dealers.--Section 954(c)(2)(C) is amended to 
read as follows:
                  ``(C) Exception for dealers.--Except as provided by 
                regulations, in the case of a regular dealer in 
                property which is property described in 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 company income--
                          ``(i) any item of income, gain, deduction, or 
                        loss (other than any item described in 
                        subparagraph (A), (E), or (G) of paragraph (1)) 
                        from any transaction (including hedging 
                        transactions) entered into in the ordinary 
                        course of such dealer's trade or business as 
                        such a dealer, and
                          ``(ii) if such dealer is a dealer in 
                        securities (within the meaning of section 475), 
                        any interest or dividend or equivalent amount 
                        described in subparagraph (E) or (G) of 
                        paragraph (1) from any transaction (including 
                        any hedging transaction or transaction 
                        described in section 956(c)(2)(J)) entered into 
                        in the ordinary course of such dealer's trade 
                        or business as such a dealer in securities, but 
                        only if the income from the transaction is 
                        attributable to activities of the dealer in the 
                        country under the laws of which the dealer is 
                        created or organized (or in the case of a 
                        qualified business unit described in section 
                        989(a), is attributable to activities of the 
                        unit in the country in which the unit both 
                        maintains its principal office and conducts 
                        substantial business activity).''
  (d) Exemption From Foreign Base Company Services Income.--Paragraph 
(2) of section 954(e) is amended by inserting ``or'' at the end of 
subparagraph (A), by striking ``, or'' at the end of subparagraph (B) 
and inserting a period, by striking subparagraph (C), and by adding at 
the end the following new flush sentence:
        ``Paragraph (1) shall also not apply to income which is exempt 
        insurance income (as defined in section 953(e)) or which is not 
        treated as foreign personal holding income by reason of 
        subsection (c)(2)(C)(ii), (h), or (i).''
  (e) Exemption for Gain.--Section 954(c)(1)(B)(i) (relating to net 
gains from certain property transactions) is amended by inserting 
``other than property which gives rise to income not treated as foreign 
personal holding company income by reason of subsection (h) or (i) for 
the taxable year'' before the comma at the end.

             Subtitle B--Generalized System of Preferences

SEC. 311. EXTENSION OF GENERALIZED SYSTEM OF PREFERENCES.

  (a) Extension of Duty-Free Treatment Under System.--Section 505 of 
the Trade Act of 1974 (29 U.S.C. 2465) is amended by striking ``June 
30, 1998'' and inserting ``February 29, 2000''.
  (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), any entry--
                  (A) of an article to which duty-free treatment under 
                title V of the Trade Act of 1974 would have applied if 
                such title had been in effect during the period 
                beginning on July 1, 1998, and ending on the day before 
                the date of the enactment of this Act, and
                  (B) that was made after June 30, 1998, 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 IV--REVENUE OFFSET

SEC. 401. TREATMENT OF CERTAIN DEDUCTIBLE LIQUIDATING DISTRIBUTIONS OF 
                    REGULATED INVESTMENT COMPANIES AND REAL ESTATE 
                    INVESTMENT TRUSTS.

  (a) In General.--Section 332 (relating to complete liquidations of 
subsidiaries) is amended by adding at the end the following new 
subsection:
  ``(c) Deductible Liquidating Distributions of Regulated Investment 
Companies and Real Estate Investment Trusts.--If a corporation receives 
a distribution from a regulated investment company or a real estate 
investment trust which is considered under subsection (b) as being in 
complete liquidation of such company or trust, then, notwithstanding 
any other provision of this chapter, such corporation shall recognize 
and treat as a dividend from such company or trust an amount equal to 
the deduction for dividends paid allowable to such company or trust by 
reason of such distribution.''.
  (b) Conforming Amendments.--
          (1) The material preceding paragraph (1) of section 332(b) is 
        amended by striking ``subsection (a)'' and inserting ``this 
        section''.
          (2) Paragraph (1) of section 334(b) is amended by striking 
        ``section 332(a)'' and inserting ``section 332''.
  (c) Effective Date.--The amendments made by this section shall apply 
to distributions after May 21, 1998.

                     TITLE V--TECHNICAL CORRECTIONS

SEC. 501. DEFINITIONS; COORDINATION WITH OTHER TITLES.

  (a) Definitions.--For purposes of this title--
          (1) 1986 code.--The term ``1986 Code'' means the Internal 
        Revenue Code of 1986.
          (2) 1998 act.--The term ``1998 Act'' means the Internal 
        Revenue Service Restructuring and Reform Act of 1998 (Public 
        Law 105-206).
          (3) 1997 act.--The term ``1997 Act'' means the Taxpayer 
        Relief Act of 1997 (Public Law 105-34).
  (b) 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. 502. AMENDMENTS RELATED TO INTERNAL REVENUE SERVICE RESTRUCTURING 
                    AND REFORM ACT OF 1998.

  (a) Amendment Related to Section 1101 of 1998 Act.--Paragraph (5) of 
section 6103(h) of the 1986 Code, as added by section 1101(b) of the 
1998 Act, is redesignated as paragraph (6).
  (b) Amendment Related to Section 3001 of 1998 Act.--Paragraph (2) of 
section 7491(a) of the 1986 Code is amended by adding at the end the 
following flush sentence:
        ``Subparagraph (C) shall not apply to any qualified revocable 
        trust (as defined in section 645(b)(1)) with respect to 
        liability for tax for any taxable year ending after the date of 
        the decedent's death and before the applicable date (as defined 
        in section 645(b)(2)).''.
  (c) Amendments Related to Section 3201 of 1998 Act.--
          (1) Section 7421(a) of the 1986 Code is amended by striking 
        ``6015(d)'' and inserting ``6015(e)''.
          (2) Subparagraph (A) of section 6015(e)(3) is amended by 
        striking ``of this section'' and inserting ``of subsection (b) 
        or (f)''.
  (d) Amendment Related to Section 3301 of 1998 Act.--Paragraph (2) of 
section 3301(c) of the 1998 Act is amended by striking ``The 
amendments'' and inserting ``Subject to any applicable statute of 
limitation not having expired with regard to either a tax underpayment 
or a tax overpayment, the amendments''.
  (e) Amendment Related to Section 3401 of 1998 Act.--Section 3401(c) 
of the 1998 Act is amended--
          (1) in paragraph (1), by striking ``7443(b)'' and inserting 
        ``7443A(b)''; and
          (2) in paragraph (2), by striking ``7443(c)'' and inserting 
        ``7443A(c)''.
  (f) Amendment Related to Section 3433 of 1998 Act.--Section 7421(a) 
of the 1986 Code is amended by inserting ``6331(i),'' after 
``6246(b),''.
  (g) Amendment Related to Section 3708 of 1998 Act.--Subparagraph (A) 
of section 6103(p)(3) of the 1986 Code is amended by inserting 
``(f)(5),'' after ``(c), (e),''.
  (h) Amendment Related to Section 5001 of 1998 Act.--
          (1) Subparagraph (B) of section 1(h)(13) of the 1986 Code is 
        amended by striking ``paragraph (7)(A)'' and inserting 
        ``paragraph (7)(A)(i)''.
          (2)(A) Subparagraphs (A)(i)(II), (A)(ii)(II), and (B)(ii) of 
        section 1(h)(13) of the 1986 Code shall not apply to any 
        distribution after December 31, 1997, by a regulated investment 
        company or a real estate investment trust with respect to--
                  (i) gains and losses recognized directly by such 
                company or trust, and
                  (ii) amounts properly taken into account by such 
                company or trust by reason of holding (directly or 
                indirectly) an interest in another such company or 
                trust to the extent that such subparagraphs did not 
                apply to such other company or trust with respect to 
                such amounts.
          (B) Subparagraph (A) shall not apply to any distribution 
        which is treated under section 852(b)(7) or 857(b)(8) of the 
        1986 Code as received on December 31, 1997.
          (C) For purposes of subparagraph (A), any amount which is 
        includible in gross income of its shareholders under section 
        852(b)(3)(D) or 857(b)(3)(D) of the 1986 Code after December 
        31, 1997, shall be treated as distributed after such date.
          (D)(i) For purposes of subparagraph (A), in the case of a 
        qualified partnership with respect to which a regulated 
        investment company meets the holding requirement of clause 
        (iii)--
                  (I) the subparagraphs referred to in subparagraph (A) 
                shall not apply to gains and losses recognized directly 
                by such partnership for purposes of determining such 
                company's distributive share of such gains and losses, 
                and
                  (II) such company's distributive share of such gains 
                and losses (as so determined) shall be treated as 
                recognized directly by such company.
        The preceding sentence shall apply only if the qualified 
        partnership provides the company with written documentation of 
        such distributive share as so determined.
          (ii) For purposes of clause (i), the term ``qualified 
        partnership'' means, with respect to a regulated investment 
        company, any partnership if--
                  (I) the partnership is an investment company 
                registered under the Investment Company Act of 1940,
                  (II) the regulated investment company is permitted to 
                invest in such partnership by reason of section 
                12(d)(1)(E) of such Act or an exemptive order of the 
                Securities and Exchange Commission under such section, 
                and
                  (III) the regulated investment company and the 
                partnership have the same taxable year.
          (iii) A regulated investment company meets the holding 
        requirement of this clause with respect to a qualified 
        partnership if (as of January 1, 1998)--
                  (I) the value of the interests of the regulated 
                investment company in such partnership is 35 percent or 
                more of the value of such company's total assets, or
                  (II) the value of the interests of the regulated 
                investment company in such partnership and all other 
                qualified partnerships is 90 percent or more of the 
                value of such company's total assets.
  (i) Effective Date.--The amendments made by this section shall take 
effect as if included in the provisions of the 1998 Act to which they 
relate.

SEC. 503. AMENDMENTS RELATED TO TAXPAYER RELIEF ACT OF 1997.

  (a) Amendment Related to Section 202 of 1997 Act.--Paragraph (2) of 
section 163(h) of the 1986 Code is amended by striking ``and'' at the 
end of subparagraph (D), by striking the period at the end of 
subparagraph (E) and inserting ``, and'', and by adding at the end the 
following new subparagraph:
                  ``(F) any interest allowable as a deduction under 
                section 221 (relating to interest on educational 
                loans).''
  (b) Provision Related to Section 311 of 1997 Act.--In the case of any 
capital gain distribution made after 1997 by a trust to which section 
664 of the 1986 Code applies with respect to amounts properly taken 
into account by such trust during 1997, paragraphs (5)(A)(i)(I), 
(5)(A)(ii)(I), and (13)(A) of section 1(h) of the 1986 Code (as in 
effect for taxable years ending on December 31, 1997) shall not apply.
  (c) Amendment Related to Section 506 of 1997 Act.--
          (1) Section 2001(f)(2) of the 1986 Code is amended by adding 
        at the end the following:
        ``For purposes of subparagraph (A), the value of an item shall 
        be treated as shown on a return if the item is disclosed in the 
        return, or in a statement attached to the return, in a manner 
        adequate to apprise the Secretary of the nature of such 
        item.''.
          (2) Paragraph (9) of section 6501(c) of the 1986 Code is 
        amended by striking the last sentence.
  (d) Amendments Related to Section 904 of 1997 Act.--
          (1) Paragraph (1) of section 9510(c) of the 1986 Code is 
        amended to read as follows:
          ``(1) In general.--Amounts in the Vaccine Injury Compensation 
        Trust Fund shall be available, as provided in appropriation 
        Acts, only for--
                  ``(A) the payment of compensation under subtitle 2 of 
                title XXI of the Public Health Service Act (as in 
                effect on August 5, 1997) for vaccine-related injury or 
                death with respect to any vaccine--
                          ``(i) which is administered after September 
                        30, 1988, and
                          ``(ii) which is a taxable vaccine (as defined 
                        in section 4132(a)(1)) at the time compensation 
                        is paid under such subtitle 2, or
                  ``(B) the payment of all expenses of administration 
                (but not in excess of $9,500,000 for any fiscal year) 
                incurred by the Federal Government in administering 
                such subtitle.''.
          (2) Section 9510(b) of the 1986 Code is amended by adding at 
        the end the following new paragraph:
          ``(3) Limitation on transfers to vaccine injury compensation 
        trust fund.--No amount may be appropriated to the Vaccine 
        Injury Compensation Trust Fund on and after the date of any 
        expenditure from the Trust Fund which is not permitted by this 
        section. The determination of whether an expenditure is so 
        permitted shall be made without regard to--
                  ``(A) any provision of law which is not contained or 
                referenced in this title or in a revenue Act, and
                  ``(B) whether such provision of law is a subsequently 
                enacted provision or directly or indirectly seeks to 
                waive the application of this paragraph.''.
  (e) Amendments Related to Section 915 of 1997 Act.--
          (1) Section 915 of the Taxpayer Relief Act of 1997 is 
        amended--
                  (A) in subsection (b), by inserting ``or 1998'' after 
                ``1997'', and
                  (B) by amending subsection (d) to read as follows:
  ``(d) Effective Date.--This section shall apply to taxable years 
ending with or within calendar year 1997.''.
          (2) Paragraph (2) of section 6404(h) of the 1986 Code is 
        amended by inserting ``Robert T. Stafford'' before 
        ``Disaster''.
  (f) Amendments Related to Section 1012 of 1997 Act.--
          (1) Paragraph (2) of section 351(c) of the 1986 Code, as 
        amended by section 6010(c) of the 1998 Act, is amended by 
        inserting ``, or the fact that the corporation whose stock was 
        distributed issues additional stock,'' after ``dispose of part 
        or all of the distributed stock''.
          (2) Clause (ii) of section 368(a)(2)(H) of the 1986 Code, as 
        amended by section 6010(c) of the 1998 Act, is amended by 
        inserting ``, or the fact that the corporation whose stock was 
        distributed issues additional stock,'' after ``dispose of part 
        or all of the distributed stock''.
  (g) Amendment Related to Section 1082 of 1997 Act.--Subparagraph (F) 
of section 172(b)(1) of the 1986 Code is amended by adding at the end 
the following new clause:
                          ``(iv) Coordination with paragraph (2).--For 
                        purposes of applying paragraph (2), an eligible 
                        loss for any taxable year shall be treated in a 
                        manner similar to the manner in which a 
                        specified liability loss is treated.''
  (h) Amendment Related to Section 1084 of 1997 Act.--Paragraph (3) of 
section 264(f) of the 1986 Code is amended by adding at the end the 
following flush sentence:
        ``If the amount described in subparagraph (A) with respect to 
        any policy or contract does not reasonably approximate its 
        actual value, the amount taken into account under subparagraph 
        (A) shall be the greater of the amount of the insurance company 
        liability or the insurance company reserve with respect to such 
        policy or contract (as determined for purposes of the annual 
        statement approved by the National Association of Insurance 
        Commissioners) or shall be such other amount as is determined 
        by the Secretary.''
  (i) Amendment Related to Section 1205 of 1997 Act.--Paragraph (2) of 
section 6311(d) of the 1986 Code is amended by striking ``under such 
contracts'' in the last sentence and inserting ``under any such 
contract for the use of credit or debit cards for the payment of taxes 
imposed by subtitle A''.
  (j) Effective Date.--The amendments made by this section shall take 
effect as if included in the provisions of the Taxpayer Relief Act of 
1997 to which they relate.

SEC. 504. AMENDMENTS RELATED TO TAX REFORM ACT OF 1984.

  (a) In General.--Subparagraph (C) of section 172(d)(4) of the 1986 
Code is amended to read as follows:
                  ``(C) any deduction for casualty or theft losses 
                allowable under paragraph (2) or (3) of section 165(c) 
                shall be treated as attributable to the trade or 
                business; and''.
  (b) Conforming Amendments.--
          (1) Paragraph (3) of section 67(b) of the 1986 Code is 
        amended by striking ``for losses described in subsection (c)(3) 
        or (d) of section 165'' and inserting ``for casualty or theft 
        losses described in paragraph (2) or (3) of section 165(c) or 
        for losses described in section 165(d)''.
          (2) Paragraph (3) of section 68(c) of the 1986 Code is 
        amended by striking ``for losses described in subsection (c)(3) 
        or (d) of section 165'' and inserting ``for casualty or theft 
        losses described in paragraph (2) or (3) of section 165(c) or 
        for losses described in section 165(d)''.
          (3) Paragraph (1) of section 873(b) is amended to read as 
        follows:
          ``(1) Losses.--The deduction allowed by section 165 for 
        casualty or theft losses described in paragraph (2) or (3) of 
        section 165(c), but only if the loss is of property located 
        within the United States.''
  (c) Effective Dates.--
          (1) The amendments made by subsections (a) and (b)(3) shall 
        apply to taxable years beginning after December 31, 1983.
          (2) The amendment made by subsection (b)(1) shall apply to 
        taxable years beginning after December 31, 1986.
          (3) The amendment made by subsection (b)(2) shall apply to 
        taxable years beginning after December 31, 1990.

SEC. 505. OTHER AMENDMENTS.

  (a) Amendments Related to Section 6103 of 1986 Code.--
          (1) Subsection (j) of section 6103 of the 1986 Code is 
        amended by adding at the end the following new paragraph:
          ``(5) Department of agriculture.--Upon request in writing by 
        the Secretary of Agriculture, the Secretary shall furnish such 
        returns, or return information reflected thereon, as the 
        Secretary may prescribe by regulation to officers and employees 
        of the Department of Agriculture whose official duties require 
        access to such returns or information for the purpose of, but 
        only to the extent necessary in, structuring, preparing, and 
        conducting the census of agriculture pursuant to the Census of 
        Agriculture Act of 1997 (Public Law 105-113).''.
          (2) Paragraph (4) of section 6103(p) of the 1986 Code is 
        amended by striking ``(j)(1) or (2)'' in the material preceding 
        subparagraph (A) and in subparagraph (F) and inserting 
        ``(j)(1), (2), or (5)''.
          (3) The amendments made by this subsection shall apply to 
        requests made on or after the date of the enactment of this 
        Act.
  (b) Amendment Related to Section 9004 of Transportation Equity Act 
for the 21st Century.--
          (1) Paragraph (2) of section 9503(f) of the 1986 Code is 
        amended to read as follows:
          ``(2) notwithstanding section 9602(b), obligations held by 
        such Fund after September 30, 1998, shall be obligations of the 
        United States which are not interest-bearing.''
          (2) The amendment made by paragraph (1) shall take effect on 
        October 1, 1998.
  (c) Clerical Amendments.--
          (1) Clause (i) of section 51(d)(6)(B) of the 1986 Code is 
        amended by striking ``rehabilitation plan'' and inserting 
        ``plan for employment''. The reference to plan for employment 
        in such clause shall be treated as including a reference to the 
        rehabilitation plans referred to in such clause as in effect 
        before the amendment made by the preceding sentence.
          (2) Subparagraphs (C) and (D) of section 6693(a)(2) of the 
        1986 Code are each amended by striking ``Section'' and 
        inserting ``section''.

            TITLE VI--AMERICAN COMMUNITY RENEWAL ACT OF 1998

SEC. 601. SHORT TITLE.

  This title may be cited as the ``American Community Renewal Act of 
1998''.

SEC. 602. DESIGNATION OF AND TAX INCENTIVES FOR RENEWAL COMMUNITIES.

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

                  ``Subchapter X--Renewal Communities

                              ``Part I.   Designation.
                              ``Part II.  Renewal community capital 
                                        gain; renewal community 
                                        business.
                              ``Part III. Family development accounts.
                              ``Part IV.  Additional incentives.

                         ``PART I--DESIGNATION

                              ``Sec. 1400E. Designation of renewal 
                                        communities.

``SEC. 1400E. DESIGNATION OF RENEWAL COMMUNITIES.

  ``(a) Designation.--
          ``(1) Definitions.--For purposes of this title, the term 
        `renewal community' means any area--
                  ``(A) which is nominated by one or more local 
                governments and the State or States in which it is 
                located for designation as a renewal community 
                (hereinafter in this section referred to as a 
                `nominated area'), and
                  ``(B) which the Secretary of Housing and Urban 
                Development designates as a renewal community, after 
                consultation with--
                          ``(i) the Secretaries of Agriculture, 
                        Commerce, Labor, and the Treasury; the Director 
                        of the Office of Management and Budget; and the 
                        Administrator of the Small Business 
                        Administration, and
                          ``(ii) in the case of an area on an Indian 
                        reservation, the Secretary of the Interior.
          ``(2) Number of designations.--
                  ``(A) In general.--The Secretary of Housing and Urban 
                Development may designate not more than 20 nominated 
                areas as renewal communities.
                  ``(B) Minimum designation in rural areas.--Of the 
                areas designated under paragraph (1), at least 4 must 
                be areas--
                          ``(i) which are within a local government 
                        jurisdiction or jurisdictions with a population 
                        of less than 50,000,
                          ``(ii) which are outside of a metropolitan 
                        statistical area (within the meaning of section 
                        143(k)(2)(B)), or
                          ``(iii) which are determined by the Secretary 
                        of Housing and Urban Development, after 
                        consultation with the Secretary of Commerce, to 
                        be rural areas.
          ``(3) Areas designated based on degree of poverty, etc.--
                  ``(A) In general.--Except as otherwise provided in 
                this section, the nominated areas designated as renewal 
                communities under this subsection shall be those 
                nominated areas with the highest average ranking with 
                respect to the criteria described in subparagraphs (B), 
                (C), and (D) of subsection (c)(3). For purposes of the 
                preceding sentence, an area shall be ranked within each 
                such criterion on the basis of the amount by which the 
                area exceeds such criterion, with the area which 
                exceeds such criterion by the greatest amount given the 
                highest ranking.
                  ``(B) Exception where inadequate course of action, 
                etc.--An area shall not be designated under 
                subparagraph (A) if the Secretary of Housing and Urban 
                Development determines that the course of action 
                described in subsection (d)(2) with respect to such 
                area is inadequate.
                  ``(C) Priority for empowerment zones and enterprise 
                communities with respect to first half of 
                designations.--With respect to the first 10 
                designations made under this section--
                          ``(i) 10 shall be chosen from nominated areas 
                        which are empowerment zones or enterprise 
                        communities (and are otherwise eligible for 
                        designation under this section), and
                          ``(ii) of such 10, 2 shall be areas described 
                        in paragraph (2)(B).
          ``(4) Limitation on designations.--
                  ``(A) Publication of regulations.--The Secretary of 
                Housing and Urban Development shall prescribe by 
                regulation no later than 4 months after the date of the 
                enactment of this section, after consultation with the 
                officials described in paragraph (1)(B)--
                          ``(i) the procedures for nominating an area 
                        under paragraph (1)(A),
                          ``(ii) the parameters relating to the size 
                        and population characteristics of a renewal 
                        community, and
                          ``(iii) the manner in which nominated areas 
                        will be evaluated based on the criteria 
                        specified in subsection (d).
                  ``(B) Time limitations.--The Secretary of Housing and 
                Urban Development may designate nominated areas as 
                renewal communities only during the 24-month period 
                beginning on the first day of the first month following 
                the month in which the regulations described in 
                subparagraph (A) are prescribed.
                  ``(C) Procedural rules.--The Secretary of Housing and 
                Urban Development shall not make any designation of a 
                nominated area as a renewal community under paragraph 
                (2) unless--
                          ``(i) the local governments and the States in 
                        which the nominated area is located have the 
                        authority--
                                  ``(I) to nominate such area for 
                                designation as a renewal community,
                                  ``(II) to make the State and local 
                                commitments described in subsection 
                                (d), and
                                  ``(III) to provide assurances 
                                satisfactory to the Secretary of 
                                Housing and Urban Development that such 
                                commitments will be fulfilled,
                          ``(ii) a nomination regarding such area is 
                        submitted in such a manner and in such form, 
                        and contains such information, as the Secretary 
                        of Housing and Urban Development shall by 
                        regulation prescribe, and
                          ``(iii) the Secretary of Housing and Urban 
                        Development determines that any information 
                        furnished is reasonably accurate.
          ``(5) Nomination process for indian reservations.--For 
        purposes of this subchapter, in the case of a nominated area on 
        an Indian reservation, the reservation governing body (as 
        determined by the Secretary of the Interior) shall be treated 
        as being both the State and local governments with respect to 
        such area.
  ``(b) Period for Which Designation Is in Effect.--
          ``(1) In general.--Any designation of an area as a renewal 
        community shall remain in effect during the period beginning on 
        the date of the designation and ending on the earliest of--
                  ``(A) December 31, 2006,
                  ``(B) the termination date designated by the State 
                and local governments in their nomination, or
                  ``(C) the date the Secretary of Housing and Urban 
                Development revokes such designation.
          ``(2) Revocation of designation.--The Secretary of Housing 
        and Urban Development may revoke the designation under this 
        section of an area if such Secretary determines that the local 
        government or the State in which the area is located--
                  ``(A) has modified the boundaries of the area, or
                  ``(B) is not complying substantially with, or fails 
                to make progress in achieving, the State or local 
                commitments, respectively, described in subsection (d).
  ``(c) Area and Eligibility Requirements.--
          ``(1) In general.--The Secretary of Housing and Urban 
        Development may designate a nominated area as a renewal 
        community under subsection (a) only if the area meets the 
        requirements of paragraphs (2) and (3) of this subsection.
          ``(2) Area requirements.--A nominated area meets the 
        requirements of this paragraph if--
                  ``(A) the area is within the jurisdiction of one or 
                more local governments,
                  ``(B) the boundary of the area is continuous, and
                  ``(C) the area--
                          ``(i) has a population, of at least--
                                  ``(I) 4,000 if any portion of such 
                                area (other than a rural area described 
                                in subsection (a)(2)(B)(i)) is located 
                                within a metropolitan statistical area 
                                (within the meaning of section 
                                143(k)(2)(B)) which has a population of 
                                50,000 or greater, or
                                  ``(II) 1,000 in any other case, or
                          ``(ii) is entirely within an Indian 
                        reservation (as determined by the Secretary of 
                        the Interior).
          ``(3) Eligibility requirements.--A nominated area meets the 
        requirements of this paragraph if the State and the local 
        governments in which it is located certify (and the Secretary 
        of Housing and Urban Development, after such review of 
        supporting data as he deems appropriate, accepts such 
        certification) that--
                  ``(A) the area is one of pervasive poverty, 
                unemployment, and general distress,
                  ``(B) the unemployment rate in the area, as 
                determined by the most recent available data, was at 
                least 1\1/2\ times the national unemployment rate for 
                the period to which such data relate,
                  ``(C) the poverty rate for each population census 
                tract within the nominated area is at least 20 percent, 
                and
                  ``(D) in the case of an urban area, at least 70 
                percent of the households living in the area have 
                incomes below 80 percent of the median income of 
                households within the jurisdiction of the local 
                government (determined in the same manner as under 
                section 119(b)(2) of the Housing and Community 
                Development Act of 1974).
          ``(4) Consideration of high incidence of crime.--The 
        Secretary of Housing and Urban Development shall take into 
        account, in selecting nominated areas for designation as 
        renewal communities under this section, the extent to which 
        such areas have a high incidence of crime.
          ``(5) Consideration of communities identified in gao study.--
        The Secretary of Housing and Urban Development shall take into 
        account, in selecting nominated areas for designation as 
        renewal communities under this section, if the area has census 
        tracts identified in the May 12, 1998, report of the Government 
        Accounting Office regarding the identification of economically 
        distressed areas.
  ``(d) Required State and Local Commitments.--
          ``(1) In general.--The Secretary of Housing and Urban 
        Development may designate any nominated area as a renewal 
        community under subsection (a) only if--
                  ``(A) the local government and the State in which the 
                area is located agree in writing that, during any 
                period during which the area is a renewal community, 
                such governments will follow a specified course of 
                action which meets the requirements of paragraph (2) 
                and is designed to reduce the various burdens borne by 
                employers or employees in such area, and
                  ``(B) the economic growth promotion requirements of 
                paragraph (3) are met.
          ``(2) Course of action.--
                  ``(A) In general.--A course of action meets the 
                requirements of this paragraph if such course of action 
                is a written document, signed by a State (or local 
                government) and neighborhood organizations, which 
                evidences a partnership between such State or 
                government and community-based organizations and which 
                commits each signatory to specific and measurable 
                goals, actions, and timetables. Such course of action 
                shall include at least five of the following:
                          ``(i) A reduction of tax rates or fees 
                        applying within the renewal community.
                          ``(ii) An increase in the level of efficiency 
                        of local services within the renewal community.
                          ``(iii) Crime reduction strategies, such as 
                        crime prevention (including the provision of 
                        such services by nongovernmental entities).
                          ``(iv) Actions to reduce, remove, simplify, 
                        or streamline governmental requirements 
                        applying within the renewal community.
                          ``(v) Involvement in the program by private 
                        entities, organizations, neighborhood 
                        organizations, and community groups, 
                        particularly those in the renewal community, 
                        including a commitment from such private 
                        entities to provide jobs and job training for, 
                        and technical, financial, or other assistance 
                        to, employers, employees, and residents from 
                        the renewal community.
                          ``(vi) State or local income tax benefits for 
                        fees paid for services performed by a 
                        nongovernmental entity which were formerly 
                        performed by a governmental entity.
                          ``(vii) The gift (or sale at below fair 
                        market value) of surplus real property (such as 
                        land, homes, and commercial or industrial 
                        structures) in the renewal community to 
                        neighborhood organizations, community 
                        development corporations, or private companies.
                  ``(B) Recognition of past efforts.--For purposes of 
                this section, in evaluating the course of action agreed 
                to by any State or local government, the Secretary of 
                Housing and Urban Development shall take into account 
                the past efforts of such State or local government in 
                reducing the various burdens borne by employers and 
                employees in the area involved.
          ``(3) Economic growth promotion requirements.--The economic 
        growth promotion requirements of this paragraph are met with 
        respect to a nominated area if the local government and the 
        State in which such area is located certify in writing that 
        such government and State, respectively, have repealed or 
        otherwise will not enforce within the area, if such area is 
        designated as a renewal community--
                  ``(A) licensing requirements for occupations that do 
                not ordinarily require a professional degree,
                  ``(B) zoning restrictions on home-based businesses 
                which do not create a public nuisance,
                  ``(C) permit requirements for street vendors who do 
                not create a public nuisance,
                  ``(D) zoning or other restrictions that impede the 
                formation of schools or child care centers, and
                  ``(E) franchises or other restrictions on competition 
                for businesses providing public services, including but 
                not limited to taxicabs, jitneys, cable television, or 
                trash hauling,
        except to the extent that such regulation of businesses and 
        occupations is necessary for and well-tailored to the 
        protection of health and safety.
  ``(e) Coordination With Treatment of Empowerment Zones and Enterprise 
Communities.--For purposes of this title, if there are in effect with 
respect to the same area both--
          ``(1) a designation as a renewal community, and
          ``(2) a designation as an empowerment zone or enterprise 
        community,
both of such designations shall be given full effect with respect to 
such area.
  ``(f) Definitions and Special Rules.--For purposes of this 
subchapter--
          ``(1) Governments.--If more than one government seeks to 
        nominate an area as a renewal community, any reference to, or 
        requirement of, this section shall apply to all such 
        governments.
          ``(2) State.--The term `State' includes Puerto Rico, the 
        Virgin Islands of the United States, Guam, American Samoa, the 
        Northern Mariana Islands, and any other possession of the 
        United States.
          ``(3) Local government.--The term `local government' means--
                  ``(A) any county, city, town, township, parish, 
                village, or other general purpose political subdivision 
                of a State,
                  ``(B) any combination of political subdivisions 
                described in subparagraph (A) recognized by the 
                Secretary of Housing and Urban Development, and
                  ``(C) the District of Columbia.
          ``(4) Application of rules relating to census tracts and 
        census data.--The rules of sections 1392(b)(4) and 1393(a)(9) 
        shall apply.

 ``PART II--RENEWAL COMMUNITY CAPITAL GAIN; RENEWAL COMMUNITY BUSINESS

                              ``Sec. 1400F. Renewal community capital 
                                        gain.
                              ``Sec. 1400G. Renewal community business 
                                        defined.

``SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN.

  ``(a) General Rule.--Gross income does not include any qualified 
capital gain recognized on the sale or exchange of a qualified 
community asset held for more than 5 years.
  ``(b) Qualified Community Asset.--For purposes of this section--
          ``(1) In general.--The term `qualified community asset' 
        means--
                  ``(A) any qualified community stock,
                  ``(B) any qualified community partnership interest, 
                and
                  ``(C) any qualified community business property.
          ``(2) Qualified community stock.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), the term `qualified community stock' means any 
                stock in a domestic corporation if--
                          ``(i) such stock is acquired by the taxpayer 
                        after December 31, 1999, and before January 1, 
                        2007, at its original issue (directly or 
                        through an underwriter) from the corporation 
                        solely in exchange for cash,
                          ``(ii) as of the time such stock was issued, 
                        such corporation was a renewal community 
                        business (or, in the case of a new corporation, 
                        such corporation was being organized for 
                        purposes of being a renewal community 
                        business), and
                          ``(iii) during substantially all of the 
                        taxpayer's holding period for such stock, such 
                        corporation qualified as a renewal community 
                        business.
                  ``(B) Redemptions.--A rule similar to the rule of 
                section 1202(c)(3) shall apply for purposes of this 
                paragraph.
          ``(3) Qualified community partnership interest.--The term 
        `qualified community partnership interest' means any interest 
        in a partnership if--
                  ``(A) such interest is acquired by the taxpayer after 
                December 31, 1999, and before January 1, 2007,
                  ``(B) as of the time such interest was acquired, such 
                partnership was a renewal community business (or, in 
                the case of a new partnership, such partnership was 
                being organized for purposes of being a renewal 
                community business), and
                  ``(C) during substantially all of the taxpayer's 
                holding period for such interest, such partnership 
                qualified as a renewal community business.
        A rule similar to the rule of paragraph (2)(B) shall apply for 
        purposes of this paragraph.
          ``(4) Qualified community business property.--
                  ``(A) In general.--The term `qualified community 
                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, 1999, and before 
                        January 1, 2007,
                          ``(ii) the original use of such property in 
                        the renewal community 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 renewal community business of the 
                        taxpayer.
                  ``(B) Special rule for substantial improvements.--The 
                requirements of clauses (i) and (ii) of subparagraph 
                (A) shall be treated as satisfied with respect to--
                          ``(i) property which is substantially 
                        improved (within the meaning of section 
                        1400B(b)(4)(B)(ii)) by the taxpayer before 
                        January 1, 2007, and
                          ``(ii) any land on which such property is 
                        located.
  ``(c) Certain Rules To Apply.--Rules similar to the rules of 
paragraphs (5), (6), and (7) of subsection (b), and subsections (e), 
(f), and (g), of section 1400B shall apply for purposes of this 
section.

``SEC. 1400G. RENEWAL COMMUNITY BUSINESS DEFINED.

  ``For purposes of this part, the term `renewal community business' 
means any entity or proprietorship which would be a qualified business 
entity or qualified proprietorship under section 1397B if--
          ``(1) references to renewal communities were substituted for 
        references to empowerment zones in such section; and
          ``(2) `80 percent' were substituted for `50 percent' in 
        subsections (b)(2) and (c)(1) of such section.

                ``PART III--FAMILY DEVELOPMENT ACCOUNTS

                              ``Sec. 1400H. Family development accounts 
                                        for renewal community EITC 
                                        recipients.
                              ``Sec. 1400I. Demonstration program to 
                                        provide matching contributions 
                                        to family development accounts 
                                        in certain renewal communities.
                              ``Sec. 1400J. Designation of earned 
                                        income tax credit payments for 
                                        deposit to family development 
                                        account.

``SEC. 1400H. FAMILY DEVELOPMENT ACCOUNTS FOR RENEWAL COMMUNITY EITC 
                    RECIPIENTS.

  ``(a) Allowance of Deduction.--
          ``(1) In general.--There shall be allowed as a deduction--
                  ``(A) in the case of a qualified individual, the 
                amount paid in cash for the taxable year by such 
                individual to any family development account for such 
                individual's benefit, and
                  ``(B) in the case of any person other than a 
                qualified individual, the amount paid in cash for the 
                taxable year by such person to any family development 
                account for the benefit of a qualified individual but 
                only if the amount so paid is designated for purposes 
                of this section by such individual.
        No deduction shall be allowed under this paragraph for any 
        amount deposited in a family development account under section 
        1400I (relating to demonstration program to provide matching 
        amounts in renewal communities).
          ``(2) Limitation.--
                  ``(A) In general.--The amount allowable as a 
                deduction to any individual for any taxable year by 
                reason of paragraph (1)(A) shall not exceed the lesser 
                of--
                          ``(i) $2,000, or
                          ``(ii) an amount equal to the compensation 
                        includible in the individual's gross income for 
                        such taxable year.
                  ``(B) Persons donating to family development accounts 
                of others.--The amount which may be designated under 
                paragraph (1)(B) by any qualified individual for any 
                taxable year of such individual shall not exceed 
                $1,000.
          ``(3) Special rules for certain married individuals.--Rules 
        similar to rules of section 219(c) shall apply to the 
        limitation in paragraph (2)(A).
          ``(4) Coordination with ira's.--No deduction shall be allowed 
        under this section to any person by reason of a payment to an 
        account for the benefit of a qualified individual if any amount 
        is paid into an individual retirement account (including a Roth 
        IRA) for the benefit of such individual.
          ``(5) Rollovers.--No deduction shall be allowed under this 
        section with respect to any rollover contribution.
  ``(b) Tax Treatment of Distributions.--
          ``(1) Inclusion of amounts in gross income.--Except as 
        otherwise provided in this subsection, any amount paid or 
        distributed out of a family development account shall be 
        included in gross income by the payee or distributee, as the 
        case may be.
          ``(2) Exclusion of qualified family development 
        distributions.--Paragraph (1) shall not apply to any qualified 
        family development distribution.
  ``(c) Qualified Family Development Distribution.--For purposes of 
this section--
          ``(1) In general.--The term `qualified family development 
        distribution' means any amount paid or distributed out of a 
        family development account which would otherwise be includible 
        in gross income, to the extent that such payment or 
        distribution is used exclusively to pay qualified family 
        development expenses for the holder of the account or the 
        spouse or dependent (as defined in section 152) of such holder.
          ``(2) Qualified family development expenses.--The term 
        `qualified family development expenses' means any of the 
        following:
                  ``(A) Qualified higher education expenses.
                  ``(B) Qualified first-time homebuyer costs.
                  ``(C) Qualified business capitalization costs.
                  ``(D) Qualified medical expenses.
                  ``(E) Qualified rollovers.
          ``(3) Qualified higher education expenses.--
                  ``(A) In general.--The term `qualified higher 
                education expenses' has the meaning given such term by 
                section 72(t)(7), determined by treating postsecondary 
                vocational educational schools as eligible educational 
                institutions.
                  ``(B) Postsecondary vocational education school.--The 
                term `postsecondary vocational educational school' 
                means an area vocational education school (as defined 
                in subparagraph (C) or (D) of section 521(4) of the 
                Carl D. Perkins Vocational and Applied Technology 
                Education Act (20 U.S.C. 2471(4))) which is in any 
                State (as defined in section 521(33) of such Act), as 
                such sections are in effect on the date of the 
                enactment of this section.
                  ``(C) 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).
          ``(4) Qualified first-time homebuyer costs.--The term 
        `qualified first-time homebuyer costs' means qualified 
        acquisition costs (as defined in section 72(t)(8) without 
        regard to subparagraph (B) thereof) with respect to a principal 
        residence (within the meaning of section 121) for a qualified 
        first-time homebuyer (as defined in such section).
          ``(5) Qualified business capitalization costs.--
                  ``(A) In general.--The term `qualified business 
                capitalization costs' means qualified expenditures for 
                the capitalization of a qualified business pursuant to 
                a qualified plan.
                  ``(B) Qualified expenditures.--The term `qualified 
                expenditures' means expenditures included in a 
                qualified plan, including capital, plant, equipment, 
                working capital, and inventory expenses.
                  ``(C) Qualified business.--The term `qualified 
                business' means any business that does not contravene 
                any law.
                  ``(D) Qualified plan.--The term `qualified plan' 
                means a business plan which meets such requirements as 
                the Secretary may specify.
          ``(6) Qualified medical expenses.--The term `qualified 
        medical expenses' means any amount paid during the taxable 
        year, not compensated for by insurance or otherwise, for 
        medical care (as defined in section 213(d)) of the taxpayer, 
        his spouse, or his dependent (as defined in section 152).
          ``(7) Qualified rollovers.--The term `qualified rollover' 
        means any amount paid from a family development account of a 
        taxpayer into another such account established for the benefit 
        of--
                  ``(A) such taxpayer, or
                  ``(B) any qualified individual who is--
                          ``(i) the spouse of such taxpayer, or
                          ``(ii) any dependent (as defined in section 
                        152) of the taxpayer.
        Rules similar to the rules of section 408(d)(3) shall apply for 
        purposes of this paragraph.
  ``(d) Tax Treatment of Accounts.--
          ``(1) In general.--Any family development account is exempt 
        from taxation under this subtitle unless such account has 
        ceased to be a family development account by reason of 
        paragraph (2). Notwithstanding the preceding sentence, any such 
        account is subject to the taxes imposed by section 511 
        (relating to imposition of tax on unrelated business income of 
        charitable, etc., organizations). Notwithstanding any other 
        provision of this title (including chapters 11 and 12), the 
        basis of any person in such an account is zero.
          ``(2) Loss of exemption in case of prohibited transactions.--
        For purposes of this section, rules similar to the rules of 
        section 408(e) shall apply.
          ``(3) Other rules to apply.--Rules similar to the rules of 
        paragraphs (4), (5), and (6) of section 408(d) shall apply for 
        purposes of this section.
  ``(e) Family Development Account.--For purposes of this title, the 
term `family development account' means a trust created or organized in 
the United States for the exclusive benefit of a qualified individual 
or his beneficiaries, but only if the written governing instrument 
creating the trust meets the following requirements:
          ``(1) Except in the case of a qualified rollover (as defined 
        in subsection (c)(7))--
                  ``(A) no contribution will be accepted unless it is 
                in cash, and
                  ``(B) contributions will not be accepted for the 
                taxable year in excess of $3,000 (determined without 
                regard to any contribution made under section 1400I 
                (relating to demonstration program to provide matching 
                amounts in renewal communities)).
          ``(2) The requirements of paragraphs (2) through (6) of 
        section 408(a) are met.
  ``(f) Qualified Individual.--For purposes of this section, the term 
`qualified individual' means, for any taxable year, an individual--
          ``(1) who is a bona fide resident of a renewal community 
        throughout the taxable year, and
          ``(2) to whom a credit was allowed under section 32 for the 
        preceding taxable year.
  ``(g) Other Definitions and Special Rules.--
          ``(1) Compensation.--The term `compensation' has the meaning 
        given such term by section 219(f)(1).
          ``(2) Married individuals.--The maximum deduction under 
        subsection (a) shall be computed separately for each 
        individual, and this section shall be applied without regard to 
        any community property laws.
          ``(3) Time when contributions deemed made.--For purposes of 
        this section, a taxpayer shall be deemed to have made a 
        contribution to a family development account on the last day of 
        the preceding taxable year if the contribution is made on 
        account of such taxable year and is made not later than the 
        time prescribed by law for filing the return for such taxable 
        year (not including extensions thereof).
          ``(4) Employer payments; custodial accounts.--Rules similar 
        to the rules of sections 219(f)(5) and 408(h) shall apply for 
        purposes of this section.
          ``(5) Reports.--The trustee of a family development account 
        shall make such reports regarding such account to the Secretary 
        and to the individual for whom the account is maintained with 
        respect to contributions (and the years to which they relate), 
        distributions, and such other matters as the Secretary may 
        require under regulations. The reports required by this 
        paragraph--
                  ``(A) shall be filed at such time and in such manner 
                as the Secretary prescribes in such regulations, and
                  ``(B) shall be furnished to individuals--
                          ``(i) not later than January 31 of the 
                        calendar year following the calendar year to 
                        which such reports relate, and
                          ``(ii) in such manner as the Secretary 
                        prescribes in such regulations.
          ``(6) Investment in collectibles treated as distributions.--
        Rules similar to the rules of section 408(m) shall apply for 
        purposes of this section.
  ``(h) Penalty for Distributions Not Used for Qualified Family 
Development Expenses.--
          ``(1) In general.--If any amount is distributed from a family 
        development account and is not used exclusively to pay 
        qualified family development expenses for the holder of the 
        account or the spouse or dependent (as defined in section 152) 
        of such holder, the tax imposed by this chapter for the taxable 
        year of such distribution shall be increased by the sum of--
                  ``(A) 100 percent of the portion of such amount which 
                is includible in gross income and is attributable to 
                amounts contributed under section 1400I (relating to 
                demonstration program to provide matching amounts in 
                renewal communities), and
                  ``(B) 10 percent of the portion of such amount which 
                is includible in gross income and is not described in 
                subparagraph (A).
        For purposes of this subsection, distributions which are 
        includable in gross income shall be treated as attributable to 
        amounts contributed under section 1400I to the extent thereof. 
        For purposes of the preceding sentence, all family development 
        accounts of an individual shall be treated as one account.
          ``(2) Exception for certain distributions.--Paragraph (1) 
        shall not apply to distributions which are--
                  ``(A) made on or after the date on which the account 
                holder attains age 59\1/2\,
                  ``(B) made to a beneficiary (or the estate of the 
                account holder) on or after the death of the account 
                holder, or
                  ``(C) attributable to the account holder's being 
                disabled within the meaning of section 72(m)(7).
  ``(i) Termination.--No deduction shall be allowed under this section 
for any amount paid to a family development account for any taxable 
year beginning after December 31, 2006.

``SEC. 1400I. DEMONSTRATION PROGRAM TO PROVIDE MATCHING CONTRIBUTIONS 
                    TO FAMILY DEVELOPMENT ACCOUNTS IN CERTAIN RENEWAL 
                    COMMUNITIES.

  ``(a) Designation.--
          ``(1) Definitions.--For purposes of this section, the term 
        `FDA matching demonstration area' means any renewal community--
                  ``(A) which is nominated under this section by each 
                of the local governments and States which nominated 
                such community for designation as a renewal community 
                under section 1400E(a)(1)(A), and
                  ``(B) which the Secretary of Housing and Urban 
                Development designates as an FDA matching demonstration 
                area after consultation with--
                          ``(i) the Secretaries of Agriculture, 
                        Commerce, Labor, and the Treasury, the Director 
                        of the Office of Management and Budget, and the 
                        Administrator of the Small Business 
                        Administration, and
                          ``(ii) in the case of a community on an 
                        Indian reservation, the Secretary of the 
                        Interior.
          ``(2) Number of designations.--
                  ``(A) In general.--The Secretary of Housing and Urban 
                Development may designate not more than 5 communities 
                as FDA matching demonstration areas.
                  ``(B) Minimum designation in rural areas.--Of the 
                areas designated under subparagraph (A), at least 2 
                must be areas described in section 1400E(a)(2)(B).
          ``(3) Limitations on designations.--
                  ``(A) Publication of regulations.--The Secretary of 
                Housing and Urban Development shall prescribe by 
                regulation no later than 4 months after the date of the 
                enactment of this section, after consultation with the 
                officials described in paragraph (1)(B)--
                          ``(i) the procedures for nominating a renewal 
                        community under paragraph (1)(A) (including 
                        procedures for coordinating such nomination 
                        with the nomination of an area for designation 
                        as a renewal community under section 1400E), 
                        and
                          ``(ii) the manner in which nominated renewal 
                        communities will be evaluated for purposes of 
                        this section.
                  ``(B) Time limitations.--The Secretary of Housing and 
                Urban Development may designate renewal communities as 
                FDA matching demonstration areas only during the 24-
                month period beginning on the first day of the first 
                month following the month in which the regulations 
                described in subparagraph (A) are prescribed.
          ``(4) Designation based on degree of poverty, etc.--The rules 
        of section 1400E(a)(3) shall apply for purposes of designations 
        of FDA matching demonstration areas under this section.
  ``(b) Period for Which Designation is in Effect.--Any designation of 
a renewal community as an FDA matching demonstration area shall remain 
in effect during the period beginning on the date of such designation 
and ending on the date on which such area ceases to be a renewal 
community.
  ``(c) Matching Contributions to Family Development Accounts.--
          ``(1) In general.--Not less than once each taxable year, the 
        Secretary shall deposit (to the extent provided in 
        appropriation Acts) into a family development account of each 
        qualified individual (as defined in section 1400H(f))--
                  ``(A) who is a resident throughout the taxable year 
                of an FDA matching demonstration area, and
                  ``(B) who requests (in such form and manner as the 
                Secretary prescribes) such deposit for the taxable 
                year,
        an amount equal to the sum of the amounts deposited into all of 
        the family development accounts of such individual during such 
        taxable year (determined without regard to any amount 
        contributed under this section).
          ``(2) Limitations.--
                  ``(A) Annual limit.--The Secretary shall not deposit 
                more than $1000 under paragraph (1) with respect to any 
                individual for any taxable year.
                  ``(B) Aggregate limit.--The Secretary shall not 
                deposit more than $2000 under paragraph (1) with 
                respect to any individual for all taxable years.
          ``(3) Exclusion from income.--Except as provided in section 
        1400H, gross income shall not include any amount deposited into 
        a family development account under paragraph (1).
  ``(d) Notice of Program.--The Secretary shall provide appropriate 
notice to residents of FDA matching demonstration areas of the 
availability of the benefits under this section.
  ``(e) Termination.--No amount may be deposited under this section for 
any taxable year beginning after December 31, 2006.

``SEC. 1400J. DESIGNATION OF EARNED INCOME TAX CREDIT PAYMENTS FOR 
                    DEPOSIT TO FAMILY DEVELOPMENT ACCOUNT.

  ``(a) In General.--With respect to the return of any qualified 
individual (as defined in section 1400H(f)) for the taxable year of the 
tax imposed by this chapter, such individual may designate that a 
specified portion (not less than $1) of any overpayment of tax for such 
taxable year which is attributable to the earned income tax credit 
shall be deposited by the Secretary into a family development account 
of such individual. The Secretary shall so deposit such portion 
designated under this subsection.
  ``(b) Manner and Time of Designation.--A designation under subsection 
(a) may be made with respect to any taxable year--
          ``(1) at the time of filing the return of the tax imposed by 
        this chapter for such taxable year, or
          ``(2) at any other time (after the time of filing the return 
        of the tax imposed by this chapter for such taxable year) 
        specified in regulations prescribed by the Secretary.
Such designation shall be made in such manner as the Secretary 
prescribes by regulations.
  ``(c) Portion Attributable to Earned Income Tax Credit.--For purposes 
of subsection (a), an overpayment for any taxable year shall be treated 
as attributable to the earned income tax credit to the extent that such 
overpayment does not exceed the credit allowed to the taxpayer under 
section 32 for such taxable year.
  ``(d) Overpayments Treated as Refunded.--For purposes of this title, 
any portion of an overpayment of tax designated under subsection (a) 
shall be treated as being refunded to the taxpayer as of the last date 
prescribed for filing the return of tax imposed by this chapter 
(determined without regard to extensions) or, if later, the date the 
return is filed.
  ``(e) Termination.--This section shall not apply to any taxable year 
beginning after December 31, 2006.

                    ``PART IV--ADDITIONAL INCENTIVES

                              ``Sec. 1400K. Commercial revitalization 
                                        credit.
                              ``Sec. 1400L. Increase in expensing under 
                                        section 179.

``SEC. 1400K. COMMERCIAL REVITALIZATION CREDIT.

  ``(a) General Rule.--For purposes of section 46, except as provided 
in subsection (e), the commercial revitalization credit for any taxable 
year is an amount equal to the applicable percentage of the qualified 
revitalization expenditures with respect to any qualified 
revitalization building.
  ``(b) Applicable Percentage.--For purposes of this section--
          ``(1) In general.--The term `applicable percentage' means--
                  ``(A) 20 percent for the taxable year in which a 
                qualified revitalization building is placed in service, 
                or
                  ``(B) at the election of the taxpayer, 5 percent for 
                each taxable year in the credit period.
        The election under subparagraph (B), once made, shall be 
        irrevocable.
          ``(2) Credit period.--
                  ``(A) In general.--The term `credit period' means, 
                with respect to any building, the period of 10 taxable 
                years beginning with the taxable year in which the 
                building is placed in service.
                  ``(B) Applicable rules.--Rules similar to the rules 
                under paragraphs (2) and (4) of section 42(f) shall 
                apply.
  ``(c) Qualified Revitalization Buildings and Expenditures.--For 
purposes of this section--
          ``(1) Qualified revitalization building.--The term `qualified 
        revitalization building' means any building (and its structural 
        components) if--
                  ``(A) such building is located in a renewal community 
                and is placed in service after December 31, 1999,
                  ``(B) a commercial revitalization credit amount is 
                allocated to the building under subsection (e), and
                  ``(C) depreciation (or amortization in lieu of 
                depreciation) is allowable with respect to the 
                building.
          ``(2) Qualified revitalization expenditure.--
                  ``(A) In general.--The term `qualified revitalization 
                expenditure' means any amount properly chargeable to 
                capital account--
                          ``(i) for property for which depreciation is 
                        allowable under section 168 and which is--
                                  ``(I) nonresidential real property, 
                                or
                                  ``(II) an addition or improvement to 
                                property described in subclause (I), 
                                and
                          ``(ii) in connection with the construction of 
                        any qualified revitalization building which was 
                        not previously placed in service or in 
                        connection with the substantial rehabilitation 
                        (within the meaning of section 47(c)(1)(C)) of 
                        a building which was placed in service before 
                        the beginning of such rehabilitation.
                  ``(B) Dollar limitation.--The aggregate amount which 
                may be treated as qualified revitalization expenditures 
                with respect to any qualified revitalization building 
                for any taxable year shall not exceed the excess of--
                          ``(i) $10,000,000, reduced by
                          ``(ii) any such expenditures with respect to 
                        the building taken into account by the taxpayer 
                        or any predecessor in determining the amount of 
                        the credit under this section for all preceding 
                        taxable years.
                  ``(C) Certain expenditures not included.--The term 
                `qualified revitalization expenditure' does not 
                include--
                          ``(i) Straight line depreciation must be 
                        used.--Any expenditure (other than with respect 
                        to land acquisitions) with respect to which the 
                        taxpayer does not use the straight line method 
                        over a recovery period determined under 
                        subsection (c) or (g) of section 168. The 
                        preceding sentence shall not apply to any 
                        expenditure to the extent the alternative 
                        depreciation system of section 168(g) applies 
                        to such expenditure by reason of subparagraph 
                        (B) or (C) of section 168(g)(1).
                          ``(ii) Acquisition costs.--The costs of 
                        acquiring any building or interest therein and 
                        any land in connection with such building to 
                        the extent that such costs exceed 30 percent of 
                        the qualified revitalization expenditures 
                        determined without regard to this clause.
                          ``(iii) Other credits.--Any expenditure which 
                        the taxpayer may take into account in computing 
                        any other credit allowable under this title 
                        unless the taxpayer elects to take the 
                        expenditure into account only for purposes of 
                        this section.
  ``(d) When Expenditures Taken Into Account.--
          ``(1) In general.--Qualified revitalization expenditures with 
        respect to any qualified revitalization building shall be taken 
        into account for the taxable year in which the qualified 
        revitalization building is placed in service. For purposes of 
        the preceding sentence, a substantial rehabilitation of a 
        building shall be treated as a separate building.
          ``(2) Progress expenditure payments.--Rules similar to the 
        rules of subsections (b)(2) and (d) of section 47 shall apply 
        for purposes of this section.
  ``(e) Limitation on Aggregate Credits Allowable With Respect to 
Buildings Located in a State.--
          ``(1) In general.--The amount of the credit determined under 
        this section for any taxable year with respect to any building 
        shall not exceed the commercial revitalization credit amount 
        (in the case of an amount determined under subsection 
        (b)(1)(B), the present value of such amount as determined under 
        the rules of section 42(b)(2)(C)) allocated to such building 
        under this subsection by the commercial revitalization credit 
        agency. Such allocation shall be made at the same time and in 
        the same manner as under paragraphs (1) and (7) of section 
        42(h).
          ``(2) Commercial revitalization credit amount for agencies.--
                  ``(A) In general.--The aggregate commercial 
                revitalization credit amount which a commercial 
                revitalization credit agency may allocate for any 
                calendar year is the amount of the State commercial 
                revitalization credit ceiling determined under this 
                paragraph for such calendar year for such agency.
                  ``(B) State commercial revitalization credit 
                ceiling.--The State commercial revitalization credit 
                ceiling applicable to any State--
                          ``(i) for each calendar year after 1999 and 
                        before 2007 is $2,000,000 for each renewal 
                        community in the State, and
                          ``(ii) zero for each calendar year 
                        thereafter.
                  ``(C) Commercial revitalization credit agency.--For 
                purposes of this section, the term `commercial 
                revitalization credit agency' means any agency 
                authorized by a State to carry out this section.
  ``(f) Responsibilities of Commercial Revitalization Credit 
Agencies.--
          ``(1) Plans for allocation.--Notwithstanding any other 
        provision of this section, the commercial revitalization credit 
        amount with respect to any building shall be zero unless--
                  ``(A) such amount was allocated pursuant to a 
                qualified allocation plan of the commercial 
                revitalization credit agency which is approved (in 
                accordance with rules similar to the rules of section 
                147(f)(2) (other than subparagraph (B)(ii) thereof)) by 
                the governmental unit of which such agency is a part, 
                and
                  ``(B) such agency notifies the chief executive 
                officer (or its equivalent) of the local jurisdiction 
                within which the building is located of such allocation 
                and provides such individual a reasonable opportunity 
                to comment on the allocation.
          ``(2) Qualified allocation plan.--For purposes of this 
        subsection, the term `qualified allocation plan' means any 
        plan--
                  ``(A) which sets forth selection criteria to be used 
                to determine priorities of the commercial 
                revitalization credit agency which are appropriate to 
                local conditions,
                  ``(B) which considers--
                          ``(i) the degree to which a project 
                        contributes to the implementation of a 
                        strategic plan that is devised for a renewal 
                        community through a citizen participation 
                        process,
                          ``(ii) the amount of any increase in 
                        permanent, full-time employment by reason of 
                        any project, and
                          ``(iii) the active involvement of residents 
                        and nonprofit groups within the renewal 
                        community, and
                  ``(C) which provides a procedure that the agency (or 
                its agent) will follow in monitoring compliance with 
                this section.
  ``(g) Termination.--This section shall not apply to any building 
placed in service after December 31, 2006.

``SEC. 1400L. INCREASE IN EXPENSING UNDER SECTION 179.

  ``(a) General Rule.--In the case of a renewal community business (as 
defined in section 1400G), for purposes of section 179--
          ``(1) the limitation under section 179(b)(1) shall be 
        increased by the lesser of--
                  ``(A) $35,000, or
                  ``(B) the cost of section 179 property which is 
                qualified renewal property placed in service during the 
                taxable year, and
          ``(2) the amount taken into account under section 179(b)(2) 
        with respect to any section 179 property which is qualified 
        renewal property shall be 50 percent of the cost thereof.
  ``(b) Recapture.--Rules similar to the rules under section 179(d)(10) 
shall apply with respect to any qualified renewal property which ceases 
to be used in a renewal community by a renewal community business.
  ``(c) Qualified Renewal Property.--For purposes of this section--
          ``(1) In general.--The term `qualified renewal property' 
        means any property to which section 168 applies (or would apply 
        but for section 179) if--
                  ``(A) such property was acquired by the taxpayer by 
                purchase (as defined in section 179(d)(2)) after 
                December 31, 1999, and before January 1, 2007, and
                  ``(B) such property would be qualified zone property 
                (as defined in section 1397C) if references to renewal 
                communities were substituted for references to 
                empowerment zones in section 1397C.
          ``(2) Certain rules to apply.--The rules of subsections 
        (a)(2) and (b) of section 1397C shall apply for purposes of 
        this section.''

SEC. 603. EXTENSION OF EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS TO 
                    RENEWAL COMMUNITIES.

  (a) Extension.--Paragraph (2) of section 198(c) (defining targeted 
area) is amended by redesignating subparagraph (C) as subparagraph (D) 
and by inserting after subparagraph (B) the following new subparagraph:
                  ``(C) Renewal communities included.--Except as 
                provided in subparagraph (B), such term shall include a 
                renewal community (as defined in section 1400E).''
  (b) Extension of Termination Date for Renewal Communities.--
Subsection (h) of section 198 is amended by inserting before the period 
``(December 31, 2006, in the case of a renewal community, as defined in 
section 1400E).''

SEC. 604. EXTENSION OF WORK OPPORTUNITY TAX CREDIT FOR RENEWAL 
                    COMMUNITIES.

  (a) Extension.--Subsection (c) of section 51 (relating to 
termination) is amended by adding at the end the following new 
paragraph:
          ``(5) Extension of credit for renewal communities.--
                  ``(A) In general.--In the case of an individual who 
                begins work for the employer after the date contained 
                in paragraph (4)(B), for purposes of section 38--
                          ``(i) in lieu of applying subsection (a), the 
                        amount of the work opportunity credit 
                        determined under this section for the taxable 
                        year shall be equal to--
                                  ``(I) 15 percent of the qualified 
                                first-year wages for such year, and
                                  ``(II) 30 percent of the qualified 
                                second-year wages for such year,
                          ``(ii) subsection (b)(3) shall be applied by 
                        substituting `$10,000' for `$6,000',
                          ``(iii) paragraph (4)(B) shall be applied by 
                        substituting for the date contained therein the 
                        last day for which the designation under 
                        section 1400E of the renewal community referred 
                        to in subparagraph (B)(i) is in effect, and
                          ``(iv) rules similar to the rules of section 
                        51A(b)(5)(C) shall apply.
                  ``(B) Qualified first- and second-year wages.--For 
                purposes of subparagraph (A)--
                          ``(i) In general.--The term `qualified wages' 
                        means, with respect to each 1-year period 
                        referred to in clause (ii) or (iii), as the 
                        case may be, the wages paid or incurred by the 
                        employer during the taxable year to any 
                        individual but only if--
                                  ``(I) the employer is engaged in a 
                                trade or business in a renewal 
                                community throughout such 1-year 
                                period,
                                  ``(II) the principal place of abode 
                                of such individual is in such renewal 
                                community throughout such 1-year 
                                period, and
                                  ``(III) substantially all of the 
                                services which such individual performs 
                                for the employer during such 1-year 
                                period are performed in such renewal 
                                community.
                          ``(ii) 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.
                          ``(iii) 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 clause (ii).''
  (b) Congruent Treatment of Renewal Communities and Enterprise Zones 
for Purposes of Youth Residence Requirements.--
          (1) High-risk youth.--Subparagraphs (A)(ii) and (B) of 
        section 51(d)(5) are each amended by striking ``empowerment 
        zone or enterprise community'' and inserting ``empowerment 
        zone, enterprise community, or renewal community''.
          (2) Qualified summer youth employee.--Clause (iv) of section 
        51(d)(7)(A) is amended by striking ``empowerment zone or 
        enterprise community'' and inserting ``empowerment zone, 
        enterprise community, or renewal community''.
          (3) Headings.--Paragraphs (5)(B) and (7)(C) of section 51(d) 
        are each amended by inserting ``or community'' in the heading 
        after ``zone''.

SEC. 605. CONFORMING AND CLERICAL AMENDMENTS.

  (a) Deduction for Contributions to Family Development Accounts 
Allowable Whether or Not Taxpayer Itemizes.--Subsection (a) of section 
62 (relating to adjusted gross income defined) is amended by inserting 
after paragraph (17) the following new paragraph:
          ``(18) Family development accounts.--The deduction allowed by 
        section 1400H(a)(1)(A).''
  (b) Tax on Excess Contributions.--
          (1) Tax imposed.--Subsection (a) of section 4973 is amended 
        by striking ``or'' at the end of paragraph (3), adding ``or'' 
        at the end of paragraph (4), and inserting after paragraph (4) 
        the following new paragraph:
          ``(5) a family development account (within the meaning of 
        section 1400H(e)),''.
          (2) Excess contributions.--Section 4973 is amended by adding 
        at the end the following new subsection:
  ``(g) Family Development Accounts.--For purposes of this section, in 
the case of a family development account, the term `excess 
contributions' means the sum of--
          ``(1) the excess (if any) of--
                  ``(A) the amount contributed for the taxable year to 
                the account (other than a qualifiedrollover, as defined 
in section 1400H(c)(7), or a contribution under section 1400I), over
                  ``(B) the amount allowable as a deduction under 
                section 1400H for such contributions, and
          ``(2) the amount determined under this subsection for the 
        preceding taxable year reduced by the sum of--
                  ``(A) the distributions out of the account for the 
                taxable year which were included in the gross income of 
                the payee under section 1400H(b)(1),
                  ``(B) the distributions out of the account for the 
                taxable year to which rules similar to the rules of 
                section 408(d)(5) apply by reason of section 
                1400H(d)(3), and
                  ``(C) the excess (if any) of the maximum amount 
                allowable as a deduction under section 1400H for the 
                taxable year over the amount contributed to the account 
                for the taxable year (other than a contribution under 
                section 1400I).
For purposes of this subsection, any contribution which is distributed 
from the family development account in a distribution to which rules 
similar to the rules of section 408(d)(4) apply by reason of section 
1400H(d)(3) shall be treated as an amount not contributed.''
  (c) Tax on Prohibited Transactions.--Section 4975 is amended--
          (1) by adding at the end of subsection (c) the following new 
        paragraph:
          ``(6) Special rule for family development accounts.--An 
        individual for whose benefit a family development 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, with respect to such 
        transaction, the account ceases to be a family development 
        account by reason of the application of section 1400H(d)(2) to 
        such account.'', and
          (2) in subsection (e)(1), by striking ``or'' at the end of 
        subparagraph (E), by redesignating subparagraph (F) as 
        subparagraph (G), and by inserting after subparagraph (E) the 
        following new subparagraph:
                  ``(F) a family development account described in 
                section 1400H(e), or''.
  (d) Information Relating to Certain Trusts and Annuity Plans.--
Subsection (c) of section 6047 is amended--
          (1) by inserting ``or section 1400H'' after ``section 219'', 
        and
          (2) by inserting ``, of any family development account 
        described in section 1400H(e),'', after ``section 408(a)''.
  (e) Inspection of Applications for Tax Exemption.--Clause (i) of 
section 6104(a)(1)(B) is amended by inserting ``a family development 
account described in section 1400H(e),'' after ``section 408(a),''.
  (f) Failure To Provide Reports on Family Development Accounts.--
Paragraph (2) of section 6693(a) is amended by striking ``and'' at the 
end of subparagraph (C), by striking the period and inserting ``, and'' 
at the end of subparagraph (D), and by adding at the end the following 
new subparagraph:
                  ``(E) section 1400H(g)(6) (relating to family 
                development accounts).''
  (g) Conforming Amendments Regarding Commercial Revitalization 
Credit.--
          (1) Section 46 (relating to investment credit) 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 adding at the end the following new paragraph:
          ``(4) the commercial revitalization credit provided under 
        section 1400K.''
          (2) Section 39(d) is amended by adding at the end the 
        following new paragraph:
          ``(9) No carryback of section 1400k credit before date of 
        enactment.--No portion of the unused business credit for any 
        taxable year which is attributable to any commercial 
        revitalization credit determined under section 1400K may be 
        carried back to a taxable year ending before the date of the 
        enactment of section 1400K.''
          (3) Subparagraph (B) of section 48(a)(2) is amended by 
        inserting ``or commercial revitalization'' after 
        ``rehabilitation'' each place it appears in the text and 
        heading.
          (4) Subparagraph (C) of section 49(a)(1) is amended by 
        striking ``and'' at the end of clause (ii), by striking the 
        period at the end of clause (iii) and inserting ``, and'', and 
        by adding at the end the following new clause:
                          ``(iv) the portion of the basis of any 
                        qualified revitalization building attributable 
                        to qualified revitalization expenditures.''
          (5) Paragraph (2) of section 50(a) is amended by inserting 
        ``or 1400K(d)(2)'' after ``section 47(d)'' each place it 
        appears.
          (6) Subparagraph (A) of section 50(a)(2) is amended by 
        inserting ``or qualified revitalization building 
        (respectively)'' after ``qualified rehabilitated building''.
          (7) Subparagraph (B) of section 50(a)(2) is amended by adding 
        at the end the following new sentence: ``A similar rule shall 
        apply for purposes of section 1400K.''
          (8) Paragraph (2) of section 50(b) 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 
        adding at the end the following new subparagraph:
                  ``(E) a qualified revitalization building (as defined 
                in section 1400K) to the extent of the portion of the 
                basis which is attributable to qualified revitalization 
                expenditures (as defined in section 1400K).''
          (9) The last sentence of section 50(b)(3) is amended to read 
        as follows: ``If any qualified rehabilitated building or 
        qualified revitalization building is used by the tax-exempt 
        organization pursuant to a lease, this paragraph shall not 
        apply for purposes of determining the amount of the 
        rehabilitation credit or the commercial revitalization 
        credit.''
          (10) Subparagraph (C) of section 50(b)(4) is amended--
                  (A) by inserting ``or commercial revitalization'' 
                after ``rehabilitated'' in the text and heading, and
                  (B) by inserting ``or commercial revitalization'' 
                after ``rehabilitation''.
          (11) Subparagraph (C) of section 469(i)(3) is amended--
                  (A) by inserting ``or section 1400K'' after ``section 
                42''; and
                  (B) by striking ``credit'' in the heading and 
                inserting ``and commercial revitalization credits''.
  (h) Clerical Amendments.--The table of subchapters for chapter 1 is 
amended by adding at the end the following new item:

                              ``Subchapter X. Renewal Communities.''

SEC. 606. EVALUATION AND REPORTING REQUIREMENTS.

  Not later than the close of the fourth calendar year after the year 
in which the Secretary of Housing and Urban Development first 
designates an area as a renewal community under section 1400E of the 
Internal Revenue Code of 1986, and at the close of each fourth calendar 
year thereafter, such Secretary shall prepare and submit to the 
Congress a report on the effects of such designations in stimulating 
the creation of new jobs, particularly for disadvantaged workers and 
long-term unemployed individuals, and promoting the revitalization of 
economically distressed areas.

                       I. SUMMARY AND BACKGROUND

                         A. Purpose and Summary

                                Purpose

    The bill, H.R. 4579 (``Taxpayer Relief Act of 1998'') is 
intended to provide needed tax relief for the nation's 
families, farmers and small businesses, provide education and 
community renewal tax incentives, extend certain expired and 
expiring tax and trade provisions, increase the earnings limit 
for Social Security recipients, modify the treatment of certain 
deductible liquidating distributions of regulated investment 
companies (``RICs'') and real estate investment trusts 
(``REITs'') to close an existing tax loophole, and provide 
necessary technical corrections to recent tax legislation.

                          Summary of the Bill

Family tax relief provisions

    Marriage penalty tax relief.--The bill increases the basic 
standard deduction for a married couple filing a joint return 
to twice the basic standard deduction for a single return in 
each taxable year beginning after December 31, 1998. Also, the 
basic standard deduction for a married taxpayer filing 
separately will be increased so that it will equal the basic 
standard deduction for singles. Further, the bill increases the 
additional standard deduction for married individuals who are 
elderly or blind to the same amount allowed for singles and 
heads of households. These amounts will be indexed for 
inflation.
    Partial exclusion for interest and dividends.--The bill 
provides an exclusion from income for individuals for up to 
$200 ($400 for married couples filing jointly) of combined 
interest and dividends received in a taxable year. The 
provision is effective for taxable years beginning after 
December 31, 1998.
    Treatment of personal credits under the individual minimum 
tax.--The bill will allow nonrefundable personal tax credits to 
offset both the individual's regular income tax liability and 
the minimum tax liability. The bill also repeals the rule that 
reduces the additional child credit and the earned income 
credit by the amount of the minimum tax liability. The 
provision is effective for taxable years beginning after 
December 31, 1997.
    Exclusion of gain on the sale of a principal residence by a 
member of the uniformed services or the Foreign Service of the 
United States.--The bill suspends the test period for ownership 
and use during certain absences due to service in the uniformed 
services or the Foreign Service of the United States. 
Specifically, the 5-year period ending on the date of the sale 
or exchange of a principal residence will not include any 
periods during which the taxpayer or the taxpayer's spouse was 
on qualified official extended duty as a member of the 
uniformed services or the Foreign Service of the United States 
and serving at a place of duty at least 50 miles away from the 
taxpayer's principal residence or under orders compelling 
residence in Government furnished quarters. Extended duty is 
defined as 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. The provision is effective for sales or 
exchanges of principal residences after the date of enactment.

Education and infrastructure provisions

    Permit private higher education institutions to establish 
qualified prepaid tuition programs.--The definition of a 
``qualified tuition program'' is expanded to include programs 
established and maintained by one or more private educational 
institutions. The provision is effective for taxable years 
beginning after December 31, 1998.
    Expand exception from arbitrage rebate for tax-exempt bonds 
issued to finance public school construction.--The bill 
liberalizes the permitted expenditure period of the present-law 
construction bond exception in the case of bonds issued to 
finance the construction of public schools. Amounts spent for 
the acquisition and improvement of land that is functionally 
related and subordinate to a school, the construction of which 
is financed with proceeds of the bond issue, will be treated as 
spent for construction. Under the provision, no rebate will be 
required on the construction proceeds of these public school 
construction bonds if the proceeds (less presently allowed 
retainage) were spent within four years after the bonds are 
issued, and the following intermediate spending targets are 
satisfied: (1) 10 percent or more of the construction proceeds 
is spent within one year after the bonds are issued; (2) 30 
percent or more of the construction proceeds is spent within 
two years after the bonds are issued; and (3) 50 percent or 
more of the construction proceeds is spent within three years 
after the bonds are issued. The provision applies to bonds 
issued after December 31, 1998.
    Increase State volume limits on private activity tax-exempt 
bonds.--The bill increases the annual State private activity 
bond volume limits to $75 (from $50) per resident of each 
State, or to $225 million (from $150 million) if greater. The 
provision is effective beginning in calendar year 1999.

Estate tax, small business and farmer tax relief provisions

    Acceleration of increased exemption from estate and gift 
tax.--The bill accelerates the scheduled increases in the 
applicable exemption amount so that the exemption equivalent 
will be $1,000,000 for decedents dying and gifts made after 
December 31, 1998.
    Increase deduction for health insurance expenses of self-
employed individuals.--The bill increases the deduction for 
health insurance of self-employed individuals to 100 percent 
for taxable years beginning in 1999 and thereafter.
    Accelerate increase in expensing for small business.--The 
bill increases the maximum dollar amount that may be deducted 
under Code section 179 to $25,000 for taxable years beginning 
in 1999 and thereafter, without the present-law phase-in rule.
    Permanent extension of income averaging for farmers.--The 
bill makes permanent income averaging for farmers.
    Extend the net operating loss (NOL) carryback period for 
farmers.--The bill allows NOLs attributable to a farming 
business to be carried back five years, whether or not incurred 
in a Presidentially declared disaster area. The carryforward 
period will remain at 20 years. A taxpayer may elect to not 
apply the five-year carryback period. The NOL rule attributable 
to a farming business will be coordinated with the other NOL 
rules. The provision is effective for NOLs taxable years 
beginning after December 31, 1997.
    Production flexibility contract payments.--Under the bill, 
the option added by the Emergency Farm Financial Relief Act of 
1998 to accelerate certain production flexibility payments is 
disregarded in determining the taxable year in which such 
payments must be included in income. The provision is effective 
for Federal Agriculture Improvement and Reform Act of 1996 
payments for fiscal year 1999.
    Designation of 20 ``renewal communities.''--The bill 
authorizes the designation of 20 ``renewal communities'' within 
which special tax incentives will be available. The tax 
benefits available in ``renewal communities'' generally will be 
effective for the seven-year period beginning January 1, 2000, 
and ending December 31, 2006.

Extension of expiring provisions

    Extension of research tax credit.--The research tax credit 
is extended for the period July 1, 1998, through February 29, 
2000. In addition, the credit rate applicable under the 
alternative incremental credit will be increased by one 
percentage point per step, that is from 1.65 percent to 2.65 
percent when a taxpayer's current-year research expenses exceed 
a base amount of 1 percent but do not exceed a base amount of 
1.5 percent; from 2.2 percent to 3.2 percent when a taxpayer's 
current-year research expenses exceed a base amount of 1.5 
percent but do not exceed a base amount of 2 percent; and from 
2.75 percent to 3.75 percent when a taxpayer's current-year 
research expenses exceed a base amount of 2 percent.
    Taxpayers will be permitted to elect the alternative 
incremental research credit regime under Code 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. Extension of the research credit is effective 
for qualified research expenditures paid or incurred during the 
period July 1, 1998, through February 29, 2000. The increase in 
the credit rate under the alternative incremental credit is 
effective for taxable years beginning after June 30, 1998.
    Extension of work opportunity tax credit.--The bill extends 
the work opportunity tax credit through February 29, 2000. The 
provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after July 1, 1998, and before March 1, 2000.
    Extension of the welfare-to-work tax credit.--The bill 
extends through February 29, 2000, the welfare-to-work tax 
credit for wages paid or incurred to a qualified individual. 
The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after May 1, 1999, and before March 1, 2000.
    Extend the deduction provided for contributions of 
appreciated stock to private foundations.--The bill extends 
permanently the special rule contained in Code section 
170(e)(5). The provision is effective for contributions of 
qualified appreciated stock to private foundations made on or 
after July 1, 1998.
    Public inspection of private foundation annual returns.--
Under the bill, private foundations will be subject to the 
public inspection requirements that currently apply to all 
other tax-exempt organizations that file annual information 
returns. Private foundations will no longer be subject to the 
publication requirements of Code section 6104(d). The public 
inspection requirements apply to requests made no earlier than 
60 days after the Treasury Department publishes regulations 
defining when documents are widely available or where a request 
is a part of a harassment campaign, but in any event not before 
December 31, 1998.
    Exceptions under subpart F for certain active financing 
income.--The bill modifies the present-law temporary exceptions 
from subpart F for income that is derived in the active conduct 
of a banking, financing, insurance, or similar business. These 
exceptions (as modified) are applicable only for taxable years 
beginning in 1999.
    With respect to income derived in the active conduct of a 
banking, financing, or similar business, the provision differs 
from the present-law temporary exceptions in the following 
significant respects. First, the provision requires a 
Controlled Foreign Corporation (``CFC'') to conduct substantial 
activity with respect to its business in order to qualify for 
the exceptions. Second, the provision adds certain nexus 
requirements which would require that income which is derived 
by a CFC or a Qualified Business Unit (``QBU'') from 
transactions with customers would be eligible for the 
exceptions if, among other things, substantially all of the 
activities in connection with such transactions are conducted 
directly by the CFC or QBU in its home country, and such income 
is treated as earned by the CFC or QBU in its home country for 
purposes of such country's tax laws. Third, the provision 
modifies the tests for determining whether a CFC is 
predominantly engaged in the active conduct of a banking, 
financing, or similar business, including modifications for 
income derived from a lending or finance business. Fourth, the 
provision extends the exceptions to income derived from certain 
cross-border transactions, provided that certain requirements 
are met. Fifth, the determination of where a customer is 
treated as located will be made under rules prescribed by the 
Secretary of the Treasury. Finally, the look-through rule that 
was included in the present-law provision for purposes of 
determining the income eligible for the exceptions will be 
eliminated.
    In the case of insurance, the provision differs from 
present law in the following significant respects. In addition 
to the exception for certain income of a qualifying insurance 
company with respect to risks located within the CFC's country 
of creation or organization that is provided under present law, 
the provision will provide additional exceptions. First, the 
provision provides temporary exceptions from insurance income 
and from foreign personal holding company income for certain 
income of a qualifying branch of a qualifying insurance company 
with respect to risks located within the home country of the 
branch, provided certain requirements are met under each of the 
exceptions. Further, the provision adds additional temporary 
exceptions from insurance income and from foreign personal 
holding company income for certain income of certain CFCs or 
branches with respect to risks located in any country other 
than the United States, provided that requirements for these 
exceptions are met. The provision applies only to taxable years 
of foreign corporations beginning in 1999, and to taxable years 
of U.S. shareholders with or within which such taxable years of 
foreign corporations end.
    Extension of the generalized system of preferences 
(``GSP'').--The bill reauthorizes the GSP trade program through 
February 29, 2000. Refunds will be authorized, upon request of 
the importer, for duties paid between July 1, 1998, and the 
date of enactment of the bill. The provision is effective for 
duties paid on or after July 1, 1998, and before March 1, 2000.

Revenue offset provision

    Treatment of certain deductible liquidating distributions 
of regulated investment companies (``RICs'') and real estate 
investment trusts (``REITs'').--Under the bill, any amount 
which a liquidating RIC or REIT may take as a deduction for 
dividends paid with respect to an otherwise tax-free 
liquidating distribution to an 80-percent corporate owner will 
be includible in the income of the recipient corporation. The 
includible amount will be treated as a dividend received from 
the RIC or REIT. The liquidating corporation will be able to 
designate the amount treated as a dividend, as a capital gain 
dividend or, in the case of a RIC, a dividend eligible for the 
70-percent dividends received deduction, to the extent provided 
by the RIC or REIT provisions of the Code.
    The bill does not otherwise change the tax treatment of the 
distribution to the parent corporation or to the RIC or REIT. 
Thus, for example, the liquidating corporation would not 
recognize gain (if any) on the liquidating distribution and the 
recipient corporation will hold the assets at a carryover 
basis. The bill is effective for distributions on or after May 
22, 1998, regardless of when the plan of liquidation was 
adopted. No inference is intended regarding the treatment of 
such transactions under present law.

Tax technical corrections provisions

    The bill makes necessary technical corrections to recent 
tax legislation, including the Internal Revenue Service 
Restructuring and Reform Act of 1998 (``1998 Act''), the 
Taxpayer Relief Act of 1997 (``1997 Act''), and other tax 
legislation.

Social Security provisions

    Increases in the Social Security earnings limit for 
individuals who have attained retirement age.--The bill 
increases the Social Security earnings limit for those between 
full retirement age (currently age 65) and age 70 in calendar 
years 1999-2008, as follows:

        Year                                              Earnings limit
1999..........................................................   $17,000
2000..........................................................    18,500
2001..........................................................    26,000
2002..........................................................    30,000
2003..........................................................    31,300
2004..........................................................    34,000
2005..........................................................    35,400
2006..........................................................    36,800
2007..........................................................    38,350
2008..........................................................    39,750

    Senior citizens between full retirement age (currently age 
65) and 70 who earn over the given earnings limit for the year 
would continue to lose $1 in benefits for every $3 earned over 
the limit. After 2008, the annual exempt amounts will be 
indexed to growth in average wages. The provision is effective 
for the taxable years ending after 1998.
    Recomputations of benefits after normal retirement age.--
Under the bill, recomputation of benefits resulting from 
earnings in the year after a worker reaches normal retirement 
age (currently age 65) and later will be reflected in the 
recipient's benefit check, effective with the January of the 
second year after the year of the earnings, one year later than 
under current law. An exception is provided for recipients who 
have one or more ``zero'' years of earnings in their wage 
averaging computation. Earnings continue to be credited as 
under present law for purposes of establishing entitlement. The 
provision is effective for earnings beginning in 1998.

                 B. Background and Need for Legislation

    As the Congress has moved to balance the Federal budget, 
the Congressional Budget Office (``CBO'') has recently 
estimated that the economy is projected to produce a $1.6 
trillion budget surplus for fiscal years 1998-2008. The 
Committee has determined that a modest portion (about 10 
percent) should be returned to the taxpayers to reduce their 
Federal tax burden, which is currently (CBO's fiscal year 1998 
estimate) at a record peacetime 20.5 percent of Gross Domestic 
Product. The goal of the Committee is to provide needed tax 
relief while preserving 90 percent of the projected Federal 
budget surplus until Social Security is reformed.
    The bill will provide a net revenue reduction of $80,074 
million in fiscal years 1999-2003. (See Part IV.A. of this 
report for detailed estimates of the budget effects of the 
bill.) In a separately reported bill (H.R. 4578), the Committee 
approved the creation of a new Treasury Account, the ``Protect 
Social Security Account,'' into which will be deposited 90 
percent of the estimated unified budget surplus. Such payments 
are to reserve 90 percent of any budget surplus until a long-
term solution for the Social Security system is enacted. The 
tax reduction bill (H.R. 4579) will only involve about 10 
percent of the projected budget surplus and will allow 
families, farmers and small businesses to retain a portion of 
the overall Federal budget surplus rather than sending such 
projected surplus revenues to the Federal Government. This will 
prevent the bill's tax reduction amounts from being spent by 
the Federal Government.

                         C. Legislative History

    The bill, H.R. 4579, was introduced by Chairman Archer on 
September 16, 1998. The Committee marked up the bill on 
September 17, 1998, and approved the bill with the Chairman's 
amendment in the nature of a substitute by a roll call vote of 
23 yeas and 15 nays.

                      II. EXPLANATION OF THE BILL

          TITLE I. INDIVIDUAL AND FAMILY TAX RELIEF PROVISIONS

A. Marriage Penalty Tax Relief (sec. 101 of the bill and sec. 63 of the 
                                 Code)

                              Present Law

Marriage penalty

    A married couple generally is treated as one tax unit that 
must pay tax on the unit's total taxable income. Although 
married couples may elect to file separate returns, the rate 
schedules and provisions are structured so that filing separate 
returns usually results in a higher tax than filing joint 
returns. Other rate schedules apply to single persons and to 
single heads of household.
    A ``marriage penalty'' exists when the sum of the tax 
liabilities of two unmarried individuals filing their own tax 
returns (either single or head of household returns) is less 
than their tax liability under a joint return (if the two 
individuals were to marry). A ``marriage bonus'' exists when 
the sum of the tax liabilities of the individuals is greater 
than their combined tax liability under a joint return.
    While the size of any marriage penalty or bonus under 
present law depends upon the individuals' incomes, number of 
dependents, and itemized deductions, as a general rule married 
couples whose incomes are split more evenly than 70-30 suffer a 
marriage penalty. Married couples whose incomes are largely 
attributable to one spouse generally receive a marriage bonus.
    Under present law, the size of the standard deduction and 
the tax bracket breakpoints follow certain customary ratios 
across filing statuses. The standard deduction and tax bracket 
breakpoints for single filers are roughly 60 percent of those 
for joint filers. 1 With these ratios, unmarried 
individuals have standard deductions whose sum exceeds the 
standard deduction they would receive as a married couple 
filing a joint return. Thus, their taxable income as joint 
filers may exceed the sum of their taxable incomes as unmarried 
individuals.
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    \1\  This is not true for the 39.6-percent rate. The beginning 
point of this rate bracket is the same for all taxpayers regardless of 
filing status.
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Basic standard deduction

    Taxpayers who do not itemize deductions may choose the 
basic standard deduction (and additional standard deductions, 
if applicable), which is subtracted (along with the deduction 
for personal exemptions) from adjusted gross income (``AGI'') 
in arriving at taxable income. The size of the basic standard 
deduction varies according to filing status and is indexed for 
inflation. For 1999, the size of the basic standard deduction 
is projected to be as follows: 2
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    \2\  Joint Committee on Taxation staff projections.

                                                          Basic standard
        Filing status                                          deduction
Married, joint return.........................................    $7,200
Head of household return......................................     6,250
Single return.................................................     4,300
Married, separate return......................................     3,600

    For 1999, the basic standard deduction for joint returns is 
projected to be 1.675 times the basic standard deduction for 
single returns.

Additional standard deductions

    An additional standard deduction is allowed for a taxpayer 
who is either elderly (age 65 or over) or blind. Two additional 
standard deductions are allowed for a taxpayer who is elderly 
(age 65 or over) and blind. In the case of a joint return, 
these rules apply to both the husband and the wife. For 
example, if both taxpayers filing a joint return are both 
elderly and blind then they are entitled to four additional 
standard deductions. For 1999, the amount of each additional 
standard deduction is projected to be $800 for married 
individuals and $1,050 for singles and heads of households. 
3 These amounts are indexed for inflation.
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    \3\  Joint Committee on Taxation staff projections.
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                           Reasons for Change

    The Committee is concerned about the inequity of the 
marriage penalty created by the present-law income tax. One 
primary concern of the Committee is that the marriage penalty 
may act as a potential disincentive to work for certain married 
couples. Also, the Committee believes that relief from the 
marriage penalty is needed because the marriage penalty may 
undermine respect for the family and may discourage family 
formation. Any attempt to address the marriage penalty involves 
the balancing of several competing principles, including equal 
tax treatment of married couples with equal incomes and the 
determination of equitable relative tax burdens of single 
individuals and married couples with equal incomes. The 
Committee believes that an increase in the standard deduction 
for married couples filing a joint return is a responsible 
first step towards removing the marriage penalty. It provides 
tax relief in 1999 to approximately 48 million married 
individuals, including more than 10 million senior citizens. 
Further, approximately six million individuals who currently 
itemize their deductions would realize the simplification 
benefits of using the basic standard deduction. Finally, the 
modification to the additional standard deduction amounts 
eliminates the disparate tax treatment under present law for 
the aged and blind based solely upon filing status.

                        Explanation of Provision

    The bill increases the basic standard deduction for a 
married couple filing a joint return to twice the basic 
standard deduction for a single return in each taxable year 
beginning after December 31, 1998. For example, the basic 
standard deduction for a married couple filing a joint return 
is increased from a projected $7,200 to $8,600 in 1999. The 
basic standard deduction for a married taxpayer filing 
separately is increased so that it equals the basic standard 
deduction for singles and equals one-half of the basic standard 
deduction for a married couple filing jointly for each taxable 
year beginning after December 31, 1998 (e.g., $4,300 in 1999). 
The basic standard deduction for a head of household is 
unchanged.
    Also, the bill increases the additional standard deduction 
for a married individual who is elderly or blind from $800 to 
$1,050 (the same amount allowed for singles and heads of 
households). This amount is indexed for inflation. The other 
rules relating to the additional standard deduction are not 
changed.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1998.

 B. Partial Exclusion for Interest and Dividends (sec. 102 of the bill 
                     and new sec. 116 of the Code)

                              Present Law

    The Code states that, except as otherwise provided, ``gross 
income means all income from whatever source derived'' (sec. 
61). Because there is no exclusion for interest and dividends, 
interest and dividends received by individuals are includible 
in income and subject to tax.

                           Reasons for Change

    The Committee believes that an exclusion from income for 
interest and dividends will provide an incentive for savings 
and will simplify the tax returns of a number of individuals. 
Approximately 68 million tax returns for 1999 will reflect tax 
savings as a result of this provision; out of that number, 
approximately 32 million tax returns will reflect a total 
exclusion from tax for all interest and dividends received. 
4
---------------------------------------------------------------------------
    \4\  Joint Committee on Taxation staff projections.
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                        Explanation of Provision

    The bill provides an exclusion from income for individuals 
for up to $200 ($400 for married couples filing jointly) of 
combined interest and dividends (other than capital gain 
dividends from RICs and REITs, dividends from tax-exempt 
corporations, and dividends received from an employee stock 
ownership plan) received in a taxable year. 5
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    \5\  From 1954 until 1986, the Code (sec. 116) contained an 
exclusion from income (in varying amounts) for dividends. For 1981 
only, that provision was also extended to interest; this provision is 
generally parallel to that provision. The exclusion for dividends was 
repealed by the Tax Reform Act of 1986.
---------------------------------------------------------------------------
    The Committee encourages the IRS to implement this 
provision so as to simplify the process of completing tax forms 
to the greatest extent practicable. For example, the Committee 
encourages the IRS to consider raising the administratively-
established dollar thresholds for completing Schedule B or for 
being able to use the Form 1040EZ.
    In determining eligibility for the earned income credit 
(``EIC'), any interest or dividends excluded from gross income 
under this provision is excluded for purposes of the EIC 
disqualified income test.
    The fact that dividends may be excluded from income 
pursuant to this provision does not affect the computation of 
the foreign tax credit.
    The exclusion under this provision is in addition to, and 
is to be applied after, the exclusion for educational savings 
bond interest (sec. 135). In applying those provisions of the 
Code (such as secs. 86, 219, 221, and 469) that determine 
modified adjusted gross income without regard to section 135, 
it is intended that the exclusion under this provision be 
computed without regard to the savings bond interest exclusion. 
Thus, for example, if an individual has $100 of interest from a 
qualified U.S. savings bond, and $150 of other interest, in 
determining modified adjusted gross income for purposes of 
section 219(g)(3), the individual will treat $200 as excluded 
from income under section 116, notwithstanding that the amount 
of the actual exclusion under section 116 (after applying 
section 135) is less than $200.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1998.

C. Treatment of Personal Credits Under the Individual Minimum Tax (sec. 
                103 of the bill and sec. 26 of the Code)

                              present law

    Present law imposes a minimum tax (``AMT'') on an 
individual to the extent the individual's tentative minimum tax 
exceeds his or her regular income tax liability. The tentative 
minimum tax is computed at rates of (1) 26 percent on the first 
$175,000 ($87,500 in the case of a married individual filing a 
separate return) of alternative minimum taxable income 
(``AMTI'') in excess of a phased-out exemption amount and (2) 
28 percent on the remaining AMTI. The maximum tax rates on net 
capital gain are the same as under the regular tax. AMTI is the 
individual's taxable income adjusted to take account of 
specified preferences and adjustments. The exemption amounts 
are: (1) $45,000 in the case of married individuals filing a 
joint return and surviving spouses; (2) $33,750 in the case of 
other unmarried individuals; and (3) $22,500 in the case of 
married individuals filing a separate return, estates and 
trusts. The exemption amounts are phased out by an amount equal 
to 25 percent of the amount by which the individual's AMTI 
exceeds (1) $150,000 in the case of married individuals filing 
a joint return and surviving spouses, (2) $112,500 in the case 
of other unmarried individuals, and (3) $75,000 in the case of 
married individuals filing separate returns or an estate or a 
trust. These amounts are not indexed for inflation.
    Present law provides for certain nonrefundable personal tax 
credits (i.e., the dependent care credit, the credit for the 
elderly and disabled, the adoption credit, the child tax 
credit, the credit for interest on certain home mortgages, the 
HOPE Scholarship and Lifetime Learning credits, and the D.C. 
homebuyer's credit). Generally, these credits are reduced or 
eliminated for individuals with adjusted gross incomes above 
certain specified amounts, and may not exceed the amount by 
which the individual's regular income tax liability exceeds the 
individual's tentative minimum tax (determined without regard 
to the AMT foreign tax credit). For families with three or more 
qualifying children, an additional child credit is provided 
which may offset the liability for social security taxes to the 
extent that tax liability exceeds the amount of the earned 
income credit. The additional child credit is reduced by the 
amount of the individual's minimum tax liability. A similar 
rule applies to the earned income credit.

                           reasons for change

    The individual minimum tax was enacted by Congress to 
ensure that no taxpayer with substantial economic income can 
avoid significant tax liability by using exclusions, 
deductions, and credits.6 The Committee believes 
that allowing middle-income families to use the nonrefundable 
personal tax credits to offset the minimum tax will not 
undermine the policy of the minimum tax, and will promote the 
important social policies underlying each of the credits.
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    \6\ See H. Rept 99-426, p. 305-6 and S. Rept. 99-313, p. 518.
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    Allowing these credits to offset the minimum tax will 
result in significant simplification. Substantially fewer 
taxpayers will need to complete the minimum tax form (Form 
6251), and worksheets accompanying the credits will be greatly 
simplified.

                        explanation of provision

    The provision allows the nonrefundable personal tax credits 
to offset both an individual's regular income tax liability and 
the AMT.
    The provision also repeals the rule that reduces the 
additional child credit and the earned income credit by the 
amount of an individual's AMT.

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 1997.
    For taxable years beginning in 1998, the nonrefundable 
personal credits may offset an individual's regular tax in 
full, but not an individual's AMT.

 D. Increase Deduction for Health Insurance Expenses of Self-Employed 
     Individuals (sec. 104 of the bill and sec. 162(l) of the Code)

                              present law

    Under present law, self-employed individuals are entitled 
to deduct a portion of the amount paid for health insurance, 
including (within certain limits) long-term care insurance, for 
the self-employed individual and the individual's spouse and 
dependents. 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.7 The deduction is available in 
the case of self insurance as well as commercial insurance. The 
self-insured plan must in fact be insurance (e.g., there must 
be appropriate risk shifting) and not merely a reimbursement 
arrangement.
---------------------------------------------------------------------------
    \7\ This rule is applied separately to long-term care insurance and 
other health insurance.
---------------------------------------------------------------------------
    The portion of health insurance expenses of self-employed 
individuals that is deductible is 45 percent for taxable years 
beginning in 1998 and 1999, 50 percent for taxable years 
beginning in 2000 and 2001, 60 percent for taxable years 
beginning in 2002, 80 percent for taxable years beginning in 
2003, 2004, and 2005, 90 percent for taxable years beginning in 
2006, and 100 percent for taxable years beginning in 2007 and 
thereafter.
    Under present law, employees can exclude from income 100 
percent of employer-provided health insurance.

                           reasons for change

    The Committee believes it appropriate to increase the 
deduction for health insurance expenses of self-employed 
individuals in order to reduce the disparity of treatment 
between such expenses and employer-provided health insurance 
and to help make health insurance more affordable for self-
employed individuals.

                        explanation of provision

    The provision increases the deduction for health insurance 
of self-employed individuals to 100 percent for taxable years 
beginning in 1999 and thereafter.

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 1998.

 E. Exclusion of Gain on the Sale of a Principal Residence by a Member 
 of the Uniformed Service or the Foreign Service of the United States 
            (sec. 105 of the bill and sec. 121 of the Code)

                              present law

    Under present law, an individual taxpayer may 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. To 
be eligible for the exclusion, the taxpayer must have owned and 
used the residence 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, to the extent provided under 
regulations, unforeseen circumstances is able to exclude an 
amount equal to the fraction of the $250,000 ($500,000 if 
married filing a joint return) which is equal to the fraction 
of the two years that the ownership and use requirements are 
met. There are no special rules relating to members of the 
uniformed services or the Foreign Service of the United States.

                           reasons for change

    The Committee believes that members of the uniformed 
services and the Foreign Service of the United States who would 
otherwise qualify for the exclusion of the gain on the sale of 
a principal residence will not be deprived the exclusion 
because of service to their country.

                        explanation of provision

    Under the bill, the 5-year test period for ownership and 
use is suspended during certain absences due to service in the 
uniformed services or the Foreign Service of the United States. 
The uniform services include: (1) the armed forces (the Army, 
Navy, Air Force, Marine Corp, and Coast Guard); (2) the 
commissioned corps of the National Oceanic and Atmospheric 
Administration; and (3) the commissioned corps of the Public 
Health Service. Specifically, the five-year period ending on 
the date of the sale or exchange of a principal residence does 
not include any periods during which the taxpayer or the 
taxpayer's spouse is on qualified official extended duty as a 
member of the uniformed services or the Foreign Service of the 
United States. Qualified official extended duty is any period 
of extended duty by a member of the uniformed services or the 
Foreign Service of the United States while serving at a place 
of duty at least 50 miles away from the taxpayer's principal 
residence or under orders compelling residence in Government 
furnished quarters. Extended duty is defined as 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.

                             effective date

    The provision is effective for sales or exchanges of 
principal residences after the date of enactment.

 F. Acceleration of Increased Exemption From Estate and Gift Tax (sec. 
               106 of the bill and sec. 2010 of the Code)

                              present law

    Increase in exemption from estate and gift tax.--Exemptions 
from the Federal estate and gift tax are provided by allowing 
reduction of the estate or gift tax by a credit, called the 
unified credit. The 1997 Act increased the present-law unified 
credit beginning in 1998, from an effective exemption (called 
the ``applicable exemption amount'') of $600,000 in 1997 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 
applicable exemption amount is not indexed for inflation.
    Deduction for interests in certain family-owned business.--
In addition, the 1997 Act provided a limited deduction for 
Federal estate tax purposes for certain family-owned business 
interests. The deduction for family-owned business interests 
may be taken only to the extent that the deduction for family-
owned business interests, plus the applicable exemption amount, 
does not exceed $1.3 million.

                           reasons for change

    The Committee believes that increasing the amount of the 
estate and gift tax unified credit encourages saving, promotes 
capital formation and entrepreneurial activity, and helps 
preserve existing family-owned farms and businesses. The 
Committee believes that acceleration of the scheduled increases 
in the unified credit will accelerate these benefits and 
provide more uniform levels of taxation among decedents 
whenever they die.

                        explanation of provision

    The bill accelerates the scheduled increase in the 
applicable exemption amount to $1,000,000 for decedents dying 
and gifts made after 1998. The bill retains the $1.3 million 
limitation on the combined applicable exclusion amount and the 
deduction for family-held business interests and, thus, the 
maximum deduction for family-held business interests under the 
bill is $300,000.

                             effective date

    The provision is effective for decedents dying, and gifts 
made, after December 31, 1998.

                        G. Education Provisions

1. Permit private higher education institutions to establish qualified 
        prepaid tuition programs (sec. 111 of the bill and sec. 529 of 
        the Code)

                              present law

    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), as well as certain 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.8
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    \8\ Specifically, section 529(c)(3)(A) provides that any 
distribution under a qualified State tuition program shall be 
includible in the gross income of the distributee in the same manner as 
provided under present-law section 72 to the extent not excluded from 
gross income under any other provision of the Code.
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                           reasons for change

    To preserve a level playing field, the Committee believes 
that private institutions of higher education should be allowed 
to establish and maintain qualified tuition programs on the 
same basis that States may do so under present law.

                        explanation of provision

    Under the bill, the definition of a ``qualified tuition 
program'' is expanded to include any program established and 
maintained by one or more eligible educational institutions 
(which may be private institutions that are not State-owned) 
that satisfies the requirements under present-law section 529 
(other than the State-ownership rule).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1998.

2. Modification of arbitrage rebate rules applicable to public school 
        construction bonds (sec. 112 of the bill and sec. 148 of the 
        Code)

                              Present Law

    Interest on bonds issued by States and local governments is 
excluded from income if the proceeds of the bonds are used to 
finance activities conducted and paid for by the governmental 
units (Code sec. 103). Interest on bonds issued by these 
governmental units to finance activities carried out and paid 
for by private persons (``private activity bonds'') is taxable 
unless the activities are specified in the Internal Revenue 
Code. Private activity bonds on which interest may be tax-
exempt include bonds for privately operated transportation 
facilities (airports, docks and wharves, mass transit, and high 
speed rail facilities), privately owned and/or provided 
municipal services (water, sewer, solid waste disposal, and 
certain electric and heating facilities), economic development 
(small manufacturing facilities and redevelopment in 
economically depressed areas), and certain social programs 
(low-income rental housing, qualified mortgage bonds, student 
loan bonds, and exempt activities of charitable organizations 
described in Code sec. 501(c)(3)).
    Subject to limited exceptions, issuers of tax-exempt bonds 
are not permitted to earn and retain profits on investment of 
bond proceeds in a manner unrelated to the governmental purpose 
of the borrowing (the ``arbitrage restrictions''). Profits are 
defined as earnings in excess of the interest paid on the 
bonds. The arbitrage restrictions require profits on these 
nonpurpose investments to be rebated to the Federal Government 
at five-year intervals, with the final payment being due 
following redemption of the bonds.
    Present law includes several exceptions to the requirement 
that arbitrage profits be rebated to the Federal Government:
    (1) If all proceeds of an issue of tax-exempt bonds are 
spent for the governmental purpose of the borrowing within six 
months after the bonds are issued, no rebate is required for 
any profits that are earned (e.g., during the six-month period 
or afterwards on funds such as certain bona fide debt service 
funds). For governmental bonds, the 100-percent expenditure 
requirement for the first six months is reduced to 95 percent, 
if the remaining five percent of the proceeds is spent within 
one year after the bonds are issued.
    (2) In the case of tax and revenue anticipation notes, 
which are short-term bonds issued to finance governmental cash 
flow deficits, no rebate is required if the amount of the 
borrowing does not exceed amounts determined by reference to 
the issuing government's projected cash flow shortfall.
    (3) In the case of governmental bonds and certain private 
activity bonds issued to finance the construction of property 
owned by a governmental unit or a section 501(c)(3) 
organization, no rebate is required (except profits on amounts 
invested in reserve funds) if proceeds are spent in a manner 
satisfying a 24-month ``spend-down'' exception (the 
``construction bond exception''). The construction bond 
exception requires expenditure of minimum amounts during each 
six-month period of the 24-month period (10 percent in the 
first six months; 45 percent in the first 12 months; 75 percent 
in the first 18 months; and 100 percent (less retainage not 
exceeding five percent) by the end of the 24 month period). 
This exception further allows issuers to elect to pay a fixed 
penalty in lieu of calculating arbitrage profits and rebating 
them to the Federal Government if any of the expenditure 
targets are not met.
    (4) In the case of governmental bonds issued by small 
governments, no rebate is required. ``Small'' governments are 
defined as governmental units with general taxing powers that, 
along with any subordinate units, issue no more than $5 million 
in governmental bonds during a calendar year. In calculating 
the $5 million issuance limit, up to $5 million of bonds to 
finance public school construction may be excluded, effectively 
increasing the issuance limit to $10 million in the case of 
small governments engaging in public school construction.

                           Reasons for Change

    The Committee is aware that a great need exists for 
construction and renovation of public schools if American 
educational excellence is to be maintained. The Committee 
determined that a more liberal spend-down exception for public 
school construction bonds is appropriate to allow issuers 
greater flexibility in the timing of bond issuance for this 
limited purpose to meet actual construction needs.

                        Explanation of Provision

    The bill liberalizes the permitted expenditure period of 
the present-law construction bond exception in the case of 
bonds issued to finance the construction of public schools. 
Amounts spent for the acquisition and improvement of land that 
is functionally related and subordinate to a school the 
construction of which is financed with proceeds of the bond 
issue are treated as spent for construction. Under the bill, no 
rebate is required on the construction proceeds of these public 
school construction bonds if the proceeds (less presently 
allowed retainage 9) are spent within four years 
after the bonds are issued, and the following intermediate 
spending targets are satisfied:
---------------------------------------------------------------------------
    \9\ Retainage amounts, limited to the present-law five percent 
amount, are required to be spent within five years after the bonds are 
issued.
---------------------------------------------------------------------------
          (1) 10 percent or more of the construction proceeds 
        is spent within one year after the bonds are issued;
          (2) 30 percent or more of the construction proceeds 
        is spent within two years after the bonds are issued; 
        and
          (3) 50 percent or more of the construction proceeds 
        is spent within three years after the bonds are issued.
    As under the present construction bond exception, issuers 
may elect to pay fixed penalties in lieu of calculating profits 
and rebating them to the Federal Government if they fail to 
satisfy the liberalized expenditure requirements. Further, as 
under the present-law exception, profits earned on reasonably 
required reserve or replacement funds or on proceeds used other 
than for construction remain subject to the rebate requirement.

                             Effective Date

    The provision applies to bonds issued after December 31, 
1998.

                     H. Social Security Provisions

1. Increases in the Social Security earnings limit for individuals who 
        have attained retirement age (sec. 121 of the bill and sec. 203 
        of the Social Security Act)

                              Present law

    Senior citizens age 70 and older receive full Social 
Security benefits regardless of the amount of earnings they 
have from wages or self employment. Those between the full 
retirement age (currently age 65) and age 70 receive full 
benefits only if their earnings are lower than an earnings 
limit amount determined by law. In 1998, the limit for those 
age 65 to 69 is $14,500. The limit is gradually raised to 
$30,000 by the year 2002 as shown in the table below. After 
2002, the annual exempt amounts are indexed to growth in 
average wages.

                                                             Present law
        Year                                              earnings limit
1998..........................................................   $14,500
1999..........................................................    15,500
2000..........................................................    17,000
2001..........................................................    25,000
2002..........................................................    30,000
2003..........................................................    31,231
2004..........................................................    32,463
2005..........................................................    33,806
2006..........................................................    35,149
2007..........................................................    36,604
2008..........................................................    37,948

    Senior citizens between the age of full retirement 
(currently age 65) and 70 who earn more than the earnings limit 
lose $1 in benefits for every $3 in wages or self-employment 
income they earn over the limit.

                           Reason for Change

    Given the combined effects of Federal, State and local 
income taxes, Social Security payroll taxes, income taxes on 
benefits, and the earnings limit, senior citizens who earn even 
moderate amounts over the limit can be subjected to extremely 
high marginal tax rates. These rates are a severe disincentive 
to work and penalize retirees who often need to work out of 
economic need. Raising the earnings limit also would ease the 
administrative burdens of the Social Security Administration, 
which spends between $100 and $150 million a year to monitor 
and update the earnings limit. SSA estimates that on average 66 
percent of all overpayments, and 16 percent of all 
underpayments, were attributable to the earnings limit.

                        Explanation of Provision

    The bill increases the Social Security earnings limit for 
those between full retirement age (currently age 65) and age 70 
in calendar years 1999-2008, as follows:

                                                          Earnings limit
        Year                                              under the bill
1998..........................................................   $14,500
1999..........................................................    17,000
2000..........................................................    18,500
2001..........................................................    26,000
2002..........................................................    30,000
2003..........................................................    31,300
2004..........................................................    34,000
2005..........................................................    35,400
2006..........................................................    36,800
2007..........................................................    38,350
2008..........................................................    39,750

    Senior citizens between full retirement age (currently age 
65) and 70 who earn over the given earnings limit for the year 
would continue to lose $1 in benefits for every $3 earned over 
the limit. After 2008, the annual exempt amounts are indexed to 
growth in average wages.

                             Effective Date

    The provision is effective for the taxable years ending 
after 1998.

2. Recomputations of benefits after normal retirement age (sec. 122 of 
        the bill and sec. 215 of the Social Security Act)

                              Present law

    Social Security benefits are based on the average of an 
individual's ``high'' years of earnings. For workers born in 
1929 or later, 35 ``high'' years of earnings are averaged. For 
those born before 1929, the number of ``high'' years averaged 
is proportionately fewer (for example, for those born in 1919, 
25 ``high'' years are averaged).
    If a retiree continues to work after entitlement to 
benefits, his or her monthly benefit may be increased if the 
new yearly earnings are greater than one of the years used in 
the initial determination of benefits. Currently, 
recomputations of benefits are effective in the year 
immediately following the year of the earnings. However, 
because of the lag between when wages are earned and when they 
are reported and recomputations are processed, most 
recomputations are actually paid in a lump-sum payment near the 
end of the year that they are effective. Subsequently, the 
adjustment is reflected in the new regular monthly benefit 
amount.

                           Reason for Change

    Since earnings are not reported until well into the year 
following the year in which they are earned, there is no 
administrative lead time built into the process for SSA to 
adjust payments on a timely basis. The adjustments almost 
always have to be provided to beneficiaries through end-of-year 
lump-sum payments (and are sometimes delayed until the next 
year). As a result, the current recomputation process is labor 
intensive for SSA, and because most recipients do not expect 
these increases, many are confused by receipt of the lump-sum 
checks. Many of those affected by the delay in recomputation 
are among those likely to benefit from the proposed increases 
in the earnings limitation.
    Under the provision, SSA's ability to manage the 
recomputation process will be greatly enhanced by having ample 
lead time between the year of the earnings and the point at 
which they are reflected in benefit levels. The benefit check 
that the recipient relies on to meet regular monthly expenses 
will not be affected by delaying the recomputation.
    Beneficiaries who lack earnings in one or more of the 
``high'' years, and who are therefore most likely to have the 
lowest Social Security benefits, will receive retroactive 
recomputations and past-due benefits as under present law.

                        Explanation of Provision

    Recomputation of benefits resulting from earnings in the 
year after a worker reaches normal retirement age (currently 
age 65) and later will be reflected in the recipient's benefit 
check, effective with the January of the second year after the 
year of the earnings. An exception is provided for recipients 
who have one or more ``zero'' years of earnings in their wage 
averaging computation. Earnings will continue to be credited as 
under present law for purposes of establishing entitlement.

                             Effective Date

    The provision is effective for earnings beginning in 1998.

       TITLE II. SMALL BUSINESS AND FARMER TAX RELIEF PROVISIONS

 A. Accelerate Increase in Expensing for Small Businesses (sec. 201 of 
                   the bill and sec. 179 of the Code)

                              Present Law

    Present law provides that, in lieu of depreciation, a 
taxpayer with a sufficiently small amount of annual investment 
may elect to deduct up to $18,500 (for taxable years beginning 
in 1998) of the cost of qualifying property placed in service 
for the taxable year (sec. 179). In general, qualifying 
property is defined as depreciable tangible personal property 
that is purchased for use in the active conduct of a trade or 
business. The $18,500 amount is reduced (but not below zero) by 
the amount by which the cost of qualifying property placed in 
service during the taxable year exceeds $200,000. In addition, 
the amount eligible to be expensed for a taxable year may not 
exceed the taxable income for a taxable year that is derived 
from the active conduct of a trade or business (determined 
without regard to this provision). Any amount that is not 
allowed as a deduction because of the taxable income limitation 
may be carried forward to succeeding taxable years (subject to 
similar limitations).
    The $18,500 amount is increased to $25,000 for taxable 
years beginning in 2003 and thereafter. The increase is phased 
in as follows: for taxable years beginning in 1999, the amount 
is $19,000; for taxable years beginning in 2000, the amount is 
$20,000; for taxable years beginning in 2001 or 2002, the 
amount is $24,000; and for taxable years beginning in 2003 and 
thereafter, the amount is $25,000.

                           Reasons for Change

    The Committee believes that section 179 expensing provides 
two important benefits for small businesses (including small 
businesses that are farms). First, it lowers the cost of 
capital for tangible property used in a trade or business. 
Second, it eliminates depreciation recordkeeping requirements 
with respect to expensed property. In the Small Business Job 
Protection Act of 1996, the Congress increased the value of 
these benefits over a phase-in period ending in 2003. The 
Committee now believes that the value of the benefits should be 
increased for taxable years beginning in 1999 and thereafter, 
without a phase-in period, so that taxpayers may receive these 
benefits earlier.

                        Explanation of Provision

    The bill provides that the maximum dollar amount that may 
be deducted under section 179 is increased to $25,000 for 
taxable years beginning in 1999 and thereafter, without the 
present-law phase-in rule.
    The Treasury Department is requested to conduct a 
comprehensive study of recovery periods and depreciation 
methods under section 168 of the Code for purposes of the 
deduction for depreciation and to provide recommendations as to 
the determination of such periods and methods in a more 
rational manner.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1998.

                           B. Farm Provisions

1. Permanent extension of income averaging for farmers (sec. 211 of the 
        bill and sec. 1301 of the Code)

                              Present Law

    An individual engaged in a farming business may elect to 
compute his or her current year tax liability by averaging, 
over the prior three-year period, all or a portion of the 
taxable income that is attributable to the farming business.
    In general, an individual who makes the election (1) 
designates all or a portion of his or her taxable income 
attributable to any farming business from the current year as 
``elected farm income;'' 10 (2) allocates one-third 
of the elected farm income to each of the three prior taxable 
years; and (3) determines the current year section 1 tax 
liability by combining (a) his or her current year section 1 
tax liability excluding the elected farm income allocated to 
the three prior taxable years, plus (b) the increases in the 
section 1 tax liability for each of the three prior taxable 
years caused by including one-third of the elected farm income 
in each such year. Any allocation of elected farm income 
pursuant to the election applies for purposes of any election 
in a subsequent taxable year.
---------------------------------------------------------------------------
    \10\ The amount of elected farm income of a taxpayer for a taxable 
year may not exceed the taxable income attributable to any farming 
business for the year.
---------------------------------------------------------------------------
    The provision does not apply for employment tax purposes, 
or to an estate or a trust. The provision also does not apply 
for purposes of the alternative minimum tax. The provision is 
effective for taxable years beginning after December 31, 1997, 
and before January 1, 2001.

                           Reasons for Change

    Income from a farming business can fluctuate significantly 
from year to year due to circumstances beyond the farmer's 
control. Allowing farmers an election to average their income 
over a period of years mitigates the adverse tax consequences 
that could result from fluctuating income levels. The Committee 
believes that the election by farmers to average their income 
should be made permanent.

                        Explanation of Provision

    The bill permanently extends the income averaging provision 
for farmers.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2000.

2. Extend the net operating loss carryback period for farmers (sec. 212 
        of the bill and sec. 172 of the Code)

                              Present Law

    A net operating loss (``NOL'') is, generally, the amount by 
which business deductions of a taxpayer exceed business gross 
income. An NOL may be carried back two years and carried 
forward 20 years to offset taxable income in such years. A 
taxpayer may elect to forgo the carryback of an NOL. In the 
case of an NOL (1) arising from casualty or theft losses of 
individual taxpayers, or (2) attributable to Presidentially 
declared disasters for taxpayers engaged in a farming business 
or a small business, the NOL can be carried back three years. A 
farming business includes the trade or business of farming, as 
well as the trade or business of operating a nursery or sod 
farm, or the raising or harvesting of certain 
trees.11 Special rules apply to real estate 
investment trusts (no carrybacks), specified liability losses 
(10-year carryback), and excess interest losses (no 
carrybacks).
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    \11\ For this purpose, the term ``farming business'' is defined as 
in sec. 263A(e)(4).
---------------------------------------------------------------------------
    A carry back of an NOL will result in the refund of Federal 
income tax for the carryback year. A carryforward of an NOL 
will reduce Federal income tax for the carryforward year.

                           Reasons for Change

    The NOL carryback and carryforward rules allow taxpayers to 
smooth out swings in business income (and Federal income taxes 
thereon) that result from business cycle fluctuations and 
unexpected financial losses. Farmers are particularly 
vulnerable to such fluctuations and losses. The Committee 
believes that farmers who suffer losses from their farming 
business should have an extended period in which to use such 
losses to offset taxable income in prior years.

                        Explanation of Provision

    The bill provides a special five-year carryback period for 
a farming loss, regardless of whether the loss was incurred in 
a Presidentially declared disaster area. The carryforward 
period remains at 20 years. A ``farming loss'' is defined as 
the amount of any net operating loss attributable to the income 
and deductions of a farming business (as defined in section 
263A(e)(4)). A farming loss cannot exceed the taxpayer's NOL 
for the taxable year. In calculating the amount of a taxpayer's 
NOL carrybacks, the portion of the NOL that is attributable to 
a farming loss is treated as a separate NOL and is taken into 
account after the remaining portion of the NOL for the taxable 
year.
    A taxpayer can elect to forgo the five-year carryback 
period for a farming loss. The election to forgo the five-year 
carryback period is made in the manner prescribed by the 
Secretary of the Treasury and must be made by the due date of 
the return (including extensions)for the year of the loss. The 
election is irrevocable. If a taxpayer elects to forgo the five-year 
carryback period, then the farming losses are subject to the rules that 
otherwise would have applied under section 172 absent the five-year 
rule. The three-year carryback period continues to apply to an NOL 
incurred in a Presidentially declared disaster area if such NOL is not 
eligible for the five-year carryback period.

                             Effective Date

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

3. Production flexibility contract payments (sec. 213 of the bill)

                              Present law

    A taxpayer is generally required to include an item in 
income no later than the time of its actual or constructive 
receipt, unless such amount is properly accounted for as of a 
different period under the taxpayer's method of accounting. If 
a taxpayer has an unrestricted right to demand the payment of 
an amount, the taxpayer is in constructive receipt of that 
amount whether or not the taxpayer makes the demand and 
actually receives the payment.
    The Federal Agriculture Improvement and Reform Act of 1996 
provides for certain annual payments to be made to certain 
farmers. These payments are made at specified times during the 
fiscal year. The Emergency Farm Financial Relief Act of 1998 
provides that all payments for fiscal year 1999 are to be paid 
at such time or times during fiscal year 1999 as the recipient 
may specify. Amounts that would otherwise be paid after 
December 31, 1998 can be specified for payment in calendar year 
1998. This potentially results in the constructive receipt (and 
thus required inclusion in taxable income) of such amounts in 
calendar year 1998, whether or not the amounts are actually 
received or the right to their receipt is fixed.

                           Reasons for Change

    The Committee believes that it is inappropriate to 
accelerate the tax on Federal Agriculture Improvement and 
Reform Act of 1996 payments where the taxpayer does not 
accelerate the actual receipt of such payments.

                        Explanation of Provision

    The option added by the Emergency Farm Financial Relief Act 
of 1998 to accelerate certain payments under the Federal 
Agriculture Improvement and Reform Act of 1996 that are due in 
fiscal 1999 is disregarded in determining the taxable year in 
which such payments must be included in income.

                             Effective Date

    The provision is effective for Federal Agriculture 
Improvement and Reform Act of 1996 payments for fiscal year 
1999.

 C. Increase in Volume Cap on Private Activity Bonds (sec. 221 of the 
                     bill and sec. 146 of the Code)

                              Present Law

    Interest on bonds issued by States and local governments is 
excluded from income if the proceeds of the bonds are used to 
finance activities conducted and paid for by the governmental 
units (Code sec. 103). Interest on bonds issued by these 
governmental units to finance activities carried out and paid 
for by private persons (``private activity bonds'') is taxable 
unless the activities are specified in the Internal Revenue 
Code. Private activity bonds on which interest may be tax-
exempt include bonds for privately operated transportation 
facilities (airports, docks and wharves, mass transit, and 
high-speed rail facilities), privately owned and/or provided 
municipal services (water, sewer, solid waste disposal, and 
certain electric and heating facilities), economic development 
(small manufacturing facilities and redevelopment in 
economically depressed areas), and certain social programs 
(low-income rental housing, qualified mortgage bonds, student 
loan bonds, and exempt activities of charitable organizations 
described in Code sec. 501(c)(3)).
    The volume of tax-exempt private activity bonds that States 
and local governments may issue for most of these purposes in 
each calendar year is limited by State-wide volume limits. The 
current annual volume limits are $50 per resident of the State 
or $150 million if greater. The volume limits do not apply to 
private activity bonds to finance airports, docks and wharves, 
certain governmentally owned, but privately operated solid 
waste disposal facilities, certain high-speed rail facilities, 
and to certain types of private activity tax-exempt bonds that 
are subject to other limits on their volume (qualified 
veterans' mortgage bonds and certain ``new'' empowerment zone 
and enterprise community bonds).

                           Reasons for Change

    The Committee determined that an adjustment to the annual 
State private activity bond volume limits to levels comparable 
to the dollar limits that first applied after enactment of the 
Tax Reform Act of 1986 is appropriate. Such an adjustment will 
assist States in meeting infrastructure needs and encouraging 
economic development and will facilitate continuation of 
privatization efforts regarding municipal services such as 
solid waste disposal, water, and sewer services without 
reversing the general policy of limiting the use of this 
Federal subsidy for conduit borrowing in transactions that 
distort market choice and efficiency.

                        Explanation of Provision

    The bill increases the present-law annual State private 
activity bond volume limits by 50 percent, to $75 per resident 
of each State (or $225 million if greater).

                             Effective Date

    The provision is effective beginning in calendar year 1999.

              TITLE III. EXTENSION OF EXPIRING PROVISIONS

A. Extension of Research and Experimentation Credit and Increase in the 
Rates for the Alternative Incremental Research Credit (sec. 301 of the 
                     bill and sec. 41 of the Code)

                         Present and Prior 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 does 
not apply to amounts paid or incurred after June 30, 1998.
    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.12
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    \12\ A special rule 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-based 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-
based 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)).
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    In computing the credit, a taxpayer's base amount may not 
be less than 50 percent of its current-year qualified research 
expenditures.

Alternative incremental research credit regime

    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 for 
any taxable year beginning after June 30, 1996, 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.

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'').13
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    \13\ Under a special rule, 75 percent of amounts paid to a research 
consortium for qualified research is treated as qualified research 
expenses eligible for the research credit (rather than 65 percent under 
the general rule under sec. 41(b)(3) governing contract research 
expenses) if (1) such research consortium is a tax-exempt organization 
that is described in section 501(c)(3) (other than a private 
foundation) or section 501(c)(6) and is organized and operated 
primarily to conduct scientific research, and (2) such qualified 
research is conducted by the consortium on behalf of the taxpayer and 
one or more persons not related to the taxpayer.
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    To be eligible for the credit, the research must not only 
satisfy the requirements of present-law section 174 but must be 
undertaken for the purpose of discovering information that 
istechnological 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 involve a process of experimentation related to 
functional aspects, performance, reliability, or quality of a business 
component.
    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

    Deductions allowed to a taxpayer under section 174 (or any 
other section) are reduced by an amount equal to 100 percent of 
the taxpayer's research tax credit determined for the taxable 
year. Taxpayers may alternatively elect to claim a reduced 
research tax credit amount under section 41 in lieu of reducing 
deductions otherwise allowed (sec. 280C(c)(3)).

                           Reasons for Change

    The Committee believes that increasing technological 
knowledge ultimately will lead to new and better products 
produced at lower costs. New and better products and lower 
production costs are the genesis of economic growth. For this 
reason, the Committee believes it is important to extend the 
research and experimentation tax credit.
    In addition, the Committee believes the alternative 
incremental credit enacted in 1996 should be strengthened. The 
alternative incremental research credit was enacted to respond 
to the changing economic circumstances of many taxpayers which 
invest heavily in research. However, the Committee believes 
that under current law, the alternative incremental research 
credit provides less of a research incentive than does the 
regular research and experimentation tax credit. Therefore, the 
Committee believes it is appropriate to increase the rate of 
the alternative incremental research credit.

                        Explanation of Provision

    The bill extends the research tax credit for 20 months--
i.e., generally, for the period July 1, 1998, through February 
29, 2000.
    In addition, the bill increases the credit rate applicable 
under the alternative incremental research credit one 
percentage point per step, that is from 1.65 percent to 2.65 
percent when a taxpayer's current-year research expenses exceed 
a base amount of 1 percent but do not exceed a base amount of 
1.5 percent; from 2.2 percent to 3.2 percent when a taxpayer's 
current-year research expenses exceed a base amount of 1.5 
percent but do not exceed a base amount of 2 percent; and from 
2.75 percent to 3.75 percent when a taxpayer's current-year 
research expenses exceed a base amount of 2 percent.
    In extending the credit, the Committee wishes to reaffirm 
the scope of the term ``qualified research.'' Section 41 
targets the credit to research which is undertaken for the 
purpose of discovering information which is technological in 
nature and the application of which is intended to be useful in 
the development of a new or improved business component of the 
taxpayer. However, eligibility for the credit does not require 
that the research be successful--i.e., the research need not 
achieve its desired result. Moreover, evolutionary research 
activities intended to improve functionality, performance, 
reliability, or quality are eligible for the credit, as are 
research activities intended to achieve a result that has 
already been achieved by other persons but is not yet within 
the common knowledge e.g., freely available to the general 
public) of the field (provided that the research otherwise 
meets the requirements of section 41, including not being 
excluded by subsection (d)(4)).
    Activities constitute a process of experimentation, as 
required for credit eligibility, if they involve evaluation of 
more than one alternative to achieve a result where the means 
of achieving the result are uncertain at the outset, even if 
the taxpayer knows at the outset that it may be technically 
possible to achieve the result. Thus, even though a researcher 
may know of a particular method of achieving an outcome, the 
use of the process of experimentation to effect a new or better 
method of achieving that outcome may be eligible for the credit 
(provided that the research otherwise meets the requirements of 
section 41, including not being excluded by subsection (d)(4)).
    Lastly, the Committee observes a lack of clarity in and 
litigation regarding the definition of ``internal-use 
software.'' The Committee believes that taxpayers should be 
given clear guidance as to what software is not subject to the 
limitations on expenditures related to ``internal-use 
software'' for purposes of the research tax credit. As such, 
the Committee encourages the Secretary of the Treasury to issue 
regulations that clarify the distinction between internal-use 
software, which is subject to a higher standard for eligibility 
for the credit, and other software, which is not subject to the 
higher standards of Code section 41(d)(4)(E).

                             Effective Date

    The extension of the research credit is effective for 
qualified research expenditures paid or incurred during the 
period July 1, 1998, through February 29, 2000. The increase in 
the credit rate under the alternative incremental research 
credit is effective for taxable years beginning after June 30, 
1998.

 B. Extension of the Work Opportunity Tax Credit (sec. 302 of the bill 
                        and sec. 51 of the Code)

                               Prior Law

In general

    The work opportunity tax credit (``WOTC''), which expired 
on June 30, 1998, was available on an elective basis for 
employers hiring individuals from one or more of eight targeted 
groups. The credit equals 40 percent (25 percent for employment 
of 400 hours or less) of qualified wages. Qualified wages are 
wages attributable to service rendered by a member of a 
targeted group during the one-year period beginning with the 
day the individual began work for the employer. For a 
vocational rehabilitation referral, however, the period begins 
on the day the individual began work for the employer on or 
after the beginning of the individual's vocational 
rehabilitation plan.
    The maximum credit per employee is $2,400 (40 percent of 
the first $6,000 of qualified first-year wages). With respect 
to qualified summer youth employees, the maximum credit is 
$1,200 (40 percent of the first $3,000 of qualified first-year 
wages).
    The employer's deduction for wages is reduced by the amount 
of the credit.

Targeted groups eligible for the credit

    The eight targeted groups are: (1) families eligible to 
receive benefits under the Temporary Assistance for Needy 
Families (TANF) Program; (2) high-risk youth; (3) qualified ex-
felons; (4) vocational rehabilitation referrals; (5) qualified 
summer youth employees; (6) qualified veterans; (7) families 
receiving food stamps; and (8) persons receiving certain 
Supplemental Security Income (SSI) benefits.

Minimum employment period

    No credit is allowed for wages paid to employees who work 
less then 120 hours in the first year of employment.

Expiration date

    The credit was effective for wages paid or incurred to a 
qualified individual who began work for an employer before July 
1, 1998.

                           Reasons for Change

    The Committee believes the preliminary experience of the 
WOTC is promising as an incentive for employers to hire 
individuals who are under-skilled, undereducated, or who 
generally may be less desirable to employers. A temporary 
extension of this credit will allow the Congress and the 
Treasury and Labor Departments to continue to monitor the 
effectiveness of the credit.

                        Explanation of Provision

    The bill extends the work opportunity tax credit for 20 
months (through February 29, 2000).

                             Effective Date

    The provision is effective for wages paid or incurred to 
qualified individuals who begin work for the employer on or 
after July 1, 1998, and before March 1, 2000.

 C. Extension of the Welfare-To-Work Tax Credit (sec. 303 of the bill 
                       and sec. 51A of the Code)

                              Present Law

    Employers are allowed a tax credit for eligible wages paid 
to qualified long-term family assistance 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 have received family assistance for at 
least 18 consecutive months ending on the hiring date; (2) 
members of a family that have received family assistance for a 
total of at least 18 months (whether or not consecutive) after 
the date of enactment of this credit (August 5, 1997) 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 two 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.
    The welfare-to-work credit 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.

                           Reasons for Change

    The Committee believes that the credit should be 
temporarily extended to provide the Congress and the Treasury 
and Labor Departments a better opportunity to assess the 
operation and effectiveness of the credit in meeting its goals. 
When enacted in the Taxpayer Relief Act of 1997, the goals of 
the welfare-to-work credit were: (1) to provide an incentive to 
hire long-term welfare recipients; (2) to promote the 
transition from welfare to work by increasing access to 
employment; and (3) to encourage employers to provide these 
individuals with training, health coverage, dependent care and 
ultimately better job attachment.

                        Explanation of Provision

    The bill extends the welfare-to-work credit for an 
additional 10 months (through February 29, 2000.

                             Effective Date

    The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after May 1, 1999, and before March 1, 2000.

D. Extend the Deduction Provided for Contributions of Appreciated Stock 
to Private Foundations; Public Inspection of Private Foundation Annual 
                                Returns

1. Extend the deduction provided for contributions of appreciated stock 
        to private foundations (sec. 304(a) of the bill and sec. 
        170(e)(5) of the Code)

                         Present and Prior Law

    In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the fair market value 
of property contributed to a charitable 
organization.14 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.
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    \14\ 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)).
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    In cases involving contributions to a private foundation 
(other than certain private operating foundations), the amount 
of the deduction is limited to the taxpayer's basis in the 
property. However, under a special rule contained in section 
170(e)(5), taxpayers are allowed a deduction equal to the fair 
market value of ``qualified appreciated stock'' contributed to 
a private foundation prior to July 1, 1998. 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.

                           Reasons for Change

    The Committee believes that, to encourage donations to 
charitable private foundations, it is appropriate to extend 
permanently the rule that allows a fair market value deduction 
for certain gifts of appreciated stock to private foundations.

                        Explanation of Provision

    The provision extends permanently the special rule 
contained in section 170(e)(5).

                             Effective Date

    The provision is effective for contributions of qualified 
appreciated stock to private foundations made on or after July 
1, 1998.

2. Public inspection of private foundation annual returns (sec. 304(b) 
        of the bill and sec. 6104 of the Code)

                              Present Law

    Tax-exempt organizations (other than churches and certain 
small organizations) are required to file an annual information 
return (Form 990) with the Internal Revenue Service (``IRS''), 
setting forth the organization's items of gross income and 
expenses attributable to such income, disbursements for tax-
exempt purposes, plus certain other information for the taxable 
year.
    Private foundations are required to make the current year's 
annual information return (Form 990-PF) available for public 
inspection at the foundation's principal office during regular 
business hours (sec. 6104(d)). Such return must be made 
available for inspection by any citizen on request made within 
180 days after the date of publication of notice of its 
availability. Notice must be published, not later than the day 
the return is required to be filed, in a newspaper having 
general circulation in the county in which the principal office 
of the foundation is located. The notice must state that the 
annual return is available for public inspection by any citizen 
who requests it, and must state the address and telephone 
number of the private foundation's principal office and the 
name of its principal manager.
    Tax-exempt organizations (other than private foundations) 
that are required to file a Form 990, including public 
charities, are required to allow public inspection at the 
organization's principal office (and certain regional or 
district offices) of their Forms 990 for the three most recent 
taxable years (sec. 6104(e)).
    The Taxpayer Bill of Rights 2 imposed additional public 
inspection requirements on tax-exempt organizations. All tax-
exempt organizations, except private foundations, will be 
required to comply with requests made in person or in writing 
by individuals who seek a copy of the organization's Form 990 
for any of the organization's three most recent taxable years. 
Upon such a request, the organization is required to supply 
copies without charge other than a reasonable fee for 
reproduction and mailing costs. If the request for copies is 
made in person, then the organization must immediately provide 
such copies. If the request for copies is made in writing, then 
copies must be provided within 30 days. In addition, all tax-
exempt organizations, including private foundations, will be 
required to comply in the same manner with requests made in 
person or in writing by individuals who seek a copy of the 
organization's application for recognition of tax-exempt status 
and certain related documents. However, an organization may be 
relieved of its obligation to provide copies if, in accordance 
with regulations to be promulgated by the Secretary of 
Treasury, (1) the organization has made the requested documents 
widely available or (2) the Secretary of the Treasury 
determined, upon application by the organization, that the 
organization was subject to a harassment campaign such that a 
waiver of the obligation to provide copies would be in the 
public interest. These additional publicinspection provisions 
apply to requests made no earlier than 60 days after the date on which 
the Treasury Department publishes regulations defining when requested 
documents have been made widely available or when a request is part of 
a harassment campaign, but in any event, not before December 31, 
1998.15 While proposed regulations have been issued, final 
regulations have not been published; therefore, the provision is not 
yet in effect.16
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    \15\ However, the legislative history of the provision indicates 
that Congress expected that organizations will comply voluntarily with 
the public inspection provisions prior to the issuance of such final 
regulations.
    \16\ Prop. Treas. Reg. sec. 301.6104(e)-1.
---------------------------------------------------------------------------
    Upon written request to the IRS, members of the general 
public also are permitted to inspect annual information returns 
of tax-exempt organizations and applications for recognition of 
tax-exempt status (and related documents) at the National 
Office of the IRS in Washington, D.C. A person making such a 
written request is notified by the IRS when the material is 
available for inspection at the National Office, where notes 
may be taken of the material open for inspection, photographs 
taken with the person's own equipment, or copies of such 
material obtained from the IRS for a fee (Treas. Reg. secs. 
301.6104(a)-6 and 301.6104(b)-1).

                           Reasons for Change

    To enhance oversight and public accountability of non-
profit organizations, the Committee believes that the 
disclosure provisions applicable to private foundations should 
be consistent with those applicable to public charities and 
other tax-exempt organizations. In addition, this change will 
result in more efficient use of private foundation resources by 
eliminating the present-law publication requirements.

                        Explanation of Provision

    Under the provision, private foundations are subject to the 
public inspection requirements that currently apply to public 
charities and all other tax-exempt organizations that file 
annual information returns. Accordingly, private foundations 
will be required to comply with requests from individuals who 
seek a copy of the foundation's annual information return for 
any of the foundation's three most recent taxable years. 
Private foundations are no longer subject to the publication 
requirements of section 6104(d).
    The Committee is aware that the length of annual 
information returns filed by certain private foundations may 
make duplication and mailing of the return expensive and 
administratively burdensome. The Committee expects that the 
Treasury Department will publish regulations to address this 
issue (e.g., by permitting persons to request a copy of 
particular portions of the return).

                             Effective Date

    The additional public inspection provisions apply to 
requests made after the later of: (1) the date which is 60 days 
after the date on which the Treasury Department publishes 
regulations defining when requested documents have been made 
widely available or when a request is part of a harassment 
campaign, or (2) December 31, 1998. The repeal of the present-
law publication requirement shall apply only to those returns 
the due date for filing of which is on or after the date the 
public inspection requirements become effective.

E. Exceptions Under Subpart F for Certain Active Financing Income (sec. 
           305 of the bill and secs. 953 and 954 of the Code)

                              Present Law

In general

    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 
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'' 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: (1) dividends, interest, royalties, rents and 
annuities; (2) net gains from the sale or exchange of (a) 
property that gives rise to the preceding types of income, (b) 
property that does not give rise to income, and (c) interests 
in trusts, partnerships, and REMICs; (3) net gains from 
commodities transactions; (4) net gains from foreign currency 
transactions; (5) income that is equivalent to interest; (6) 
income from notional principal contracts; and (7) payments in 
lieu of dividends.
    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. 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)).
    Temporary exceptions from foreign personal holding company 
income and foreign base company services income apply for 
subpart F purposes for certain income that is derived in the 
active conduct of a banking, financing, insurance, or similar 
business. These exceptions (described below) are applicable 
only for taxable years beginning in 1998.

Income from the active conduct of a banking, financing, or similar 
        business

    A 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 or similar business generally is determined 
under the principles applicable in determining financial 
services income for foreign tax credit limitationpurposes. 
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. In this regard, 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) (as in effect prior to the 
enactment of the Taxpayer Relief Act of 1997). See Prop. Treas. Reg. 
secs. 1.1296-4 and 1.1296-6. The Secretary of the Treasury is directed 
to prescribe regulations applying look-through treatment in 
characterizing for this purpose dividends, interest, income equivalent 
to interest, rents and royalties from related persons.
    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, a corporation is 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 prior law section 1296(b) (as in 
effect prior to the enactment of the Taxpayer Relief Act of 
1997); qualified bank affiliates and qualified securities 
affiliates are 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 (``QBU'') of a corporation from 
transactions with unrelated persons located in the country in 
which the QBU 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.

Income from the active conduct of an insurance business

    A temporary exception from foreign personal holding company 
income applies for certain investment income of a qualifying 
insurance company with respect to risks located within the 
CFC's country of creation or organization. These rules differ 
from the rules of 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.
    A temporary exception applies 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. 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 are defined as 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 apply. Any one 
of the three rules can be elected with respect to a particular 
line of business.
    First, reserves for such contracts can 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 can be determined 
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 can be determined to be 
equal to the net surrender value of the contract (as defined in 
section 807(e)(1)(A)).
    In no event can 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.
    A temporary exception from foreign personal holding company 
income also applies 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 company is a company 
(including any predecessor) that has not been engaged in the 
active conduct of an insurance business for more than 5 years. 
In general, 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 insurancebusiness. In the event of the 
acquisition of a book of business from another company through an 
assumption or indemnity reinsurance transaction, the 5-year 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. 
Reinsurance transactions among related persons may not be used to 
multiply the number of 5-year periods.
    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 sec. 817), only the 
income specifically allocable to such contracts are taken into 
account. In the case of other contracts, income not 
specifically allocable is allocated ratably among such 
contracts.
    A qualifying insurance company is defined as 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 temporary exceptions do not apply to investment income 
(includable in the income of a U.S. shareholder of a CFC 
pursuant to sec. 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.

Anti-abuse rule

    An anti-abuse rule applies for purposes of these temporary 
exceptions. For purposes of applying these exceptions, items 
with respect to a transaction or series of transactions are 
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.

Foreign base company services income

    A temporary exception from foreign base company services 
income applies 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 or is a 
qualifying insurance company.

                           Reasons for Change

    The subpart F rules historically have been aimed at 
requiring current inclusion by the U.S. shareholders of income 
of a CFC that is either passive or easily moveable. Under the 
subpart F rules, certain U.S. shareholders of a CFC are subject 
to U.S. tax on a current basis on certain income (including 
certain insurance income and foreign personal holding company 
income) earned by the CFC, whether or not such income is 
distributed to the shareholders. Prior to the enactment of the 
Tax Reform Act of 1986 (the ``1986 Act''), exceptions from 
foreign personal holding company income were provided for 
income derived in the active conduct of a banking, financing, 
or similar business, or derived from certain investments made 
by an insurance company. The Committee recognizes that the 1986 
Act's repeal of these exceptions may be viewed as causing the 
subpart F rules to apply to income that is neither passive nor 
easily moveable, requiring inclusion of such income on a 
current basis by U.S. shareholders. In the Taxpayer Relief Act 
of 1997, a one-year temporary exception from foreign personal 
holding company income was enacted 17 for income 
from the active conduct of an insurance, banking, financing, or 
similar business. The Committee believes it is appropriate to 
extend for one year these exceptions from subpart F, with 
certain modifications.
---------------------------------------------------------------------------
    \17\ The President canceled this provision in 1997 pursuant to the 
Line Item Veto Act. On June 25, 1998, the U.S. Supreme Court held that 
the cancellation procedures set forth in the Line Item Veto Act are 
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091 (June 
25, 1998).
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    The Committee believes that modifications to the present-
law provision are appropriate, including changes designed to 
treat various types of businesses with active financing income 
more similarly to each other than does the present-law 
provision. The Committee also believes that it is appropriate 
to modify the present-law provision to require that eligible 
businesses conduct substantial activity with regard to their 
respective financial service businesses, and that the income 
eligible for the exceptions have a nexus with the business 
activities giving rise to such income. In the case of 
transactions conducted with persons located outside the home 
country of the CFC or its foreign branch (so-called ``cross 
border'' transactions), the Committee believes that it is 
appropriate to impose higher standards for qualifying under the 
provision due to the increased concerns with respect to the 
mobility of income from such transactions.

                        Explanation of Provision

In general

    The bill extends and modifies the present-law temporary 
exceptions from subpart F for income that is derived in the 
active conduct of a banking, financing, or similar business or 
in the conduct of an insurance business. These exceptions (as 
modified) are applicable only for taxable years beginning in 
1999.
    With respect to income derived in the active conduct of a 
banking, financing, or similar business, the bill differs from 
the present-law temporary exceptions in the following 
significant respects. First, the bill requires a CFC to conduct 
substantial activity with respect to its business in order to 
qualify for the exceptions. Second, the bill adds certain nexus 
requirements which require that income which is derived by a 
CFC or QBU from transactions with customers iseligible for the 
exceptions if, among other things, substantially all of the activities 
in connection with such transactions are conducted directly by the CFC 
or QBU in its home country, and such income is treated as earned by the 
CFC or QBU in its home country for purposes of such country's tax laws. 
Third, the bill modifies the tests for determining whether a CFC is 
predominantly engaged in the active conduct of a banking, financing, or 
similar business, including modifications for income derived from a 
lending or finance business. Fourth, the bill extends the exceptions to 
income derived from certain cross border transactions, provided that 
certain requirements are met. Fifth, the determination of where a 
customer is treated as located is made under rules prescribed by the 
Secretary of the Treasury. Finally, the look-through rule that was 
included in the present-law provision for purposes of determining the 
income eligible for the exceptions is eliminated.
    In the case of insurance, the bill differs from present law 
in the following significant respects. In addition to the 
exception for certain income of a qualifying insurance company 
with respect to risks located within the CFC's country of 
creation or organization that is provided under present law, 
the bill provides additional exceptions. First, the bill 
provides temporary exceptions from insurance income and from 
foreign personal holding company income for certain income of a 
qualifying branch of a qualifying insurance company with 
respect to risks located within the home country of the branch, 
provided certain requirements are met under each of the 
exceptions. Further, the bill adds additional temporary 
exceptions from insurance income and from foreign personal 
holding company income for certain income of certain CFCs or 
branches with respect to risks located in any country other 
than the United States, provided that the requirements for 
these exceptions are met.

Income from the active conduct of a banking, financing or similar 
        business

            Substantial activity requirement
    The bill modifies the exceptions from subpart F for income 
derived in the active conduct of a banking, financing, or 
similar business by, among other things, incorporating a 
substantial activity requirement. Under the bill, the subpart F 
exceptions apply to a CFC that is an eligible controlled 
foreign corporation (an ``eligible CFC'). An eligible CFC is 
defined as a CFC which is predominantly engaged in the active 
conduct of a banking, financing, or similar business, but only 
if it conducts substantial activity with respect to such 
business.
    Whether a CFC is considered to conduct substantial activity 
with respect to a banking, financing, or similar business is 
determined under all the facts and circumstances. It is 
intended that as part of this facts and circumstances analysis 
in determining whether the activities conducted by the CFC are 
substantial, all relevant factors are taken into account, 
including the overall size of the CFC, the amount of its 
revenues and expenses, the number of its employees, the ratio 
of its revenues per employee, the amount of property it owns, 
and the nature, size, and relative significance of the 
applicable activities conducted by the CFC. Under the bill, the 
Secretary is granted the authority to prescribe regulations to 
carry out the purposes of these exceptions. It is intended that 
such authority includes the authority to prescribe rules 
relating to whether a CFC (or, as relevant, a QBU) is 
considered to conduct substantial activity.
    It also is intended that as part of this facts and 
circumstances analysis, a CFC is required to conduct 
substantially all of the activities necessary for the 
generation of income with respect to the business, which 
generally include the following:
          Initial solicitation of customers (including 
        vendors);
          Advising customers on financial needs, including 
        funding and financial products;
          Providing financial and technical advice to 
        customers;
          Designing or tailoring financial products to 
        customers' needs;
          Negotiating terms with customers;
          Performing credit analysis on customers and 
        evaluating noncredit risks;
          Providing related services to customers;
          Making loans, entering into leases, extending credit 
        or entering into other transactions with customers that 
        generate income that would be considered derived in the 
        active conduct of a banking, financing, or similar 
        business;
          Collecting from customers;
          Performing remarketing activities (including sales) 
        following termination of transactions with customers;
          Responding to customers failure to satisfy their 
        obligations under transactions, including enforcement 
        or renegotiation of terms, liquidation of collateral, 
        foreclosure, and/or institution of litigation; and
          Holding collateral for transactions with customers.
It is intended that the performance of back-office functions 
(including accounting for income or loss, recordkeeping, and 
routine communicating with customers) not be taken into account 
in determining whether the substantial activity requirement is 
satisfied. It also is intended that the relevant activities of 
the business may be modified by Treasury regulation to take 
into account future changes in the operations of these 
businesses.
    In general, the substantial activity requirement is applied 
based on the activities of the CFC as a whole, including the 
activities of any QBUs of the CFC. In determining whether the 
substantial activity requirement is satisfied, activities 
performed in the country in which the CFC is incorporated (or 
in the country in which the QBU has its principal office) by 
employees of a related person of the CFC are taken into 
account, but only to the extent that the related person is 
compensated on an arm's-length basis for the services of such 
employees and such compensationis includible in the related 
person's income in such country for purposes of such country's income 
tax laws. For this purpose, a related person has the meaning provided 
in section 954(d)(3), substituting ``at least 80 percent'' for ``more 
than 50 percent.'' It is intended that the activities of such a related 
person would not again be taken into account in determining whether 
another CFC or QBU (e.g., the related person) satisfies the substantial 
activity requirement.
            Predominantly engaged requirement
    The bill also modifies the rules for determining whether a 
CFC is predominantly engaged in the active conduct of a 
banking, financing, or similar business. Alternative rules 
apply for this purpose.
    Banking or securities business.--The bill modifies the 
present-law application of the banking or securities business 
tests for determining whether a CFC is predominantly engaged in 
the active conduct of a banking, financing or similar business. 
Under the bill, a CFC 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 
business and is an institution licensed to do business as a 
bank in the United States (or is any other corporation not so 
licensed which is specified in regulations). In addition, a CFC 
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 securities business and is 
registered as a securities broker or dealer under applicable 
U.S. securities laws (or is any other corporation not so 
registered which is specified in regulations). It generally is 
intended that these requirements for the active conduct of a 
banking or securities business are to be interpreted in the 
manner provided in the regulations proposed under prior law 
section 1296(b) (as in effect prior to the enactment of the 
Taxpayer Relief Act of 1997). See Prop. Treas. Reg. secs. 
1.1296-4 and 1.1296-6. Specifically, it is intended that these 
requirements include the requirements for foreign banks under 
Prop. Treas. Reg. sec. 1.1296-4 as currently drafted. However, 
it is not intended that these requirements be considered to be 
satisfied by a CFC merely because it is a qualified bank 
affiliate or a qualified securities affiliate within the 
meaning of the proposed regulations under former section 
1296(b).
    Lending or finance business.--The bill modifies the 
present-law 70 percent test for determining whether a CFC is 
predominantly engaged in the active conduct of a banking, 
financing, or similar business. Under the bill, a CFC is 
considered to be predominantly engaged in the active conduct of 
such business if more than 70 percent of its gross income is 
derived directly from the active and regular conduct of a 
lending or finance business from transactions with customers 
which are unrelated persons. For this purpose, it is intended 
that transactions with customers located in the United States 
not be taken into account in determining whether the 70-percent 
test is satisfied.
    For this purpose, a CFC is considered to be engaged in a 
lending or finance business if it is engaged in the business 
of:
          (1) making loans;
          (2) purchasing or discounting accounts receivable, 
        notes (including loans), or installment obligations;
          (3) engaging in leasing (including entering into 
        leases and purchasing, servicing and disposing of 
        leases and leased assets);
          (4) issuing letters of credit and providing 
        guarantees;
          (5) providing charge and credit card services; or
          (6) rendering services or making facilities available 
        in connection with the foregoing activities carried on 
        by the corporation rendering such services or 
        facilities, or by another corporation which is a member 
        of the same affiliated group.
For this purpose, whether two corporations are affiliated is 
determined by reference to section 1504 with one modification: 
the exclusion for foreign corporations is disregarded.
    Whether any portion of a CFC's gross income is derived 
directly from the active and regular conduct of a lending or 
finance business is determined under all the facts and 
circumstances. Under the bill, the Secretary is granted the 
authority to prescribe regulations to carry out the purposes of 
these exceptions. It is intended that such authority includes 
the authority to prescribe rules relating to this 
determination.
            Qualified banking or financing income exempt from subpart F
    In general.--If a CFC is treated as an eligible CFC (i.e., 
it satisfies the substantial activity and predominantly engaged 
requirements), the subpart F exceptions apply to qualified 
banking or financing income of such corporation. Qualified 
banking or financing income is defined as income which is 
derived in the active conduct of a banking, financing, or 
similar business by an eligible CFC or a QBU of such CFC if: 
(1) the income is derived from transactions with customers not 
located in the United States, (2) substantially all of the 
activities in connection with such transactions are conducted 
directly by the corporation or unit in its home country, and 
(3) the income is treated as earned by such corporation or unit 
in its home country for purposes of such country's tax laws. 
For this purpose, income is considered to be earned by a CFC or 
a QBU in its home country if such income is sourced and 
allocable to such CFC or QBU in its home country for purposes 
of such country's tax laws. In addition, for this purpose, 
activities are considered to be conducted by a CFC or QBU if 
such activities are performed by employees of the CFC or QBU. 
Except as provided by regulations, a CFC's home country is 
defined as its country of creation or organization, and a QBU's 
home country is defined as the country in which the unit 
maintains its principal office. Moreover, income derived from 
transactions with customers apply only to transactions with 
customers acting in their capacity as such.
    For this purpose, it is intended that income derived by an 
eligible CFC or QBU of such CFC from the following types of 
activities be considered to be income derived in the 
activeconduct of a banking, financing, or similar business (provided 
that the other requirements for these exceptions are satisfied):
          (1) regularly making personal, mortgage, industrial, 
        or other loans in the ordinary course of the 
        corporation's trade or business;
          (2) factoring evidences of indebtedness for 
        customers;
          (3) purchasing, selling, discounting, or negotiating 
        for customers notes, drafts, checks, bills of exchange, 
        acceptances, or other evidences of indebtedness;
          (4) issuing letters of credit and negotiating drafts 
        drawn thereunder for customers;
          (5) performing trust services, including as a 
        fiduciary, agent, or custodian, for customers, provided 
        such trust activities are not performed in connection 
        with services provided by a dealer in stock, securities 
        or similar financial instruments;
          (6) arranging foreign exchange transactions 
        (including any section 988 transaction within the 
        meaning of section 988(c)(1)) for, or engaging in 
        foreign exchange transactions with, customers;
          (7) arranging interest rate or currency futures, 
        forwards, options or notional principal contracts for, 
        or entering into such transactions with, customers;
          (8) underwriting issues of stock, debt instruments or 
        other securities under best efforts or firm commitment 
        agreements for customers;
          (9) engaging in leasing (including entering into 
        leases and purchasing, servicing and disposing of 
        leases and leased assets);
          (10) providing charge and credit card services for 
        customers or factoring receivables obtained in the 
        course of providing such services;
          (11) providing traveler's check and money order 
        services for customers;
          (12) providing correspondent bank services for 
        customers;
          (13) providing paying agency and collection agency 
        services for customers;
          (14) maintaining restricted reserves (including money 
        or securities) in a segregated account in order to 
        satisfy a capital or reserve requirement imposed by a 
        local banking or securities regulatory authority;
          (15) engaging in hedging activities directly related 
        to another activity described herein;
          (16) repackaging mortgages and other financial assets 
        into securities and servicing activities with respect 
        to such assets (including the accrual of interest 
        incidental to such activity);
          (17) engaging in financing activities typically 
        provided in the ordinary course by an investment bank, 
        such as project financing provided in connection with 
        construction projects, structured finance (including 
        the extension of a loan and the sale of participations 
        or interests in the loan to other financial 
        institutions or investors), and leasing activities to 
        the extent incidental to such financing activities;
          (18) providing financial or investment advisory 
        services, investment management services, fiduciary 
        services, or custodial services;
          (19) purchasing or selling stock, debt instruments, 
        interest rate or currency futures or other securities 
        or derivative financial products (including notional 
        principal contracts) from or to customers and holding 
        stock, debt instruments and other securities as 
        inventory for sale to customers, unless the relevant 
        securities or derivative financial products are not 
        held in a dealer capacity;
          (20) effecting transactions in securities for 
        customers as a securities broker; and
          (21) any other activity that the Secretary of the 
        Treasury determines to be a financing activity 
        conducted by active corporations in the ordinary course 
        of their business.
    Qualified banking or financing income of an eligible CFC or 
QBU of such CFC is determined separately for the CFC and each 
QBU, taking into account, in the case of an eligible CFC, only 
items of income, gain, deduction, loss or other items, as well 
as activities, of such CFC that are not properly allocable to 
any QBUs. Similarly, in the case of a QBU, qualified banking or 
financing income is determined by taking into account such 
applicable items (e.g., income and activities) that are 
properly allocable to such QBU. Under the bill, the Secretary 
is granted the authority to prescribe regulations to carry out 
the purposes of these exceptions. It is intended that such 
authority includes the authority to prescribe rules for 
properly allocating items and activities among branches or 
units of a CFC, and between the CFC and its branches or units.
    Income from local customer transactions.--If the 
requirements above are satisfied, the exceptions apply to 
income that is derived from transactions with customers located 
in the CFC's home country. In addition, the exceptions apply to 
income that is derived by a QBU of an eligible CFC from 
transactions with customers located in the QBU's home country.
    For example, assume that a CFC is incorporated in the 
United Kingdom and has operations in France that constitute a 
QBU. Also assume that the activities of the U.K. CFC's head 
office together with the activities of the French QBU satisfy 
the substantial activity requirement. Under the bill, income 
derived by the U.K. CFC from transactions with customers in the 
United Kingdom is eligible for the exceptions if substantially 
all of the activities in connection with the transaction are 
performed in the United Kingdom by employees of the U.K.CFC, 
and the income is treated as earned by the U.K. CFC in the United 
Kingdom for U.K. income tax purposes. In addition, income derived by 
the French QBU from transactions with customers in France is eligible 
for the exceptions if substantially all of the activities in connection 
with the transactions are performed in France by employees of the 
French QBU, and the income is treated as earned by the French QBU in 
France for French income tax purposes.
    Income from cross border transactions.--If the requirements 
above are satisfied, the exceptions also apply to income from 
certain cross border transactions, but only if a higher 
standard with respect to the substantial activity requirement 
is satisfied. Under the bill, income derived by a CFC from 
transactions with customers not located in the CFC's home 
country or the United States is eligible for the exceptions if 
the CFC conducts substantial activity with respect to a 
banking, financing, or similar business in its home country. In 
addition, income derived by a QBU of an eligible CFC from 
transactions with customers not located in the QBU's home 
country or the United States is eligible for the exceptions, 
but only if the QBU conducts substantial activity with respect 
to such a business in its home country. For this purpose, the 
substantial activity requirement is applied by looking only at 
the activities of the applicable CFC or QBU on a stand-alone 
basis. Thus, income derived by a QBU from transactions with 
customers not located in its home country (or in the United 
States) is eligible for the exceptions if the activities of the 
QBU itself constitute substantial activities (provided that the 
other requirements are satisfied).
    Consider again the U.K. CFC and the French QBU. If the head 
office of the U.K. CFC derives income from a transaction with a 
customer in Germany, the income is eligible for the exceptions 
if the activities of the CFC itself (without regard to those of 
the French QBU) satisfy the substantial activity requirement. 
Alternatively, if the French QBU derives income from a 
transaction with a German customer, the income is eligible for 
the exceptions if the activities of the French QBU itself 
satisfy the substantial activity requirement.
    Home country requirement for income earned with respect to 
a lending or finance business.--In the case of a lending or 
finance business, in addition to the requirements described 
above, the bill includes an additional requirement to qualify 
for the exceptions in the case of income earned by a CFC that 
is an eligible CFC which satisfies the predominantly engaged 
requirement for an active lending or finance business. For such 
an eligible CFC, income derived by such CFC is eligible for the 
exceptions only if such CFC derives more than 30 percent of its 
gross income directly from the active and regular conduct of a 
lending or finance business from transactions with customers 
that are unrelated persons and that are located within the 
CFC's home country (the ``home country'' requirement). In 
addition, income derived by a QBU of such an eligible CFC is 
eligible for the exceptions only if such QBU derives more than 
30 percent of its gross income directly from the active and 
regular conduct of a lending or finance business from 
transactions with customers that are unrelated persons and that 
are located within the QBU's home country. For this purpose, it 
is intended that transactions with customers located in the 
United States not be taken into account.
    The home country requirement is applied on a stand-alone 
basis to the particular CFC or QBU. Thus, the 30-percent gross 
income test takes into account only the gross income of a 
particular CFC (without regard to the income of its QBUs) from 
transactions with its home-country unrelated customers. 
Similarly, in the case of a QBU, there is taken into account 
the gross income of the particular QBU (without regard to the 
income of the CFC or other QBUs) from transactions with its 
home country unrelated customers. Accordingly, if more than 70 
percent of the CFC's gross income is derived directly from the 
active and regular conduct of a lending or finance business 
from transactions with unrelated customers, and one of the 
CFC's QBUs satisfies the home country requirement but another 
QBU does not satisfy such requirement, income derived by the 
QBU that satisfies the home country requirement is eligible for 
the exceptions from subpart F (provided that the other 
requirements are satisfied), but income derived by the other 
QBU is not eligible for the exceptions.
    Coordination with dealer exception.--The bill provides that 
the exceptions under section 954(h) for income derived in the 
active conduct of a banking, financing, or similar business do 
not apply to income described in the dealer exception under 
section 954(c)(2)(C)(ii) (described below) for a dealer in 
securities which is an eligible CFC that satisfies the 
predominantly engaged requirement for a securities business.

Exception for securities dealers

    The bill provides an additional exception from foreign 
personal holding company income for certain income derived by a 
securities dealer within the meaning of section 475 (the so-
called ``dealer exception''). The dealer exception applies to 
interest or dividends (or equivalent amounts described in sec. 
954(c)(1)(E) or (G)) from any transaction (including a hedging 
transaction or a transaction consisting of a deposit of 
collateral or margin described in sec. 956(c)(2)(J)) entered 
into in the ordinary course of the dealer's trade or business 
as such a securities dealer, but only if the income is 
attributable to activities of the dealer in the country in 
which the dealer is created or organized (or, in the case of a 
QBU of the dealer, is attributable to activities of the QBU in 
the country in which the QBU both maintains its principal 
office and conducts substantial business activity). For this 
purpose, income is considered to be attributable to activities 
of the dealer in its country of incorporation (or to a QBU in 
the country in which the QBU both maintains its principal 
office and conducts substantial business activity), if such 
income is attributable to activities performed in such country 
by employees of the dealer (or QBU), and such income is treated 
as earned in such country by the dealer (or QBU) for purposes 
of such country's tax laws. For this purpose, income is 
considered to be earned in the country in which the dealer is 
created or organized (or, in the case of a QBU, in the country 
in which the QBU both maintains its principal office and 
conducts substantial business activity), if such income is 
sourced and allocable to such dealer (or QBU) in such country 
for purposes of such country's tax laws. It is intended that 
the dealer exception not apply to income from transactions with 
persons located in the United States with respect to U.S. 
securities. In addition, it is intended that the dealer 
exception will apply to interest paid by customers to the 
dealer on margin loans in connection with sales of securities 
(provided that the other requirements of the provision are 
satisfied).

Insurance income

            In general
    The bill provides a temporary exception to insurance income 
under section 953. For purposes of the exception to insurance 
income, reserves for an exempt insurance or annuity contract 
are determined in the same manner as under the temporary 
exception, described below, for foreign personal holding 
company income relating to certain insurance contracts (sec. 
954(i), as added by the bill). For purposes of these 
provisions, reserves are intended to include discounted unpaid 
losses or losses incurred, as appropriate, for property and 
casualty contracts.
            Operation of the exception
    The bill provides an exception from insurance income for 
income derived by a qualifying insurance company that is 
attributable to the issuing (or reinsuring) of an exempt 
contract by the qualifying insurance company or a qualifying 
insurance company branch of such a company, and that is treated 
as earned by the company or branch in that company's, or 
branch's, home country for purposes of that country's tax laws. 
The exception from insurance income does not apply to income 
attributable to the issuing (or reinsuring) of an exempt 
contract as the result of any arrangement whereby another 
corporation receives a substantially equal amount of premiums 
or other consideration in respect of issuing (or reinsuring a 
contract that is not an exempt contract). An exempt contract is 
an insurance or annuity contract issued or reinsured by a 
qualifying insurance company or qualified insurance company 
branch in connection with property in, liability arising out of 
activity in, or the lives or health of residents of, a country 
other than the United States.
    No contract is treated as an exempt contract unless the 
qualifying insurance company or branch derives more than 30 
percent of its net written premiums from exempt contracts 
(determined without regard to this sentence) covering 
applicable home country risks, and with respect to which no 
policyholder, insured, annuitant, or beneficiary is a related 
person (within the meaning of sec. 954(d)(3)). Applicable home 
country risks are risks in connection with property in, 
liability arising out of activity in, or the lives or health of 
residents of, the home country of the qualifying insurance 
company or branch, as the case may be. In all cases, the 30 
percent test is applied on a unit-by-unit basis. Accordingly, 
income derived by a qualifying insurance company branch of a 
CFC qualifies only if such branch alone satisfies the 30 
percent test (without regard to the net written premiums of any 
other branch). Income derived by the CFC qualifies only if the 
CFC alone satisfies the 30 percent test without regard to the 
net written premiums of any other unit or branch of the CFC.
    When determinations under the bill are made separately with 
respect to a qualifying insurance company and its qualifying 
insurance company branch or branches, then in the case of the 
qualifying insurance company, only income, gain, or loss and 
activities of the company not properly allocable or 
attributable to any qualifying insurance company branch are 
taken into account. In the case of a qualifying insurance 
company branch, only income, gain, or loss and activities of 
the branch that are properly allocable or attributable to it 
are taken into account. Under the bill, the Secretary is 
granted the authority to carry out the purposes of these 
exceptions. It is intended that such authority includes the 
authority to prescribe rules for properly allocating items and 
activities among branches or units of a CFC, and among the CFC 
and its branches or units.
    The home country of a CFC is the country in which the CFC 
is created or organized. The home country of a qualified 
business unit that is a qualifying insurance company branch of 
a qualifying insurance company means the country in which the 
principal office of such unit is located and in which such unit 
is licensed, authorized, or regulated by the applicable 
insurance regulatory body to sell insurance, reinsurance or 
annuity contracts to persons other than related persons (within 
the meaning of sec. 954(d)(3)) in that country.
            Qualifying insurance company
    A qualifying insurance company is a CFC that meets the 
following requirements, which are intended to distinguish firms 
that have a real business nexus with a foreign country or 
countries from firms that do not. The first requirement is that 
the CFC be subject to regulation as an insurance (or 
reinsurance) company by its home country, and that the CFC be 
licensed, authorized, or regulated by the applicable insurance 
regulatory body for its home country to sell insurance, 
reinsurance, or annuity contracts to persons other than related 
persons (within the meaning of section 954(d)(3)) in its home 
country.
    The second requirement is that the CFC derive more than 50 
percent of its aggregate net written premiums from the 
insurance or reinsurance by the CFC (on an aggregate basis, 
including qualifying insurance company branches) covering 
applicable home country risks (as described above) of the CFC 
or branch, as the case may be. For purposes of this rule, if a 
policyholder, insured, annuitant, or beneficiary is a related 
person, then the contract is treated as not covering home 
country risks. A related person has the meaning set forth in 
section 954(d)(3). In the case of a qualifying insurance 
company branch, premiums are taken into account under this 
second requirement only to the extent the premiums are treated 
as earned by the branch in its home country for purposes of 
that country's tax laws.
    The 50 percent test applies on an aggregate basis. For 
example, assume that a German CFC has a branch in France and a 
branch in Italy. Assume that $50 of net written premiums are 
properly allocable to the Italian branch, $100 of net written 
premiums are properly allocable to the French branch, and $100 
of net written premiums are properly allocable to the CFC in 
Germany. For the Italian branch, assume $20 of the $50, or 40 
percent, is from home country risks. For the French branch, 
assume that $80 of the $100, or 80 percent, is from home 
country risks. For the CFC in Germany, assume that $60 of the 
$100, or 60 percent, is from home country risks. Taking into 
account the respective amounts and percentages, the CFC has 64 
percent of its net written premiums from home country risks on 
an aggregate basis.
    The third requirement is that the CFC be engaged in the 
insurance business and that it would be subject to tax under 
subchapter L if it were a domestic corporation. A CFC is 
considered to be engaged in the insurance business, within the 
meaning of this bill, if it operates in a manner consistent 
with the operation of other bona fide commercial insurance 
companies that sell insurance products to unrelated parties in 
its home country, and conducts managerial activities in that 
country with respect to the major functions of the insurance 
business. A factor, among others, that could be considered in 
determining whether it conducts managerial activities in its 
home country with respect to the major functions of the 
insurance business may be whetherin its home country it 
exercises key decision making in determining business strategy with 
respect to the major functions of the insurance business. For purposes 
of the requirement that the CFC be engaged in the insurance business, 
activities performed in the home country of the CFC by employees of the 
CFC and of a related person are taken into account, to the extent that 
the related person is compensated on a arm's length basis for the 
services of such employees and such compensation is includible in the 
related person's income in such country for purposes of that country's 
tax laws. For this purpose, a related person has the meaning provided 
in section 954(d)(3), substituting ``at least 80 percent'' for ``more 
than 50 percent.'' In determining whether a CFC is engaged in the 
insurance business, for example, an entity that is not engaged in 
regular and continuous transactions with persons that are not related 
persons (as described in the generally applicable anti-abuse rules) is 
not considered as engaged in the insurance business.
            Qualifying insurance company branch
    A qualifying insurance company branch is a qualified 
business unit of a CFC that meets two requirements. A qualified 
business unit means any separate and clearly identified unit of 
a trade or business of a taxpayer which maintains separate 
books and records (within the meaning of sec. 989(a)). The 
first requirement is that the unit be licensed, authorized, or 
regulated by the applicable insurance regulatory body for its 
home country to sell insurance, reinsurance or annuity 
contracts to persons other than related persons (within the 
meaning of sec. 954(d)(3)) in that country. It is intended that 
the applicable insurance regulatory body be the regulatory body 
that has the authority to license, authorize, or regulate with 
respect to the insurance business in the country where the 
branch is located and a branch that is regulated by such a body 
be considered to be regulated in the country where the branch 
is located. The second requirement is that the CFC (of which 
the branch is a unit) be a qualifying insurance company, taking 
the unit into account for purposes of the applicable tests 
(above) as if it were a qualifying insurance company branch.
            Additional requirements in the case of cross border risks
    The bill imposes additional requirements with respect to 
any contract that covers cross border risks (that is, risks 
other than applicable home country risks), due to the increased 
concern about mobility of income in cross border business. A 
contract issued by a qualifying insurance company or qualifying 
insurance company branch that covers risks other than 
applicable home country risks is not treated as an exempt 
contract unless such company or branch, as the case may be, (1) 
conducts substantial activity in its home country with respect 
to the insurance business, and (2) performs in its home country 
substantially all of the activities necessary to give rise to 
the income generated by the contract.
    Whether a CFC or unit thereof is considered to perform in 
its home country substantial activities with respect to the 
insurance business is determined under all the facts and 
circumstances. It is intended that as part of this facts and 
circumstances analysis in determining whether the activities 
conducted by the CFC or unit are substantial, all relevant 
factors are taken into account, including the overall size of 
the CFC or unit, the amount of its revenues and expenses, the 
number of its employees, the ratio of its revenues per 
employee, the amount of property it owns, and the nature, size 
and relative significance of the applicable activities 
conducted by the CFC or unit. Under the bill, the Secretary is 
granted the authority to carry out the purposes of these 
exceptions. It is intended that such authority includes the 
authority to prescribe regulations relating to whether a CFC or 
unit is considered to conduct substantial activity.
    It also is intended that as part of this facts and 
circumstances analysis, a CFC or unit is required to conduct 
substantially all of the activities necessary for the 
generation of income with respect to the insurance business. 
Such activities of an insurance business generally depend on 
the line of business, and could include:
          Designing or tailoring insurance products to meet 
        market or customer requirements;
          Performing actuarial analysis with respect to 
        insurance products;
          Determining investment options for separate account-
        type products;
          Performing underwriting functions with respect to 
        insurance products;
          Performing analysis for purposes of risk assessment;
          Performing analysis for purposes of setting premium 
        rates;
          Performing analysis for purposes of calculating 
        reserves;
          Performing claims management and adjustment 
        functions;
          Developing marketing strategies, advertising and 
        other public image activities;
          Making (or arranging for) sales to customers;
          Maintaining reserves and surplus (other than excess 
        surplus);
          Making (or arranging for) investments; and
          Collecting from customers.
It further is intended that the performance of back-office 
functions (including accounting for income or loss, 
recordkeeping, and routine communicating with customers) not be 
taken into account in determining whether the substantial 
activity requirement is satisfied. It also is intended that the 
relevant activities of the business may be modified by Treasury 
regulation to take into account the actual operation of lines 
of insurance business and future changes in the operation of 
lines of insurance business.
    It further is intended that activities performed in the 
CFC's or unit's home country by employees of a related person 
(within the meaning of sec. 954(d)(3), substituting ``at least 
80 percent'' for ``more than 50 percent'') be taken into 
account, to the extent that the related person is compensated 
on an arm's length basis for the services of such employees and 
such compensation is includible in the related person's income 
in that country for purposes of such country's tax laws. It 
also is intended that the activities of such a related person 
are not again taken into account in determining whether another 
CFC or unit (e.g., the related person) satisfies the 
substantial activity requirement.
     In addition, with respect to a contract issued by a 
qualifying insurance company or qualifying insurance company 
branch that covers risks other than applicable home country 
risks, the qualifying insurance company or qualifying insurance 
company branch is required to perform in its home country 
substantially all of the activities necessary to give rise to 
the income generated by the contract.

Foreign personal holding company income with respect to insurance

    The bill provides a temporary exception from foreign 
personal holding income for certain investment income derived 
by a qualifying insurance company and by certain qualifying 
insurance company branches.
    The exception applies to income (received from a person 
other than a related person) from investments made by a 
qualifying insurance company or qualifying insurance company 
branch of its reserves allocable to exempt contracts or 80 
percent of its unearned premiums from exempt contracts. For 
this purpose, an exempt contract has the meaning provided under 
the bill.
    In the case of exempt contracts that are 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 
are used if the qualifying insurance company or qualifying 
insurance company branch were subject to tax under subchapter L 
of the Code, with certain modifications. For this purpose, 
unearned premiums and losses incurred are determined in 
accordance with section 832(b) 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). However, in 
applying these rules, there is substituted for the applicable 
Federal interest rate the interest rate determined for the 
functional currency of the company or branch and which (except 
as provided by the Treasury Secretary) is calculated in the 
same manner as the Federal mid-term rate under section 1274(d). 
In addition, there is substituted for the loss payment pattern 
under section 846 the appropriate foreign loss payment pattern 
determined by the Treasury Secretary for the line of business. 
In the case of health insurance contracts, it is intended that 
appropriate foreign mortality and morbidity tables be used for 
this purpose.
    In the case of an exempt contract that is a life insurance 
or annuity contract, reserves for such contracts are determined 
as follows. The reserves equal the greater of: (1) the net 
surrender value of the contract (as defined in section 
807(e)(1)(A)), including in the case of pension plan contracts; 
or (2) the amount determined by applying the tax reserve method 
that would apply if the qualifying insurance company were 
subject to tax under Subchapter L of the Code, with the 
following modifications. First, there is substituted for the 
applicable Federal interest rate an interest rate determined 
for the functional currency of the qualifying insurance 
company's home country, calculated (except as provided by the 
Treasury Secretary in order to address insufficient data and 
similar problems) in the same manner as the mid-term applicable 
Federal interest rate (``AFR'') (within the meaning of section 
1274(d)). Second, there is substituted for the prevailing State 
assumed rate the highest assumed interest rate permitted to be 
used for purposes of determining statement reserves in the 
foreign country for the contract. Third, in lieu of U.S. 
mortality and morbidity tables, there are applied mortality and 
morbidity tables that reasonably reflect the current mortality 
and morbidity risks in the foreign country. Fourth, the 
Treasury Secretary may provide that the interest rate and 
mortality and morbidity tables of a qualifying insurance 
company may be used for one or more of its branches when 
appropriate.
    In no event may the reserve for any contract at any time 
exceed the foreign statement reserve for the contract, reduced 
by any catastrophe, equalization, or deficiency reserve or any 
similar reserve. In the case of a contract that is a property, 
casualty, or health insurance contract, it is intended that 
this limitation applies with respect to unpaid losses by line 
of business (similar to sec. 846(a)(3)). These rules apply 
whether the contract is regulated as a property, casualty, 
health, life insurance, annuity, or any other type of contract.
    The bill also provides an exception from foreign personal 
holding company income for income from investment of assets 
equal to (1) one-third of premiums earned during the taxable 
year on exempt contracts regulated in the country in which sold 
as property, casualty, or health insurance contracts, and (2) 
10 percent of reserves (determined for purposes of the bill) 
for contracts regulated in the country in which sold as life 
insurance or annuity contracts. In no event does the exception 
from foreign personal holding company income apply to 
investment income with respect to excess surplus.
    To prevent the shifting of relatively high-yielding assets 
to generate investment income that qualifies under this 
temporary exception, the bill provides that, except as provided 
by the Treasury Secretary, income is allocated to contracts as 
follows. In the case of a separate account-type contract 
(including a variable contract not meeting the requirements of 
section 817), the income credited under the contract is 
allocable only to that contract. Income not so allocated 
generally is allocated ratably among all contracts that are not 
separate account-type contracts, subject to the anti-abuse 
rules (described below).

Other definitions and anti-abuse rules relating to insurance

    The bill provides that the present-law statutory definition 
of a life insurance contract (under secs. 7702 or 101(f)), as 
well as the distribution on death requirement of section 72(s) 
and the diversification requirement of section 817(h), do not 
apply for purposes of determining reserves for a life insurance 
or annuity contract under sections 953 and 954 of the Code, 
provided that neither the policyholders, the insureds or 
annuitants, nor the beneficiaries with respect to the contract 
are U.S. persons.
    The bill provides a rule coordinating the exception to 
insurance income with the present-law special rule for certain 
captive insurance companies (sec. 953(c)). Under the 
coordination rule, the scope of the present-law rule that 
related party insurance income is treated as subpart F income 
is retained. The exception under the bill from the definition 
of insurance income does not include income derived from exempt 
contracts that cover risks other than applicable home country 
risks, for purposes of the rules of section 953(c).
    The anti-abuse rules applicable under the subpart F 
exceptions provided in section 954(h) (other than sec. 
954(h)(7)(B)) (as added by the bill) apply to these exceptions 
for insurance. In addition, the bill provides anti-abuse rules 
applicable under the exceptions from subpart F income relating 
to insurance.
    The bill provides that there shall be disregarded any item 
of income, gain, loss, or deduction of, or derived from, an 
entity which is not engaged in regular and continuous 
transactions with persons that are not related persons. This 
rule is intended, for example, to address the use of fronting 
companies or similar entities (that are not engaged in regular 
and continuous transactions with persons that are not related 
persons) to reinsure risks in a manner to cause a CFC or branch 
to qualify as a qualifying insurance company or qualifying 
insurance company branch by meeting percentage requirements 
with respect to home country risks that it would not otherwise 
meet.
     The bill provides that there shall be disregarded 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 bill also provides that a contract is not treated as an 
exempt contract (as described above), if any policyholder, 
insured or annuitant, or beneficiary is a resident of the 
United States, the contract was marketed to the U.S. resident, 
and was written to cover a risk outside the United States.
    The bill also provides that a contract is not treated as an 
exempt contract, if the contract covers risks located both 
within and outside the United States, and the qualifying 
insurance company or branch does not maintain such records, and 
file such reports, with respect to the contract as the Treasury 
Secretary requires. It is intended that documentation that is 
contemporaneous with the issuance of the contract be maintained 
by the qualifying insurance company or branch.
    The bill also provides that the Treasury Secretary may 
prescribe rules for the allocation of contracts (and income 
from contracts) among two or more qualifying insurance company 
branches of a qualifying insurance company in order to clearly 
reflect the income of such branches.
    The bill also provides that premiums from a contract are 
treated as not covering home country risks (and are treated as 
covering risks other than home country risks) for purposes of 
the tests for 30 percent and 50 percent, respectively, of net 
written premiums if the contract reinsures a contract issued or 
reinsured by a related person (within the meaning of sec. 
954(d)(3)).
    The bill also provides that the Treasury Secretary may 
prescribe regulations as may be necessary or appropriate to 
carry out the purposes of the exceptions from insurance income 
and foreign personal holding company income provided under 
sections 953(e) and 954(i) (as added by the bill).

Other anti-abuse rules

    The bill generally includes the anti-abuse rules of the 
present-law provision, with certain further refinements. Under 
the bill, the anti-abuse rules provide that items with respect 
to a transaction or series of transactions are disregarded if 
one of the principal purposes of the transaction or 
transactions is to qualify income or gain for these exceptions, 
including any transaction or a series of transactions a 
principal purpose of which is the acceleration or deferral of 
any item in order to claim the benefits of these exceptions. In 
addition, the anti-abuse rules provide that items of an entity 
which is not engaged in regular and continuous transactions 
with customers which are not related persons are disregarded. 
Moreover, items with respect to a transaction or series of 
transactions are disregarded if one of the principal purposes 
of the transaction or transactions is to qualify income or gain 
for these exceptions, including utilizing or doing business 
with: (1) one or more entities in order to satisfy any home 
country requirement, or (2) a special purpose entity or 
arrangement, including a securitization or financing 
arrangement or any similar entity or arrangement. Finally, the 
anti-abuse rules provide that a related person, officer, 
director, or employee with respect to any CFC (or QBU) which 
otherwise would be treated as a customer of such corporation or 
unit with respect to any transaction would not be treated as a 
customer, if a principal purpose of such transaction is to 
satisfy any requirement for these exceptions.

Sale of assets of an active financing business

    The bill includes a modification to address the treatment 
of sales of assets of an active financing business. In general, 
foreign personal holding company income includes net gains from 
the sale or exchange of property that gives rise to dividends, 
interest, royalties, rents, or annuities. The bill provides an 
exception from this rule for income that qualifies for the 
exception from subpart F for income derived in the active 
conduct of a banking, financing, or similar business. Under the 
bill, foreign personal holding company income does not include 
net gains from the sale or exchange of property that gives rise 
to dividends, interest, royalties, rents, or annuities if such 
property gives rise to income not treated as foreign personal 
holding company income for the taxable year by reason of the 
exceptions under section 954(h) or (i) (as added by the bill) 
for income derived in the active conduct of a banking, 
financing, or similar business or in the conduct of an 
insurance business. It is intended that this exception applies 
only to the extent that, prior to its disposition, the property 
was held to generate or generated income which qualifies for 
the exceptions under section 954(h) or (i) (and such property 
was not so held for a principal purpose of taking advantage of 
this exception).

Exceptions from foreign base company services income

    The present-law provision includes a corresponding 
exception from foreign base company services income for income 
derived by a CFC from the performance of services that are 
directly related to a transaction entered into by the CFC that 
gives rise to income that is eligible for these exceptions from 
subpart F. Under the bill, foreign base company services income 
does not include income that is not treated as foreign personal 
holding company income by reason of the exceptions under 
section 954(h) or 954(i) or the securities dealer exception 
under section 954(c)(2)(C)(ii), or treated as exempt insurance 
income by reason of section 953(e) (as added by the bill).

                             Effective Date

    The provision applies only to taxable years of foreign 
corporations beginning in 1999, and to taxable years of U.S. 
shareholders with or within which such taxable years of foreign 
corporations end.

F. Extension of the Generalized System of Preferences (sec. 311 of the 
              bill and sec. 505 of the Trade Act of 1974)

                         Present and Prior Law

    Title V of the Trade Act of 1974, as amended, grants 
authority to the President to provide duty-free treatment on 
imports of certain articles from beneficiary developing 
countries subject to certain conditions and limitations. To 
qualify for GSP privileges, each beneficiary country is subject 
to various mandatory and discretionary eligiblity criteria. 
Import sensitive products are ineligible for GSP. The GSP 
program, which is designed to promote development through trade 
rather than traditional aid programs, expired after June 30, 
1998.

                           Reasons for Change

    The Committee believes it is appropriate to extend the GSP 
program.

                        Explanation of Provision

    The bill reauthorizes the GSP program to terminate after 
February 29, 2000. Refunds would be authorized, upon request of 
the importer, for duties paid between July 1, 1998, and the 
date of enactment of the bill.

                             Effective Date

    The provision is effective for duties paid on or after July 
1, 1998, and before March 1, 2000.

                   TITLE IV. REVENUE OFFSET PROVISION

    A. Treatment of Certain Deductible Liquidating Distributions of 
Regulated Investment Companies and Real Estate Investment Trusts (sec. 
           401 of the bill and secs. 332 and 334 of the Code)

                              Present Law

    Regulated investment companies (``RICs'') and real estate 
investment trusts (``REITs'') are allowed a deduction for 
dividends paid to their shareholders. The deduction for 
dividends paid includes amounts distributed in liquidation 
which are properly chargeable to earnings and profits, as well 
as, in the case of a complete liquidation occurring within 24 
months after the adoption of a plan of complete liquidation, 
any distribution made pursuant to such plan to the extent of 
earnings and profits. Rules that govern the receipt of 
dividends from RICs and REITs generally provide for including 
the amount of the dividend in the income of the shareholder 
receiving the dividend that was deducted by the RIC or REIT. 
Generally, any shareholder realizing gain from a liquidating 
distribution of a RIC or REIT includes the amount of gain in 
the shareholder's income. However, in the case of a liquidating 
distribution to a corporation owning 80-percent of the stock of 
the distributing corporation, a separate rule generally 
provides that the distribution is tax-free to the parent 
corporation. The parent corporation succeeds to the tax 
attributes, including the adjusted basis of assets, of the 
distributing corporation. Under these rules, a liquidating RIC 
or REIT might be allowed a deduction for amounts paid to its 
parent corporation, without a corresponding inclusion in the 
income of the parent corporation, resulting in income being 
subject to no tax.
    A RIC or REIT may designate a portion of a dividend as a 
capital gain dividend to the extent the RIC or REIT itself has 
a net capital gain, and a RIC may designate a portion of the 
dividend paid to a corporate shareholder as eligible for the 
70-percent dividends-received deduction to the extent the RIC 
itself received dividends from other corporations. If certain 
conditions are satisfied, a RIC also is permitted to pass 
through to its shareholders the tax-exempt character of the 
RIC's net income from tax-exempt obligations through the 
payment of ``exempt interest dividends,'' though no deduction 
is allowed for such dividends.

                           Reasons for Change

    RICs and REITs are important investment vehicles, 
particularly for small investors. The RIC and REIT rules are 
designed to encourage investors to pool their resources and 
achieve the type of investment opportunities, subject to a 
single level of tax, that otherwise would be available only to 
a larger investor. Nonetheless, the Committee understands that 
some corporations have attempted to use the ``dividends paid 
deduction'' for a RIC or REIT in combination with the separate 
rule that allows a corporate parent to receive property from an 
80 percent subsidiary without tax when the subsidiary is 
liquidating, and have argued that the combination of these two 
rules permits income deducted by the RIC or REIT and paid to 
the parent corporation to be entirely tax free during the 
period of liquidation of the RIC or REIT. The Committee 
believes that income of a RIC or REIT which is not taxable to 
the RIC or REIT because of the dividends paid deduction also 
should not be excluded from the income of the RIC's or REIT's 
shareholders as a liquidating distribution to a parent 
shareholder. This legislation will not affect the intended 
beneficiaries of the RIC and REIT rules.

                        Explanation of Provision

    Any amount which a liquidating RIC or REIT may take as a 
deduction for dividends paid with respect to an otherwise tax-
free liquidating distribution to an 80-percent corporate owner 
is includible in the income of the recipient corporation. The 
includible amount is treated as a dividend received from the 
RIC or REIT. The liquidating corporation may designate the 
amount treated as a dividend as a capital gain dividend or, in 
the case of a RIC, a dividend eligible for the 70-percent 
dividends received deduction or an exempt interest dividend, to 
the extent provided by the RIC or REIT provisions of the Code.
    The provision does not otherwise change the tax treatment 
of the distribution to the parent corporation or to the RIC or 
REIT. Thus, for example, the liquidating corporation will not 
recognize gain (if any) on the liquidating distribution and the 
recipient corporation will hold the assets at a carryover 
basis, even where the amount received is treated as a 
dividend..

                             Effective Date

    The provision is effective for distributions on or after 
May 22, 1998, regardless of when the plan of liquidation was 
adopted.
    No inference is intended regarding the treatment of such 
transactions under present law.

                   TITLE V. TAX TECHNICAL CORRECTIONS

    Except as otherwise provided, the technical corrections 
contained in the bill generally are effective as if included in 
the originally enacted related legislation.

                A. Technical Corrections to the 1998 Act

1. Burden of proof (sec. 502(b) of the bill, sec. 3001 of the 1998 Act, 
        and sec. 7491 (a)(2)(C) of the Code)

                              Present Law

    The Treasury Secretary has the burden of proof in any court 
proceeding with respect to a factual issue if the taxpayer 
introduces credible evidence with respect to any factual issue 
relevant to ascertaining the taxpayer's tax liability, provided 
specified conditions are satisfied (sec. 7491). One of these is 
that corporations, trusts, and partnerships must meet certain 
net worth limitations. These net worth limitations do not apply 
to individuals or to estates.

                        Explanation of Provision

    The provision removes the net worth limitation from certain 
revocable trusts for the same period of time that the trust 
would have been treated as part of the estate had the trust 
made the election under section 645 to be treated as part of 
the estate.

2. Relief for innocent spouses (sec. 502(c) of the bill, sec. 3201 of 
        the 1998 Act, and secs. 2024(a) and 6015(e) of the Code)

                              Present Law

    A taxpayer who is no longer married to, is separated from, 
or has been living apart for at least 12 months from the person 
with whom he or she originally joined in filing a joint Federal 
income tax return may elect to limit his or her liability for a 
deficiency arising from such joint return to the amount of the 
deficiency that is attributable to items that are allocable to 
such electing spouse. The election is limited to deficiency 
situations and only affects the amount of the deficiency for 
which the electing spouse is liable. Thus, the election cannot 
be used to generate a refund, to direct a refund to one spouse 
or the other, or to allocate responsibility for payment where a 
balance due is reported on, but not paid with, a joint return.
    In addition to the election to limit the liability for 
deficiencies, a taxpayer may be eligible for innocent spouse 
relief. Innocent spouse relief allows certain taxpayers who 
joined in the filing of a joint return to be relieved of 
liability for an understatement of tax that is attributable to 
items of the other spouse to the extent that the taxpayer did 
not know or have reason to know of the understatement. The 
Secretary is also authorized to provide equitable relief in 
situations where, taking into account all of the facts and 
circumstances, it is inequitable to hold an individual 
responsible for all or a part of any unpaid tax or deficiency 
arising from a joint return. Under certain circumstances, it is 
possible that a refund could be obtained under this authority.

                        Explanation of Provision

    The provision clarifies that the ability to obtain a credit 
or refund of Federal income tax is limited to situations where 
the taxpayer qualifies for innocent spouse relief or where the 
Secretary exercises his authority to provide equitable relief.

3. Interest netting (sec. 502(d) of the bill and sec. 3301 (c)(2) of 
        the 1998 Act)

                              Present Law

    For calendar quarters beginning after July 22, 1998, a net 
interest rate of zero applies where interest is payable and 
allowable on equivalent amounts of overpayment and underpayment 
of any tax imposed by the Internal Revenue Code. In addition, 
the net interest rate of zero applies to periods on or before 
July 22, 1998, providing (1) the statute of limitations has not 
expired with respect to either the underpayment or overpayment, 
(2) the taxpayer identifies the periods of underpayment and 
overpayment where interest is payable and allowable for which 
the net interest rate of zero would apply, and (3) on or before 
December 31, 1999, the taxpayer asks the Secretary to apply the 
net zero rate.

                        Explanation of Provision

    The provision restores language originally included in the 
Senate amendment that clarifies that the applicability of the 
zero net interest rate for periods on or before July 22, 1998 
is subject to any applicable statute of limitations not having 
expired with regard to either a tax underpayment or 
overpayment.

4. Effective date for elimination of 18-month holding period for 
        capital gains (sec. 502(h) of the bill, sec. 5001 of the 1998 
        Act, and sec. 1(h) of the Code)

                              Present Law

    The 1998 Act repealed the provision in the 1997 Act 
providing a maximum 28-percent rate for the long-term capital 
gain attributable to property held more than one year but not 
more than 18 months. Instead, the 1998 Act treated this gain in 
the same manner as gain from property held more than 18 months. 
The provision in the 1998 Act is effective for amounts properly 
taken into account after December 31, 1997. For gains taken 
into account by a pass-thru entity, such as a partnership, S 
corporation, trust, estate, RIC or REIT, the date that the 
entity properly took the gain into account is the appropriate 
date in applying this provision. Thus, for example, amounts 
properly taken into account by a pass-thru entity in 1997 with 
respect to property held more than one year but not more than 
18 months which are included in income on an individual's 1998 
return are taken into account in computing 28-percent rate 
gain.

                        Explanation of Provision

    Under the provision, in the case of a capital gain dividend 
made by a RIC or REIT after 1997, no amount will be taken into 
account in computing the net gain or loss in the 28-percent 
rate gain category by reason of property being held more than 
one year but not more than 18 months, other than amounts taken 
into account by the RIC or REIT from other pass-thru entities 
(other than in structures, such as a ``master-feeder 
structure'', in which the RIC invests a substantial portion of 
its assets in one or more partnerships holding portfolio 
securities and having the same taxable year as the RIC). A 
similar rule applies to amounts properly taken into account by 
a RIC or REIT by reason of holding, directly or indirectly, an 
interest in another RIC or REIT to which the rule in the 
preceding sentence applies.
    For example, if a RIC sold stock held more than one year 
but not more than 18 months on November 15, 1997, for a gain, 
and makes a capital gain dividend in 1998, the gain is not 
taken into account in computing 28-percent rate gain for 
purposes of determining the taxation of the 1998 dividend. 
(Thus, all the netting and computations made by the RIC need to 
be redone with respect to all post-1997 capital gain dividends, 
whether or not dividends of 28-percent rate gain.) If, however, 
the gain was taken into account by a RIC by reason of holding 
an interest in a calendar year 1997 partnership which itself 
sold the stock, the gain will not be recharacterized by reason 
of this provision (unless the RIC's investment in the 
partnership satisfies the exception for master-feeder 
structures). If the gain was taken into account by a RIC by 
reason on holding an interest in a REIT and the gain was 
excluded from 28-percent rate gain by reason of the application 
of this provision to the REIT, the gain will be excluded from 
28-percent rate gain in determining the tax of the RIC 
shareholders.
     The provision also corrects a cross reference.

                B. Technical Corrections to the 1997 Act

1. Treatment of interest on qualified education loans (sec. 503(a) of 
        the bill, sec. 202 of the 1997 Act, and secs. 221 and 163(h) of 
        the Code)

                              Present Law

    Present law, as modified by the 1997 Act, provides that 
certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expense, up to a maximum dollar amount per year 
($1,000 for taxable years beginning in 1998), subject to 
certain requirements. Present law also provides that in the 
case of a taxpayer other than a corporation, no deduction is 
allowed for personal interest. For this purpose, personal 
interest means any interest allowable as a deduction, other 
than certain types of interest listed in the statute. This 
provision does not specifically provide that otherwise 
deductible qualified education loan interest is not treated as 
personal interest.

                        Explanation of Provision

    The provision clarifies that otherwise deductible qualified 
education loan interest is not treated as nondeductible 
personal interest.

2. Capital gain distributions of charitable remainder trusts (sec. 
        503(b) of the bill, sec. 311 of the 1997 Act and sec. 5001 of 
        the 1998 Act, and sec. 1(h) of the Code)

                              Present Law

    Under present law, the income beneficiary of a charitable 
remainder trust (``CRT'') includes the trust's capital gain in 
income when the gains are distributed to the beneficiary (sec. 
664(b)(2)). Internal Revenue Service Notice 98-20 provides 
guidance with respect to the categorization of long-term 
capital gain distributions from a CRT under the capital gain 
rules enacted by the 1997 Act. Under the Notice, long-term 
capital gains properly taken into account by the trust before 
January 1, 1997, are treated as falling in the 20-percent group 
of gain (i.e., gain not in the 28-percent rate gain or 
unrecaptured sec. 1250 gain). Long-term capital gains properly 
taken into account by the trust after December 31, 1996, and 
before May 7, 1997, are included in 28-percent rate gain. Long-
term capital gains properly taken into account by the trust 
after May 6, 1997, are treated as falling into the category 
which would apply if the trust itself were subject to tax.

                        Explanation of Provision

    The provision provides that, in the case of a capital gain 
distribution by a CRT after December 31, 1997, with respect to 
amounts properly taken into account by the trust during 1997, 
amounts will not be included in the 28-percent rate gain 
category solely by reason of being properly taken into account 
by the trust before May 7, 1997, or by reason of the property 
being held not more than 18 months. Thus, for example, the sale 
of stock by a CRT on February 1, 1997, will not be taken into 
account in determining 28-percent rate gain where the gain is 
distributed after 1997.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1997.

3. Gifts may not be revalued for estate tax purposes after expiration 
        of statute of limitations (sec. 503(c) of the bill, sec. 506 of 
        the 1997 Act, and secs. 2001(f)(2) and 6501(c)(9) of the Code)

                              Present Law

    Basic structure of Federal estate and gift taxes.--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 in that year and in 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, the unified credit, and certain other credits.
    This structure raises two different, but related, issues: 
(1) what is the period beyond which additional gift taxes 
cannot be assessed or collected--generically referred to as the 
``statute of limitations''--and (2) what is the period beyond 
which the amount of prior transfers cannot be revalued for the 
purpose of determining the amount of tax on subsequent 
transfers.
    Gift tax statute of limitations.--Section 6501(a) provides 
the general rule that any tax (including gift and estate tax) 
must be assessed within three years after the return is filed 
by the taxpayer. Under section 6501(e)(2), the period for 
assessments of gift or estate tax is increased to six years 
where there is more than a 25 percent omission in the amount of 
the total gifts or gross estate disclosed on the gift or estate 
tax return.
    Revaluation of gifts for gift tax purposes.--Under a 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 if the statute of 
limitations for assessment of gift tax on the prior gifts has 
expired.
    In addition, section 6501(c)(9) provides that the value of 
any item which is required to be disclosed on a gift tax return 
may not be redetermined by the Commissioner after the 
expiration of the statute of limitations. 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). Further, 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). The IRS is to develop an administrative appeals process 
whereby a taxpayer can challenge a redetermination of value by 
the IRS prior to issuance of a final notice. In the event the 
taxpayer and the IRS cannot agree on the value of a gift, the 
1997 Act provided the U.S. Tax Court with jurisdiction to issue 
a declaratory judgment on the value of a gift (section 7477). 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 
U.S. 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.
    Revaluation of gifts for estate tax purposes.--Similarly, a 
gift cannot be revalued for purposes of determining the 
applicable estate tax bracket and available unified credit if 
(1) the statute of limitations has expired and (2) the value of 
the gift is shown or disclosed on gift tax return or is 
disclosed in a statement attached to the gift tax return 
(section 2001(f)).

                        Explanation of Provision

    The bill clarifies the rules relating to revaluations of 
prior transfers for computation of the estate tax to provide 
that the value of a prior transfer cannot be redetermined if 
the transfer was disclosed on a gift tax return, or in a 
statement attached to the gift tax return, in a manner to 
adequately apprise the Treasury Secretary of the nature the 
transfer, even if there was no gift tax imposed on that 
transfer.
    In addition, the bill removes the revaluation rule in 
section 6501(c)(9) since the substance of that rule also is 
provided in sections 2001(f) and 2504(c). The Committee intends 
that there be no change in the manner of finally determining 
the value of a gift as a result of this amendment.

4. Coordinate Vaccine Injury Compensation Trust Fund expenditure 
        purposes with list of taxable vaccines (sec. 503(d) of the 
        bill, sec. 904 of the 1997 Act, and sec. 9510(c) of the Code)

                              Present Law

    A manufacturer's excise tax is imposed on certain vaccines 
routinely recommended for administration to children (sec. 
4131). The tax is imposed at a rate of $0.75 per dose on any 
listed vaccine component. Taxable vaccine components are 
vaccines against diphtheria, tetanus, pertussis, measles, 
mumps, rubella, polio, HIB (haemophilus influenza type B), 
hepatitis B, and varicella (chicken pox). Tax was imposed on 
vaccines against diphtheria, tetanus, pertussis, measles, 
mumps, rubella, and polio by the Omnibus Budget Reconciliation 
Act of 1987. Tax was imposed on vaccines against HIB, hepatitis 
B, and varicella by the 1997 Act.
    Amounts equal to net revenues from this excise tax are 
deposited in the Vaccine Injury Compensation Trust Fund 
(``Vaccine 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. Present law provides that payments from the 
Vaccine Trust Fund may be made only for vaccines eligible under 
the program as of December22, 1987 (sec. 9510(c)(1)). Thus, 
payments may not be made for injuries related to the HIB, hepatitis B 
or varicella vaccines.

                        Explanation of Provision

    The provision provides that payments are permitted from the 
Vaccine Trust Fund for injuries related to the administration 
of the HIB, hepatitis B, and varicella vaccines. The provision 
also clarifies that expenditures from the Vaccine Trust Fund 
may occur only as provided in the Code and makes conforming 
amendments.

5. Abatement of interest by reason of Presidentially declared disasters 
        (sec. 503(e) of the bill, sec. 915 of the 1997 Act, and sec. 
        6404(h) of the Code)

                              Present Law

    The Taxpayer Relief Act of 1997 (``1997 Act'') provided 
that, if the Secretary of the Treasury extends the filing date 
of an individual tax return for 1997 for individuals living in 
an area that has been declared a disaster area by the President 
during 1997, no interest shall be charged as a result of the 
failure of an individual taxpayer to file an individual tax 
return, or pay the taxes shown on such return, during the 
extension.
    The Internal Revenue Service Restructuring and Reform Act 
of 1998 (``1998 Act'') contains a similar rule applicable to 
all taxpayers for tax years beginning after 1997 for disasters 
declared after 1997. The status of disasters declared in 1998 
but that relate to the 1997 tax year is unclear.

                        Explanation of Provision

    The provision amends the 1997 Act rule so that it is 
available for disasters declared in 1997 or in 1998 with 
respect to the 1997 tax year.

6. Treatment of certain corporate distributions (sec. 503(f) of the 
        bill, sec. 1012 of the 1997 Act, and secs. 351(c) and 
        368(a)(2)(H) of the Code)

                              Present Law

    The 1997 Act (sec. 1012(a)) requires a distributing 
corporation to recognize corporate level gain on the 
distribution of stock of a controlled corporation under section 
355 of the Code if, pursuant to a plan or series of related 
transactions, one or more persons acquire a 50-percent or 
greater interest (defined as 50 percent or more of the voting 
power or value of the stock) of either the distributing or 
controlled corporation (Code sec. 355(e)). Certain transactions 
are excepted from the definition of acquisition for this 
purpose. Under the technical corrections included in the 
Internal Revenue Service Restructuring and Reform Act of 1998, 
in the case of acquisitions under section 355(e)(3)(A)(iv), the 
acquisition of stock in the distributing corporation or any 
controlled corporation is disregarded to the extent that the 
percentage of stock owned directly or indirectly in such 
corporation by each person owning stock in such corporation 
immediately before the acquisition does not 
decrease.1
---------------------------------------------------------------------------
    \1\ This exception (as certain other exceptions) does not apply if 
the stock held before the acquisition was acquired pursuant to a plan 
(or series of related transactions) to acquire a 50-percent or greater 
interest in the distributing or a controlled corporation.
---------------------------------------------------------------------------
    In the case of a 50-percent or more 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. No adjustment to the basis of the 
stock or assets of either corporation is allowed by reason of 
the recognition of the gain.2
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    \2\ The 1997 Act does not limit the otherwise applicable Treasury 
regulatory authority under section 336(e) of the Code. Nor does it 
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.
---------------------------------------------------------------------------
    The 1997 Act (as amended by the technical corrections 
contained in the Internal Revenue Service Restructuring and 
Reform Act of 1998) also modified 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 reorganizations under 
section 368(a)(1)(D), the fact that the shareholders of the 
distributing corporation dispose of part or all of the 
distributed stock shall not be taken into account.
    The effective date (Act section 1012(d)(1)) states that the 
relevant provisions of the 1997 Act apply to distributions 
after April 16, 1997, pursuant to a plan (or series of related 
transactions) which involves an acquisition occurring after 
such date (unless certain transition provisions apply).

                        Explanation of Provision

    The provision clarifies the ``control immediately after'' 
requirement of section 351(c) and section 368(a)(2)(H) in the 
case of certain divisive transactions in which a corporation 
contributes assets to a controlled corporation and then 
distributes the stock of the controlled corporation in a 
transaction that meets the requirements of section 355 (or so 
much of section 356 as relates to section 355). In such cases, 
not only the fact that the shareholders of the distributing 
corporation dispose of part or all of the distributed stock, 
but also the fact that the corporation whose stock was 
distributed issues additional stock, shall not be taken into 
account.

                             Effective Date

    The provision generally is effective for distributions 
after April 16, 1997, as if included in the 1997 Act.

7. Treatment of net operating losses arising from certain eligible 
        losses (sec. 503(g) of the bill, sec. 1082 of the 1997 Act, and 
        sec. 172(b)(1)(F) of the Code)

                              Present Law

    The 1997 Act changed the general net operating loss 
(``NOL'') carryback period of a taxpayer from three years to 
two years. The three-year carryback period was retained in the 
case of an NOL attributable to an eligible loss. An eligible 
loss is defined as (1) a casualty or theft loss of an 
individual taxpayer, or (2) an NOL attributable to a 
Presidentially declared disaster area by a taxpayer engaged in 
a farming business or a small business. Other special rules 
apply to real estate investment trusts (REITs) (no carrybacks), 
specified liability losses (10-year carryback), and excess 
interest losses (no carrybacks).

                        Explanation of Provision

    The provision coordinates the use of eligible losses with 
the general rule for NOLs in the same manner as a loss arising 
from a specified liability loss. Thus, an eligible loss for any 
year is treated as a separate net operating loss and is taken 
into account after the remaining portion of the net operating 
loss for the taxable year.

8. Determination of unborrowed policy cash value under COLI pro rata 
        interest disallowance rules (sec. 503(h) of the bill, sec. 1084 
        of the 1997 Act, and sec. 264(f) of the Code)

                              Present Law

    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 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. 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 unborrowed policy cash value of 
a contract.

                        Explanation of Provision

    The provision clarifies the meaning of ``unborrowed policy 
cash value'' under section 264(f)(3), with respect to any life 
insurance, annuity or endowment contract. The technical 
correction clarifies that under section 264(f)(3), if the cash 
surrender value (determined without regard to any surrender 
charges) with respect to any policy or contract does not 
reasonably approximate its actual value, then the amount taken 
into account for this purpose is the greater of (1) the amount 
of the insurance company's liability with respect to the policy 
or contract, as determined for purposes of the annual statement 
approved by the National Association or Insurance 
Commissioners, (2) the amount of the insurance company's 
reserve with respect to the policy or contract for purposes of 
such annual statement; or such other amount as is determined by 
the Treasury Secretary. No inference is intended that such 
amounts may not be taken into account in determining the cash 
surrender value of a policy or contract in such circumstances 
for purposes of any other provision of the Code.

9. Payment of taxes by commercially acceptable means (sec. 503(i) of 
        the bill, sec. 1205 of the 1997 Act, and sec. 6311 (d)(2) of 
        the Code)

                              Present Law

    The Code generally permits the payment of taxes by 
commercially acceptable means (such as credit cards) (sec. 
6311(d)). The Treasury Secretary may not pay any fee or provide 
any other consideration in connection with this provision. This 
fee prohibition may have an unintended impact on Treasury 
contracts for the provision of services unrelated to the 
payment of income taxes by commercially acceptable means.

                        Explanation of Provision

    The provision clarifies that the prohibition on paying any 
fees or providing any other consideration applies to the use of 
credit or debit cards for the payment of income taxes.

                C. Technical Corrections to the 1984 Act

1. Casualty loss deduction (sec. 504 of the bill, sec. 711(c) of the 
        1984 Act, and secs. 172(d)(4), 67(b)(3), 68(c)(3), and 873(b) 
        of the Code)

                              Present Law

    The Tax Reform Act of 1984 (``1984 Act'') deleted casualty 
and theft losses from property connected with a nonbusiness 
transaction entered into for profit from the list of losses set 
forth in section 165(c)(3). This amendment was made in order to 
provide that these losses were deductible in full and not 
subject to the $100 per casualty limitation or the 10-percent 
adjusted gross income floor applicable to personal casualty 
losses. However, the amendment inadvertently eliminated the 
deduction for these losses from the computation of the net 
operating loss. Also, the Tax Reform Act of 1986 provided that 
casualty losses described in section 165(c)(3) are not 
miscellaneous itemized deductions subject to the 2-percent 
adjusted gross income floor, and the Revenue Reconciliation Act 
of 1990 provided that these losses are not treated as itemized 
deductions in computing the overall limitation on itemized 
deductions. The losses of nonresident aliens are limited to 
deductions described in section 165(c)(3). Because of the 
change made by the 1984 Act, the reference to section 165(c)(3) 
does not include casualty and theft losses from nonbusiness 
transactions entered into for profit.

                        Explanation of Provision

    The provision provides that all deductions for nonbusiness 
casualty and theft losses are taken into account in computing 
the net operating loss. Also, these deductions are not treated 
as miscellaneous itemized deductions subject to the 2-percent 
adjusted gross income floor, or as itemized deductions subject 
to the overall limitation on itemized deductions, and are 
allowed to nonresident aliens.

                            Effective Dates

    The provision relating to the net operating loss and the 
deduction for nonresident aliens applies to taxable years 
beginning after December 31, 1983.
    The provision relating to miscellaneous itemized deductions 
applies to taxable years beginning after December 31, 1986.
    The provision relating to the overall limitation on 
itemized deductions applies to taxable years beginning after 
December 31, 1990.

     D. Disclosure of Tax Return Information to the Department of 
  Agriculture (sec. 505(a) of the bill and sec. 6103 (j) of the Code)

                              Present Law

    Tax return information generally may not be disclosed, 
except as specifically provided by statute. Disclosure is 
permitted to the Bureau of the Census for specified purposes, 
which included the responsibility of structuring, conducting, 
and preparing the census of agriculture (sec. 6103(j)(1)). The 
Census of Agriculture Act of 1997 (P.L. 105-113) transferred 
this responsibility from the Bureau of the Census to the 
Department of Agriculture.

                        Explanation of Provision

    The provision permits the continuation of disclosure of tax 
return information for the purpose of structuring, conducting, 
and preparing the census of agriculture by authorizing the 
Department of Agriculture to receive this information.

                             Effective Date

    The provision is effective on the date of enactment of this 
technical correction.

E. Technical Corrections to the Transportation Equity Act for the 21st 
   Century (sec. 505(b) of the bill, sec. 9004 of the Act, and sec. 
                          9503(f) of the Code)

                              Present Law

    The Transportation Equity Act for the 21st Century 
(``Transportation Equity Act'') (P.L. 105-178) extended the 
Highway Trust Fund and accompanying highway excise taxes. The 
Transportation Equity Act also changed the budgetary treatment 
of Highway Trust Fund expenditures, including repeal of a 
provision that balances maintained in the Highway Trust Fund 
pending expenditure earn interest from the General Fund of the 
Treasury.

                        Explanation of Provision

    The provision clarifies that the Secretary of the Treasury 
is not required to invest Highway Trust Fund balances in 
interest-bearing obligations (because any interest paid to the 
Trust Fund by the General Fund would be immediately returned to 
the General Fund).

                 TITLE VI. RENEWAL COMMUNITY PROVISIONS

(secs. 601-606 of the bill and secs. 39, 46, 48, 49, 50, 51, 62, 4973, 
       4975, 6047, 6104, 6693, and new secs. 1400E-M of the Code)

                              Present Law

In general

            Zones and communities designated under OBRA 1993
    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 and three 
empowerment zones are located in rural areas.\3\ 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).
---------------------------------------------------------------------------
    \3\ 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, and 
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) 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); (3) special tax-exempt 
financing for certain zone facilities (described in more detail 
below); and (4) the so-called ``brownfields'' tax incentive, 
which allows taxpayers to expense (rather than capitalize) 
certain environmental remediation expenditures.\4\
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    \4\ The environmental remediation expenditure must be incurred in 
connection with the abatement or control of hazardous substances at a 
qualified contaminated site, generally meaning 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. Targeted areas include: 
(1) empowerment zones and enterprise communities as designated under 
OBRA 1993 and the 1997 Act (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. 
The ``brownfields'' provision (enacted in the 1997 Act) applies to 
eligible expenditures incurred in taxable years ending after date of 
enactment and before January 1, 2001.
---------------------------------------------------------------------------
    The 95 enterprise communities are eligible for the special 
tax-exempt financing benefits and ``brownfields'' tax 
incentive, but not the other tax incentives (i.e., the wage 
credit and additional sec. 179 expensing) available in the 
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 (other than the ``brownfields'' 
incentive) 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).
            Additional zones designated under 1997 Act
    Two additional urban zones with same tax incentives as 
previously designated empowerment zones.--Pursuant to the Tax 
Relief Act of 1997 (``1997 Act''), the Secretary of HUD 
designated 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 
the same tax incentives generally apply (i.e., the wage credit, 
additional expensing, special tax-exempt financing, and 
``brownfields'' incentive) as are available within the 
empowerment zones authorized by OBRA 1993.\5\ The two 
additional empowerment zones are subject to the same 
eligibility criteria under present-law section 1392 that apply 
to the original six urban empowerment zones.\6\
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    \5\ The two additional empowerment zones are located in Cleveland 
and Los Angeles. The wage credit available in the two new urban 
empowerment zones is modified slightly to provide that the credit rate 
will be 20 percent for calendar years 2000-2004, 15-percent for 
calendar year 2005, 10 percent for calendar year 2006, and five percent 
for calendar year 2007. No wage credit will be available in the two new 
urban empowerment zones after 2007.
    \6\ In order to permit designation of these two additional 
empowerment zones, the 1997 Act increased the aggregate population cap 
applicable to urban empowerment zones from 750,000 to a cap of one 
million aggregate population for the eight urban empowerment zones.
---------------------------------------------------------------------------
    The two additional empowerment zones must be designated 
within 180 days after enactment of the 1997 Act (i.e., the 
designations must be made by February 1, 1998). However, a 
special rule provides that the designations of these two 
additional empowerment zones will not take effect until January 
1, 2000 (and generally will remain in effect for 10 years).
    20 additional urban and rural empowerment zones.--The 1997 
Act also authorizes theSecretaries 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).7 With respect 
to these additional empowerment zones, the present-law eligibility 
criteria are expanded slightly in comparison to the eligibility 
criteria provided for by OBRA 1993. First, the general square mileage 
limitations (i.e., 20 square miles for urban areas and 1,000 square 
miles 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 may be divided among up to three 
noncontiguous parcels. In addition, the general requirement that at 
least half of the nominated area consists of census tracts with poverty 
rates of 35 percent or more does not apply to the 20 additional 
empowerment zones. However, 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.8 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 was 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.9
---------------------------------------------------------------------------
    \7\ In contrast to OBRA 1993, areas located within Indian 
reservations are eligible for designation as one of the additional 20 
empowerment zones under the 1997 Act.
    \8\ In lieu of the poverty criteria, outmigration may be taken into 
account in designating one rural empowerment zone.
    \9\ A special rule enacted as part of the 1997 Act modifies the 
present-law empowerment zone and enterprise community designation 
criteria so that any zones or communities designated in the future in 
the States of Alaska or Hawaii will not be subject to the general size 
limitations, nor will such zones or communities be subject to the 
general poverty-rate criteria. 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).
---------------------------------------------------------------------------
    Within the 20 additional empowerment zones, qualified 
``enterprise zone businesses'' are eligible to receive up to 
$20,000 of additional section 179 expensing 10 and 
to utilize special tax-exempt financing benefits. The 
``brownfields'' tax incentive (described above) also is 
available within all designated empowerment zones. However, 
businesses within the 20 additional empowerment zones are not 
eligible to receive the present-law wage credit available 
within the 11 other designated empowerment zones (i.e., the 
wage credit is available only within the nine zones designated 
under OBRA 1993 and the two urban zones designated under the 
1997 Act that are eligible for the same tax incentives as are 
available in the nine zones designated under OBRA 1993).
---------------------------------------------------------------------------
    \10\ However, the additional section 179 expensing is not available 
within the additional 2,000 acres allowed to be included under the 1997 
Act 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.11
---------------------------------------------------------------------------
    \11\ In addition, the 1997 Act also provides for special tax 
incentives (some of which are modeled after the empowerment zone tax 
incentives, but which also include a zero percent capital gains rate 
for certain qualified assets) for the District of Columbia.
---------------------------------------------------------------------------

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; 12 (2) at least 50 percent 
13 of the total gross income is derived from the 
active conduct of a ``qualified business'' within a zone or 
community; (3) a substantial portion of the business' tangible 
property is used within a zone or community; (4) a substantial 
portion of the business' intangible property is used in the 
active conduct of such business; (5) a substantial portion 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) less 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.
---------------------------------------------------------------------------
    \12\ A qualified proprietorship is not required to meet the 
requirement that the sole trade or business of the proprietor is the 
active conduct of a qualified business within the empowerment zone or 
enterprise community.
    \13\ The 1997 Act reduced this threshold from 80 percent (as 
enacted in OBRA 1993) to 50 percent.
---------------------------------------------------------------------------
    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.14 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.15 The 
rental of tangible personal property to others is not a 
qualified business unless at least 50 percent of the rental of 
such property is by enterprise zone businesses or by residents 
of an empowerment zone or enterprise community.
---------------------------------------------------------------------------
    \14\ 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.
    \15\ The 1997 Act provides that the lessor of property may rely on 
a lessee's certification that such lessee is an enterprise zone 
business.
---------------------------------------------------------------------------

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. However, a special rule 
(enacted in the 1997 Act) provides that certain ``new 
empowerment zone facility bonds'' issued for qualified 
enterprise zone businesses in the 20 additional empowerment 
zones are not subject to the State private activity bond volume 
caps or the special limits on issue size generally applicable 
to qualified enterprise zone facility bonds.16
---------------------------------------------------------------------------
    \16\ The maximum amount of ``new empowerment zone facility 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.
---------------------------------------------------------------------------
    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 
17) the principal user of which is an ``enterprise 
zone business'' (also defined above 18), or (2) 
functionally related and subordinate land located in the 
empowerment zone or enterprise community.19 These 
bonds may only be issued while an empowerment zone or 
enterprise community designation is in effect.
---------------------------------------------------------------------------
    \17\ A special rule (enacted in the 1997 Act) 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 and need 
not be 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 exceed 15 percent of the 
taxpayer's basis at the beginning of the period, or $5,000 (whichever 
is greater).
    \18\ 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.
    A special rule (enacted in the 1997 Act) 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 the 
first three taxable years after the startup period.
    \19\ A special rule (enacted in the 1997 Act) waives until the end 
of a ``startup period'' the requirement that 95 percent or more of the 
proceeds of a bond issue be used by a qualified enterprise zone 
business. With respect to each property, the startup period would end 
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 available only if, at the beginning of the startup period, 
there is a reasonable expectation that the use by a qualified 
enterprise zone business will be satisfied at the end of the startup 
period and the business makes bona fide efforts to satisfy the 
enterprise zone business definition.
---------------------------------------------------------------------------
    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.

                           Reasons for Change

    The Committee believes that the tax incentives available in 
empowerment zones and enterprise communities are inadequate to 
address the problems of distressed rural and urban areas. 
Revitalization of economically distressed areas through 
expanded business and employment opportunities should help 
alleviate both economic and social problems in such areas.

                        Explanation of Provision

    The bill authorizes the designation of 20 ``renewal 
communities'' within which special tax incentives will be 
available. The following is a description of the designation 
process and the tax incentives that are available within the 
proposed renewal communities.

                          Designation process

    Designation of 20 renewal communities.--Under the bill, the 
Secretary of HUD is authorized to designate up to 20 ``renewal 
communities'' from areas nominated by States and local 
governments. At least 20 percent of the designated communities 
must be in rural areas (defined as areas which (1) are within 
local government jurisdictions with a population less than 
50,000, (2) are outside of a metropolitan statistical area, or 
(3) are determined by HUD to be a rural area). The Secretary of 
HUD is required to publish (within four months after enactment) 
regulations describing the selection process, and all 
designations of renewal communities would have to be made 
within 24 months after such regulations are published. 
Designations generally remain in effect through December 31, 
2006.
    Old empowerment zones and enterprise communities may seek 
additional designation as renewal communities.--The bill allows 
the previously designated empowerment zones and enterprise 
communities to be eligible for designation as renewal 
communities. Priority would be given in the designation of the 
first 50 percent of renewal communities to nominated areas 
which are empowerment zones or enterprise communities under 
present law and which otherwise meet the requirements of the 
proposal for designation as a renewal community. If a 
previously designated empowerment zone or enterprise community 
is selected as one of the 20 renewal communities, then the 
area's designation as a empowerment zone or enterprise 
community would remain in effect and the same area would also 
be designated as a renewal community. For such an area 
obtaining dual-designation status, the special tax incentives 
available for empowerment zones (or enterprise communities, as 
the case may be) and for renewal communities are available. If 
an area previously designated as an empowerment zone or 
enterprise community does not seek designation (or is not 
selected by the Secretary of HUD) as a renewal community, then 
the present-law empowerment zone and enterprise community 
provisions continue to apply to that area.
    Eligibility criteria.--To be designated as a renewal 
community, a nominated area must meet all of the following 
criteria: (1) each census tract must have a poverty rate of at 
least 20 percent; (2) at least 70 percent of the households 
have incomes below 80 percent of the median income of 
households within the local government jurisdiction; (3) the 
unemployment rate is at least 1.5 times the national 
unemployment rate; and (4) the area is one of pervasive 
poverty, unemployment, and general distress.
    Except with respect to the designation of the first 50 
percent of renewal communities under which priority is given to 
existing empowerment zones and enterprise communities (as 
described above), those areas with the highest average ranking 
of factors (1), (2), and (3) above would be designated as 
renewal communities. The Secretary of HUD could also take into 
account in selecting areas for designation the extent to which 
such areas have a high incidence of crime, as well as whether 
the area has census tracts identified in the May 12, 1998, 
report of the General Accounting Office regarding the 
identification of economically distressed areas.
    There are no geographic size or maximum population 
limitations placed on the designated renewal communities. The 
bill merely requires that the boundary of a designated 
community be ``continuous'' and that the designated community 
have a population of at least 4,000 if the community is located 
within a metropolitan statistical area (at least 1,000 in all 
other cases, or the community must be entirely within an Indian 
reservation).
    Required State and local government course of action.--In 
order for an area to be designated as a renewal community, the 
bill requires State and local governments to submit a written 
course of action which promises within the nominated area at 
least five of the following:(1) a reduction of tax rates or 
fees; (2) an increase in the level of efficiency of local services; (3) 
crime reduction strategies; (4) actions to remove or streamline 
governmental requirements; (5) involvement by private entities and 
community groups, such as to provide jobs and job training and 
financial assistance; (6) State or local income tax benefits for fees 
paid for services performed by a nongovernmental entity which were 
formerly performed by a government entity; and (7) the gift (or sale at 
below fair market value) of surplus realty by the State or local 
government to community organizations or private companies.
    In addition, the bill requires that the nominating State 
and local governments promise to promote economic growth in the 
nominated area by repealing or not enforcing (1) licensing 
requirements for occupations that do not ordinarily require a 
professional degree, (2) zoning restrictions on home-based 
businesses which do not create a public nuisance, (3) permit 
requirements for street vendors who do not create a public 
nuisance, (4) zoning or other restrictions that impede the 
formation of schools or child care centers, and (5) franchises 
or other restrictions on competition for businesses providing 
public services, including but not limited to taxicabs, 
jitneys, cable television, or trash hauling, unless such 
regulations are ``well-tailored to the protection of health and 
safety.''

Tax incentives for renewal communities

    The following tax incentives generally are available during 
the seven-year period beginning January 1, 2000, and ending 
December 31, 2006.
    100-percent capital gain exclusion.--The bill provides for 
a 100 percent capital gains exclusion for qualified capital 
gain from the sale of a qualified community asset acquired 
after December 31, 1999, and before January 1, 2007, and held 
for more than five years. A ``qualified community asset'' 
includes: (1) qualified community stock (meaning original-issue 
stock acquired for cash in a ``renewal community business,'' 
defined below); (2) qualified community partnership interest 
(meaning a partnership interest acquired for cash in a renewal 
community business); and (3) qualified community business 
property (meaning tangible real and personal property used in a 
renewal community business, if acquired (or substantially 
improved) by the taxpayer after December 31, 1999, and before 
January 1, 2007). The exclusion is available only if during 
substantially all of the taxpayer's holding period, the 
corporation or partnership qualifies as a renewal community 
business, or substantially all of the use of the property is in 
a renewal community business. Property continues to be a 
``qualified community asset'' if sold (or otherwise 
transferred) to a subsequent purchaser, provided that the 
property continues to represent an interest in (or is tangible 
property used in) a renewal community business. In the case of 
the termination of an area's status as a renewal community, the 
amount of gain eligible for the exclusion cannot exceed the 
amount that would have been excludable had the property been 
sold on the date of the termination of status. Any gain 
attributable to the period before January 1, 2000, and after 
December 31, 2006, is not eligible for the 100-percent capital 
gains exclusion.
    A ``renewal community business'' for purposes of the 
capital gain exclusion, as well as for purposes of the 
increased expensing under section 179 (described below), 
generally must satisfy the requirements of an ``enterprise zone 
business'' under present law; however, at least 50 percent (as 
opposed to 80 percent) of the total gross income of the 
business must be derived from the active conduct of a 
``qualified business'' within a renewal community.
    Family development accounts.--Under the bill, individual 
taxpayers are allowed to claim an above-the-line deduction for 
certain amounts paid in cash to a family development account 
(``FDA'') established for the benefit of a ``qualified 
individual,'' meaning an individual who both resides in a 
renewal community throughout the taxable year and who was 
allowed to claim the earned income tax credit (``EITC'') during 
the preceding taxable year. An FDA is subject to rules similar 
to the rules for Individual Retirement Arrangements (``IRAs''). 
No deduction is allowed for any amount paid to an FDA for a 
taxable year beginning after December 31, 2006.
    A qualified individual may claim a deduction for a taxable 
year for amounts contributed to his or her FDA(s) of up to the 
lesser of (1) $2,000 or (2) the amount of the individual's 
compensation included in gross income for the year. Any other 
person may deduct up to $1,000 per year for amounts contributed 
to an FDA established on behalf of a qualified individual. 
Under the bill, no more than $3,000 of contributions (excluding 
certain demonstration program matching contributions described 
below) can be made to the FDAs of a qualified individual in any 
taxable year. Contributions to an FDA may be made on or before 
April 15th of the following taxable year. The bill permits (but 
does not require) individuals to direct that the IRS directly 
deposit their EITC refunds into an FDA on behalf of such 
individual.
    The bill provides that up to 5 of the renewal communities 
may be designated by the Secretary of HUD as ``FDA matching 
demonstration areas,'' with respect to which HUD will, at the 
request of a qualified individual, match amounts contributed to 
FDAs, up to $1,000 per individual per taxable year (with a 
$2,000 lifetime cap). At least 2 of the FDA matching 
demonstration areas must be rural areas. The Secretary of HUD 
may designate renewal communities as FDA matching demonstration 
areas only during the 24-month period after such Secretary 
prescribes regulations regarding such areas. The matching grant 
amounts made under this demonstration program are excluded from 
the gross income of the account holder, and no deduction is 
allowed for matching grant amounts. The Secretary of the 
Treasury is required to provide notice to residents of FDA 
matching demonstration areas of the availability of matching 
contributions.
    The bill provides that an FDA is exempt from taxation 
(other than the unrelated business income tax imposed by 
present-law section 511). Distributions from an FDA that are 
qualified family development distributions are not included in 
gross income. A distribution from an FDA is a qualified family 
development distribution if the distribution is used 
exclusively to pay (1) qualified post-secondary educational 
expenses, (2) certain first-time homebuyer expenses, (3) 
certain qualified business capitalization costs, or (4) 
qualified medical expenses. Such qualified expenses must be 
incurred on behalf of the FDA account holder, or the spouse or 
dependent of the account holder. Distributions from an FDA that 
are not qualified family development distributions are included 
in gross income and subject to either a 100-percent penalty tax 
(in the case of a distribution attributable to a demonstration 
matching contribution) or a 10-percent penalty tax (in the case 
of a distribution that is not attributable to a demonstration 
matchingcontribution). The 100-percent and 10-percent penalty 
taxes do not apply to distributions that are made on or after the 
account holder attains age 59\1/2\, dies, or becomes disabled. Any 
distribution from an FDA that is not a qualified family development 
distribution is deemed to have been made from demonstration matching 
contributions (and, therefore, subject to a 100-percent penalty) until 
all such demonstration matching contributions have been withdrawn. The 
purpose of this rule is to encourage account holders to use the amounts 
contributed to the FDA for qualified family development distributions 
or to save such amounts for retirement.
    The bill permits tax-free (and penalty-free) rollovers of 
amounts in an FDA into another such account established for the 
benefit of an individual who (1) both resides in a renewal 
community throughout the taxable year and was allowed to claim 
the earned income tax credit during the preceding taxable year, 
and (2) either is the account holder or is a spouse or 
dependent of the account holder.
    Commercial revitalization credit.--The bill allows 
taxpayers to claim a nonrefundable ``commercial revitalization 
credit'' equal to: (1) a 20-percent credit rate for the year a 
qualified building is placed in service or, if the taxpayer 
elects, (2) a 5-percent credit rate for each year during a 10-
year period after the building is placed in service for costs 
(up to $10 million per building) of constructing or 
substantially rehabilitating one or more buildings used for 
commercial purposes in a designated renewal community. A 
qualified building must be located in a renewal community and 
be placed in service after December 31, 1999, and before 
January 1, 2007. Under the bill, each State is allowed to 
allocate no more than $2 million of credits to each renewal 
community located within the State for each calendar year.
    Additional section 179 expensing.--A renewal community 
business (defined above) is allowed an additional $35,000 of 
section 179 expensing for qualified renewal property placed in 
service after an area is designated a renewal community. Thus, 
if a renewal community business is located in an area that is 
designated as both an empowerment zone and a renewal community, 
such business could be allowed an additional $55,000 of section 
179 expensing (i.e., $20,000 of additional expensing because 
the area is designated an empowerment zone plus $35,000 of 
additional expensing because the area is designated a renewal 
community). As under present law, the section 179 expensing 
allowed to a taxpayer is phased out if the cost of section 179 
property placed in service during the year by the taxpayer 
exceeds $200,000.
    Expensing of environmental remediation costs 
(``brownfields'').--Under the bill, taxpayers can elect to 
treat certain environmental remediation expenditures that would 
otherwise be chargeable to capital account as deductible in the 
year paid or incurred. The expenditure must be incurred in 
connection with the abatement or control of environmental 
contaminants, as required by Federal and State law, at a trade 
or business site located within a designated renewal community. 
This provision makes available to taxpayers located in renewal 
communities the ``brownfields'' provision enacted as part of 
the 1997 Act, which allows taxpayers to expense certain 
environmental remediation expenditures on property located in 
an empowerment zone, enterprise community, or certain other 
designated areas. This provision applies to expenditures 
incurred after December 31, 1999, and before January 1, 2007.
    Extension of work opportunity tax credit.--The bill permits 
employers to claim the Work Opportunity Tax Credit (``WOTC'') 
with respect to individuals hired from one or more targeted 
groups that live and perform substantially all of their work in 
a renewal community. The WOTC is available to an employer if 
(1) the employer is engaged in a trade or business in a renewal 
community throughout the one-year period for which the credit 
is being claimed, (2) the individual with respect to whom the 
WOTC is claimed is a resident of the renewal community 
throughout the one-year period, and (3) substantially all of 
the services which the individual performs for the employer 
during the one-year period are performed in the renewal 
community. The availability of the WOTC in renewal communities 
expires with respect to wages paid after December 31, 2006. 
20 Under this provision, the WOTC with respect to a 
qualifying individual is 15 percent of qualified first-year 
wages and 30 percent of qualified second-year wages. No more 
than $10,000 of wages may be taken into account in each year. 
Thus, the maximum credit for a qualifying individual is $1,500 
with respect to qualified first-year wages and $3,000 with 
respect to qualified second-year wages. Qualified wages 
generally consist of wages paid or incurred during the one-year 
period for which the WOTC is being calculated.
---------------------------------------------------------------------------
    \20\  The Work Opportunity Tax Credit expired July 1, 1998. Section 
302 of the bill extends the Work Opportunity Tax Credit through 
February 29, 2000.
---------------------------------------------------------------------------
    Targeted groups eligible for the credit include: (1) 
certain individuals certified by the designated local 
employment agency as being a member of a family eligible to 
receive benefits under the Temporary Assistance for Needy 
Families program (``TANF''); (2) certain ex-felons having a 
hiring date within one year of release from prison or date of 
conviction; (3) individuals who are at least 18 but not 25 
years of age and have a principal place of abode within an 
empowerment zone, enterprise community, or renewal community; 
(4) individuals who are at least 18 but not 25 years of age who 
are certified 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; (5) 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; (6) individuals who are 16 or 17 years of age, 
perform services during any 90-day period between May 1 and 
September 15, and have a principal place of abode within an 
empowerment zone, enterprise community, or renewal community; 
(7) certain veterans who receive food stamps; and (8) 
recipients of certain (``SSI'') Supplemental Security Income 
benefits.
    Treasury reports.--The bill provides that, not later than 
the close of the fourth calendar year after the year the 
Secretary of HUD first designates an area as a renewal 
community and every four years thereafter, the Secretary of 
Treasury must report to Congress on the effects of such 
designation in stimulating the creation of new jobs, 
particularly for disadvantaged workers and long-term unemployed 
individuals, and promoting the revitalization of economically 
distressed areas.

                             Effective Date

    Under the bill, renewal communities must be designated 
within 24 months after publication of certain regulations by 
HUD. The tax benefits available in renewal communities 
generally are effective for the 7-year period beginning January 
1, 2000, and ending December 31, 2006.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 2(l)(2)(B) of Rule XI of the 
Rules of the House of Representatives, the following statements 
are made concerning the votes of the Committee on Ways and 
Means in its consideration of the bill, H.R. 4579.

Motion to report the bill

    The bill, H.R. 4579, as amended, was ordered favorably 
reported by a roll call vote of 23 yeas to 15 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
            Representatives                 Yea       Nay            Representatives             Yea       Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer.............................        X   ........  Mr. Rangel.....................  ........        X
Mr. Crane..............................        X   ........  Mr. Stark......................  ........        X
Mr. Thomas.............................        X   ........  Mr. Matsui.....................  ........        X
Mr. Shaw...............................        X   ........  Mrs. Kennelly..................        X   ........
Mrs. Johnson...........................        X   ........  Mr. Coyne......................  ........        X
Mr. Bunning............................        X   ........  Mr. Levin......................  ........        X
Mr. Houghton...........................        X   ........  Mr. Cardin.....................  ........        X
Mr. Herger.............................        X   ........  Mr. McDermott..................  ........        X
Mr. McCrery............................        X   ........  Mr. Kleczka....................  ........        X
Mr. Camp...............................        X   ........  Mr. Lewis......................  ........        X
Mr. Ramstad............................        X   ........  Mr. Neal.......................  ........        X
Mr. Nussle.............................        X   ........  Mr. McNulty....................  ........        X
Mr. Johnson............................        X   ........  Mr. Jefferson..................  ........        X
Ms. Dunn...............................        X   ........  Mr. Tanner.....................  ........        X
Mr. Collins............................        X   ........  Mr. Becerra....................  ........        X
Mr. Portman............................  ........  ........  Mrs. Thurman...................  ........        X
Mr. English............................        X   ........
Mr. Ensign.............................        X   ........
Mr. Christensen........................        X   ........
Mr. Watkins............................        X   ........
Mr. Hayworth...........................        X   ........
Mr. Weller.............................        X   ........
Mr. Hulshof............................        X   ........
----------------------------------------------------------------------------------------------------------------

Vote on amendment

    A roll call vote was conducted on the following amendment 
to the Chairman's amendment in the nature of a substitute.
    An amendment by Mr. Rangel, that would make the bill's 
provisions contingent upon attaining long-term solvency within 
the Social Security system, but permitting the provisions of 
the bill which extend expiring provisions (together with a 
revenue offset) and increase the Social Security earnings 
limitation (and the budget offsets) to take effect immediately, 
was defeated by a roll call vote of 15 yeas to 23 nays. The 
vote was as follows:

----------------------------------------------------------------------------------------------------------------
            Representatives                 Yea       Nay            Representatives             Yea       Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer.............................  ........        X   Mr. Rangel.....................        X   ........
Mr. Crane..............................  ........        X   Mr. Stark......................        X   ........
Mr. Thomas.............................  ........        X   Mr. Matsui.....................        X   ........
Mr. Shaw...............................  ........        X   Mrs. Kennelly..................  ........  ........
Mrs. Johnson...........................  ........        X   Mr. Coyne......................        X   ........
Mr. Bunning............................  ........        X   Mr. Levin......................        X   ........
Mr. Houghton...........................  ........        X   Mr. Cardin.....................        X   ........
Mr. Herger.............................  ........        X   Mr. McDermott..................        X   ........
Mr. McCrery............................  ........        X   Mr. Kleczka....................        X   ........
Mr. Camp...............................  ........        X   Mr. Lewis......................        X   ........
Mr. Ramstad............................  ........        X   Mr. Neal.......................        X   ........
Mr. Nussle.............................  ........        X   Mr. McNulty....................        X   ........
Mr. Johnson............................  ........        X   Mr. Jefferson..................        X   ........
Ms. Dunn...............................  ........        X   Mr. Tanner.....................        X   ........
Mr. Collins............................  ........  ........  Mr. Becerra....................        X   ........
Mr. Portman............................  ........        X   Mrs. Thurman...................        X   ........
Mr. English............................  ........        X
Mr. Ensign.............................  ........        X
Mr. Christensen........................  ........        X
Mr. Watkins............................  ........        X
Mr. Hayworth...........................  ........        X
Mr. Weller.............................  ........        X
Mr. Hulshof............................  ........        X
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with clause 7(a) of Rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the estimated budget effects of H.R. 4579, as 
reported by the Committee.
    The bill, as reported, is estimated to have the following 
budget effects:

                ESTIMATED BUDGET EFFECTS OF H.R. 4579, THE ``TAXPAYER RELIEF ACT OF 1998'' AS APPROVED BY THE COMMITTEE ON WAYS AND MEANS
                                                        [By fiscal years in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                Provision                                Effective                  1999        2000        2001        2002        2003      1999-2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
I. Family Tax Relief Provisions:
    A. Marriage Penalty Tax Relief--       tyba 12/31/98.......................      -3,517      -5,935      -6,057      -6,255      -6,310      -28,074
     adjust the standard deduction so
     that it is twice that of the
     standard deduction for a single
     taxpayer; make uniform additional
     standard deduction for the blind and
     elderly.
    B. $200/$400 Exclusion for Interest    tyba 12/31/98.......................        -693      -3,472      -3,521      -3,599      -3,669      -14,954
     and Dividends.
    C. Treatment of Nonrefundable          tyba 12/31/97.......................      -1,042      -1,103      -1,442      -1,911      -2,577       -8,075
     Personal Credits (child credit,
     adoption, credit, HOPE and Lifetime
     Learning credits, etc.) Under the
     Alternative Individual Minimum Tax.
    D. Suspension of 5-Year Holding        sa DOE..............................          -5         -12         -12         -13         -13          -54
     Period Relating to Gain on Sale of
     Principal Residence for Members of
     the Uniformed Services and the
     Foreign Service Serving Outside the
     Area in Which the Property is
     Located.
                                                                                ------------------------------------------------------------------------
      Subtotal of Family Tax Relief        ....................................      -5,257     -10,522     -11,032     -11,778     -12,569      -51,157
       Provisions.
                                                                                ========================================================================
II. Education and Infrastructure
 Provisions:
    A. Permit Private Higher Education     ci tyba 12/31/98....................         -43        -117        -127        -137        -148         -572
     Schools to Establish Qualified
     Prepaid Tuition Programs.
    B. Provide a 4-Year Exception from     bia 12/31/98........................         -86        -238        -343        -379        -332       -1,379
     Arbitrage Rebate for Tax-Exempt
     Bonds Issued to Finance Public
     School Construction.
    C. Increase Private Activity Bond      1/1/99..............................         -16        -111        -225        -329        -425       -1,107
     Volume Cap to the Greater of $75 Per
     Capita or $225 Million.
    D. Designate 20 Renewal Communities;   DOE.................................          -3        -156        -256        -282        -343       -1,039
     Provide Various Incentives Starting
     1/1/00, Including 100% Capital Gains
     Exclusion on Certain Investments.
                                                                                ------------------------------------------------------------------------
      Subtotal of Education and            ....................................        -148        -622        -951      -1,127      -1,248       -4,097
       Infrastructure Provisions.
                                                                                =============
III. Small Business and Farmer Tax Relief
 Provisions:
    A. Accelerate the $1 Million Estate    dda 12/31/98........................  ..........      -4,381      -4,278      -4,641      -4,626      -17,926
     Tax Unified Credit Exemption.
    B. Accelerate 100% Deduction for       tybe 12/31/98.......................        -415      -1,247      -1,249      -1,241        -959       -5,111
     Health Insurance Premiums of Self-
     Employed Individuals.
    C. Accelerate $25,000 Small Business   tyba 12/31/98.......................        -600        -945        -140        -319        -307       -1,059
     and Farmer Expensing.
    D. Permanent Extension of Income       tyba 12/31/00.......................  ..........  ..........          -2         -21         -22          -45
     Averaging for Farmers.
    E. Extend the Net Operating Loss       NOLgi tyba 12/31/97.................         -20         -18         -16         -14         -13          -81
     Carryback Period for Farmer Losses.
    F. Farmers Production Flexibility      DOE.................................         -98          98  ..........  ..........  ..........  ...........
     Contract Payments Not Included in
     Income Prior to Receipt.
                                                                                ------------------------------------------------------------------------
      Subtotal of Small Business and       ....................................      -1,133      -6,493      -5,685      -5,598      -5,313      -24,222
       Farmer Tax Relief Provisions.
                                                                                ========================================================================
IV. Extension of Expiring Provisions:
    A. Extend the R&E Credit and Increase  7/1/98..............................      -1,543      -1,076        -677        -407        -249       -3,952
     the Rates for the Alternative
     Incremental Research Credit by 1-
     Percentage Point (through 2/29/00).
    B. Extend the Work Opportunity Tax     wpoifibwa 6/30/98...................        -245        -245        -156         -67         -25         -737
     Credit (through 2/29/00).
    C. Extend the Welfare to Work Tax      wpoifibwa 4/30/99...................         -14         -47         -37         -19          -8         -124
     Credit (through 2/29/00).
    D. Permanently Extend Contributions    7/1/98; tyea 12/31/98...............         -23         -56         -71         -83         -91         -324
     of Appreciated Stock to Private
     Foundations; Public Inspection of
     Private Foundation Annual Returns.
    E. 1-Year Modified Extension of        tybi 1999...........................        -117        -378  ..........  ..........  ..........         -495
     Exemption from Subpart F for Active
     Financing Income.
    F. Extend the Generalized System of    7/1/98..............................        -393        -142  ..........  ..........  ..........         -535
     Preferences (through 2/29/00) \1\.
                                                                                ------------------------------------------------------------------------
      Subtotal of Extension of Expiring    ....................................      -2,335      -1,944        -941        -576        -373       -6,167
       Provisions.
                                                                                ========================================================================
V. Revenue Offset Provisions:
    A. Change the Treatment of Certain     dma 5/21/98.........................       2,425       1,109         723         640         672        5,569
     Deductible Liquidating Distributions
     of RICs and REITs.
                                                                                ------------------------------------------------------------------------
      Subtotal of Revenue Offset           ....................................       2,425       1,109         723         640         672        5,569
       Provision.
VI. Tax Technical Corrections Provisions
      Total of Revenue Provisions........  ....................................      -6,448     -18,472     -17,886     -18,439     -18,831      -80,074
Social Security Outlay Provisions \2\
    A. Accelerate Phase-in of $30,000      tyea 12/31/98.......................        -175        -225        -150         -25          10         -565
     Earnings Test Limit.
    B. Delay Benefit Recomputations......  bma 12/31/98........................          10         140         140         140         140          570
                                                                                ------------------------------------------------------------------------
      Subtotal of Social Security Outlay   ....................................        -165         -85         -10         115         150            5
       Provisions.
                                                                                ========================================================================
      Net Total..........................  ....................................      -6,613     -18,557     -17,896     -18,324     -18,681     -80,069
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimate provided by the Congressional Budget Office.
\2\ Preliminary and unofficial estimates provided by the Congressional Budget Office.
 Legend for ``Effective'' column; ci=contributions in; bia=bonds issued after; bma=benefits months after; dda=decedents dying after; dma=distributions
  made after; DOE=date of enactment; NOLgi=net operating losses generated in; sa=sales after; tyba=taxable years beginning after; tybi=taxable years
  beginning in; tyea=taxable years ending after; wpoifibwa=wages paid or incurred for individuals beginning work after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with subdivision (B) of clause 2(l)(3) of 
Rule XI of the Rules of the House of Representatives, the 
Committee states that the Social Security provisions (secs. 121 
and 122) involve increased (sec. 121) and decreased (sec. 122) 
budget outlays. (See Part IV.A., above.)

Tax expenditures

    In compliance with subdivision (B) of clause 2(l)(3) of 
Rule XI of the Rules of the House of Representatives, the 
Committee states that the individual income tax reduction 
provisions (other than the increased standard deduction for 
married taxpayers), the business income tax reduction 
provisions (other than the provision relating to farmer 
production flexibility contract payments), and the extensions 
of expiring income tax provisions involve increased tax 
expenditures. The partial exclusion for individual interest and 
dividend income is a new tax expenditure to the Tax Code.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with subdivision (C) of the clause 2(l)(3) of 
Rule XI of the Rules of the House of Representatives, requiring 
a cost estimate prepared by the Congressional Budget Office 
(``CBO''), the Committee advises that the CBO has submitted the 
following statement on H.R. 4579, as reported.

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 23, 1998.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4579, the Taxpayer 
Relief Act of 1998.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Hester 
Grippando (for revenues) and Kathy Ruffing.
            Sincerely,
                                          June E. O'Neil, Director.
    Enclosure.

H.R. 4579--Taxpayer Relief Act of 1998

    Summary: The Taxpayer Relief Act of 1998 is an omnibus tax 
bill that would amend exiting tax laws and extend numerous tax 
provisions that have expired recently or are about to expire. 
H.R. 4579 would also increase the amount that Social Security 
beneficiaries who are over the age of eligibility for full 
retirement benefits (currently 65) and under age 70 could earn 
without having their benefits reduced and would offset the 
resulting costs by delaying recomputations of benefits for 
recent earnings. The Congressional Budget Office (CBO) and the 
Joint Committee on Taxation (JCT) estimate that H.R. 4579 would 
decrease governmental receipts by $80 billion over the 1999-
2003 period. In addition, CBO estimates that this bill would 
reduce spending for Social Security by $5 million over the same 
period.
    H.R. 4579 contains no intergovernmental mandates as defined 
in the unfunded Mandates Reform Act (UMRA) and would impose no 
costs on state, local, or tribal governments. The bill imposes 
one new private-sector mandate through changes in the treatment 
of certain deductible liquidating distributions of regulated 
investment companies and real estate investment trusts. The 
costs of the new mandate would exceed the threshold ($100 
million in 1996, adjusted annually for inflation) specified in 
UMRA in fiscal years 1999-2003.
    Description of major provisions: Title I, Provisions 
Primarily Affecting Individuals and Families, would:
          Raise the standard deduction for married couples,
          Provide for a partial exclusion of income from 
        interest and dividends,
          Change treatment of personal credits under the 
        individual alternative minimum tax,
          Accelerate the increase in the deduction for health 
        insurance expenses for self-employed individuals,
          Establish a special rule relating to gain on sale of 
        principal residence for members of the uniformed forces 
        and the foreign service serving outside the area where 
        the property is located,
          Accelerate the increase in the unified credit in the 
        estate and gift tax,
          Permit schools of higher education to establish 
        qualified prepaid tuition programs,
          Change the treatment of tax-exempt bonds issued to 
        finance public school construction,
          Increase the Social Security earnings limit for 
        individuals who attained retirement age, and
          Change the recomputation of benefits after normal 
        retirement age.
    Title II, Provisions Primarily Affecting Farming and Other 
Businesses, would:
          Accelerate the increase in expensing for small 
        businesses,
          Permanently extend income averaging for farmers,
          Extend the net operating loss carryback period for 
        farmers,
          Allow farmers not to include payments from production 
        flexibility contracts in income prior to receipt, and
          Increase state volume limits on private activity tax-
        exempt bonds.
    Title III, Extension and Modification of Certain Expiring 
Provisions, would:
          Extend the research and experimentation tax credit 
        through February 29, 2000,
          Extend the work opportunity tax credit through 
        February 29, 2000,
          Extend the welfare-to-work tax credit through 
        February 29, 2000,
          Permanently extend the deduction provided for 
        contributions of appreciated stock to private 
        foundations,
          Modify and extend for one year the exemption from 
        Subpart F for active financing income, and
          Extend the Generalized System of Preferences through 
        February 29, 2000,
    Title IV, Revenue Offset Provision, would change the 
treatment of certain deductible liquidating distributions of 
regulated investment companies and real estate investment 
trust.
    Title V would make technical corrections to existing tax 
laws.
    Title VI, The American Community Renewal Act of 1998, would 
designate 20 renewal communities and provide various tax 
incentives.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 4579 is summarized in the following 
table. The costs of this legislation fall within budget 
function 650 (Social Security).

                          TABLE 1. SUMMARY OF ESTIMATED BUDGETARY EFFECTS OF H.R. 4579
                                     [By fiscal year in millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                   1998       1999       2000       2001       2002       2003
----------------------------------------------------------------------------------------------------------------
                                                    REVENUES
Title I: Provisions Primarily Affecting
 Individuals and Families.....................          0     -5,801    -16,505    -17,029    -18,176    -18,634
Title II: Provisions Primarily Affecting
 Farming and Other Businesses.................          0       -734       -976       -383        -45       -153
Title III: Extension and Modification of
 Certain Expiring Provisions..................          0     -2,335     -1,944       -941       -576       -373
Title IV: Revenue Offset......................          0      2,425      1,109        723        640        672
Title VI: American Community Renewal Act......          0         -3       -156       -256       -282       -343
                                               -----------------------------------------------------------------
      Total...................................          0     -6,448    -18,472    -17,886    -18,439    -18,831
                                                 DIRECT SPENDING
Spending under current law:
    Old-Age, Survivors, and Disability
     Insurance \1\............................    375,785    391,477    408,764    427,736    448,711    471,221
Proposed changes:
    Old-Age, Survivors, and Disability
     Insurance \1\............................          0        165         85         10       -115       -150
Spending under H.R. 4579
    Old-Age, Survivors, and Disability
     Insurance \1\............................    375,785    391,642    408,849    427,746    448,596    471,071
                                                CHANGE IN SURPLUS
Proposed changes:
    Off-budget................................          0       -165        -85        -10        115        150
    On-budget.................................          0     -6,448    -18,472    -17,886    -18,439    -18,831
                                               -----------------------------------------------------------------
      Total...................................          0     -6,613    -18,557    -17,896    -18,324    -18,681
----------------------------------------------------------------------------------------------------------------
\1\ Spending from the Old-Age and Survivors Insurance and Disability Insurance trust funds is off-budget under
  current law.
Notes.--Components may not sum to totals due to rounding. The table does not include any spending that may occur
  subject to appropriations as a result of federal deposits to the family development accounts, authorized in
  title VI.
Source: Joint Committee on Taxation and Congressional Budget Office.

Basis of Estimate

            Revenues
    All the estimates for the revenue provisions, with the 
exception of the Generalized System of Preferences (GSP) in 
subtitle B of title III, were provided by the JCT.
    The Taxpayer Relief Act of 1998 would renew GSP, which 
expired on June 30, 1998, through February 29, 2000. Taxpayers 
could apply for refunds for the period between July 1, 1998, 
and October 1, 1998. GSP affords nonreciprocal tariff 
preferences to approximately 140 developing countries to aid 
their economic development and to diversify and expand their 
production and exports. Generally, duty-free treatment of 
imported goods from GSP-designated developing countries is 
extended to products that are not competitive internationally. 
The program contains safeguards to protect domestic industries 
that are sensitive to import competition. CBO estimates that 
renewing GSP would reduce governmental receipts by $393 million 
in fiscal year 1999, $142 million in fiscal year 2000, and a 
total of $535 million over the 1999-2000 period, net of payroll 
and income tax offsets. This estimates is based on projections 
of U.S. imports and recent data on collections from beneficiary 
countries under the GSP program.
            Provisions Relating to Social Security
    Subtitle C of title I contains two provisions relating to 
Social Security.
    Earnings Limit.--Section 121 of H.R. 4579 would increase 
the amount that certain Social Security beneficiaries could 
earn without having their benefits reduced. Under current law, 
for beneficiaries over retirement age (currently 65) and 
younger than age 70, one dollar of benefits is withheld for 
every three dollars of earnings above a threshold, which equals 
$14,500 in 1998. A stricter test applies to retired workers 
between the ages of 62 and 64; beneficiaries above the age of 
70 are exempt. This year's limit of $14,500 was set two years 
ago in the Contract with America Advancement Act (Public Law 
104-121), and will increase to $30,000 by 2002 and in step with 
average wages thereafter. This bill would raise the exempt 
amount of earnings in each of the next ten years except 2002 
(see Table 2).

        TABLE 2. EARNINGS TEST FOR CERTAIN SOCIAL SECURITY BENEFICIARIES UNDER CURRENT LAW AND H.R. 4579
----------------------------------------------------------------------------------------------------------------
                                          Exempt
                                          amount       Exempt
            Calendar year                 under        amount     Difference          Affected age group
                                       current law   under H.R.
                                           \1\          4579
----------------------------------------------------------------------------------------------------------------
1998.................................      $14,500      $14,500            0  65 to 70
1999.................................       15,500       17,000        1,500  65 to 70
2000.................................       17,000       18,500        1,500  65 to 70
2001.................................       25,000       26,000        1,000  65 to 70
2002.................................       30,000       30,000            0  65 to 70
2003.................................       31,200       31,300          100  65 and 2 months to 70
2004.................................       32,520       34,000        1,480  65 and 4 months to 70
2005.................................       33,840       35,400        1,560  65 and 6 months to 70
2006.................................       35,160       36,800        1,640  65 and 8 months to 70
2007.................................       36,600       38,350        1,750  65 and 10 months to 70
2008.................................       37,920       39,750        1,830  66 to 70
----------------------------------------------------------------------------------------------------------------
\1\ Through 2002, these amounts are set in the Contract With America Advancement Act (Public Law 104-121). After
  2002, they are indexed to overall wage increases. A lower limit applies to beneficiaries who have not reached
  the age for full (unreduced) retirement benefits.

    In calendar years 1999 and 2000, CBO estimates that the 
proposed increase in the earnings limit would lead to extra 
Social Security outlays of about $225 million each year. 
Because the increase would not take effect until January 1999, 
the cost in fiscal year 1999 would be only about $175 million. 
In those years, based on information from the Social Security 
Administration (SSA), CBO estimates that about 500,000 
beneficiaries would receive benefit increase. The maximum gain 
in those years for a beneficiary would be $500 (that is, the 
proposed $1,500 increase times the one-third reduction in 
benefits that the recipient would experience under current 
law); of course, not all of those affected would receive the 
maximum increase. The costs of the bill would fall after 2000 
for several reasons. First, the retirement age is scheduled to 
increase under current law, effective for people reaching age 
62 in 2000 (age 65 in 2003), and fewer people will be in the 
relevant age bracket. Second, the threshold for the earnings 
test is already scheduled to climb steeply under current law, 
and fewer people will exceed it. Finally, those older workers 
who benefit form this proposal will thereby forfeit a part of 
their delayed retirement credit for the rest of their 
lifetimes. In 2003, for example, when the proposed change in 
the earnings test itself is negligible, CBO estimates that 
about $10 million would be saved, on balance, by virtue of the 
delayed retirement credit (see Table 3).
    Delay In Benefit Recomputations.--Benefits for retired 
workers are essentially computed by averaging the highest 35 
years of the worker's earnings and applying a benefit 
formula.When a retiree continues to have earnings, SSA checks to see 
whether substituting that year of earnings--in lieu of one of the other 
35 years--would lead to a higher benefit. Those recomputations are 
based on the annual earnings that employers report to the Internal 
Revenue Service. About 85 percent of such earnings are posted within 6 
months of the close of the calendar year, and about 98 percent within 9 
months. Because of this lag, recomputations--which are now effective 
for the January immediately after the year of earnings--typically lead 
to a lump-sum payment of retroactive benefits when they are finally 
processed.
    Section 122 of H.R. 4579 provides that, in most cases, the 
recomputation would raise benefits effective in January of the 
second year following the earnings. That is, benefits for the 
year after the earnings we received would not reflect those 
earnings. H.R. 4579 would make an exception in cases where that 
latest year of earnings would substitute for a year of zero 
earnings in the beneficiary's previous high 35. The provision 
would apply only to beneficiaries who have reached retirement 
age and would be effective beginning with earnings in 1998. 
Because SSA would not have processed most of those 
recomputations until late in the fiscal year, savings in 1999 
are estimated at just $10 million. Thereafter, the proposal is 
estimated to affect nearly 1 million beneficiaries a year for 
annual savings of $140 million.

                                        TABLE 3. ESTIMATED BUDGETARY EFFECTS OF SPENDING PROVISIONS OF H.R. 4579
                                                        [By fiscal year, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  1999     2000     2001     2002     2003     2004     2005     2006     2007     2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 121. Increase earnings limit for Social Security
 beneficiaries over the age of retirement.....................      175      225      150       25      -10      110      150      150      150      150
Section 122. Delay recomputation of benefits for certain
 Social Security beneficiaries over the age of retirement.....      -10     -140     -140     -140     -140     -140     -140     -140     -140     -140
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--These provisions would affect benefit outlays from the Old-Age and Survivors Insurance trust fund, which is off-budget.
Source: Congressional Budget Office.

    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act of 1985 establishes pay-as-you-go 
procedures for legislation affecting direct spending or 
receipts. Only changes affecting on-budget outlays and receipts 
(that is, those in non-Social Security programs) affect the 
pay-as-you-go scorecard. For purposes of enforcing pay-as-you-
go procedures, only the effects in the current year, budget 
year, and the succeeding four years are counted (see Table 4).

                                                 TABLE 4. SUMMARY OF PAY-AS-YOU-GO EFFECTS OF H.R. 4579
                                                        [By fiscal year, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               1999       2000       2001       2002       2003       2004       2005       2006       2007       2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Change in outlays..........................         0          0          0          0          0          0          0          0          0          0
Change in receipts.........................    -6,448    -18,472    -17,886    -18,439    -18,831    -19,738    -18,620    -18,523    -19,119    -21,034
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office and Joint Committee on Taxation.

    Social Security outlays and receipts do not appear on the 
pay-as-you-go scorecard, but the House of Representatives 
tracks them separately. That tally includes effects only for 
the year in which the legislation takes effect and the four 
subsequent years; for H.R. 4579, the relevant years are 1999 
through 2003. The scorecard also includes balances carried over 
from laws enacted in previous years, such as the Contract with 
American Advancement Act, enacted in 1996 (see Table 5).

    TABLE 5. CBO ESTIMATE OF CURRENT STATUS OF THE SOCIAL SECURITY SCORECARD IN THE HOUSE OF REPRESENTATIVES
                                    [By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                  1999      2000      2001      2002      2003
----------------------------------------------------------------------------------------------------------------
Scorecard at start of 1999:
    OASDI taxes...............................................        80  ........  ........  ........  ........
    OASDI benefits............................................      -114        75  ........  ........  ........
                                                               -------------------------------------------------
      Net Effect..............................................       194       -75  ........  ........  ........
Effect of Taxpayer Relief Act of 1998 (H.R. 4579):
    OASDI taxes...............................................  ........  ........  ........  ........  ........
    OASDI benefits............................................       165        85        10      -115      -150
                                                               -------------------------------------------------
      Net Effect..............................................      -165       -85       -10       115       150
Scorecard assuming enactment of H.R. 4579:
    OASDI taxes...............................................        80  ........  ........  ........  ........
    OASDI benefits............................................        51       160        10      -115      -150
                                                               -------------------------------------------------
      Net effect..............................................        29      -160       -10       115       150
----------------------------------------------------------------------------------------------------------------
Note. OASDI=Old-Age, Survivors, and Disability Insurance.
Sources: Congressional Budget Office and Joint Committee on Taxation.

    Estimated impact on State, local, and tribal governments: 
Section 4 of UMRA excludes from the application of that act any 
legislative provisions that relate to the old-age, survivors, 
and disability insurance program under title II of the Soial 
Security Act. CBO has determined that all provisions of 
subtitle C of title I fit within that exclusion. CBO and JCT 
have determined that the remaining provisions of H.R. 4579 
contain no intergovernmental mandates as defined in UMRA.
    Estimated impact on the private Sector: JCT has determined 
that title IV would impose a new private-sector mandate on 
regulated investment companies and real estate in investment 
trusts by changing the treatment of certain deductible 
liquidating distributions. The direct costs of the new mandate 
would exceed the statutory threshold ($100 million in 1996, 
adjusted annually for inflation) established in UMRA in each of 
fiscal years 1999 through 2003 (see Table 6). UMRA does not 
apply to the provisions of subtitle C of title I. The other 
provisions of H.R. 4579 contain no private-sector mandates.

                               TABLE 6. ESTIMATED COST OF PRIVATE-SECTOR MANDATES
                                    [By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                        1998      1999      2000      2001      2002      2003
----------------------------------------------------------------------------------------------------------------
Cost to the private sector..........................         0     2,425     1,109       723       640       672
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation.

    Estimate prepared by: Federal spending: Kathy Ruffing and 
Deb Reis, Federal revenues: Hester Grippando; Impact on State, 
local, and tribal governments: Pepper Santalucia; Impact on the 
private sector: Lesley Frymier.
    Estimate approved by: Frank Sammartino, Assistant Director 
for Tax Analysis (Acting); Paul N. Van de Water, Assistant 
Director for Budget Analysis.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    With respect to subdivision (A) of clause 2(l)(3) of Rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that it was the 
result of the Committee's oversight activities with respect to 
providing tax relief for the marriage tax penalty, tax relief 
for modest amounts of interest and dividend income, individual 
minimum tax relief for taxpayers utilizing personal tax 
credits, education and community renewal tax incentives, small 
business and farmer tax relief, acceleration of the increased 
estate tax unified credit exemption, extension of certain 
expired and expiring tax and trade provisions, closing a tax 
loophole with respect to the treatment of certain deductible 
liquidating distributions of RICs and REITs, acceleration of 
the phase-in of increased Social Security earnings limit and 
delay of Social Security benefit recomputations, and necessary 
tax technical corrections that the Committee concluded that it 
is appropriate and timely to enact the provisions contained in 
the bill as reported.

    B. Summary of Findings and Recommendations of the Committee on 
                    Government Reform and Oversight

    With respect to subdivision (D) of clause 2(l)(3) of Rule 
XI of the Rules of the House of Representatives, the Committee 
advises that no specific oversight findings or recommendations 
have been submitted to this Committee by the Committee on 
Government Reform and Oversight with respect to the provisions 
contained in the bill.

                 C. Constitutional Authority Statement

    With respect to clause 2(l)(4) of Rule XI of the Rules of 
the House of Representatives (relating to Constitutional 
Authority), the Committee states that the Committee's action in 
reporting this bill is derived from Article I of the 
Constitution, Section 7 (``All bills for raising revenue shall 
originate in the House of Representatives'') and Section 8 
(``The Congress shall have the power to lay and collect taxes, 
duties, imports and excises, to pay the debts * * * of the 
United States''), and from the 16th Amendment to the 
Constitution.

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
    The Committee has determined that the provision of the bill 
relating to treatment of certain deductible liquidating 
distributions of RICs and REITs (bill sec. 401) will impose a 
Federal mandate on the private sector totaling $5,569 million 
for fiscal years 1999-2003. This amount is no greater than the 
aggregate estimated amounts the private sector will be required 
to pay in order to comply with this private sector mandate 
during this period. The bill will not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                E. Applicability of House Rule XXI 5(c)

    Rule XXI 5(c) of the Rules of the House of Representatives 
provides, in part, that ``No bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase shall be considered as passed or agreed to unless 
determined by a vote of not less than three-fifths of the 
Members.'' The Committee has carefully reviewed the provisions 
of the bill, and states that the provisions of the bill do not 
involve any Federal income tax rate increase within the meaning 
of the rule.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

  In compliance with clause 3 of rule XIII of the Rules of the 
House of Representatives, changes in existing law made by the 
bill, as reported, are shown as follows (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

                     INTERNAL REVENUE CODE OF 1986

Subtitle A--Income Taxes

           *       *       *       *       *       *       *


                  CHAPTER 1--NORMAL TAXES AND SURTAXES

        Subchapter A. Determination of tax liability.
     * * * * * * *
        Subchapter X. Renewal communities.

Subchapter A--Determination of Tax Liability

           *       *       *       *       *       *       *


PART I--TAX ON INDIVIDUALS

           *       *       *       *       *       *       *


SEC. 1. TAX IMPOSED.

  (a) * * *

           *       *       *       *       *       *       *

  (f) Adjustments in Tax Tables so That Inflation Will Not 
Result in Tax Increases.--
          (1) * * *

           *       *       *       *       *       *       *

          (6) Rounding.--
                  (A) * * *
                  (B) Table for married individuals filing 
                separately.--In the case of a married 
                individual filing a separate return, 
                subparagraph (A) [(other than with respect to 
                subsection (c)(4) of section 63 (as it applies 
                to subsections (c)(5)(A) and (f) of such 
                section) and section 151(d)(4)(A)) shall be 
                applied] (other than with respect to sections 
                63(c)(4) and 151(d)(4)(A)) shall be applied by 
                substituting ``$25'' for ``$50'' each place it 
                appears.

           *       *       *       *       *       *       *

  (h) Maximum Capital Gains Rate.--
          (1) * * *

           *       *       *       *       *       *       *

          (13) Special rules.--
                  (A) * * *
                  (B) Determination of unrecaptured section 
                1250 gain.--The amount determined under 
                paragraph [(7)(A)] (7)(A)(i) shall not include 
                gain--
                          (i) which is properly taken into 
                        account for the portion of the taxable 
                        year before May 7, 1997; or
                          (ii) from property held not more than 
                        18 months which is properly taken into 
                        account for the portion of the taxable 
                        year after July 28, 1997, and before 
                        January 1, 1998.

           *       *       *       *       *       *       *


PART IV--CREDITS AGAINST TAX

           *       *       *       *       *       *       *


Subpart A--Nonrefundable Personal Credits

           *       *       *       *       *       *       *


SEC. 24. CHILD TAX CREDIT.

  (a) * * *

           *       *       *       *       *       *       *

  (d) Additional Credit for Families with 3 or More Children.--
          (1) * * *
          [(2) Reduction of credit to taxpayer subject to 
        alternative minimum tax.--The credit determined under 
        this subsection for the taxable year shall be reduced 
        by the excess (if any) of--
                  [(A) the amount of tax imposed by section 55 
                (relating to alternative minimum tax) with 
                respect to such taxpayer for such taxable year, 
                over
                  [(B) the amount of the reduction under 
                section 32(h) with respect to such taxpayer for 
                such taxable year.]
          [(3)] (2) Social security taxes.--For purposes of 
        paragraph (1)--
                  (A) * * *

           *       *       *       *       *       *       *


SEC. 25. INTEREST ON CERTAIN HOME MORTGAGES.

  (a) * * *

           *       *       *       *       *       *       *

  (f) Reduction in Aggregate Amount of Qualified Mortgage Bonds 
Which May be Issued Where Certain Requirements Not Met.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Special rule for states having constitutional 
        home rule cities.--In the case of a State having one or 
        more constitutional home rule cities (within the 
        meaning of section [146(d)(3)(C)] 146(d)(2)(C)), the 
        reduction in the State ceiling by reason of paragraph 
        (1) shall be allocated to the constitutionalhome rule 
city, or to the portion of the State not within such city, whichever 
caused the reduction.

           *       *       *       *       *       *       *


SEC. 26. LIMITATION BASED ON TAX LIABILITY; DEFINITION OF TAX 
                    LIABILITY.

  [(a) Limitation Based on Amount of Tax.--The aggregate amount 
of credits allowed by this subpart for the taxable year shall 
not exceed the excess (if any) of--
          [(1) the taxpayer's regular tax liability for the 
        taxable year, over
          [(2) the tentative minimum tax for the taxable year 
        (determined without regard to the alternative minimum 
        tax foreign tax credit).]
  (a) Limitation Based on Amount of Tax.--The aggregate amount 
of credits allowed by this subpart for the taxable year shall 
not exceed the sum of--
          (1) the taxpayer's regular tax liability for the 
        taxable year, and
          (2) the tax imposed for the taxable year by section 
        55(a).
For purposes of applying the preceding sentence, paragraph (2) 
shall be treated as being zero for any taxable year beginning 
during 1998.

           *       *       *       *       *       *       *


Subpart C--Refundable Credits

           *       *       *       *       *       *       *


SEC. 32. EARNED INCOME.

  (a) * * *

           *       *       *       *       *       *       *

  [(h) Reduction of Credit to Taxpayers Subject to Alternative 
Minimum Tax.--The credit allowed under this section for the 
taxable year shall be reduced by the amount of tax imposed by 
section 55 (relating to alternative minimum tax) with respect 
to such taxpayer for such taxable year.]

Subpart D--Business Related Credits

           *       *       *       *       *       *       *


SEC. 39. CARRYBACK AND CARRYFORWARD OF UNUSED CREDITS.

  (a) * * *

           *       *       *       *       *       *       *

  (d) Transitional Rules.--
          (1) * * *

           *       *       *       *       *       *       *

          (9) No carryback of section 1400k credit before date 
        of enactment.--No portion of the unused business credit 
        for any taxable year which is attributable to any 
        commercial revitalization credit determined under 
        section 1400K may be carried back to a taxable year 
        ending before the date of the enactment of section 
        1400K.

           *       *       *       *       *       *       *


SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Base Amount.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Election of alternative incremental credit.--
                  (A) In general.--At the election of the 
                taxpayer, the credit determined under 
                subsection (a)(1) shall be equal to the sum 
                of--
                          (i) [1.65] 2.65 percent of so much of 
                        the qualified research expenses for the 
                        taxable year as exceeds 1 percent of 
                        the average described in subsection 
                        (c)(1)(B) but does not exceed 1.5 
                        percent of such average,
                          (ii) [2.2] 3.2 percent of so much of 
                        such expenses as exceeds 1.5 percent of 
                        such average but does not exceed 2 
                        percent of such average, and
                          (iii) [2.75] 3.75 percent of so much 
                        of such expenses as exceeds 2 percent 
                        of such average.

           *       *       *       *       *       *       *

  (h) Termination.--
          (1) In general.--This section shall not apply to any 
        amount paid or incurred--
                  (A) after June 30, 1995, and before July 1, 
                1996, or
                  (B) after [June 30, 1998] February 29, 2000.
        Notwithstanding the preceding sentence, in the case of 
        a taxpayer making an election under subsection (c)(4) 
        for its first taxable year beginning after June 30, 
        1996, and before July 1, 1997, this section shall apply 
        to amounts paid or incurred during the [24-month] 44-
        month period beginning with the first month of such 
        year. The [24 months] 44 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.

           *       *       *       *       *       *       *


SEC. 42. LOW-INCOME HOUSING CREDIT.

  (a) * * *

           *       *       *       *       *       *       *

  (h) Limitation on Aggregate Credit Allowable With Respect to 
Projects Located in a State.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Housing credit dollar amount for agencies.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (E) Special rule for states with 
                constitutional home rule cities.--For purposes 
                of this subsection--
                          (i) * * *

           *       *       *       *       *       *       *

                          (iii) Constitutional home rule 
                        city.--For purposes of this paragraph, 
                        the term ``constitutional home rule 
                        city'' has the meaning given such term 
                        by section [146(d)(3)(C)] 146(d)(2)(C).

           *       *       *       *       *       *       *


SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR RARE DISEASES 
                    OR CONDITIONS.

  (a) * * *
  (b) Qualified Clinical Testing Expenses For Purposes of This 
Section.--
          (1) Qualified clinical testing expenses.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (D) Special rule.--For purposes of this 
                paragraph, section 41 shall be deemed to remain 
                in effect for periods after June 30, 1995, and 
                before July 1, 1996, and periods after [June 
                30, 1998] February 29, 2000.

           *       *       *       *       *       *       *


Subpart E--Rules for Computing Investment Credit

           *       *       *       *       *       *       *


SEC. 46. AMOUNT OF CREDIT.

  For purposes of section 38, the amount of the investment 
credit determined under this section for any taxable year shall 
be the sum of--
          (1) the rehabilitation credit,
          (2) the energy credit, [and]
          (3) the reforestation credit[.], and
          (4) the commercial revitalization credit provided 
        under section 1400K.

           *       *       *       *       *       *       *


SEC. 48. ENERGY CREDIT; REFORESTATION CREDIT.

  (a) Energy Credit.--
          (1) * * *
          (2) Energy percentage.--
                  (A) * * *
                  (B) Coordination with rehabilitation or 
                commercial revitalization.--The energy 
                percentage shall not apply to that portion of 
                the basis of any property which is attributable 
                to qualified rehabilitation or commercial 
                revitalization expenditures.

           *       *       *       *       *       *       *


SEC. 49. AT-RISK RULES.

  (a) General Rule.--
          (1) Certain nonrecourse financing excluded from 
        credit base.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Credit base defined.--For purposes of 
                this paragraph, the term ``credit base'' 
                means--
                          (i) the portion of the basis of any 
                        qualified rehabilitated building 
                        attributable to qualified 
                        rehabilitation expenditures,
                          (ii) the basis of any energy 
                        property, [and]
                          (iii) the amortizable basis of any 
                        qualified timber property[.], and
                          (iv) the portion of the basis of any 
                        qualified revitalization building 
                        attributable to qualified 
                        revitalization expenditures.

           *       *       *       *       *       *       *


SEC. 50. OTHER SPECIAL RULES.

  (a) Recapture in Case of Dispositions, Etc.--Under 
regulations prescribed by the Secretary--
          (1) * * *
          (2) Property ceases to qualify for progress 
        expenditures.--
                  (A) In general.--If during any taxable year 
                any building to which section 47(d) or 
                1400K(d)(2) applied ceases (by reason of sale 
                or other disposition, cancellation or 
                abandonment of contract, or otherwise) to be, 
                with respect to the taxpayer, property which, 
                when placed in service, will be a qualified 
                rehabilitated building or qualified 
                revitalization building (respectively), then 
                the tax under this chapter for such taxable 
                year shall be increased by an amount equal to 
                the aggregate decrease in the credits allowed 
                under section 38 for all prior taxable years 
                which would have resulted solely from reducing 
                to zero the credit determined under this 
                subpart with respect to such building.
                  (B) Certain excess credit recaptured.--Any 
                amount which would have been applied as a 
                reduction under paragraph (2) of section 47(b) 
                but for the fact that a reduction under such 
                paragraph cannot reduce the amount taken into 
                account under section 47(b)(1) below zero shall 
                be treated as an amount required to be 
                recaptured under subparagraph (A) for the 
                taxable year during which the building is 
                placed in service. A similar rule shall apply 
                for purposes of section 1400K.
                  (C) Certain sales and leasebacks.--Under 
                regulations prescribed by the Secretary, a sale 
                by, and leaseback to, a taxpayer who, when the 
                property is placed in service, will be a lessee 
                to whom the rules referred to in subsection 
                (d)(5) apply shall not be treated as a 
                cessation described in subparagraph (A) to the 
                extent that the amount which will be passed 
                through to the lessee under suchrules with 
respect to such property is not less than the qualified rehabilitation 
expenditures properly taken into account by the lessee under section 
47(d) or 1400K(d)(2) with respect to such property.
                  (D) Coordination with paragraph (1).--If, 
                after property is placed in service, there is a 
                disposition or other cessation described in 
                paragraph (1), then paragraph (1) shall be 
                applied as if any credit which was allowable by 
                reason of section 47(d) or 1400K(d)(2) and 
                which has not been required to be recaptured 
                before such disposition, cessation, or change 
                in use were allowable for the taxable year the 
                property was placed in service.
                  (E) Special rules.--Rules similar to the 
                rules of this paragraph shall apply in cases 
                where qualified progress expenditures were 
                taken into account under the rules referred to 
                in section 48(a)(5).

           *       *       *       *       *       *       *

  (b) Certain Property Not Eligible.--No credit shall be 
determined under this subpart with respect to--
          (1) * * *
          (2) Property used for lodging.--No credit shall be 
        determined under this subpart with respect to any 
        property which is used predominantly to furnish lodging 
        or in connection with the furnishing of lodging. The 
        preceding sentence shall not apply to--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) a certified historic structure to the 
                extent of that portion of the basis which is 
                attributable to qualified rehabilitation 
                expenditures; [and]
                  (D) any energy property[.]; and
                  (E) a qualified revitalization building (as 
                defined in section 1400K) to the extent of the 
                portion of the basis which is attributable to 
                qualified revitalization expenditures (as 
                defined in section 1400K).
          (3) Property used by certain tax-exempt 
        organizations.--No credit shall be determined under 
        this subpart with respect to any property used by an 
        organization (other than a cooperative described in 
        section 521 which is exempt from the tax imposed by 
        this chapter unless such property is used predominantly 
        in an unrelated trade or business the income of which 
        is subject to tax under section 511. If the property is 
        debt-financed property (as defined in section 514(b), 
        the amount taken into account for purposes of 
        determining the amount of the credit under this subpart 
        with respect to such property shall be that percentage 
        of the amount (which but for this paragraph would be so 
        taken into account) which is the same percentage as is 
        used under section 514(a), for the year the property is 
        placed in service, in computing the amount of gross 
        income to be taken into account during such taxable 
        year with respect to such property. [If any qualified 
        rehabilitated building is used by the tax-exempt 
        organization pursuant to a lease, this paragraph shall 
        not apply for purposes of determining the amount of the 
        rehabilitation credit.] If any qualified rehabilitated 
        building or qualified revitalization building is used 
        by the tax-exempt organization pursuant to a lease, 
        this paragraph shall not apply for purposes of 
        determining the amount of the rehabilitation credit or 
        the commercial revitalization credit.
          (4) Property used by governmental units or foreign 
        persons or entities.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Exception for qualified rehabilitated or 
                commercial revitalization buildings leased to 
                governments, etc.--If any qualified 
                rehabilitated or commercial revitalization 
                building is leased to a governmental unit (or a 
                foreign person or entity) this paragraph shall 
                not apply for purposes of determining the 
                rehabilitation or commercial revitalization 
                credit with respect to such building.

           *       *       *       *       *       *       *


Subpart F--Rules for Computing Work Opportunity Credit

           *       *       *       *       *       *       *


SEC. 51. AMOUNT OF CREDIT.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Wages Defined.--For purposes of this subpart--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Termination.--The term ``wages'' shall not 
        include any amount paid or incurred to an individual 
        who begins work for the employer--
                  (A) after December 31, 1994, and before 
                October 1, 1996, or
                  (B) after [June 30, 1998] February 29, 2000.
          (5) Extension of credit for renewal communities.--
                  (A) In general.--In the case of an individual 
                who begins work for the employer after the date 
                contained in paragraph (4)(B), for purposes of 
                section 38--
                          (i) in lieu of applying subsection 
                        (a), the amount of the work opportunity 
                        credit determined under this section 
                        for the taxable year shall be equal 
                        to--
                                  (I) 15 percent of the 
                                qualified first-year wages for 
                                such year, and
                                  (II) 30 percent of the 
                                qualified second-year wages for 
                                such year,
                          (ii) subsection (b)(3) shall be 
                        applied by substituting ``$10,000'' for 
                        ``$6,000'',
                          (iii) paragraph (4)(B) shall be 
                        applied by substituting for the date 
                        contained therein the last day for 
                        which the designation under section 
                        1400E of the renewal community referred 
                        to in subparagraph (B)(i) is in effect, 
                        and
                          (iv) rules similar to the rules of 
                        section 51A(b)(5)(C) shall apply.
                  (B) Qualified first and second-year wages.--
                For purposes of subparagraph (A)--
                          (i) In general.--The term ``qualified 
                        wages'' means, with respect to each 1-
                        year period referred to in clause (ii) 
                        or (iii), as the case may be, the wages 
                        paid or incurred by the employer during 
                        the taxable year to any individual but 
                        only if--
                                  (I) the employer is engaged 
                                in a trade or business in a 
                                renewal community throughout 
                                such 1-year period,
                                  (II) the individual is a 
                                resident of such renewal 
                                community throughout such 1-
                                year period, and
                                  (III) substantially all of 
                                the services which such 
                                individual performs for the 
                                employer during such 1-year 
                                period are performed in such 
                                renewal community.
                          (ii) 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.
                          (iii) 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 clause (ii).
  (d) Members of Targeted Groups.--For purposes of this 
subpart--
          (1) * * *

           *       *       *       *       *       *       *

          (5) High-risk youth.--
                  (A) In general.--The term ``high-risk youth'' 
                means any individual who is certified by the 
                ``designated local agency''--
                          (i) as having attained age 18 but not 
                        age 25 on the hiring date, and
                          (ii) as having his principal place of 
                        abode within an [empowerment zone or 
                        enterprise community] empowerment zone, 
                        enterprise community, or renewal 
                        community.
                  (B) Youth must continue to reside in zone or 
                community.--In the case of a high-risk youth, 
                the term ``qualified wages'' shall not include 
                wages paid or incurred for services performed 
                while such youth's principal place of abode is 
                outside an [empowerment zone or enterprise 
                community] empowerment zone, enterprise 
                community, or renewal community.
          (6) Vocational rehabilitation referral.--The term 
        ``vocational rehabilitation referral'' means any 
        individual who is certified by the designated local 
        agency as--
                  (A) * * *
                  (B) having been referred to the employer upon 
                completion of (or while receiving) 
                rehabilitative services pursuant to--
                          (i) an individualized written 
                        [rehabilitation plan] plan for 
                        employment under a State plan for 
                        vocational rehabilitation services 
                        approved under the Rehabilitation Act 
                        of 1973, or
                          (ii) a program of vocational 
                        rehabilitation carried out under 
                        chapter 31 of title 38, United States 
                        Code.
          (7) Qualified summer youth employee.--
                  (A) In general.--The term ``qualified summer 
                youth employee'' means any individual--
                          (i) * * *

           *       *       *       *       *       *       *

                          (iv) who is certified by the 
                        designated local agency as having his 
                        principal place of abode within an 
                        [empowerment zone or enterprise 
                        community] empowerment zone, enterprise 
                        community, or renewal community.

           *       *       *       *       *       *       *

                  (C) Youth must continue to reside in zone or 
                community.--Paragraph (5)(B) shall apply for 
                purposes of subparagraph (A)(iv).

           *       *       *       *       *       *       *


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

  (a) * * *

           *       *       *       *       *       *       *

  (f) Termination.--This section shall not apply to individuals 
who begin work for the employer after [April 30, 1999] February 
29, 2000.

           *       *       *       *       *       *       *


Subchapter B--Computation of Taxable Income

           *       *       *       *       *       *       *


  PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE 
INCOME, ETC.

           *       *       *       *       *       *       *


SEC. 62. ADJUSTED GROSS INCOME DEFINED.

  (a) General Rule.--For purposes of this subtitle, the term 
``adjusted gross income'' means, in the case of an individual, 
gross income minus the following deductions:
          (1) * * *

           *       *       *       *       *       *       *

          (18) Family development accounts.--The deduction 
        allowed by section 1400H(a)(1)(A).

           *       *       *       *       *       *       *


SEC. 63. TAXABLE INCOME DEFINED.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Standard Deduction.--For purposes of this subtitle--
          (1) * * *
          (2) Basic standard deduction.--For purposes of 
        paragraph (1), the basic standard deduction is--
                  (A) [$5,000] twice the dollar amount in 
                effect under subparagraph (C) for the taxable 
                year in the case of--
                          (i) a joint return, or
                          (ii) a surviving spouse (as defined 
                        in section 2(a)),
                  (B) $4,400 in the case of a head of household 
                (as defined in section 2(b)), or
                  (C) $3,000 [in the case of an individual who 
                is not married and who is not a surviving 
                spouse or head of household, or] in any other 
                case.
                  [(D) $2,500 in the case of a married 
                individual filing a separate return.]

           *       *       *       *       *       *       *

          (4) Adjustments for inflation.--In the case of any 
        taxable year beginning in a calendar year after 1988, 
        each dollar amount contained in paragraph (2) or (5) or 
        subsection (f) shall be increased by an amount equal 
        to--
                  (A) such dollar amount, multiplied by
                  (B) 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).
        The preceding sentence shall not apply to the amount 
        referred to in paragraph (2)(A).

           *       *       *       *       *       *       *

  (f) Aged or Blind Additional Amounts.--
          (1) Additional amounts for the aged.--The taxpayer 
        shall be entitled to an additional amount of [$600] 
        $750--
                  (A) for himself if he has attained age 65 
                before the close of his taxable year, and
                  (B) for the spouse of the taxpayer if the 
                spouse has attained age 65 before the close of 
                the taxable year and an additional exemption is 
                allowable to the taxpayer for such spouse under 
                section 151(b).
          (2) Additional amount for blind.--The taxpayer shall 
        be entitled to an additional amount of [$600] $750--
                  (A) for himself if he is blind at the close 
                of the taxable year, and
                  (B) for the spouse of the taxpayer if the 
                spouse is blind as of the close of the taxable 
                year and an additional exemption is allowable 
                to the taxpayer for such spouse under section 
                151(b).
        For purposes of subparagraph (B), if the spouse dies 
        during the taxable year the determination of whether 
        such spouse is blind shall be made as of the time of 
        such death.
          [(3) Higher amount for certain unmarried 
        individuals.--In the case of an individual who is not 
        married and is not a surviving spouse, paragraphs (1) 
        and (2) shall be applied by substituting ``$750'' for 
        ``$600''.]
          [(4)] (3) Blindness defined.--For purposes of this 
        subsection, an individual is blind only if his central 
        visual acuity does not exceed 20/200 in the better eye 
        with correcting lenses, or if his visual acuity is 
        greater than 20/200 but is accompanied by a limitation 
        in the fields of vision such that the widest diameter 
        of the visual field subtends an angle no greater than 
        20 degrees.

           *       *       *       *       *       *       *


SEC. 67. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS.

  (a) * * *
  (b) Miscellaneous Itemized Deductions.--For purposes of this 
section, the term ``miscellaneous itemized deductions'' means 
the itemized deductions other than--
          (1) * * *

           *       *       *       *       *       *       *

          (3) the deduction under section 165(a) [for losses 
        described in subsection (c)(3) or (d) of section 165] 
        for casualty or theft losses described in paragraph (2) 
        or (3) of section 165(c) or for losses described in 
        section 165(d),

           *       *       *       *       *       *       *


SEC. 68. OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Exception for Certain Itemized Deductions.--For purposes 
of this section, the term ``itemized deductions'' does not 
include--
          (1) * * *

           *       *       *       *       *       *       *

          (3) the deduction under section 165(a) [for losses 
        described in subsection (c)(3) or (d) of section 165] 
        for casualty or theft losses described in paragraph (2) 
        or (3) of section 165(c) or for losses described in 
        section 165(d).

           *       *       *       *       *       *       *


PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME

           *       *       *       *       *       *       *


SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE 
                    CONTRACTS.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Amounts Not Received as Annuities.--
          (1) * * *

           *       *       *       *       *       *       *

          (9) Extension of paragraph (2)(B) to qualified 
        [state] tuition programs and educational individual 
        retirement accounts.--Notwithstanding any other 
        provision of this subsection, paragraph (2)(B) shall 
        apply to amounts received under a [qualified State 
        tuition program] qualified tuition program (as defined 
        in section 529(b)) or under an education individual 
        retirement account (as defined in section 530(b)). The 
        rule of paragraph (8)(B) shall apply for purposes of 
        this paragraph.

           *       *       *       *       *       *       *


        PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

        Sec. 101. Certain death benefits.
     * * * * * * *
        Sec. 116. Partial exclusion of dividends and interest received 
                  by individuals.
     * * * * * * *

SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTEREST RECEIVED BY 
                    INDIVIDUALS.

  (a) Exclusion From Gross Income.--Gross income does not 
include dividends and interest received during the taxable year 
by an individual.
  (b) Limitations.--
          (1) Maximum amount.--The aggregate amount excluded 
        under subsection (a) for any taxable year shall not 
        exceed $200 ($400 in the case of a joint return).
          (2) Certain dividends excluded.--Subsection (a) shall 
        not apply to any dividend from a corporation which, for 
        the taxable year of the corporation in which the 
        distribution is made, or for the next preceding taxable 
        year of the corporation, is a corporation exempt from 
        tax under section 501 (relating to certain charitable, 
        etc., organization) or section 521 (relating to 
        farmers' cooperative associations).
  (c) Special Rules.--For purposes of this section--
          (1) Exclusion not to apply to capital gain dividends 
        from regulated investment companies and real estate 
        investment trusts.--

          For treatment of capital gain dividends, see sections 854(a) 
        and 857(c).

          (2) Certain nonresident aliens ineligible for 
        exclusion.--In the case of a nonresident alien 
        individual, subsection (a) shall apply only--
                  (A) in determining the tax imposed for the 
                taxable year pursuant to section 871(b)(1) and 
                only in respect of dividends and interest which 
                are effectively connected with the conduct of a 
                trade or business within the United States, or
                  (B) in determining the tax imposed for the 
                taxable year pursuant to section 877(b).
          (3) Dividends from employee stock ownership plans.--
        Subsection (a) shall not apply to any dividend 
        described in section 404(k).

           *       *       *       *       *       *       *


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

  (a) * * *

           *       *       *       *       *       *       *

  (d) Special Rules.--
          (1) * * *

           *       *       *       *       *       *       *

          (9) Members of uniformed services and foreign 
        service.--
                  (A) In general.--The running of the 5-year 
                period described in subsection (a) shall be 
                suspended with respect to an individual during 
                any time that such individual or such 
                individual's spouse is serving on qualified 
                official extended duty as a member of the 
                uniformed services or of the Foreign Service.
                  (B) Qualified official extended duty.--For 
                purposes of this paragraph--
                          (i) In general.--The term ``qualified 
                        official extended duty'' means any 
                        period of extended duty as a member of 
                        the uniformed services or a member of 
                        the Foreign Service during which the 
                        member serves at a duty station which 
                        is at least 50 miles from such property 
                        or is under Government orders to reside 
                        in Government quarters.
                          (ii) Uniformed services.--The term 
                        ``uniformed services'' has the meaning 
                        given such term by section 101(a)(5) of 
                        title 10, United States Code, as in 
                        effect on the date of the enactment of 
                        this paragraph.
                          (iii) Foreign service of the united 
                        states.--The term ``member of the 
                        Foreign Service'' has the meaning given 
                        the term ``member of the Service'' by 
                        paragraph (1), (2), (3), (4), or (5) of 
                        section 103 of the Foreign Service Act 
                        of 1980, as in effect on the date of 
                        the enactment of this paragraph.
                          (iv) Extended duty.--The term 
                        ``extended 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.

           *       *       *       *       *       *       *


SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER 
                    EDUCATION TUITION AND FEES.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Definitions.--For purposes of this section--
          (1) * * *
          (2) Qualified higher education expenses.--
                  (A) * * *
                  (B) Exception for education involving sports, 
                etc.--Such term shall not include expenses with 
                respect to any course or other education 
                involving sports, games, or hobbies other than 
                as part of a degree program.
                  (C) Contributions to [qualified state tuition 
                program] qualified tuition programs and 
                education individual retirement accounts.--Such 
                term shall include any contribution to a 
                [qualified State tuition program] qualified 
                tuition program (as defined in section 529 on 
                behalf of a designated beneficiary (as defined 
                in such section), or to an education individual 
                retirement account (as defined in section 530 
                on behalf of an account beneficiary, who is an 
                individual described in subparagraph (A); but 
                there shall be no increase in the investment in 
                the contract for purposes of applying section 
                72 by reason of any portion of such 
                contribution which is not includible in gross 
                income by reason of this subparagraph.

           *       *       *       *       *       *       *

          (4) Modified adjusted gross income.--The term 
        ``modified adjusted gross income'' means the adjusted 
        gross income of the taxpayer for the taxable year 
        determined--
                  (A) without regard to this section and 
                sections 116, 137, 911, 931, and 933, and
                  (B) after the application of sections 86, 
                469, and 219.
  (d) Special Rules.--
          (1) Adjustment for certain scholarships and veterans 
        benefits.--The amount of 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 sum of the amounts received with respect to 
        such individual for the taxable year as--
                  (A) * * *

           *       *       *       *       *       *       *

                  (D) a payment, waiver, or reimbursement of 
                qualified higher education expenses under a 
                [qualified State tuition program] qualified 
                tuition program (within the meaning of section 
                529(b).

           *       *       *       *       *       *       *

          (4) Coordination with section 116.--This section 
        shall be applied before section 116.
          [(4)] (5) Regulations.--The Secretary may prescribe 
        such regulations as may be necessary or appropriate to 
        carry out this section, including regulations requiring 
        record keeping and information reporting.

           *       *       *       *       *       *       *


PART IV--TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS

           *       *       *       *       *       *       *


Subpart A--Private Activity Bonds

           *       *       *       *       *       *       *


SEC. 146. VOLUME CAP.

  (a) * * *

           *       *       *       *       *       *       *

  (d) State Ceiling.--For purposes of this section--
          [(1) In general.--The State ceiling applicable to any 
        State for any calendar year shall be the greater of--
                  [(A) an amount equal to $75 multiplied by the 
                State population, or
                  [(B) $250,000,000.
        Subparagraph (B) shall not apply to any possession of 
        the United States.
          [(2) Adjustment after 1987.--In the case of calendar 
        years after 1987, paragraph (1) shall be applied by 
        substituting--
                  [(A) ``$50'' for ``$75'', and
                  [(B) ``$150,000,000'' for ``$250,000,000''.]
          (1) In general.--The State ceiling applicable to any 
        State for any calendar year shall be the greater of--
                  (A) an amount equal to $75 multiplied by the 
                State population, or
                  (B) $225,000,000.
        Subparagraph (B) shall not apply to any possession of 
        the United States.
          [(3)] (2) Special rule for states with constitutional 
        home rule cities.--For purposes of this section--
                  (A) * * *

           *       *       *       *       *       *       *

          [(4)] (3) Special rule for possessions with 
        populations of less than the population of the least 
        populous state.--
                  (A) * * *

           *       *       *       *       *       *       *


Subpart B--Requirements Applicable to All State and Local Bonds

           *       *       *       *       *       *       *


SEC. 148. ARBITRAGE.

  (a) * * *

           *       *       *       *       *       *       *

  (f) Required Rebate to the United States.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Special rules for applying paragraph (2).--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Exception from rebate for certain 
                proceeds to be used to finance construction 
                expenditures.--
                          (i) * * *

           *       *       *       *       *       *       *

                          (xviii) 4-year spending requirement 
                        for public school construction issue.--
                                  (I) In general.--In the case 
                                of a public school construction 
                                issue, the spending 
                                requirements of clause (ii) 
                                shall be treated as met if at 
                                least 10 percent of the 
                                available construction proceeds 
                                of the construction issue are 
                                spent for the governmental 
                                purposes of the issue within 
                                the 1-year period beginning on 
                                the date the bonds are issued, 
                                30 percent of such proceeds are 
                                spent for such purposes within 
                                the 2-year period beginning on 
                                such date, 50 percent of such 
                                proceeds are spent for such 
                                purposes within the 3-year 
                                period beginning on such date, 
                                and 100 percent of such 
                                proceeds are spent for such 
                                purposes within the 4-year 
                                period beginning on such date.
                                  (II) Public school 
                                construction issue.--For 
                                purposes of this clause, the 
                                term ``public school 
                                construction issue'' means any 
                                construction issue if no bond 
                                which is part of such issue is 
                                a private activity bond and all 
                                of the available construction 
                                proceeds of such issue are to 
                                be used for the construction 
                                (as defined in clause (iv)) of 
                                public school facilities to 
                                provide education or training 
                                below the postsecondary level 
                                or for the acquisition of land 
                                that is functionally related 
                                and subordinate to such 
                                facilities.
                                  (III) Other rules to apply.--
                                Rules similar to the rules of 
                                the preceding provisions of 
                                this subparagraph which apply 
                                to clause (ii) also apply to 
                                this clause.

           *       *       *       *       *       *       *


PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

           *       *       *       *       *       *       *


SEC. 162. TRADE OR BUSINESS EXPENSES.

  (a) * * *

           *       *       *       *       *       *       *

  (l) Special Rules for Health Insurance Costs of Self-Employed 
Individuals.--
          [(1) Allowance of deduction.--
                  [(A) In general.--In the case of an 
                individual who is an employee within the 
                meaning of section 401(c)(1), there shall be 
                allowed as a deduction under this section an 
                amount equal to the applicable percentage of 
                the amount paid during the taxable year for 
                insurance which constitutes medical care for 
                the taxpayer, his spouse, and dependents.
                  [(B) Applicable percentage.--For purposes of 
                subparagraph (A), the applicable percentage 
                shall be determined under the following table:

        [For taxable years beginning                      The applicable
          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.]  

          (1) Allowance of deduction.--In the case of an 
        individual who is an employee within the meaning of 
        section 401(c)(1), there shall be allowed as a 
        deduction under this section an amount equal to 100 
        percent of the amount paid during the taxable year for 
        insurance which constitutes medical care for the 
        taxpayer, his spouse, and dependents.

           *       *       *       *       *       *       *


SEC. 163. INTEREST.

  (a) * * *

           *       *       *       *       *       *       *

  (h) Disallowance of Deduction for Personal Interest.--
          (1) * * *
          (2) Personal interest.--For purposes of this 
        subsection, the term ``personal interest'' means any 
        interest allowable as a deduction under this chapter 
        other than--
                  (A) * * *

           *       *       *       *       *       *       *

                  (D) any qualified residence interest (within 
                the meaning of paragraph (3)), [and]
                  (E) 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 6163[.], and
                  (F) any interest allowable as a deduction 
                under section 221 (relating to interest on 
                educational loans).

           *       *       *       *       *       *       *


SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Certain Contributions of Ordinary Income and Capital Gain 
Property.--
          (1) * * *

           *       *       *       *       *       *       *

          (5) Special rule for contributions of stock for which 
        market quotations are readily available.--
                  (A) * * *

           *       *       *       *       *       *       *

                  [(D) Termination.--This paragraph shall not 
                apply to contributions made--
                          [(i) after December 31, 1994, and 
                        before July 1, 1996, or
                          [(ii) after June 30, 1998.]

           *       *       *       *       *       *       *


SEC. 172. NET OPERATING LOSS DEDUCTION.

  (a) * * *
  (b) Net Operating Carrybacks and Carryovers.--
          (1) Years to which loss may be carried.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (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) * * *

           *       *       *       *       *       *       *

                        Such term shall not include any farming 
                        loss (as defined in subsection (i)).

           *       *       *       *       *       *       *

                          (iv) Coordination with paragraph 
                        (2).--For purposes of applying 
                        paragraph (2), an eligible loss for any 
                        taxable year shall be treated in a 
                        manner similar to the manner in which a 
                        specified liability loss is treated.
                  (G) Farming losses.--In the case of a 
                taxpayer which has a farming loss (as defined 
                in subsection (i)) for a taxable year, such 
                farming loss shall be a net operating loss 
                carryback to each of the 5 taxable years 
                preceding the taxable year of such loss.

           *       *       *       *       *       *       *

  (d) Modifications.--The modifications referred to in this 
section are as follows:
          (1) * * *

           *       *       *       *       *       *       *

          (4) Nonbusiness deductions of taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation, the deductions allowable by this chapter 
        which are not attributable to a taxpayer's trade or 
        business shall be allowed only to the extent of the 
        amount of the gross income not derived from such trade 
        or business. For purposes of the preceding sentence--
                  (A) * * *

           *       *       *       *       *       *       *

                  [(C) any deduction allowable under section 
                165(c)(3) (relating to casualty losses) shall 
                not be taken into account; and]
                  (C) any deduction for casualty or theft 
                losses allowable under paragraph (2) or (3) of 
                section 165(c) shall be treated as attributable 
                to the trade or business; and

           *       *       *       *       *       *       *

  (i) Rules Relating to Farming Losses.--For purposes of this 
section--
          (1) In general.--The term ``farming loss'' means the 
        lesser of--
                  (A) the amount which would be the net 
                operating loss for the taxable year if only 
                income and deductions attributable to farming 
                businesses (as defined in section 263A(e)(4)) 
                are taken into account, or
                  (B) the amount of the net operating loss for 
                such taxable year.
          (2) Coordination with subsection (b)(2).--For 
        purposes of applying subsection (b)(2), a farming loss 
        for any taxable year shall be treated in a manner 
        similar to the manner in which a specified liability 
        loss is treated.
          (3) Election.--Any taxpayer entitled to a 5-year 
        carryback under subsection (b)(1)(G) from any loss year 
        may elect to have the carryback period with respect to 
        such loss year determined without regard to subsection 
        (b)(1)(G). Such election shall be made in such manner 
        as may be prescribed by the Secretary and shall be made 
        by the due date (including extensions of time) for 
        filing the taxpayer's return for the taxable year of 
        the net operating loss. Such election, once made for 
        any taxable year, shall be irrevocable for such taxable 
        year.
  [(i)] (j) Cross References.--

          (1) For treatment of net operating loss carryovers in certain 
        corporate acquisitions, see section 381.
          (2) For special limitation on net operating loss carryovers in 
        case of a corporate change of ownership, see section 382.

           *       *       *       *       *       *       *


SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.

  (a) * * *
  (b) Limitations.--
          [(1) Dollar limitation.--The aggregate cost which may 
        be taken into account under subsection (a) for any 
        taxable year shall not exceed the following applicable 
        amount:

    [If the taxable year                                  The applicable
      begins in:                                            amount is:  
      1997....................................................  18,000  
      1998....................................................  18,500  
      1999....................................................  19,000  
      2000....................................................  20,000  
      2001 or 2002............................................  24,000  
      2003 or thereafter...................................... 25,000]  

          (1) Dollar limitation.--The aggregate cost which may 
        be taken into account under subsection (a) for any 
        taxable year shall not exceed $25,000.

           *       *       *       *       *       *       *


PART IX--ITEMS NOT DEDUCTIBLE

           *       *       *       *       *       *       *


SEC. 264. CERTAIN AMOUNTS PAID IN CONNECTION WITH INSURANCE CONTRACTS.

  (a) * * *

           *       *       *       *       *       *       *

  (f) Pro Rata Allocation of Interest Expense to Policy Cash 
Values.--
          (1) * * *

           *       *       *       *       *       *       *

          (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.
        If the amount described in subparagraph (A) with 
        respect to any policy or contract does not reasonably 
        approximate its actual value, the amount taken into 
        account under subparagraph (A) shall be the greater of 
        the amount of the insurance company liability or the 
        insurance company reserve with respect to such policy 
        or contract (as determined for purposes of the annual 
        statement approved by the National Association of 
        Insurance Commissioners) or shall be such other amount 
        as is determined by the Secretary.

           *       *       *       *       *       *       *


SEC. 265. EXPENSES AND INTEREST RELATING TO TAX-EXEMPT INCOME.

  (a) General Rule.--No deduction shall be allowed for--
          (1) * * *
          (2) Interest.--Interest on indebtedness incurred or 
        continued to purchase or carry obligations the interest 
        on which is wholly exempt from the taxes imposed by 
        this subtitle, or to purchase or carry obligations or 
        shares, or to make deposits, to the extent the interest 
        thereon is excludable from gross income under section 
        116.

           *       *       *       *       *       *       *


Subchapter C--Corporate Distributions and Adjustments

           *       *       *       *       *       *       *


PART II--CORPORATE LIQUIDATIONS

           *       *       *       *       *       *       *


Subpart A--Effects on Recipients

           *       *       *       *       *       *       *


SEC. 332. COMPLETE LIQUIDATIONS OF SUBSIDIARIES.

  (a) * * *
  (b) Liquidations to Which Section Applies.--For purposes of 
[subsection (a)] this section, a distribution shall be 
considered to be in complete liquidation only if--
          (1) the corporation receiving such property was, on 
        the date of the adoption of the plan of liquidation, 
        and has continued to be at all times until the receipt 
        of the property, the owner of stock (in such other 
        corporation) meeting the requirements of section 
        1504(a)(2); and either

           *       *       *       *       *       *       *

  (c) Deductible Liquidating Distributions of Regulated 
Investment Companies and Real Estate Investment Trusts.--If a 
corporation receives a distribution from a regulated investment 
company or a real estate investment trust which is considered 
under subsection (b) as being in complete liquidation of such 
company or trust, then, notwithstanding any other provision of 
this chapter, such corporation shall recognize and treat as a 
dividend from such company or trust an amount equal to the 
deduction for dividends paid allowable to such company or trust 
by reason of such distribution.

           *       *       *       *       *       *       *


SEC. 334. BASIS OF PROPERTY RECEIVED IN LIQUIDATIONS.

  (a) * * *
  (b) Liquidation of Subsidiary.--
          (1) In general.--If property is received by a 
        corporate distributee in a distribution in a complete 
        liquidation to which [section 332(a)] section 332 
        applies (or in a transfer described in section 
        337(b)(1)), the basis of such property in the hands of 
        such distributee shall be the same as it would be in 
        the hands of the transferor; except that, in any case 
        in which gain or loss is recognized by the liquidating 
        corporation with respect to such property, the basis of 
        such property in the hands of such distributee shall be 
        the fair market value of the property at the time of 
        the distribution.

           *       *       *       *       *       *       *


PART III--CORPORATE ORGANIZATIONS AND REORGANIZATIONS

           *       *       *       *       *       *       *


Subpart A--Corporate Organizations

           *       *       *       *       *       *       *


SEC. 351. TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Special Rules Where Distribution to Shareholders.--
          (1) * * *
          (2) Special rule for section 355.--If the 
        requirements of section 355 (or so much of section 356 
        as relates to section 355) are met with respect to a 
        distribution described in paragraph (1), then, solely 
        for purposes of determining the tax treatment of the 
        transfers of property to the controlled corporation by 
        the distributing corporation, the fact that the 
        shareholders of the distributing corporation dispose of 
        part or all of the distributed stock, or the fact that 
        the corporation whose stock was distributed issues 
        additional stock, shall not be taken into account in 
        determining control for purposes of this section.

           *       *       *       *       *       *       *


Subpart D--Special Rule; Definitions

           *       *       *       *       *       *       *


SEC. 368. DEFINITIONS RELATING TO CORPORATE REORGANIZATIONS.

  (a) Reorganization.--
          (1) * * *
          (2) Special rules relating to paragraph (1).--
                  (A) * * *

           *       *       *       *       *       *       *

                  (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 (or so much of section 
                        356 as relates to section 355) are met, 
                        the fact that the shareholders of the 
                        distributing corporation dispose of 
                        part or all of the distributed stock, 
                        or the fact that the corporation whose 
                        stock was distributed issues additional 
                        stock, shall not be taken into account.

           *       *       *       *       *       *       *


Subchapter E--Accounting Periods and Methods of Accounting

           *       *       *       *       *       *       *


PART II--METHODS OF ACCOUNTING

           *       *       *       *       *       *       *


Subpart C--Taxable Year for Which Deductions Taken

           *       *       *       *       *       *       *


SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

  (a) * * *

           *       *       *       *       *       *       *

  (i) $25,000 Offset for Rental Real Estate Activities.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Phase-out of exemption.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Exception for low-income housing [credit] 
                and commercial revitalization credits.--
                Subparagraph (A) shall not apply to any portion 
                of the passive activity credit for any taxable 
                year which is attributable to any credit 
                determined under section 42 or section 1400K.

           *       *       *       *       *       *       *


Subchapter F--Exempt Organizations

           *       *       *       *       *       *       *


              PART VIII--HIGHER EDUCATION SAVINGS ENTITIES

        Sec. 529. Qualified [State] tuition programs.
     * * * * * * *

[SEC. 529. QUALIFIED STATE TUITION PROGRAMS.]

SEC. 529. QUALIFIED TUITION PROGRAMS.

  (a) General Rule.--A [qualified State tuition program] 
qualified tuition program shall be exempt from taxation under 
this subtitle. Notwithstanding the preceding sentence, such 
program shall be subject to the taxes imposed by section 511 
(relating to imposition of tax on unrelated business income of 
charitable organizations).
  (b) Qualified State Tuition Program.--For purposes of this 
section--
          (1) In general.--The term ``[qualified State tuition 
        program] qualified tuition program'' means a program 
        established and maintained by a State or agency or 
        instrumentality thereof or by 1 or more eligible 
        educational institutions--
                  (A) * * *

           *       *       *       *       *       *       *

          (2) Cash contributions.--A program shall not be 
        treated as a [qualified State tuition program] 
        qualified tuition program unless it provides that 
        purchases or contributions may only be made in cash.
          (3) Refunds.--A program shall not be treated as a 
        [qualified State tuition program] qualified tuition 
        program unless it imposes a more than de minimis 
        penalty on any refund of earnings from the account 
        which are not--
                  (A) used for qualified higher education 
                expenses of the designated beneficiary,
                  (B) made on account of the death or 
                disability of the designated beneficiary, or
                  (C) made on account of a scholarship (or 
                allowance or payment described in section 
                135(d)(1)(B) or (C)) received by the designated 
                beneficiary to the extent the amount of the 
                refund does not exceed the amount of the 
                scholarship, allowance, or payment.
          (4) Separate accounting.--A program shall not be 
        treated as a [qualified State tuition program] 
        qualified tuition program unless it provides separate 
        accounting for each designated beneficiary.
          (5) No investment direction.--A program shall not be 
        treated as a [qualified State tuition program] 
        qualified tuition program unless it provides that any 
        contributor to, or designated beneficiary under, such 
        program may not directly or indirectly direct the 
        investment of any contributions to the program (or any 
        earnings thereon).
          (6) No pledging of interest as security.--A program 
        shall not be treated as a [qualified State tuition 
        program] qualified tuition program if it allows any 
        interest in the program or any portion thereof to be 
        used as security for a loan.
          (7) Prohibition on excess contributions.--A program 
        shall not be treated as a [qualified State tuition 
        program] qualified tuition program unless it provides 
        adequate safeguards to prevent contributions on behalf 
        of a designated beneficiary in excess of those 
        necessary to provide for the qualified higher education 
        expenses of the beneficiary.
  (c) Tax Treatment of Designated Beneficiaries and 
Contributors.--
          (1) In general.--Except as otherwise provided in this 
        subsection, no amount shall be includible in gross 
        income of--
                  (A) a designated beneficiary under a 
                [qualified State tuition program] qualified 
                tuition program, or
                  (B) a contributor to such program on behalf 
                of a designated beneficiary,
        with respect to any distribution or earnings under such 
        program.
          (2) 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.
          (3) Distributions.--
                  (A) In general.--Any distribution under a 
                [qualified State tuition program] qualified 
                tuition program shall be includible in the 
                gross income of the distributee in the manner 
                as provided under section 72 to the extent not 
                excluded from gross income under any other 
                provision of this chapter.
                  (B) In-kind distributions.--Any benefit 
                furnished to a designated beneficiary under a 
                [qualified State tuition program] qualified 
                tuition program shall be treated as a 
                distribution to the beneficiary.
                  (C) Change in beneficiaries.--
                          (i) Rollovers.--Subparagraph (A) 
                        shall not apply to that portion of any 
                        distribution which, within 60 days of 
                        such distribution, is transferred to 
                        the credit of another designated 
                        beneficiary under a [qualified State 
                        tuition program] qualified tuition 
                        program who is a member of the family 
                        of the designated beneficiary with 
                        respect to which the distribution was 
                        made.
                          (ii) Change in designated 
                        beneficiaries.--Any change in the 
                        designated beneficiary of an interest 
                        in a [qualified State tuition program] 
                        qualified tuition program shall not be 
                        treated as a distribution for purposes 
                        of subparagraph (A) if the new 
                        beneficiary is a member of the family 
                        of the old beneficiary.
                  (D) Operating rules.--For purposes of 
                applying section 72--
                          (i) to the extent provided by the 
                        Secretary, all [qualified State tuition 
                        programs] qualified tuition programs of 
                        which an individual is a designated 
                        beneficiary shall be treated as one 
                        program,
                          (ii) all distributions during a 
                        taxable year shall be treated as one 
                        distribution, and
                          (iii) the value of the contract, 
                        income on the contract, and investment 
                        in the contract shall be computed as of 
                        the close of the calendar year in which 
                        the taxable year begins.

           *       *       *       *       *       *       *

  (d) Reports.--Each officer or employee having control of the 
[qualified State tuition program] qualified 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.
  (e) Other Definitions and Special Rules.--For purposes of 
this section--
          (1) Designated beneficiary.--The term ``designated 
        beneficiary'' means--
                  (A) the individual designated at the 
                commencement of participation in the [qualified 
                State tuition program] qualified tuition 
                program as the beneficiary of amounts paid (or 
                to be paid) to the program,
                  (B) in the case of a change in beneficiaries 
                described in subsection (c)(3)(C), the 
                individual who is the new beneficiary, and
                  (C) in the case of an interest in a qualified 
                [State tuition program] qualified tuition 
                program purchased by a State or local 
                government (or agency or instrumentality 
                thereof) or an organization described in 
                section 501(c)(3) and exempt from taxation 
                under section 501(a) as part of a scholarship 
                program operated by such government or 
                organization, the individual receiving such 
                interest as a scholarship.

           *       *       *       *       *       *       *

          (3) Qualified higher education expenses.--
                  (A) * * *
                  (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] 
                        qualified 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.
          (4) Application of section 514.--An interest in a 
        [qualified State tuition program] qualified tuition 
        program shall not be treated as debt for purposes of 
        section 514.
          (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.

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) * * *
          (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] qualified 
                tuition program (as defined in section 529(b) 
                for the benefit of the beneficiary of the 
                account.

           *       *       *       *       *       *       *


Subchapter H--Banking Institutions

           *       *       *       *       *       *       *


PART I--RULES OF GENERAL APPLICATION TO BANKING INSTITUTIONS

           *       *       *       *       *       *       *


SEC. 584. COMMON TRUST FUNDS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Income of Participants in Fund.--Each participant in the 
common trust fund in computing its taxable income shall 
include, whether or not distributed and whether or not 
distributable--
          (1) * * *

           *       *       *       *       *       *       *

The proportionate share of each participant in the amount of 
dividends or interest received by the common trust fund and to 
which section 116 applies shall be considered for purposes of 
such section as having been received by such participant.

           *       *       *       *       *       *       *


Subchapter J--Estates, Trusts, Beneficiaries, and Decedents

           *       *       *       *       *       *       *


PART I--ESTATES, TRUSTS, AND BENEFICIARIES

           *       *       *       *       *       *       *


Subpart A--General Rules for Taxation of Estates and Trusts

           *       *       *       *       *       *       *


SEC. 643. DEFINITIONS APPLICABLE TO SUBPARTS A, B, C, AND D.

  (a) Distributable Net Income.--For purposes of this part, the 
term ``distributable net income'' means, with respect to any 
taxable year, the taxable income of the estate or trust 
computed with the following modifications--
          (1) * * *

           *       *       *       *       *       *       *

          (7) Dividends or interest.--There shall be included 
        the amount of any dividends or interest excluded from 
        gross income pursuant to section 116.
          [(7)] (8) Abusive transactions.--The Secretary shall 
        prescribe such regulations as may be necessary or 
        appropriate to carry out the purposes of this part, 
        including regulations to prevent avoidance of such 
        purposes.

           *       *       *       *       *       *       *


Subchapter M--Regulated Investment Companies and Real Estate Investment 
Trusts

           *       *       *       *       *       *       *


PART II--REAL ESTATE INVESTMENT TRUSTS

           *       *       *       *       *       *       *


SEC. 854. LIMITATIONS APPLICABLE TO DIVIDENDS RECEIVED FROM REGULATED 
                    INVESTMENT COMPANY.

  (a) Capital Gain Dividend.--For purposes of section 116 
(relating to partial exclusion of dividends and interest 
received by individuals) and section 243 (relating to 
deductions for dividends received by corporations), a capital 
gain dividend (as defined in section 852(b)(3)) received from a 
regulated investment company shall not be considered as a 
dividend.

           *       *       *       *       *       *       *


SEC. 857. TAXATION OF REAL ESTATE INVESTMENT TRUSTS AND THEIR 
                    BENEFICIARIES.

  (a) * * *

           *       *       *       *       *       *       *

  [(c) Restrictions Applicable to Dividends Received From Real 
Estate Investment Trusts.--For purposes of section 243 
(relating to deductions for dividends received by 
corporations), a dividend received from a real estate 
investment trust which meets the requirements of this part 
shall not be considered as a dividend.]
  (c) Restrictions Applicable to Dividends Received From Real 
Estate Investment Trusts.--
          (1) Treatment for section 116.--For purposes of 
        section 116 (relating to partial exclusion of dividends 
        and interest received by individuals), a capital gain 
        dividend (as defined in subsection (b)(3)(C)) received 
        from a real estate investment trust which meets the 
        requirements of this part shall not be considered as a 
        dividend.
          (2) Treatment for section 243.--For purposes of 
        section 243 (relating to deductions for dividends 
        received by corporations), a dividend received from a 
        real estate investment trust which meets the 
        requirements of this part shall not be considered as a 
        dividend.

           *       *       *       *       *       *       *


SEC. 873. DEDUCTIONS.

  (a) * * *
  (b) Exceptions.--The following deductions shall be allowed 
whether or not they are connected with income which is 
effectively connected with the conduct of a trade or business 
within the United States:
          [(1) Losses.--The deduction for losses allowed by 
        section 165(c)(3), but only if the loss is of property 
        located within the United States.]
          (1) Losses.--The deduction allowed by section 165 for 
        casualty or theft losses described in paragraph (2) or 
        (3) of section 165(c), but only if the loss is of 
        property located within the United States.

           *       *       *       *       *       *       *


 Subchapter N--Tax Bases on Income From Sources Within or Without the 
United States

           *       *       *       *       *       *       *


PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

           *       *       *       *       *       *       *


Subpart F--Controlled of Foreign Corporations

           *       *       *       *       *       *       *


SEC. 953. INSURANCE INCOME.

  [(a) General Rule.--For purposes of section 952(a)(1), the 
term ``insurance income'' means any income which--
          [(1) is attributable to the issuing (or reinsuring) 
        of any insurance or annuity contract--
                  [(A) in connection with property in, 
                liability arising out of activity in, or in 
                connection with the lives or health of 
                residents of, a country other than the country 
                under the laws of which the controlled foreign 
                corporation is created or organized, or
                  [(B) in connection with risks not described 
                in subparagraph (A) as the result of any 
                arrangement whereby another corporation 
                receives a substantially equal amount of 
                premiums or other consideration in respect of 
                issuing (or reinsuring) a contract described in 
                subparagraph (A), and
          [(2) would (subject to the modifications provided by 
        paragraphs (1) and (2) of subsection (b)) be taxed 
        under subchapter L of this chapter if such income were 
        the income of a domestic insurance company.]
  (a) Insurance Income.--
          (1) In general.--For purposes of section 952(a)(1), 
        the term ``insurance income'' means any income which--
                  (A) is attributable to the issuing (or 
                reinsuring) of an insurance or annuity 
                contract, and
                  (B) would (subject to the modifications 
                provided by subsection (b)) be taxed under 
                subchapter L of this chapter if such income 
                were the income of a domestic insurance 
                company.
          (2) Exception.--Such term shall not include any 
        exempt insurance income (as defined in subsection (e)).
  (b) Special Rules.--For purposes of subsection (a)--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Reserves for any insurance or annuity contract 
        shall be determined in the same manner as under section 
        954(i).
          [(3)] (4) All items of income, expenses, losses, and 
        deductions shall be properly allocated or apportioned 
        under regulations prescribed by the Secretary.

           *       *       *       *       *       *       *

  (e) Exempt Insurance Income.--For purposes of this section--
          (1) Exempt insurance income defined.--
                  (A) In general.--The term ``exempt insurance 
                income'' means income derived by a qualifying 
                insurance company which--
                          (i) is attributable to the issuing 
                        (or reinsuring) of an exempt contract 
                        by such company or a qualifying 
                        insurance company branch of such 
                        company, and
                          (ii) is treated as earned by such 
                        company or branch in its home country 
                        for purposes of such country's tax 
                        laws.
                  (B) Exception for certain arrangements.--Such 
                term shall not include income attributable to 
                the issuing (or reinsuring) of an exempt 
                contract as the result of any arrangement 
                whereby another corporation receives a 
                substantially equal amount of premiums or other 
                consideration in respect of issuing (or 
                reinsuring) a contract which is not an exempt 
                contract.
                  (C) Determinations made separately.--For 
                purposes of this subsection and section 954(i), 
                the exempt insurance income and exempt 
                contracts of a qualifying insurance company or 
                any qualifying insurance company branch of such 
                company shall be determined separately for such 
                company and each such branch by taking into 
                account--
                          (i) in the case of the qualifying 
                        insurance company, only items of 
                        income, deduction, gain, or loss, and 
                        activities of such company not properly 
                        allocable or attributable to any 
                        qualifying insurance company branch of 
                        such company, and
                          (ii) in the case of a qualifying 
                        insurance company branch, only items of 
                        income, deduction, gain, or loss and 
                        activities properly allocable or 
                        attributable to such unit.
          (2) Exempt contract.--
                  (A) In general.--The term ``exempt contract'' 
                means an insurance or annuity contract issued 
                or reinsured by a qualifying insurance company 
                or qualifying insurance company branch in 
                connection with property in, liability arising 
                out of activity in, or the lives or health of 
                residents of, a country other than the United 
                States.
                  (B) Minimum home country income required.--
                          (i) In general.--No contract of a 
                        qualifying insurance company or of a 
                        qualifying insurance company branch 
                        shall be treated as an exempt contract 
                        unless such company or branch derives 
                        more than 30 percent of its net written 
                        premiums from exempt contracts 
                        (determined without regard to this 
                        subparagraph)--
                                  (I) which cover applicable 
                                home country risks, and
                                  (II) with respect to which no 
                                policyholder, insured, 
                                annuitant, or beneficiary is a 
                                related person (as defined in 
                                section 954(d)(3)).
                          (ii) Applicable home country risks.--
                        The term ``applicable home country 
                        risks'' means risks in connection with 
                        property in, liability arising out of 
                        activity in, or the lives or health of 
                        residents of, the home country of the 
                        qualifying insurance company or 
                        qualifying insurance company branch, as 
                        the case may be, issuing or reinsuring 
                        the contract covering the risks.
                  (C) Substantial activity requirements for 
                cross border risks.--A contract issued by a 
                qualifying insurance company or qualifying 
                insurance company branch which covers risks 
                other than applicable home country risks (as 
                defined in subparagraph (B)(ii)) shall not be 
                treated as an exempt contract unless such 
                company or branch, as the case may be--
                          (i) conducts substantial activity 
                        with respect to an insurance business 
                        in its home country, and
                          (ii) performs in its home country 
                        substantially all of the activities 
                        necessary to give rise to the income 
                        generated by such contract.
          (3) Qualifying insurance company.--The term 
        ``qualifying insurance company'' means any controlled 
        foreign corporation which--
                  (A) is subject to regulation as an insurance 
                (or reinsurance) company by its home country, 
                and is licensed, authorized, or regulated by 
                the applicable insurance regulatory body for 
                its home country to sell insurance, 
                reinsurance, or annuity contracts to persons 
                other than related persons (within the meaning 
                of section 954(d)(3)) in such home country,
                  (B) derives more than 50 percent of its 
                aggregate net written premiums from the 
                issuance or reinsurance by suchcontrolled 
foreign corporation and each of its qualifying insurance company 
branches of contracts--
                          (i) covering applicable home country 
                        risks (as defined in paragraph (2)) of 
                        such corporation or branch, as the case 
                        may be, and
                          (ii) with respect to which no 
                        policyholder, insured, annuitant, or 
                        beneficiary is a related person (as 
                        defined in section 954(d)(3)),
                except that in the case of a branch, such 
                premiums shall only be taken into account to 
                the extent such premiums are treated as earned 
                by such branch in its home country for purposes 
                of such country's tax laws, and
                  (C) is engaged in the insurance business and 
                would be subject to tax under subchapter L if 
                it were a domestic corporation.
          (4) Qualifying insurance company branch.--The term 
        ``qualifying insurance company branch'' means a 
        qualified business unit (within the meaning of section 
        989(a)) of a controlled foreign corporation if--
                  (A) such unit is licensed, authorized, or 
                regulated by the applicable insurance 
                regulatory body for its home country to sell 
                insurance, reinsurance, or annuity contracts to 
                persons other than related persons (within the 
                meaning of section 954(d)(3)) in such home 
                country, and
                  (B) such controlled foreign corporation is a 
                qualifying insurance company, determined under 
                paragraph (3) as if such unit were a qualifying 
                insurance company branch.
          (5) Life insurance or annuity contract.--For purposes 
        of this section and section 954, the determination of 
        whether a contract issued by a controlled foreign 
        corporation or a qualified business unit (within the 
        meaning of section 989(a)) is a life insurance contract 
        or an annuity contract shall be made without regard to 
        sections 72(s), 101(f), 817(h), and 7702 if--
                  (A) such contract is regulated as a life 
                insurance or annuity contract by the 
                corporation's or unit's home country, and
                  (B) no policyholder, insured, annuitant, or 
                beneficiary with respect to the contract is a 
                United States person.
          (6) Home country.--For purposes of this subsection, 
        except as provided in regulations--
                  (A) Controlled foreign corporation.--The term 
                ``home country'' means, with respect to a 
                controlled foreign corporation, the country in 
                which such corporation is created or organized.
                  (B) Qualified business unit.--The term ``home 
                country'' means, with respect to a qualified 
                business unit (as defined in section 989(a)), 
                the country in which the principal office of 
                such unit is located and in which such unit is 
                licensed, authorized, or regulated by the 
                applicable insurance regulatory body to sell 
                insurance, reinsurance, or annuity contracts to 
                persons other than related persons (as defined 
                in section 954(d)(3)) in such country.
          (7) Anti-abuse rules.--For purposes of applying this 
        subsection and section 954(i)--
                  (A) the rules of section 954(h)(7) (other 
                than subparagraph (B) thereof) shall apply,
                  (B) there shall be disregarded any item of 
                income, gain, loss, or deduction of, or derived 
                from, an entity which is not engaged in regular 
                and continuous transactions with persons which 
                are not related persons,
                  (C) there shall be disregarded any change in 
                the method of computing reserves a principal 
                purpose of which is the acceleration or 
                deferral of any item in order to claim the 
                benefits of this subsection or section 954(i),
                  (D) a contract of insurance or reinsurance 
                shall not be treated as an exempt contract (and 
                premiums from such contract shall not be taken 
                into account for purposes of paragraph (2)(B) 
                or (3)) if--
                          (i) any policyholder, insured, 
                        annuitant, or beneficiary is a resident 
                        of the United States and such contract 
                        was marketed to such resident and was 
                        written to cover a risk outside the 
                        United States, or
                          (ii) the contract covers risks 
                        located within and without the United 
                        States and the qualifying insurance 
                        company or qualifying insurance company 
                        branch does not maintain such 
                        contemporaneous records, and file such 
                        reports, with respect to such contract 
                        as the Secretary may require,
                  (E) the Secretary may prescribe rules for the 
                allocation of contracts (and income from 
                contracts) among 2 or more qualifying insurance 
                company branches of a qualifying insurance 
                company in order to clearly reflect the income 
                of such branches, and
                  (F) premiums from a contract shall not be 
                taken into account for purposes of paragraph 
                (2)(B) or (3) if such contract reinsures a 
                contract issued or reinsured by a related 
                person (as defined in section 954(d)(3)).
        For purposes of subparagraph (D), the determination of 
        where risks are located shall be made under the 
        principles of section 953.
          (8) Coordination with subsection (c).--In determining 
        insurance income for purposes of subsection (c), exempt 
        insurance income shall not include income derived from 
        exempt contracts which cover risks other than 
        applicable home country risks.
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection and section 954(i).
          (10) Application.--This subsection and section 954(i) 
        shall apply only to the first taxable year of a foreign 
        corporation beginning after December 31, 1998, and 
        before January 1, 2000, and to taxable years of United 
        States shareholders with or within which such taxable 
        year of such foreign corporation ends.
          (11) Cross reference.--

          For income exempt from foreign personal holding company 
        income, see section 954(i).

SEC. 954. FOREIGN BASE COMPANY INCOME.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Foreign Personal Holding Company Income.--
          (1) In general.--For purposes of subsection (a)(1), 
        the term ``foreign personal holding company income'' 
        means the portion of the gross income which consists 
        of:
                  (A) Dividends, etc.--Dividends, interest, 
                royalties, rents, and annuities.
                  (B) Certain property transactions.--The 
                excess of gains over losses from the sale or 
                exchange of property--
                          (i) which gives rise to income 
                        described in subparagraph (A) (after 
                        application of paragraph (2)(A)) other 
                        than property which gives rise to 
                        income not treated as foreign personal 
                        holding company income by reason of 
                        subsection (h) or (i) for the taxable 
                        year,
                          (ii) which is an interest in a trust, 
                        partnership, or REMIC, or
                          (iii) which does not give rise to any 
                        income.
                Gains and losses from the sale or exchange of 
                any property which, in the hands of the 
                controlled foreign corporation, is property 
                described in section 1221(1) shall not be taken 
                into account under this subparagraph.

           *       *       *       *       *       *       *

          (2) Exception for certain amounts.--
                  (A) * * *

           *       *       *       *       *       *       *

                  [(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) Exception for dealers.--Except as 
                provided by regulations, in the case of a 
                regular dealer in property which is property 
                described in 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 company income--
                          (i) any item of income, gain, 
                        deduction, or loss (other than any item 
                        described in subparagraph (A), (E), or 
                        (G) of paragraph (1)) from any 
                        transaction (including hedging 
                        transactions) entered into in the 
                        ordinary course of such dealer's trade 
                        or business as such a dealer, and
                          (ii) if such dealer is a dealer in 
                        securities (within the meaning of 
                        section 475), any interest or dividend 
                        or equivalent amount described in 
                        subparagraph (E) or (G) of paragraph 
                        (1) from any transaction (including any 
                        hedging transaction or transaction 
                        described in section 956(c)(2)(J)) 
                        entered into in the ordinary course of 
                        such dealer's trade or business as such 
                        a dealer in securities, but only if the 
                        income from the transaction is 
                        attributable to activities of the 
                        dealer in the country under the laws of 
                        which the dealer is created or 
                        organized (or in the case of a 
                        qualified business unit described in 
                        section 989(a), is attributable to 
                        activities of the unit in the country 
                        in which the unit both maintains its 
                        principal office and conducts 
                        substantial business activity).

           *       *       *       *       *       *       *

  (e) Foreign Base Company Services Income.--
          (1) * * *
          (2) Exception.--Paragraph (1) shall not apply to 
        income derived in connection with the performance of 
        services which are directly related to--
                  (A) the sale or exchange by the controlled 
                foreign corporation of property manufactured, 
                produced, grown, or extracted by it and which 
                are performed before the time of the sale or 
                exchange, or
                  (B) an offer or effort to sell or exchange 
                such property[, or].
                  [(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.]
        Paragraph (1) shall also not apply to income which is 
        exempt insurance income (as defined in section 953(e)) 
        or which is not treated as foreign personal holding 
        income by reason of subsection (c)(2)(C)(ii), (h), or 
        (i).

           *       *       *       *       *       *       *

  [(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 0premiums (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 the enactment 
                        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 respect to 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 in the 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 company 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.]
  (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 qualified banking or financing income of an 
        eligible controlled foreign corporation.
          (2) Eligible controlled foreign corporation.--For 
        purposes of this subsection--
                  (A) In general.--The term ``eligible 
                controlled foreign corporation'' means a 
                controlled foreign corporation which--
                          (i) is predominantly engaged in the 
                        active conduct of a banking, financing, 
                        or similar business, and
                          (ii) conducts substantial activity 
                        with respect to such business.
                  (B) Predominantly engaged.--A controlled 
                foreign corporation shall be treated as 
                predominantly engaged in the active conduct of 
                a banking, financing, or similar business if--
                          (i) more than 70 percent of the gross 
                        income of the controlled foreign 
                        corporation is derived directly from 
                        the active and regular conduct of a 
                        lending or finance business from 
                        transactions with customers which are 
                        not related persons,
                          (ii) it is engaged in the active 
                        conduct of a banking business and is an 
                        institution licensed to do business as 
                        a bank in the United States (or is any 
                        other corporation not so licensed which 
                        is specified by the Secretary in 
                        regulations), or
                          (iii) it is engaged in the active 
                        conduct of a securities business and is 
                        registered as a securities broker or 
                        dealer under section 15(a) of the 
                        Securities Exchange Act of 1934 or is 
                        registered as a Government securities 
                        broker or dealer under section 15C(a) 
                        of such Act (or is any other 
                        corporation not so registered which is 
                        specified by the Secretary in 
                        regulations).
          (3) Qualified banking or financing income.--For 
        purposes of this subsection--
                  (A) In general.--The term ``qualified banking 
                or financing income'' means income of an 
                eligible controlled foreign corporation which--
                          (i) is derived in the active conduct 
                        of a banking, financing, or similar 
                        business by--
                                  (I) such eligible controlled 
                                foreign corporation, or
                                  (II) a qualified business 
                                unit of such eligible 
                                controlled foreign corporation,
                          (ii) is derived from 1 or more 
                        transactions--
                                  (I) with customers located in 
                                a country other than the United 
                                States, and
                                  (II) substantially all of the 
                                activities in connection with 
                                which are conducted directly by 
                                the corporation or unit in its 
                                home country, and
                          (iii) is treated as earned by such 
                        corporation or unit in its home country 
                        for purposes of such country's tax 
                        laws.
                  (B) Limitation on nonbanking businesses.--No 
                income of an eligible controlled foreign 
                corporation not described in clause (ii) or 
                (iii) of paragraph (2)(B) (or of a qualified 
                business unit of such corporation) shall be 
                treated as qualified banking or financing 
                income unless more than 30 percent of such 
                corporation's or unit's gross income is derived 
                directly from the active and regular conduct of 
                a lending or finance business from transactions 
                with customers which are not related persons 
                and which are located within such corporation's 
                or unit's home country.
                  (C) Substantial activity requirement for 
                cross border income.--The term ``qualified 
                banking or financing income'' shall not include 
                income derived from 1 or more transactions with 
                customers located in a country other than the 
                home country of the eligible controlled foreign 
                corporation or a qualified business unit of 
                such corporation unless such corporation or 
                unit conducts substantial activity with respect 
                to a banking, financing, or similar business in 
                its home country.
                  (D) Determinations made separately.--For 
                purposes of this paragraph, the qualified 
                banking or financing income of an eligible 
                controlled foreign corporation and each 
                qualified business unit of such corporation 
                shall be determined separately for such 
                corporation and each such unit by taking into 
                account--
                          (i) in the case of the eligible 
                        controlled foreign corporation, only 
                        items of income, deduction, gain, or 
                        loss and activities of such corporation 
                        not properly allocable or attributable 
                        to any qualified business unit of such 
                        corporation, and
                          (ii) in the case of a qualified 
                        business unit, only items of income, 
                        deduction, gain, or loss and activities 
                        properly allocable or attributable to 
                        such unit.
          (4) Lending or finance business.--For purposes of 
        this subsection, the term ``lending or finance 
        business'' means the business of--
                  (A) making loans,
                  (B) purchasing or discounting accounts 
                receivable, notes, or installment obligations,
                  (C) engaging in leasing (including entering 
                into leases and purchasing, servicing, and 
                disposing of leases and leased assets),
                  (D) issuing letters of credit or providing 
                guarantees,
                  (E) providing charge and credit card 
                services, or
                  (F) rendering services or making facilities 
                available in connection with activities 
                described in subparagraphs (A) through (E) 
                carried on by--
                          (i) the corporation (or qualified 
                        business unit) rendering services or 
                        making facilities available, or
                          (ii) another corporation (or 
                        qualified business unit of a 
                        corporation) which is a member of the 
                        same affiliated group (as defined in 
                        section 1504, but determined without 
                        regard to section 1504(b)(3)).
          (5) Other definitions.--For purposes of this 
        subsection--
                  (A) Customer.--The term ``customer'' means, 
                with respect to any controlled foreign 
                corporation or qualified business unit, any 
                person which has a customer relationship with 
                such corporation or unit and which is acting in 
                its capacity as such.
                  (B) Home country.--Except as provided in 
                regulations--
                          (i) Controlled foreign corporation.--
                        The term ``home country'' means, with 
                        respect to any controlled foreign 
                        corporation, the country under the laws 
                        of which the corporation was created or 
                        organized.
                          (ii) Qualified business unit.--The 
                        term ``home country'' means, with 
                        respect to any qualified business unit, 
                        the country in which such unit 
                        maintains its principal office.
                  (C) Located.--The determination of where a 
                customer is located shall be made under rules 
                prescribed by the Secretary.
                  (D) Qualified business unit.--The term 
                ``qualified business unit'' has the meaning 
                given such term by section 989(a).
                  (E) Related person.--The term ``related 
                person'' has the meaning given such term by 
                subsection (d)(3).
          (6) Coordination with exception for dealers.--
        Paragraph (1) shall not apply to income described in 
        subsection (c)(2)(C)(ii) of a dealer in securities 
        (within the meaning of section 475) which is an 
        eligible controlled foreign corporation described in 
        paragraph (2)(B)(iii).
          (7) Anti-abuse rules.--For purposes of applying this 
        subsection and subsection (c)(2)(C)(ii)--
                  (A) 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 
isqualifying income or gain for the exclusion under this section, 
including any 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,
                  (B) there shall be disregarded any item of 
                income, gain, loss, or deduction of an entity 
                which is not engaged in regular and continuous 
                transactions with customers which are not 
                related persons,
                  (C) there shall be disregarded any item of 
                income, gain, loss, or deduction with respect 
                to any transaction or series of transactions 
                utilizing, or doing business with--
                          (i) one or more entities in order to 
                        satisfy any home country requirement 
                        under this subsection, or
                          (ii) a special purpose entity or 
                        arrangement, including a 
                        securitization, financing, or similar 
                        entity or arrangement,
                if one of the principal purposes of such 
                transaction or series of transactions is 
                qualifying income or gain for the exclusion 
                under this subsection, and
                  (D) a related person, an officer, a director, 
                or an employee with respect to any controlled 
                foreign corporation (or qualified business 
                unit) which would otherwise be treated as a 
                customer of such corporation or unit with 
                respect to any transaction shall not be so 
                treated if a principal purpose of such 
                transaction is to satisfy any requirement of 
                this subsection.
          (8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection, subsection 
        (c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last 
        sentence of subsection (e)(2).
          (9) Application.--This subsection, subsection 
        (c)(2)(C)(ii), and the last sentence of subsection 
        (e)(2) shall apply only to the first taxable year of a 
        foreign corporation beginning after December 31, 1998, 
        and before January 1, 2000, and to taxable years of 
        United States shareholders with or within which such 
        taxable year of such foreign corporation ends.
  (i) Special Rule for Income Derived in the Active Conduct of 
Insurance Business.--
          (1) In general.--For purposes of subsection (c)(1), 
        foreign personal holding company income shall not 
        include qualified insurance income of a qualifying 
        insurance company.
          (2) Qualified insurance income.--The term ``qualified 
        insurance income'' means income of a qualifying 
        insurance company which is--
                  (A) 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 or a qualifying insurance company 
                branch of its reserves allocable to exempt 
                contracts or of 80 percent of its unearned 
                premiums from exempt contracts (as both are 
                determined in the manner prescribed under 
                paragraph (4)), or
                  (B) 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 or a 
                qualifying insurance company branch of an 
                amount of its assets allocable to exempt 
                contracts equal to--
                          (i) in the case of 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 life insurance or 
                        annuity contracts, 10 percent of the 
                        reserves described in subparagraph (A) 
                        for such contracts.
          (3) Principles for determining insurance income.--
        Except as provided by the Secretary, for purposes of 
        subparagraphs (A) and (B) of paragraph (2)--
                  (A) in the case of any contract which is a 
                separate account-type contract (including any 
                variable contract not meeting the requirements 
                of section 817), income credited under such 
                contract shall be allocable only to such 
                contract, and
                  (B) income not allocable under subparagraph 
                (A) shall be allocated ratably among contracts 
                not described in subparagraph (A).
          (4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (2)(A)--
                  (A) Property and casualty contracts.--The 
                unearned premiums and reserves of a qualifying 
                insurance company or a qualifying insurance 
                company branch with respect to property, 
                casualty, or health insurance contracts shall 
                be determined using the same methods and 
                interest rates which would be used if such 
                company or branch were subject to tax under 
                subchapter L, except that--
                          (i) the interest rate determined for 
                        the functional currency of the company 
                        or branch, and which, except as 
                        provided by the Secretary, is 
                        calculated in the same manner as the 
                        Federal mid-term rate under section 
                        1274(d), shall be substituted for the 
                        applicable Federal interest rate, and
                          (ii) such company or branch shall use 
                        the appropriate foreign loss payment 
                        pattern.
                  (B) Life insurance and annuity contracts.--
                The amount of the reserve of a qualifying 
                insurance company or qualifying insurance 
                company branch for any life insurance or 
                annuity contract shall be equal to the greater 
                of--
                          (i) the net surrender value of such 
                        contract (as defined in section 
                        807(e)(1)(A)), or
                          (ii) the reserve determined under 
                        paragraph (5).
                  (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 statement 
                reserves (less any catastrophe, deficiency, 
                equalization, or similar reserves).
          (5) Amount of reserve.--The amount of the reserve 
        determined under this paragraph with respect to any 
        contract shall be determined in the same manner as it 
        would be determinedif the qualifying insurance company 
or qualifying insurance company branch were subject to tax under 
subchapter L, except that in applying such subchapter--
                  (A) the interest rate determined for the 
                functional currency of the company or branch, 
                and which, except as provided by the Secretary, 
                is calculated in the same manner as the Federal 
                mid-term rate under section 1274(d), shall be 
                substituted for the applicable Federal interest 
                rate,
                  (B) the highest assumed interest rate 
                permitted to be used in determining foreign 
                statement reserves shall be substituted for the 
                prevailing State assumed interest rate, and
                  (C) tables for mortality and morbidity which 
                reasonably reflect the current mortality and 
                morbidity risks in the company's or branch's 
                home country shall be substituted for the 
                mortality and morbidity tables otherwise used 
                for such subchapter.
        The Secretary may provide that the interest rate and 
        mortality and morbidity tables of a qualifying 
        insurance company may be used for 1 or more of its 
        qualifying insurance company branches when appropriate.
          (6) Definitions.--For purposes of this subsection, 
        any term used in this subsection which is also used in 
        section 953(e) shall have the meaning given such term 
        by section 953.

           *       *       *       *       *       *       *


                   Subchapter X--Renewal Communities

        Part I. Designation.
        Part II. Renewal community capital gain; renewal community 
                  business.
        Part III. Family development accounts.
        Part IV. Additional incentives.

                          PART I--DESIGNATION

        Sec. 1400E. Designation of renewal communities.

SEC. 1400E. DESIGNATION OF RENEWAL COMMUNITIES.

  (a) Designation.--
          (1) Definitions.--For purposes of this title, the 
        term ``renewal community'' means any area--
                  (A) which is nominated by one or more local 
                governments and the State or States in which it 
                is located for designation as a renewal 
                community (hereinafter in this section referred 
                to as a ``nominated area''), and
                  (B) which the Secretary of Housing and Urban 
                Development designates as a renewal community, 
                after consultation with--
                          (i) the Secretaries of Agriculture, 
                        Commerce, Labor, and the Treasury; the 
                        Director of the Office of Management 
                        and Budget; and the Administrator of 
                        the Small Business Administration, and
                          (ii) in the case of an area on an 
                        Indian reservation, the Secretary of 
                        the Interior.
          (2) Number of designations.--
                  (A) In general.--The Secretary of Housing and 
                Urban Development may designate not more than 
                20 nominated areas as renewal communities.
                  (B) Minimum designation in rural areas.--Of 
                the areas designated under paragraph (1), at 
                least 4 must be areas--
                          (i) which are within a local 
                        government jurisdiction or 
                        jurisdictions with a population of less 
                        than 50,000,
                          (ii) which are outside of a 
                        metropolitan statistical area (within 
                        the meaning of section 143(k)(2)(B)), 
                        or
                          (iii) which are determined by the 
                        Secretary of Housing and Urban 
                        Development, after consultation with 
                        the Secretary of Commerce, to be rural 
                        areas.
          (3) Areas designated based on degree of poverty, 
        etc.--
                  (A) In general.--Except as otherwise provided 
                in this section, the nominated areas designated 
                as renewal communities under this subsection 
                shall be those nominated areas with the highest 
                average ranking with respect to the criteria 
                described in subparagraphs (B), (C), and (D) of 
                subsection (c)(3). For purposes of the 
                preceding sentence, an area shall be ranked 
                within each such criterion on the basis of the 
                amount by which the area exceeds such 
                criterion, with the area which exceeds such 
                criterion by the greatest amount given the 
                highest ranking.
                  (B) Exception where inadequate course of 
                action, etc.--An area shall not be designated 
                under subparagraph (A) if the Secretary of 
                Housing and Urban Development determines that 
                the course of action described in subsection 
                (d)(2) with respect to such area is inadequate.
                  (C) Priority for empowerment zones and 
                enterprise communities with respect to first 
                half of designations.-- With respect to the 
                first 10 designations made under this section--
                          (i) 10 shall be chosen from nominated 
                        areas which are empowerment zones or 
                        enterprise communities (and are 
                        otherwise eligible for designation 
                        under this section), and
                          (ii) of such 10, 2 shall be areas 
                        described in paragraph (2)(B).
          (4) Limitation on designations.--
                  (A) Publication of regulations.--The 
                Secretary of Housing and Urban Development 
                shall prescribe by regulation no later than 4 
                months after the date of the enactment of this 
                section, after consultation with the officials 
                described in paragraph (1)(B)--
                          (i) the procedures for nominating an 
                        area under paragraph (1)(A),
                          (ii) the parameters relating to the 
                        size and population characteristics of 
                        a renewal community, and
                          (iii) the manner in which nominated 
                        areas will be evaluated based on the 
                        criteria specified in subsection (d).
                  (B) Time limitations.--The Secretary of 
                Housing and Urban Development may designate 
                nominated areas as renewal communities only 
                during the 24-month period beginning on the 
                first day of the first month following the 
                month in which the regulations described in 
                subparagraph (A) are prescribed.
                  (C) Procedural rules.--The Secretary of 
                Housing and Urban Development shall not make 
                any designation of a nominated area as a 
                renewal community under paragraph (2) unless--
                          (i) the local governments and the 
                        States in which the nominated area is 
                        located have the authority--
                                  (I) to nominate such area for 
                                designation as a renewal 
                                community,
                                  (II) to make the State and 
                                local commitments described in 
                                subsection (d), and
                                  (III) to provide assurances 
                                satisfactory to the Secretary 
                                of Housing and Urban 
                                Development that such 
                                commitments will be fulfilled,
                          (ii) a nomination regarding such area 
                        is submitted in such a manner and in 
                        such form, and contains such 
                        information, as the Secretary of 
                        Housing and Urban Development shall by 
                        regulation prescribe, and
                          (iii) the Secretary of Housing and 
                        Urban Development determines that any 
                        information furnished is reasonably 
                        accurate.
          (5) Nomination process for indian reservations.--For 
        purposes of this subchapter, in the case of a nominated 
        area on an Indian reservation, the reservation 
        governing body (as determined by the Secretary of the 
        Interior) shall be treated as being both the State and 
        local governments with respect to such area.
  (b) Period for Which Designation Is in Effect.--
          (1) In general.--Any designation of an area as a 
        renewal community shall remain in effect during the 
        period beginning on the date of the designation and 
        ending on the earliest of--
                  (A) December 31, 2006,
                  (B) the termination date designated by the 
                State and local governments in their 
                nomination, or
                  (C) the date the Secretary of Housing and 
                Urban Development revokes such designation.
          (2) Revocation of designation.--The Secretary of 
        Housing and Urban Development may revoke the 
        designation under this section of an area if such 
        Secretary determines that the local government or the 
        State in which the area is located--
                  (A) has modified the boundaries of the area, 
                or
                  (B) is not complying substantially with, or 
                fails to make progress in achieving, the State 
                or local commitments, respectively, described 
                in subsection (d).
  (c) Area and Eligibility Requirements.--
          (1) In general.--The Secretary of Housing and Urban 
        Development may designate a nominated area as a renewal 
        community under subsection (a) only if the area meets 
        the requirements of paragraphs (2) and (3) of this 
        subsection.
          (2) Area requirements.--A nominated area meets the 
        requirements of this paragraph if--
                  (A) the area is within the jurisdiction of 
                one or more local governments,
                  (B) the boundary of the area is continuous, 
                and
                  (C) the area--
                          (i) has a population, of at least--
                                  (I) 4,000 if any portion of 
                                such area (other than a rural 
                                area described in subsection 
                                (a)(2)(B)(i)) is located within 
                                a metropolitan statistical area 
                                (within the meaning of section 
                                143(k)(2)(B)) which has a 
                                population of 50,000 or 
                                greater, or
                                  (II) 1,000 in any other case, 
                                or
                          (ii) is entirely within an Indian 
                        reservation (as determined by the 
                        Secretary of the Interior).
          (3) Eligibility requirements.--A nominated area meets 
        the requirements of this paragraph if the State and the 
        local governments in which it is located certify (and 
        the Secretary of Housing and Urban Development, after 
        such review of supporting data as he deems appropriate, 
        accepts such certification) that--
                  (A) the area is one of pervasive poverty, 
                unemployment, and general distress,
                  (B) the unemployment rate in the area, as 
                determined by the most recent available data, 
                was at least 1\1/2\ times the national 
                unemployment rate for the period to which such 
                data relate,
                  (C) the poverty rate for each population 
                census tract within the nominated area is at 
                least 20 percent, and
                  (D) in the case of an urban area, at least 70 
                percent of the households living in the area 
                have incomes below 80 percent of the median 
                income of households within the jurisdiction of 
                the local government (determined in the same 
                manner as under section 119(b)(2) of the 
                Housing and Community Development Act of 1974).
          (4) Consideration of high incidence of crime.--The 
        Secretary of Housing and Urban Development shall take 
        into account, in selecting nominated areas for 
        designation as renewal communities under this section, 
        the extent to which such areas have a high incidence of 
        crime.
          (5) Consideration of communities identified in gao 
        study.--The Secretary of Housing and Urban Development 
        shall take into account, in selecting nominated areas 
        for designation as renewal communities under this 
        section, if the area has census tracts identified in 
        the May 12, 1998, report of the General Accounting 
        Office regarding the identification of economically 
        distressed areas.
  (d) Required State and Local Commitments.--
          (1) In general.--The Secretary of Housing and Urban 
        Development may designate any nominated area as a 
        renewal community under subsection (a) only if--
                  (A) the local government and the State in 
                which the area is located agree in writing 
                that, during any period during which the area 
                is a renewal community, such governments will 
                follow a specified course of action which meets 
                the requirements of paragraph (2) and is 
                designed to reduce the various burdens borne by 
                employers or employees in such area, and
                  (B) the economic growth promotion 
                requirements of paragraph (3) are met.
          (2) Course of action.--
                  (A) In general.--A course of action meets the 
                requirements of this paragraph if such course 
                of action is a written document, signed by a 
                State (or local government) and neighborhood 
                organizations, which evidences a partnership 
                between such State or government and community-
                based organizations and which commits each 
                signatory to specific and measurable goals, 
                actions, and timetables. Such course of action 
                shall include at least five of the following:
                          (i) A reduction of tax rates or fees 
                        applying within the renewal community.
                          (ii) An increase in the level of 
                        efficiency of local services within the 
                        renewal community.
                          (iii) Crime reduction strategies, 
                        such as crime prevention (including the 
                        provision of such services by 
                        nongovernmental entities).
                          (iv) Actions to reduce, remove, 
                        simplify, or streamline governmental 
                        requirements applying within the 
                        renewal community.
                          (v) Involvement in the program by 
                        private entities, organizations, 
                        neighborhood organizations, and 
                        community groups, particularly those in 
                        the renewal community, including a 
                        commitment from such private entities 
                        to provide jobs and job training for, 
                        and technical, financial, or other 
                        assistance to, employers, employees, 
                        and residents from the renewal 
                        community.
                          (vi) State or local income tax 
                        benefits for fees paid for services 
                        performed by a nongovernmental entity 
                        which were formerly performed by a 
                        governmental entity.
                          (vii) The gift (or sale at below fair 
                        market value) of surplus real property 
                        (such as land, homes, and commercial or 
                        industrial structures) in the renewal 
                        community to neighborhood 
                        organizations, community development 
                        corporations, or private companies.
                  (B) Recognition of past efforts.--For 
                purposes of this section, in evaluating the 
                course of action agreed to by any State or 
                local government, the Secretary of Housing and 
                Urban Development shall take into account the 
                past efforts of such State or local government 
                in reducing the various burdens borne by 
                employers and employees in the area involved.
          (3) Economic growth promotion requirements.--The 
        economic growth promotion requirements of this 
        paragraph are met with respect to a nominated area if 
        the local government and the State in which such area 
        is located certify in writing that such government and 
        State, respectively, have repealed or otherwise will 
        not enforce within the area, if such area is designated 
        as a renewal community--
                  (A) licensing requirements for occupations 
                that do not ordinarily require a professional 
                degree,
                  (B) zoning restrictions on home-based 
                businesses which do not create a public 
                nuisance,
                  (C) permit requirements for street vendors 
                who do not create a public nuisance,
                  (D) zoning or other restrictions that impede 
                the formation of schools or child care centers, 
                and
                  (E) franchises or other restrictions on 
                competition for businesses providing public 
                services, including but not limited to 
                taxicabs, jitneys, cable television, or trash 
                hauling,
        except to the extent that such regulation of businesses 
        and occupations is necessary for and well-tailored to 
        the protection of health and safety.
  (e) Coordination With Treatment of Empowerment Zones and 
Enterprise Communities.--For purposes of this title, if there 
are in effect with respect to the same area both--
          (1) a designation as a renewal community, and
          (2) a designation as an empowerment zone or 
        enterprise community,
both of such designations shall be given full effect with 
respect to such area.
  (f) Definitions and Special Rules.--For purposes of this 
subchapter--
          (1) Governments.--If more than one government seeks 
        to nominate an area as a renewal community, any 
        reference to, or requirement of, this section shall 
        apply to all such governments.
          (2) State.--The term ``State'' includes Puerto Rico, 
        the Virgin Islands of the United States, Guam, American 
        Samoa, the Northern Mariana Islands, and any other 
        possession of the United States.
          (3) Local government.--The term ``local government'' 
        means--
                  (A) any county, city, town, township, parish, 
                village, or other general purpose political 
                subdivision of a State,
                  (B) any combination of political subdivisions 
                described in subparagraph (A) recognized by the 
                Secretary of Housing and Urban Development, and
                  (C) the District of Columbia.
          (4) Application of rules relating to census tracts 
        and census data.--The rules of sections 1392(b)(4) and 
        1393(a)(9) shall apply.

  PART II--RENEWAL COMMUNITY CAPITAL GAIN; RENEWAL COMMUNITY BUSINESS

        Sec. 1400F. Renewal community capital gain.
        Sec. 1400G. Renewal community business defined.

SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN.

  (a) General Rule.--Gross income does not include any 
qualified capital gain recognized on the sale or exchange of a 
qualified community asset held for more than 5 years.
  (b) Qualified Community Asset.--For purposes of this 
section--
          (1) In general.--The term ``qualified community 
        asset'' means--
                  (A) any qualified community stock,
                  (B) any qualified community partnership 
                interest, and
                  (C) any qualified community business 
                property.
          (2) Qualified community stock.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``qualified 
                community stock'' means any stock in a domestic 
                corporation if--
                          (i) such stock is acquired by the 
                        taxpayer after December 31, 1999, and 
                        before January 1, 2007, at its original 
                        issue (directly or through an 
                        underwriter) from the corporation 
                        solely in exchange for cash,
                          (ii) as of the time such stock was 
                        issued, such corporation was a renewal 
                        community business (or, in the case of 
                        a new corporation, such corporation was 
                        being organized for purposes of being a 
                        renewal community business), and
                          (iii) during substantially all of the 
                        taxpayer's holding period for such 
                        stock, such corporation qualified as a 
                        renewal community business.
                  (B) Redemptions.--A rule similar to the rule 
                of section 1202(c)(3) shall apply for purposes 
                of this paragraph.
          (3) Qualified community partnership interest.--The 
        term ``qualified community partnership interest'' means 
        any interest in a partnership if--
                  (A) such interest is acquired by the taxpayer 
                after December 31, 1999, and before January 1, 
                2007,
                  (B) as of the time such interest was 
                acquired, such partnership was a renewal 
                community business (or, in the case of a new 
                partnership, such partnership was being 
                organized for purposes of being a renewal 
                community business), and
                  (C) during substantially all of the 
                taxpayer's holding period for such interest, 
                such partnership qualified as a renewal 
                community business.
        A rule similar to the rule of paragraph (2)(B) shall 
        apply for purposes of this paragraph.
          (4) Qualified community business property.--
                  (A) In general.--The term ``qualified 
                community 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, 
                        1999, and before January 1, 2007,
                          (ii) the original use of such 
                        property in the renewal community 
                        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 renewal 
                        community business of the taxpayer.
                  (B) Special rule for substantial 
                improvements.--The requirements of clauses (i) 
                and (ii) of subparagraph (A) shall be treated 
                as satisfied with respect to--
                          (i) property which is substantially 
                        improved (within the meaning of section 
                        1400B(b)(4)(B)(ii)) by the taxpayer 
                        before January 1, 2007, and
                          (ii) any land on which such property 
                        is located.
  (c) Certain Rules To Apply.--Rules similar to the rules of 
paragraphs (5), (6), and (7) of subsection (b), and subsections 
(e), (f), and (g), of section 1400B shall apply for purposes of 
this section.

SEC. 1400G. RENEWAL COMMUNITY BUSINESS DEFINED.

  For purposes of this part, the term ``renewal community 
business'' means any entity or proprietorship which would be a 
qualified business entity or qualified proprietorship under 
section 1397B if--
          (1) references to renewal communities were 
        substituted for references to empowerment zones in such 
        section; and
          (2) ``80 percent'' were substituted for ``50 
        percent'' in subsections (b)(2) and (c)(1) of such 
        section.

                 PART III--FAMILY DEVELOPMENT ACCOUNTS

        Sec. 1400H. Family development accounts for renewal community 
                  EITC recipients.
        Sec. 1400I. Demonstration program to provide matching 
                  contributions to family development accounts in 
                  certain renewal communities.
        Sec. 1400J. Designation of earned income tax credit payments for 
                  deposit to family development account.

SEC. 1400H. FAMILY DEVELOPMENT ACCOUNTS FOR RENEWAL COMMUNITY EITC 
                    RECIPIENTS.

  (a) Allowance of Deduction.--
          (1) In general.--There shall be allowed as a 
        deduction--
                  (A) in the case of a qualified individual, 
                the amount paid in cash for the taxable year by 
                such individual to any family development 
                account for such individual's benefit, and
                  (B) in the case of any person other than a 
                qualified individual, the amount paid in cash 
                for the taxable year by such person to any 
                family development account for the benefit of a 
                qualified individual but only if the amount so 
                paid is designated for purposes of this section 
                by such individual.
        No deduction shall be allowed under this paragraph for 
        any amount deposited in a family development account 
        under section 1400I (relating to demonstration program 
        to provide matching amounts in renewal communities).
          (2) Limitation.--
                  (A) In general.--The amount allowable as a 
                deduction to any individual for any taxable 
                year by reason of paragraph (1)(A) shall not 
                exceed the lesser of--
                          (i) $2,000, or
                          (ii) an amount equal to the 
                        compensation includible in the 
                        individual's gross income for such 
                        taxable year.
                  (B) Persons donating to family development 
                accounts of others.--The amount which may be 
                designated under paragraph (1)(B) by any 
                qualified individual for any taxable year of 
                such individual shall not exceed $1,000.
          (3) Special rules for certain married individuals.--
        Rules similar to rules of section 219(c) shall apply to 
        the limitation in paragraph (2)(A).
          (4) Coordination with ira's.--No deduction shall be 
        allowed under this section to any person by reason of a 
        payment to an account for the benefit of a qualified 
        individual if any amount is paid into an individual 
        retirement account (including a Roth IRA) for the 
        benefit of such individual.
          (5) Rollovers.--No deduction shall be allowed under 
        this section with respect to any rollover contribution.
  (b) Tax Treatment of Distributions.--
          (1) Inclusion of amounts in gross income.--Except as 
        otherwise provided in this subsection, any amount paid 
        or distributed out of a family development account 
        shall be included in gross income by the payee or 
        distributee, as the case may be.
          (2) Exclusion of qualified family development 
        distributions.--Paragraph (1) shall not apply to any 
        qualified family development distribution.
  (c) Qualified Family Development Distribution.--For purposes 
of this section--
          (1) In general.--The term ``qualified family 
        development distribution'' means any amount paid or 
        distributed out of a family development account which 
        would otherwise be includible in gross income, to the 
        extent that such payment or distribution is used 
        exclusively to pay qualified family development 
        expenses for the holder of the account or the spouse or 
        dependent (as defined in section 152) of such holder.
          (2) Qualified family development expenses.--The term 
        ``qualified family development expenses'' means any of 
        the following:
                  (A) Qualified higher education expenses.
                  (B) Qualified first-time homebuyer costs.
                  (C) Qualified business capitalization costs.
                  (D) Qualified medical expenses.
                  (E) Qualified rollovers.
          (3) Qualified higher education expenses.--
                  (A) In general.--The term ``qualified higher 
                education expenses'' has the meaning given such 
                term by section 72(t)(7), determined by 
                treating postsecondary vocational educational 
                schools as eligible educational institutions.
                  (B) Postsecondary vocational education 
                school.--The term ``postsecondary vocational 
                educational school'' means an area vocational 
                education school (as defined in subparagraph 
                (C) or (D) of section 521(4) of the Carl D. 
                Perkins Vocational and Applied Technology 
                Education Act (20 U.S.C. 2471(4))) which is in 
                any State (as defined in section 521(33) of 
                such Act), as such sections are in effect on 
                the date of the enactment of this section.
                  (C) 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).
          (4) Qualified first-time homebuyer costs.--The term 
        ``qualified first-time homebuyer costs'' means 
        qualified acquisition costs (as defined in section 
        72(t)(8) without regard to subparagraph (B) thereof) 
        with respect to a principal residence (within the 
        meaning of section 121) for a qualified first-time 
        homebuyer (as defined in such section).
          (5) Qualified business capitalization costs.--
                  (A) In general.--The term ``qualified 
                business capitalization costs'' means qualified 
                expenditures for the capitalization of a 
                qualified business pursuant to a qualified 
                plan.
                  (B) Qualified expenditures.--The term 
                ``qualified expenditures'' means expenditures 
                included in a qualified plan, including 
                capital, plant, equipment, working capital, and 
                inventory expenses.
                  (C) Qualified business.--The term ``qualified 
                business'' means any business that does not 
                contravene any law.
                  (D) Qualified plan.--The term ``qualified 
                plan'' means a business plan which meets such 
                requirements as the Secretary may specify.
          (6) Qualified medical expenses.--The term ``qualified 
        medical expenses'' means any amount paid during the 
        taxable year, not compensated for by insurance or 
        otherwise, for medical care (as defined in section 
        213(d)) of the taxpayer, his spouse, or his dependent 
        (as defined in section 152).
          (7) Qualified rollovers.--The term ``qualified 
        rollover'' means any amount paid from a family 
        development account of a taxpayer into another such 
        account established for the benefit of--
                  (A) such taxpayer, or
                  (B) any qualified individual who is--
                          (i) the spouse of such taxpayer, or
                          (ii) any dependent (as defined in 
                        section 152) of the taxpayer.
        Rules similar to the rules of section 408(d)(3) shall 
        apply for purposes of this paragraph.
  (d) Tax Treatment of Accounts.--
          (1) In general.--Any family development account is 
        exempt from taxation under this subtitle unless such 
        account has ceased to be a family development account 
        by reason of paragraph (2). Notwithstanding the 
        preceding sentence, any such account is subject to the 
        taxes imposed by section 511 (relating to imposition of 
        tax on unrelated business income of charitable, etc., 
        organizations). Notwithstanding any other provision of 
        this title (including chapters 11 and 12), the basis of 
        any person in such an account is zero.
          (2) Loss of exemption in case of prohibited 
        transactions.--For purposes of this section, rules 
        similar to the rules of section 408(e) shall apply.
          (3) Other rules to apply.--Rules similar to the rules 
        of paragraphs (4), (5), and (6) of section 408(d) shall 
        apply for purposes of this section.
  (e) Family Development Account.--For purposes of this title, 
the term ``family development account'' means a trust created 
or organized in the United States for the exclusive benefit of 
a qualified individual or his beneficiaries, but only if the 
written governing instrument creating the trust meets the 
following requirements:
          (1) Except in the case of a qualified rollover (as 
        defined in subsection (c)(7))--
                  (A) no contribution will be accepted unless 
                it is in cash, and
                  (B) contributions will not be accepted for 
                the taxable year in excess of $3,000 
                (determined without regard to any contribution 
                made under section 1400I (relating to 
                demonstration program to provide matching 
                amounts in renewal communities)).
          (2) The requirements of paragraphs (2) through (6) of 
        section 408(a) are met.
  (f) Qualified Individual.--For purposes of this section, the 
term ``qualified individual'' means, for any taxable year, an 
individual--
          (1) who is a bona fide resident of a renewal 
        community throughout the taxable year, and
          (2) to whom a credit was allowed under section 32 for 
        the preceding taxable year.
  (g) Other Definitions and Special Rules.--
          (1) Compensation.--The term ``compensation'' has the 
        meaning given such term by section 219(f)(1).
          (2) Married individuals.--The maximum deduction under 
        subsection (a) shall be computed separately for each 
        individual, and this section shall be applied without 
        regard to any community property laws.
          (3) Time when contributions deemed made.--For 
        purposes of this section, a taxpayer shall be deemed to 
        have made a contribution to a family development 
        account on the last day of the preceding taxable year 
        if the contribution is made on account of such taxable 
        year and is made not later than the time prescribed by 
        law for filing the return for such taxable year (not 
        including extensions thereof).
          (4) Employer payments; custodial accounts.--Rules 
        similar to the rules of sections 219(f)(5) and 408(h) 
        shall apply for purposes of this section.
          (5) Reports.--The trustee of a family development 
        account shall make such reports regarding such account 
        to the Secretary and to the individual for whom the 
        account is maintained with respect to contributions 
        (and the years to which they relate), distributions, 
        and such other matters as the Secretary may require 
        under regulations. The reports required by this 
        paragraph--
                  (A) shall be filed at such time and in such 
                manner as the Secretary prescribes in such 
                regulations, and
                  (B) shall be furnished to individuals--
                          (i) not later than January 31 of the 
                        calendar year following the calendar 
                        year to which such reports relate, and
                          (ii) in such manner as the Secretary 
                        prescribes in such regulations.
          (6) Investment in collectibles treated as 
        distributions.--Rules similar to the rules of section 
        408(m) shall apply for purposes of this section.
  (h) Penalty for Distributions Not Used for Qualified Family 
Development Expenses.--
          (1) In general.--If any amount is distributed from a 
        family development account and is not used exclusively 
        to pay qualified family development expenses for the 
        holder of the account or the spouse or dependent (as 
        defined in section 152) of such holder, the tax imposed 
        by this chapter for the taxable year of such 
        distribution shall be increased by the sum of--
                  (A) 100 percent of the portion of such amount 
                which is includible in gross income and is 
                attributable to amounts contributed under 
                section 1400I (relating to demonstration 
                program to provide matching amounts in renewal 
                communities), and
                  (B) 10 percent of the portion of such amount 
                which is includible in gross income and is not 
                described in subparagraph (A).
        For purposes of this subsection, distributions which 
        are includable in gross income shall be treated as 
        attributable to amounts contributed under section 1400I 
        to the extent thereof. For purposes of the preceding 
        sentence, all family development accounts of an 
        individual shall be treated as one account.
          (2) Exception for certain distributions.--Paragraph 
        (1) shall not apply to distributions which are--
                  (A) made on or after the date on which the 
                account holder attains age 59\1/2\,
                  (B) made to a beneficiary (or the estate of 
                the account holder) on or after the death of 
                the account holder, or
                  (C) attributable to the account holder's 
                being disabled within the meaning of section 
                72(m)(7).
  (i) Termination.--No deduction shall be allowed under this 
section for any amount paid to a family development account for 
any taxable year beginning after December 31, 2006.

SEC. 1400I. DEMONSTRATION PROGRAM TO PROVIDE MATCHING CONTRIBUTIONS TO 
                    FAMILY DEVELOPMENT ACCOUNTS IN CERTAIN RENEWAL 
                    COMMUNITIES.

  (a) Designation.--
          (1) Definitions.--For purposes of this section, the 
        term ``FDA matching demonstration area'' means any 
        renewal community--
                  (A) which is nominated under this section by 
                each of the local governments and States which 
                nominated such community for designation as a 
                renewal community under section 1400E(a)(1)(A), 
                and
                  (B) which the Secretary of Housing and Urban 
                Development designates as an FDA matching 
                demonstration area after consultation with--
                          (i) the Secretaries of Agriculture, 
                        Commerce, Labor, and the Treasury, the 
                        Director of the Office of Management 
                        and Budget, and the Administrator of 
                        the Small Business Administration, and
                          (ii) in the case of a community on an 
                        Indian reservation, the Secretary of 
                        the Interior.
          (2) Number of designations.--
                  (A) In general.--The Secretary of Housing and 
                Urban Development may designate not more than 5 
                communities as FDA matching demonstration 
                areas.
                  (B) Minimum designation in rural areas.--Of 
                the areas designated under subparagraph (A), at 
                least 2 must be areas described in section 
                1400E(a)(2)(B).
          (3) Limitations on designations.--
                  (A) Publication of regulations.--The 
                Secretary of Housing and Urban Development 
                shall prescribe by regulation no later than 4 
                months after the date of the enactment of this 
                section, after consultation with the officials 
                described in paragraph (1)(B)--
                          (i) the procedures for nominating a 
                        renewal community under paragraph 
                        (1)(A) (including procedures for 
                        coordinating such nomination with the 
                        nomination of an area for designation 
                        as a renewal community under section 
                        1400E), and
                          (ii) the manner in which nominated 
                        renewal communities will be evaluated 
                        for purposes of this section.
                  (B) Time limitations.--The Secretary of 
                Housing and Urban Development may designate 
                renewal communities as FDA matching 
                demonstration areas only during the 24-month 
                period beginning on the first day of the first 
                month following the month in which the 
                regulations described in subparagraph (A) are 
                prescribed.
          (4) Designation based on degree of poverty, etc.--The 
        rules of section 1400E(a)(3) shall apply for purposes 
        of designations of FDA matching demonstration areas 
        under this section.
  (b) Period for Which Designation is in Effect.--Any 
designation of a renewal community as an FDA matching 
demonstration area shall remain in effect during the period 
beginning on the date of such designation and ending on the 
date on which such area ceases to be a renewal community.
  (c) Matching Contributions to Family Development Accounts.--
          (1) In general.--Not less than once each taxable 
        year, the Secretary shall deposit (to the extent 
        provided in appropriation Acts) into a family 
        development account of each qualified individual (as 
        defined in section 1400H(f))--
                  (A) who is a resident throughout the taxable 
                year of an FDA matching demonstration area, and
                  (B) who requests (in such form and manner as 
                the Secretary prescribes) such deposit for the 
                taxable year,
        an amount equal to the sum of the amounts deposited 
        into all of the family development accounts of such 
        individual during such taxable year (determined without 
        regard to any amount contributed under this section).
          (2) Limitations.--
                  (A) Annual limit.--The Secretary shall not 
                deposit more than $1000 under paragraph (1) 
                with respect to any individual for any taxable 
                year.
                  (B) Aggregate limit.--The Secretary shall not 
                deposit more than $2000 under paragraph (1) 
                with respect to any individual for all taxable 
                years.
          (3) Exclusion from income.--Except as provided in 
        section 1400H, gross income shall not include any 
        amount deposited into a family development account 
        under paragraph (1).
  (d) Notice of Program.--The Secretary shall provide 
appropriate notice to residents of FDA matching demonstration 
areas of the availability of the benefits under this section.
  (e) Termination.--No amount may be deposited under this 
section for any taxable year beginning after December 31, 2006.

SEC. 1400J. DESIGNATION OF EARNED INCOME TAX CREDIT PAYMENTS FOR 
                    DEPOSIT TO FAMILY DEVELOPMENT ACCOUNT.

  (a) In General.--With respect to the return of any qualified 
individual (as defined in section 1400H(f)) for the taxable 
year of the tax imposed by this chapter, such individual may 
designate that a specified portion (not less than $1) of any 
overpayment of tax for such taxable year which is attributable 
to the earned income tax credit shall be deposited by the 
Secretary into a family development account of such individual. 
The Secretary shall so deposit such portion designated under 
this subsection.
  (b) Manner and Time of Designation.--A designation under 
subsection (a) may be made with respect to any taxable year--
          (1) at the time of filing the return of the tax 
        imposed by this chapter for such taxable year, or
          (2) at any other time (after the time of filing the 
        return of the tax imposed by this chapter for such 
        taxable year) specified in regulations prescribed by 
        the Secretary.
Such designation shall be made in such manner as the Secretary 
prescribes by regulations.
  (c) Portion Attributable to Earned Income Tax Credit.--For 
purposes of subsection (a), an overpayment for any taxable year 
shall be treated as attributable to the earned income tax 
credit to the extent that such overpayment does not exceed the 
credit allowed to the taxpayer under section 32 for such 
taxable year.
  (d) Overpayments Treated as Refunded.--For purposes of this 
title, any portion of an overpayment of tax designated under 
subsection (a) shall be treated as being refunded to the 
taxpayer as of the last date prescribed for filing the return 
of tax imposed by this chapter (determined without regard to 
extensions) or, if later, the date the return is filed.
  (e) Termination.--This section shall not apply to any taxable 
year beginning after December 31, 2006.

                     PART IV--ADDITIONAL INCENTIVES

        Sec. 1400K. Commercial revitalization credit.
        Sec. 1400L. Increase in expensing under section 179.

SEC. 1400K. COMMERCIAL REVITALIZATION CREDIT.

  (a) General Rule.--For purposes of section 46, except as 
provided in subsection (e), the commercial revitalization 
credit for any taxable year is an amount equal to the 
applicable percentage of the qualified revitalization 
expenditures with respect to any qualified revitalization 
building.
  (b) Applicable Percentage.--For purposes of this section--
          (1) In general.--The term ``applicable percentage'' 
        means--
                  (A) 20 percent for the taxable year in which 
                a qualified revitalization building is placed 
                in service, or
                  (B) at the election of the taxpayer, 5 
                percent for each taxable year in the credit 
                period.
        The election under subparagraph (B), once made, shall 
        be irrevocable.
          (2) Credit period.--
                  (A) In general.--The term ``credit period'' 
                means, with respect to any building, the period 
                of 10 taxable years beginning with the taxable 
                year in which the building is placed in 
                service.
                  (B) Applicable rules.--Rules similar to the 
                rules under paragraphs (2) and (4) of section 
                42(f) shall apply.
  (c) Qualified Revitalization Buildings and Expenditures.--For 
purposes of this section--
          (1) Qualified revitalization building.--The term 
        ``qualified revitalization building'' means any 
        building (and its structural components) if--
                  (A) such building is located in a renewal 
                community and is placed in service after 
                December 31, 1999,
                  (B) a commercial revitalization credit amount 
                is allocated to the building under subsection 
                (e), and
                  (C) depreciation (or amortization in lieu of 
                depreciation) is allowable with respect to the 
                building.
          (2) Qualified revitalization expenditure.--
                  (A) In general.--The term ``qualified 
                revitalization expenditure'' means any amount 
                properly chargeable to capital account--
                          (i) for property for which 
                        depreciation is allowable under section 
                        168 and which is--
                                  (I) nonresidential real 
                                property, or
                                  (II) an addition or 
                                improvement to property 
                                described in subclause (I), and
                          (ii) in connection with the 
                        construction of any qualified 
                        revitalization building which was not 
                        previously placed in service or in 
                        connection with the substantial 
                        rehabilitation (within the meaning of 
                        section 47(c)(1)(C)) of a building 
                        which was placed in service before the 
                        beginning of such rehabilitation.
                  (B) Dollar limitation.--The aggregate amount 
                which may be treated as qualified 
                revitalization expenditures with respect to any 
                qualified revitalization building for any 
                taxable year shall not exceed the excess of--
                          (i) $10,000,000, reduced by
                          (ii) any such expenditures with 
                        respect to the building taken into 
                        account by the taxpayer or any 
                        predecessor in determining the amount 
                        of the credit under this section for 
                        all preceding taxable years.
                  (C) Certain expenditures not included.--The 
                term ``qualified revitalization expenditure'' 
                does not include--
                          (i) Straight line depreciation must 
                        be used.--Any expenditure (other than 
                        with respect to land acquisitions) with 
                        respect to which the taxpayer does not 
                        use the straight line method over a 
                        recovery period determined under 
                        subsection (c) or (g) of section 168. 
                        The preceding sentence shall not apply 
                        to any expenditure to the extent the 
                        alternative depreciation system of 
                        section 168(g) applies to such 
                        expenditure by reason of subparagraph 
                        (B) or (C) of section 168(g)(1).
                          (ii) Acquisition costs.--The costs of 
                        acquiring any building or interest 
                        therein and any land in connection with 
                        such building to the extent that such 
                        costs exceed 30 percent of the 
                        qualified revitalization expenditures 
                        determined without regard to this 
                        clause.
                          (iii) Other credits.--Any expenditure 
                        which the taxpayer may take into 
                        account in computing any other credit 
                        allowable under this title unless the 
                        taxpayer elects to take the expenditure 
                        into account only for purposes of this 
                        section.
  (d) When Expenditures Taken Into Account.--
          (1) In general.--Qualified revitalization 
        expenditures with respect to any qualified 
        revitalization building shall be taken into account for 
        the taxable year in which the qualified revitalization 
        building is placed in service. For purposes of the 
        preceding sentence, a substantial rehabilitation or 
        reconstruction of a building shall be treated as a 
        separate building.
          (2) Progress expenditure payments.--Rules similar to 
        the rules of subsections (b)(2) and (d) of section 47 
        shall apply for purposes of this section.
  (e) Limitation on Aggregate Credits Allowable With Respect to 
Buildings Located in a State.--
          (1) In general.--The amount of the credit determined 
        under this section for any taxable year with respect to 
        any building shall not exceed the commercial 
        revitalization credit amount (in the case of an amount 
        determined under subsection (b)(1)(B), the present 
        value of such amount as determined under the rules of 
        section 42(b)(2)(C)) allocated to such building under 
        this subsection by the commercial revitalization credit 
        agency. Such allocation shall be made at the same time 
        and in the same manner as under paragraphs (1) and (7) 
        of section 42(h).
          (2) Commercial revitalization credit amount for 
        agencies.--
                  (A) In general.--The aggregate commercial 
                revitalization credit amount which a commercial 
                revitalization credit agency may allocate for 
                any calendar year is the amount of the State 
                commercial revitalization credit ceiling 
                determined under this paragraph for such 
                calendar year for such agency.
                  (B) State commercial revitalization credit 
                ceiling.--The State commercial revitalization 
                credit ceiling applicable to any State--
                          (i) for each calendar year after 1999 
                        and before 2007 is $2,000,000 for each 
                        renewal community in the State, and
                          (ii) zero for each calendar year 
                        thereafter.
                  (C) Commercial revitalization credit 
                agency.--For purposes of this section, the term 
                ``commercial revitalization credit agency'' 
                means any agency authorized by a State to carry 
                out this section.
  (f) Responsibilities of Commercial Revitalization Credit 
Agencies.--
          (1) Plans for allocation.--Notwithstanding any other 
        provision of this section, the commercial 
        revitalization credit amount with respect to any 
        building shall be zero unless--
                  (A) such amount was allocated pursuant to a 
                qualified allocation plan of the commercial 
                revitalization credit agency which is approved 
                (in accordance with rules similar to the rules 
                of section 147(f)(2) (other than subparagraph 
                (B)(ii) thereof)) by the governmental unit of 
                which such agency is a part, and
                  (B) such agency notifies the chief executive 
                officer (or its equivalent) of the local 
                jurisdiction within which the building is 
                located of such allocation and provides such 
                individual a reasonable opportunity to comment 
                on the allocation.
          (2) Qualified allocation plan.--For purposes of this 
        subsection, the term ``qualified allocation plan'' 
        means any plan--
                  (A) which sets forth selection criteria to be 
                used to determine priorities of the commercial 
                revitalization credit agency which are 
                appropriate to local conditions,
                  (B) which considers--
                          (i) the degree to which a project 
                        contributes to the implementation of a 
                        strategic plan that is devised for a 
                        renewal community through a citizen 
                        participation process,
                          (ii) the amount of any increase in 
                        permanent, full-time employment by 
                        reason of any project, and
                          (iii) the active involvement of 
                        residents and nonprofit groups within 
                        the renewal community, and
                  (C) which provides a procedure that the 
                agency (or its agent) will follow in monitoring 
                compliance with this section.
  (g) Termination.--This section shall not apply to any 
building placed in service after December 31, 2002.

SEC. 1400L. INCREASE IN EXPENSING UNDER SECTION 179.

  (a) General Rule.--In the case of a renewal community 
business (as defined in section 1400G), for purposes of section 
179--
          (1) the limitation under section 179(b)(1) shall be 
        increased by the lesser of--
                  (A) $35,000, or
                  (B) the cost of section 179 property which is 
                qualified renewal property placed in service 
                during the taxable year, and
          (2) the amount taken into account under section 
        179(b)(2) with respect to any section 179 property 
        which is qualified renewal property shall be 50 percent 
        of the cost thereof.
  (b) Recapture.--Rules similar to the rules under section 
179(d)(10) shall apply with respect to any qualified renewal 
property which ceases to be used in a renewal community by a 
renewal community business.
  (c) Qualified Renewal Property.--For purposes of this 
section--
          (1) In general.--The term ``qualified renewal 
        property'' means any property to which section 168 
        applies (or would apply but for section 179) if--
                  (A) such property was acquired by the 
                taxpayer by purchase (as defined in section 
                179(d)(2)) after December 31, 1999, and before 
                January 1, 2007, and
                  (B) such property would be qualified zone 
                property (as defined in section 1397C) if 
                references to renewal communities were 
                substituted for references to empowerment zones 
                in section 1397C.
          (2) Certain rules to apply.--The rules of subsections 
        (a)(2) and (b) of section 1397C shall apply for 
        purposes of this section.

Subtitle B--Estate and Gift Taxes

           *       *       *       *       *       *       *


CHAPTER 11--ESTATE TAX

           *       *       *       *       *       *       *


Subchapter A--Estates of Citizens or Residents

           *       *       *       *       *       *       *


PART I--TAX IMPOSES

           *       *       *       *       *       *       *


SEC. 2001. IMPOSITION AND RATE OF TAX.

  (a) * * *

           *       *       *       *       *       *       *

  (f) Valuation of Gifts.--
          (1) * * *
          (2) Final determination.--For purposes of paragraph 
        (1), a value shall be treated as finally determined for 
        purposes of chapter 12 if--
                  (A) * * *

           *       *       *       *       *       *       *

        For purposes of subparagraph (A), the value of an item 
        shall be treated as shown on a return if the item is 
        disclosed in the return, or in a statement attached to 
        the return, in a manner adequate to apprise the 
        Secretary of the nature of such item.

           *       *       *       *       *       *       *


PART II--CREDITS AGAINST TAX

           *       *       *       *       *       *       *


SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.

  (a) * * *

           *       *       *       *       *       *       *

  [(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
                                                        The applicable  
  dying, and gifts made, during:
                                                    exclusion 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) Applicable Credit Amount.--
          (1) In general.--For purposes of this section, the 
        applicable credit amount is $345,800.
          (2) Applicable exclusion amount.--For purposes of the 
        provisions of this title which refer to this 
        subsection, the applicable exclusion amount is 
        $1,000,000.

           *       *       *       *       *       *       *


Subtitle D--Miscellaneous Excise Taxes

           *       *       *       *       *       *       *


CHAPTER 43--QUALIFIED PENSION, ETC., PLANS

           *       *       *       *       *       *       *


SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO CERTAIN TAX-FAVORED ACCOUNTS 
                    AND ANNUITIES.

  (a) Tax Imposed.--In the case of--
          (1) * * *

           *       *       *       *       *       *       *

          (3) an individual retirement annuity (within the 
        meaning of section 408(b)), a custodial account treated 
        as an annuity contract under section 403(b)(7)(A) 
        (relating to custodial accounts for regulated 
        investment company stock), [or]
          (4) an education individual retirement account (as 
        defined in section 530, or
          (5) a family development account (within the meaning 
        of section 1400H(e)),
there is imposed for each taxable year a tax in an amount equal 
to 6 percent of the amount of the excess contributions to such 
individual's accounts or annuities (determined as of the close 
of the taxable year). The amount of such tax for any taxable 
year shall not exceed 6 percent of the value of the account or 
annuity (determined as of the close of the taxable year). In 
the case of an endowment contract described in section 408(b), 
the tax imposed by this section does not apply to any amount 
allocable to life, health, accident, or other insurance under 
such contract. The tax imposed by this subsection shall be paid 
by such individual.

           *       *       *       *       *       *       *

  (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 
        one beneficiary, the term ``excess contributions'' 
        means the sum of--
                  (A) the amount by which the amount 
                contributed for the taxable year to such 
                accounts exceeds $500 (or, if less, the sum of 
                the maximum amounts permitted to be contributed 
                under section 530(c) by the contributors to 
                such accounts for such year);
                  (B) if any amount is contributed (other than 
                a contribution described in section 
                530(b)(2)(B)) during such year to a [qualified 
                State tuition program] qualified tuition 
                program for the benefit of such beneficiary, 
                any amount contributed to such accounts for 
                such taxable year; and

           *       *       *       *       *       *       *

  (g) Family Development Accounts.--For purposes of this 
section, in the case of a family development account, the term 
``excess contributions'' means the sum of--
          (1) the excess (if any) of--
                  (A) the amount contributed for the taxable 
                year to the account (other than a qualified 
                rollover, as defined in section 1400H(c)(7), or 
                a contribution under section 1400I), over
                  (B) the amount allowable as a deduction under 
                section 1400H for such contributions, and
          (2) the amount determined under this subsection for 
        the preceding taxable year reduced by the sum of--
                  (A) the distributions out of the account for 
                the taxable year which were included in the 
                gross income of the payee under section 
                1400H(b)(1),
                  (B) the distributions out of the account for 
                the taxable year to which rules similar to the 
                rules of section 408(d)(5) apply by reason of 
                section 1400H(b)(3), and
                  (C) the excess (if any) of the maximum amount 
                allowable as a deduction under section 1400H 
                for the taxableyear over the amount contributed 
to the account for the taxable year (other than a contribution under 
section 1400I).
For purposes of this subsection, any contribution which is 
distributed from the family development account in a 
distribution to which rules similar to the rules of section 
408(d)(4) apply by reason of section 1400H(b)(3) shall be 
treated as an amount not contributed.

           *       *       *       *       *       *       *


SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Prohibited Transaction.--
          (1) * * *

           *       *       *       *       *       *       *

          (6) Special rule for family development accounts.--An 
        individual for whose benefit a family development 
        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, with respect to such transaction, the 
        account ceases to be a family development account by 
        reason of the application of section 1400H(d)(2) to 
        such account.

           *       *       *       *       *       *       *

  (e) Definitions.--
          (1) Plan.--For purposes of this section, the term 
        ``plan'' means--
                  (A) * * *

           *       *       *       *       *       *       *

                  (E) an education individual retirement 
                account described in section 530, [or]
                  (F) a family development account described in 
                section 1400H(e), or
                  [(F)] (G) a trust, plan, account, or annuity 
                which, at any time, has been determined by the 
                Secretary to be described in any preceding 
                subparagraph of this paragraph.

           *       *       *       *       *       *       *


Subtitle F--Procedure and Administration

           *       *       *       *       *       *       *


CHAPTER 61--INFORMATION AND RETURNS

           *       *       *       *       *       *       *


Subchapter A--Returns and Records

           *       *       *       *       *       *       *


PART II--TAX RETURNS OR STATEMENTS

           *       *       *       *       *       *       *


Subpart B--Income Tax Returns

           *       *       *       *       *       *       *


SEC. 6015. RELIEF FROM JOINT AND SEVERAL LIABILITY ON JOINT RETURN.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Petition for Review by Tax Court.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Applicable rules.--
                  (A) Allowance of credit or refund.--Except as 
                provided in subparagraph (B), notwithstanding 
                any other law or rule of law (other than 
                section 6512(b), 7121, or 7122), credit or 
                refund shall be allowed or made to the extent 
                attributable to the application [of this 
                section] of subsection (b) or (f).

           *       *       *       *       *       *       *


PART III--INFORMATION RETURNS

           *       *       *       *       *       *       *


Subpart A--General Requirement

           *       *       *       *       *       *       *


SEC. 6033. RETURNS BY EXEMPT ORGANIZATIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Additional Provisions Relating to Private Foundations.--
In the case of an organization which is a private foundation 
(within the meaning of section 509(a))--
          (1) the Secretary shall by regulations provide that 
        the private foundation shall include in its annual 
        return under this section such information (not 
        required to be furnished by subsection (b) or the forms 
        or regulations prescribed thereunder) as would have 
        been required to be furnished under section 6056 
        (relating to annual reports by private foundations) as 
        such section 6056 was in effect on January 1, 1979, and
          [(2) a copy of the notice required by section 6104(d) 
        (relating to public inspection of private foundations' 
        annual returns), together with proof of publication 
        thereof, shall be filed by the foundation together with 
        the annual return under this section, and]
          [(3)] (2) the foundation managers shall furnish 
        copies of the annual return under this section to such 
        State officials, at such times, and under such 
        conditions, as the Secretary may by regulations 
        prescribe.

           *       *       *       *       *       *       *


SEC. 6047. INFORMATION RELATING TO CERTAIN TRUSTS AND ANNUITY PLANS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Other Programs.--To the extent provided by regulations 
prescribed by the Secretary, the provisions of this section 
apply with respect to any payment described in section 219 or 
section 1400H and to transactions of any trust described in 
section 408(a), of any family development account described in 
section 1400H(e), or under an individual retirement annuity 
described in section 408(b).

           *       *       *       *       *       *       *


Subchapter B--Extensions of Time For Payment

           *       *       *       *       *       *       *


SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN 
                    INFORMATION.

  (a) * * *

           *       *       *       *       *       *       *

  (h) Disclosure to Certain Federal Officers and Employees for 
Purposes of Tax Administration, Etc.--
          (1) * * *

           *       *       *       *       *       *       *

          [(5)] (6) Internal Revenue Service Oversight Board.--
                  (A) In general.--Notwithstanding paragraph 
                (1), and except as provided in subparagraph 
                (B), no return or return information may be 
                disclosed to any member of the Oversight Board 
                described in subparagraph (A) or (D) of section 
                7802(b)(1) or to any employee or detailee of 
                such Board by reason of their service with the 
                Board. Any request for information not 
                permitted to be disclosed under the preceding 
                sentence, and any contact relating to a 
                specific taxpayer, made by any such individual 
                to an officer or employee of the Internal 
                Revenue Service shall be reported by such 
                officer or employee to the Secretary, the 
                Treasury Inspector General for Tax 
                Administration, and the Joint Committee on 
                Taxation.

           *       *       *       *       *       *       *

  (j) Statistical Use.--
          (1) * * *

           *       *       *       *       *       *       *

          (5) Department of agriculture.--Upon request in 
        writing by the Secretary of Agriculture, the Secretary 
        shall furnish such returns, or return information 
        reflected thereon, as the Secretary may prescribe by 
        regulation to officers and employees of the Department 
        of Agriculture whose official duties require access to 
        such returns or information for the purpose of, but 
        only to the extent necessary in, structuring, 
        preparing, and conducting the census of agriculture 
        pursuant to the Census of Agriculture Act of 1997 
        (Public Law 105-113).

           *       *       *       *       *       *       *

  (p) Procedure and Recordkeeping.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Records of inspection and disclosure.--
                  (A) System of recordkeeping.--Except as 
                otherwise provided by this paragraph, the 
                Secretary shall maintain a permanent system of 
                standardized records or accountings of all 
                requests for inspection or disclosure of 
                returns and return information (including the 
                reasons for and dates of such requests) and of 
                returns and return information inspected or 
                disclosed under this section. Notwithstanding 
                the provisions of section 552a(c) of title 5, 
                United States Code, the Secretary shall not be 
                required to maintain a record or accounting of 
                requests for inspection or disclosure of 
                returns and return information, or of returns 
                and return information inspected or disclosed, 
                under the authority of subsections (c), (e), 
                (f)(5), (h)(1), (3)(A), or (4), (i)(4), or 
                (7)(A)(ii), (k)(1), (2), (6), (8), or (9) 
                (l)(1), (4)(B), (5), (7), (8), (9), (10), (11), 
                (12), (13), (14), (15), (16), or (17) (m) or 
                (n). The records or accountings required to be 
                maintained under this paragraph shall be 
                available for examination by the Joint 
                Committee on Taxation or the Chief of Staff of 
                such joint committee. Such record or accounting 
                shall also be available for examination by such 
                person or persons as may be, but only to the 
                extent, authorized to make such examination 
                under section 552a(c)(3) of title 5, United 
                States Code.

           *       *       *       *       *       *       *

          (4) Safeguards.--Any Federal agency described in 
        subsection (h)(2), (h)(5), (i)(1), (2), (3), or (5), 
        [(j)(1) or (2)] (j)(1), (2), or (5), (k)(8), (l)(1), 
        (2), (3), (5), (11), (13), (14), or (17) or (o)(1), the 
        General Accounting Office, or any agency, body, or 
        commission described in subsection (d), (i)(3)(B)(i) or 
        (l)(6), (7), (8), (9), (10), (12) or (15) shall, as a 
        condition for receiving returns or return information--
                  (A) * * *

           *       *       *       *       *       *       *

                  (F) upon completion of use of such returns or 
                return information--
                          (i) * * *
                          (ii) in the case of an agency 
                        described in subsections (h)(2), 
                        (h)(5), (i)(1), (2), (3), or (5), 
                        [(j)(1) or (2)] (j)(1), (2), or (5), 
                        (k)(8), (l)(1), (2), (3), (5), (10), 
                        (11), (12), (13), (14), (15), or (17) 
                        or (o)(1), or the General Accounting 
                        Office, either--
                                  (I) * * *

           *       *       *       *       *       *       *


SEC. 6104. PUBLICITY OF INFORMATION REQUIRED FROM CERTAIN EXEMPT 
                    ORGANIZATIONS AND CERTAIN TRUSTS.

  (a) Inspection of Applications for Tax Exemption.--
          (1) Public Inspection.--
                  (A) * * *
                  (B) Pension, etc., plans.--The following 
                shall be open to public inspection at such 
                times and in such places as the Secretary may 
                prescribe:
                          (i) any application filed with 
                        respect to the qualification of a 
                        pension, profit-sharing, or stock bonus 
                        plan under section 401(a) or 403(a), an 
                        individual retirement account described 
                        in section 408(a), a family development 
                        account described in section 1400H(e), 
                        or an individual retirement annuity 
                        described in section 408(b),

           *       *       *       *       *       *       *

  [(d) Public Inspection of Private Foundations' Annual 
Returns.--The annual return required to be filed under section 
6033 (relating to returns by exempt organizations) by any 
organization which is a private foundation within the meaning 
of section 509(a) shall be made available by the foundation 
managers for inspection at the principal office of the 
foundation during regular business hours by any citizen on 
request made within 180 days after the date of the publication 
of notice of its availability. Such notice shall be published, 
not later than the day prescribed for filing such annual return 
(determined with regard to any extension of time for filing), 
in a newspaper having general circulation in the county in 
which the principal office of the private foundation is 
located. The notice shall state that the annual return of the 
private foundation is available at its principal office for 
inspection during regular business hours by any citizen who 
requests it within 180 days after the date of such publication, 
and shall state the address and the telephone number of the 
private foundation's principal office and the name of its 
principal manager.
  [(e) Public Inspection of Certain Annual Returns and 
Applications for Exemption.--
          [(1) Annual returns.--
                  [(A) In general.--During the 3-year period 
                beginning on the filing date--
                          [(i) a copy of the annual return 
                        filed under section 6033 (relating to 
                        returns by exempt organizations) by any 
                        organization to which this paragraph 
                        applies shall be made available by such 
                        organization for inspection during 
                        regular business hours by any 
                        individual at the principal office of 
                        such organization and, if such 
                        organization regularly maintains 1 or 
                        more regional or district offices 
                        having 3 or more employees, at each 
                        such regional or district office, and
                          [(ii) upon request of an individual 
                        made at such principal office or such a 
                        regional or district office, a copy of 
                        such annual return shall be provided to 
                        such individual without charge other 
                        than a reasonable fee for any 
                        reproduction and mailing costs.
        The request described in clause (ii) must be made in 
        person or in writing. If the request under clause (ii) 
        is made in person, such copy shall be provided 
        immediately and, if made in writing, shall be provided 
        within 30 days.
                  [(B) Organizations to which paragraph 
                applies.--This paragraph shall apply to any 
                organization which--
                          [(i) is described in subsection (c) 
                        or (d) of section 501 and exempt from 
                        taxation under section 501(a), and
                          [(ii) is not a private foundation 
                        (within the meaning of section 509(a)).
                  [(C) Nondisclosure of contributors.--
                Subparagraph (A) shall not require the 
                disclosure of the name or address of any 
                contributor to the organization. In the case of 
                an organization described in section 501(d), 
                subparagraph (A) shall not require the 
                disclosure of the copies referred to in section 
                6031(b) with respect to such organization.
                  [(D) Filing date.--For purposes of 
                subparagraph (A), the term ``filing date'' 
                means the last day prescribed for filing the 
                return under section 6033 (determined with 
                regard to any extension of time for filing).
          [(2) Application for exemption.--
                  [(A) In general.--If--
                          [(i) an organization described in 
                        subsection (c) or (d) of section 501 is 
                        exempt from taxation under section 
                        501(a), and
                          [(ii) such organization filed an 
                        application for recognition of 
                        exemption under section 501, a copy of 
                        such application (together with a copy 
                        of any papers submitted in support of 
                        such application and any letter or 
                        other document issued by the Internal 
                        Revenue Service with respect to such 
                        application) shall be made available by 
                        the organization for inspection during 
                        regular business hours by any 
                        individual at the principal office of 
                        the organization and, if the 
                        organization regularly maintains 1 or 
                        more regional or district offices 
                        having 3 or more employees, at each 
                        such regional or district office (and, 
                        upon request of an individual made at 
                        such principal office or such a 
                        regional or district office, a copy of 
                        the material requested to be available 
                        for inspection under this subparagraph 
                        shall be provided (in accordance with 
                        the last sentence of paragraph (1)(A)) 
                        to such individual without charge other 
                        than reasonable fee for any 
                        reproduction and mailing costs).
                  [(B) Nondisclosure of certain information.--
                Subparagraph (A) shall not require the 
                disclosure of any information if the Secretary 
                withheld such information from public 
                inspection under subsection (a)(1)(D).
          [(3) Limitation.--Paragraph (1)(A)(ii) (and the 
        corresponding provision of paragraph (2)) shall not 
        apply to any request if, in accordance with regulations 
        promulgated by the Secretary, the organization has made 
        the requested documentswidely available, or, the 
Secretary determines, upon application by an organization, that such 
request is part of a harassment campaign and that compliance with such 
request is not in the public interest.]
  (d) Public Inspection of Certain Annual Returns and 
Applications for Exemption.--
          (1) In general.--In the case of an organization 
        described in subsection (c) or (d) of section 501 and 
        exempt from taxation under section 501(a)--
                  (A) a copy of--
                          (i) the annual return filed under 
                        section 6033 (relating to returns by 
                        exempt organizations) by such 
                        organization, and
                          (ii) if the organization filed an 
                        application for recognition of 
                        exemption under section 501, the exempt 
                        status application materials of such 
                        organization,
                shall be made available by such organization 
                for inspection during regular business hours by 
                any individual at the principal office of such 
                organization and, if such organization 
                regularly maintains 1 or more regional or 
                district offices having 3 or more employees, at 
                each such regional or district office, and
                  (B) upon request of an individual made at 
                such principal office or such a regional or 
                district office, a copy of such annual return 
                and exempt status application materials shall 
                be provided to such individual without charge 
                other than a reasonable fee for any 
                reproduction and mailing costs.
        The request described in subparagraph (B) must be made 
        in person or in writing. If such request is made in 
        person, such copy shall be provided immediately and, if 
        made in writing, shall be provided within 30 days.
          (2) 3-year limitation on inspection of returns.--
        Paragraph (1) shall apply to an annual return filed 
        under section 6033 only during the 3-year period 
        beginning on the last day prescribed for filing such 
        return (determined with regard to any extension of time 
        for filing).
          (3) Exceptions from disclosure requirement.--
                  (A) Nondisclosure of contributors, etc.--
                Paragraph (1) shall not require the disclosure 
                of the name or address of any contributor to 
                the organization. In the case of an 
                organization described in section 501(d), 
                subparagraph (A) shall not require the 
                disclosure of the copies referred to in section 
                6031(b) with respect to such organization.
                  (B) Nondisclosure of certain other 
                information.--Paragraph (1) shall not require 
                the disclosure of any information if the 
                Secretary withheld such information from public 
                inspection under subsection (a)(1)(D).
          (4) Limitation on providing copies.--Paragraph (1)(B) 
        shall not apply to any request if, in accordance with 
        regulations promulgated by the Secretary, the 
        organization has made the requested documents widely 
        available, or the Secretary determines, upon 
        application by an organization, that such request is 
        part of a harassment campaign and that compliance with 
        such request is not in the public interest.
          (5) Exempt status application materials.--For 
        purposes of paragraph (1), the term ``exempt status 
        applicable materials'' means the application for 
        recognition of exemption under section 501 and any 
        papers submitted in support of such application and any 
        letter or other document issued by the Internal Revenue 
        Service with respect to such application.

           *       *       *       *       *       *       *


CHAPTER 64--COLLECTION

           *       *       *       *       *       *       *


Subchapter B--Receipt of Payment

           *       *       *       *       *       *       *


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

  (a) * * *

           *       *       *       *       *       *       *

  (d) Payment by Other Means.--
          (1) * * *
          (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] 
        under any such contract for the use of credit or debit 
        cards for the payment of taxes imposed by subtitle A.

           *       *       *       *       *       *       *


CHAPTER 65--ABATEMENTS, CREDITS, AND REFUNDS

           *       *       *       *       *       *       *


Subchapter A--Procedure in General

           *       *       *       *       *       *       *


SEC. 6404. ABATEMENTS.

  (a) * * *

           *       *       *       *       *       *       *

  (h) Abatement of Interest on Underpayments by Taxpayers in 
Presidentially Declared Disaster Areas.--
          (1) * * *
          (2) Presidentially declared disaster area.--For 
        purposes of paragraph (1), the term ``Presidentially 
        declared disaster area'' means, with respect to any 
        taxpayer, any area which the President has determined 
        warrants assistance by theFederal Government under the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act.

           *       *       *       *       *       *       *


CHAPTER 66--LIMITATIONS

           *       *       *       *       *       *       *


Subchapter A--Limitations on Assessment and Collection

           *       *       *       *       *       *       *


SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Exceptions.--
          (1) * * *

           *       *       *       *       *       *       *

          (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.]

           *       *       *       *       *       *       *


 CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE 
PENALTIES

           *       *       *       *       *       *       *


Subchapter A--Additions to the Tax and Additional Amounts

           *       *       *       *       *       *       *


PART I--GENERAL PROVISIONS

           *       *       *       *       *       *       *


SEC. 6652. FAILURE TO FILE CERTAIN INFORMATION RETURNS, REGISTRATION 
                    STATEMENTS, ETC.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Returns by Exempt Organizations and by Certain Trusts.--
          (1) Annual returns under section 6033.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Public inspection of annual returns.--In 
                the case of a failure to comply with the 
                requirements of [subsection (d) or (e)(1) of 
                section 6104 (relating to public inspection of 
                annual returns)] section 6104(d) with respect 
                to any annual return on the date and in the 
                manner prescribed therefor (determined with 
                regard to any extension of time for filing), 
                there shall be paid by the person failing to 
                meet such requirements $20 for each day during 
                which such failure continues. The maximum 
                penalty imposed under this subparagraph on all 
                persons for failures with respect to any 1 
                return shall not exceed $10,000.
                  (D) Public inspection of applications for 
                exemption.--In the case of a failure to comply 
                with the requirements of [section 6104(e)(2) 
                (relating to public inspection of applications 
                for exemption)] section 6104(d) with respect to 
                any exempt status application materials (as 
                defined in such section) on the date and in the 
                manner prescribed therefor, there shall be paid 
                by the person failing to meet such requirements 
                $20 for each day during which such failure 
                continues.

           *       *       *       *       *       *       *


Subchapter B--Assessable Penalties

           *       *       *       *       *       *       *


PART I--GENERAL PROVISIONS

           *       *       *       *       *       *       *


SEC. 6685. ASSESSABLE PENALTY WITH RESPECT TO PUBLIC INSPECTION 
                    REQUIREMENTS FOR CERTAIN TAX-EXEMPT ORGANIZATIONS.

  In addition to the penalty imposed by section 7207 (relating 
to fraudulent returns, statements, or other documents), any 
person who is required to comply with the requirements of 
subsection (d) [or (e)] of section 6104 and who fails to so 
comply with respect to any return or application, if such 
failure is willful, shall pay a penalty of $5,000 with respect 
to each such return or application.

           *       *       *       *       *       *       *


SEC. 6693. FAILURE TO PROVIDE REPORTS ON CERTAIN TAX-FAVORED ACCOUNTS 
                    OR ANNUITIES; PENALTIES RELATING TO DESIGNATED 
                    NONDEDUCTIBLE CONTRIBUTIONS.

  (a) Reports.--
          (1) * * *
          (2) Provisions.--The provisions referred to in this 
        paragraph are--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) [Section] section 529(d) (relating to 
                [qualified State tuition programs] qualified 
                tuition programs), [and]
                  (D) [Section] section 530(h) (relating to 
                education individual retirement accounts)[.], 
                and
                  (E) section 1400H(g)(7) (relating to family 
                development accounts).

           *       *       *       *       *       *       *


CHAPTER 75--CRIMES, OTHER OFFENSES, AND FORFEITURES

           *       *       *       *       *       *       *


Subchapter A--Crimes

           *       *       *       *       *       *       *


PART I--GENERAL PROVISIONS

           *       *       *       *       *       *       *


SEC. 7207. FRAUDULENT RETURNS, STATEMENTS, OR OTHER DOCUMENTS.

  Any person who willfully delivers or discloses to the 
Secretary any list, return, account, statement, or other 
document, known by him to be fraudulent or to be false as to 
any material matter, shall be fined not more than $10,000 
($50,000 in the case of a corporation), or imprisoned not more 
than 1 year, or both. Any person required pursuant to 
subsection (b) of section 6047 or pursuant to subsection (d) 
[or (e)] of section 6104 to furnish any information to the 
Secretary or any other person who willfully furnishes to the 
Secretary or such other person any information known by him to 
be fraudulent or to be false as to any material matter shall be 
fined not more than $10,000 ($50,000 in the case of a 
corporation), or imprisoned not more than 1 year, or both.

           *       *       *       *       *       *       *


CHAPTER 76--JUDICIAL PROCEEDINGS

           *       *       *       *       *       *       *


Subchapter B--Proceedings by Taxpayers and Third Parties

           *       *       *       *       *       *       *


SEC. 7421. PROHIBITION OF SUITS TO RESTRAIN ASSESSMENT OR COLLECTION.

  (a) Tax.--Except as provided in sections [6015(d)] 6015(e), 
6212(a) and (c), 6213(a), 6225(b), 6246(b), 6331(i), 6672(b), 
6694(c), 7426(a) and (b)(1), and 7429(b), and 7463 no suit for 
the purpose of restraining the assessment or collection of any 
tax shall be maintained in any court by any person, whether or 
not such person is the person against whom such tax was 
assessed.

           *       *       *       *       *       *       *


Subchapter E--Burden of Proof

           *       *       *       *       *       *       *


SEC. 7491. BURDEN OF PROOF.

  (a) Burden Shifts Where Taxpayer Produces Credible 
Evidence.--
          (1) * * *
          (2) Limitations.--Paragraph (1) shall apply with 
        respect to an issue only if--
                  (A) the taxpayer has complied with the 
                requirements under this title to substantiate 
                any item;
                  (B) the taxpayer has maintained all records 
                required under this title and has cooperated 
                with reasonable requests by the Secretary for 
                witnesses, information, documents, meetings, 
                and interviews; and
                  (C) in the case of a partnership, 
                corporation, or trust, the taxpayer is 
                described in section 7430(c)(4)(A)(ii).
        Subparagraph (C) shall not apply to any qualified 
        revocable trust (as defined in section 645(b)(1)) with 
        respect to liability for tax for any taxable year 
        ending after the date of the decedent's death and 
        before the applicable date (as defined in section 
        645(b)(2)).

           *       *       *       *       *       *       *


Subtitle I--Trust Fund Code

           *       *       *       *       *       *       *


CHAPTER 98--TRUST FUND CODE

           *       *       *       *       *       *       *


Subchapter A--Establishment of Trust Fund

           *       *       *       *       *       *       *


SEC. 9503. HIGHWAY TRUST FUND.

  (a) * * *

           *       *       *       *       *       *       *

  (f) Determination of Trust Fund Balances After September 30, 
1998.--For purposes of determining the balances of the Highway 
Trust Fund and the Mass Transit Account after September 30, 
1998--
          (1) the opening balance of the Highway Trust Fund 
        (other than the Mass Transit Account) on October 1, 
        1998, shall be $8,000,000,000, and
          [(2) no interest accruing after September 30, 1998, 
        on any obligation held by such Fund shall be credited 
        to such Fund.]
          (2) notwithstanding section 9602(b), obligations held 
        by such Fund after September 30, 1998, shall be 
        obligations of the United States which are not 
        interest-bearing.
The Secretary shall cancel obligations held by the Highway 
Trust Fund to reflect the reduction in the balance under this 
subsection.

           *       *       *       *       *       *       *


SEC. 9510. VACCINE INJURY COMPENSATION TRUST FUND.

  (a) * * *
  (b) Transfers to Trust Fund.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Limitation on transfers to vaccine injury 
        compensation trust fund.--No amount may be appropriated 
        to the Vaccine Injury Compensation Trust Fund on and 
        after the date of any expenditure from the Trust Fund 
        which is not permitted by this section. The 
        determination of whether an expenditure is so permitted 
        shall be made without regard to--
                  (A) any provision of law which is not 
                contained or referenced in this title or in a 
                revenue Act, and
                  (B) whether such provision of law is a 
                subsequently enacted provision or directly or 
                indirectly seeks to waive the application of 
                this paragraph.
  (c) Expenditures from Trust Fund.--
          [(1) In general.--Amounts in the Vaccine Injury 
        Compensation Trust Fund shall be available, as provided 
        in appropriation Acts, only for the payment of 
        compensation under subtitle 2 of title XXI of the 
        Public Health Service Act (as in effect on the date of 
        the enactment of this section) for vaccine-related 
        injury or death with respect to vaccines administered 
        after September 30, 1988 or for the payment of all 
        expenses of administration (but not in excess of 
        $6,000,000 for any fiscal year) incurred by the Federal 
        Government in administering such subtitle.]
          (1) In general.--Amounts in the Vaccine Injury 
        Compensation Trust Fund shall be available, as provided 
        in appropriation Acts, only for--
                  (A) the payment of compensation under 
                subtitle 2 of title XXI of the Public Health 
                Service Act (as in effect on August 5, 1997) 
                for vaccine-related injury or death with 
                respect to any vaccine--
                          (i) which is administered after 
                        September 30, 1988, and
                          (ii) which is a taxable vaccine (as 
                        defined in section 4132(a)(1)) at the 
                        time compensation is paid under such 
                        subtitle 2, or
                  (B) the payment of all expenses of 
                administration (but not in excess of $9,500,000 
                for any fiscal year) incurred by the Federal 
                Government in administering such subtitle.

           *       *       *       *       *       *       *

                              ----------                              


                          SOCIAL SECURITY ACT



           *       *       *       *       *       *       *
TITLE II--FEDERAL OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE BENEFITS

           *       *       *       *       *       *       *


                    reduction of insurance benefits

                            Maximum Benefits

Sec. 203. (a) * * *

           *       *       *       *       *       *       *


                  Months to Which Earnings Are Charged

  (f) For purposes of subsection (b)--
          (1) * * *

           *       *       *       *       *       *       *

          (8)(A) * * *
          (B) Except as otherwise provided in subparagraph (D), 
        the exempt amount which is applicable to individuals 
        described in such subparagraph and the exempt amount 
        which is applicable to other individuals, for each 
        month of a particular taxable year, shall each be 
        whichever of the following is the larger--
                  (i) * * *
                  (ii) the product of the corresponding exempt 
                amount which is in effect with respect to 
                months in the taxable year ending [after 2001 
                and before 2003] after 2007 and before 2009 
                (with respect to individuals described in 
                subparagraph (D)) or the taxable year ending 
                after 1993-and before 1995 (with respect to 
                other individuals), and the ratio of--
                          (I) the national average wage index 
                        (as defined in section 209(k)(1)) for 
                        the calendar year before the calendar 
                        year in which the determination under 
                        subparagraph (A) is made, to
                          (II) the national average wage index 
                        (as so defined) for [2000] 2006 (with 
                        respect to individuals described in 
                        subparagraph (D)) or 1992 (with respect 
                        to other individuals),
        with such product, if not a multiple of $10, being 
        rounded to the next higher multiple of $10 where such 
        product is a multiple of $5 but not of $10 and to the 
        nearest multiple of $10 in any other case.

           *       *       *       *       *       *       *

          (D) Notwithstanding any other provision of this 
        subsection, the exempt amount which is applicable to an 
        individual who has attained retirement age (as defined 
        in section 216(l)) before the close of the taxable year 
        involved shall be--
                  (i) * * *

           *       *       *       *       *       *       *

                  [(iv) for each month of any taxable year 
                ending after 1998 and before 2000, $1,291.66\2/
                3\,
                  [(v) for each month of any taxable year 
                ending after 1999 and before 2001, $1,416.66\2/
                3\,
                  [(vi) for each month of any taxable year 
                ending after 2000 and before 2002, $2,083.33\1/
                3\,
                  [(vii) for each month of any taxable year 
                ending after 2001 and before 2003, $2,500.00.]
                  (iv) for each month of any taxable year 
                ending after 1998 and before 2000, $1,416.66\2/
                3\,
                  (v) for each month of any taxable year ending 
                after 1999 and before 2001, $1,541.66\2/3\,
                  (vi) for each month of any taxable year 
                ending after 2000 and before 2002, $2,166.66\2/
                3\,
                  (vii) for each month of any taxable year 
                ending after 2001 and before 2003, $2,500.00,
                  (viii) for each month of any taxable year 
                ending after 2002 and before 2004, $2,608.33\1/
                3\,
                  (ix) for each month of any taxable year 
                ending after 2003 and before 2005, $2,833.33\1/
                3\,
                  (x) for each month of any taxable year ending 
                after 2004 and before 2006, $2,950.00,
                  (xi) for each month of any taxable year 
                ending after 2005 and before 2007, $3,066.66\2/
                3\,
                  (xii) for each month of any taxable year 
                ending after 2006 and before 2008, $3,195.83\1/
                3\, and
                  (xiii) for each month of any taxable year 
                ending after 2007 and before 2009, $3,312.50.

           *       *       *       *       *       *       *


                computation of primary insurance amount

Sec. 215. For the purposes of this title--

                        Primary Insurance Amount

  (a) * * *

           *       *       *       *       *       *       *


                       Recomputation of Benefits

  (f)(1) * * *
  (2) If an individual has wages or self-employment income for 
a year after 1965 for any part of which he is entitled to old-
age insurance benefits, the Secretary shall, at such time or 
times and within such period as he may by regulations 
prescribe, recompute such individual's primary insurance amount 
with respect to each such year. Such recomputation shall be 
made as provided in subsections (a)(1) (A) and (C) and (a)(3) 
as though the year with respect to which such recomputation is 
made is the last year of the period specified in subsection 
(b)(2)(C). A recomputation under this paragraph with respect to 
any year shall be effective--
          (A) \1\ [in the case of an individual who did not die 
        in such year, for monthly benefits beginning with 
        benefits for January of the following year; or] in the 
        case of an individual who did not die in the year with 
        respect to which the recomputation is made, for monthly 
        benefits beginning with benefits for January of--
---------------------------------------------------------------------------
    \1\ Subparagraph (A) as in effect in December 1978 and applied in 
certain cases under the provisions of such Act as in effect after 
December 1978.
---------------------------------------------------------------------------
                  (i) the second year following the year with 
                respect to which the recomputation is made, in 
                any such case in which the individual is 
                entitled to old-age insurance benefits, the 
                individual has attained age 65 as of the end of 
                the year preceding the year with respect to 
                which the recomputation is made, and the year 
                with respect to which the recomputation is made 
                would not be substituted in recomputation under 
                this subsection for a benefit computation year 
                in which no wages or self-employment income 
                have been credited previously to such 
                individual, or
                  (ii) the first year following the year with 
                respect to which the recomputation is made, in 
                any other such case; or

           *       *       *       *       *       *       *

  (D) A recomputation under this paragraph with respect to any 
year shall be effective--
          [(i) in the case of an individual who did not die in 
        that year, for monthly benefits beginning with benefits 
        for January of the following year; or]
          (i) in the case of an individual who did not die in 
        the year with respect to which the recomputation is 
        made, for monthly benefits beginning with benefits for 
        January of--
                  (I) the second year following the year with 
                respect to which the recomputation is made, in 
                any such case in which the individual is 
                entitled to old-age insurance benefits, the 
                individual has attained retirement age (as 
                defined in section 216(l)) as of the end of the 
                year preceding the year with respect to which 
                the recomputation is made, and the year with 
                respect to which the recomputation is made 
                would not be substituted in recomputation under 
                this subsection for a benefit computation year 
                in which no wages or self-employment income 
                have been credited previously to such 
                individual, or
                  (II) the first year following the year with 
                respect to which the recomputation is made, in 
                any other such case; or

           *       *       *       *       *       *       *

  (7) This subsection as in effect in December 1978, and as 
amended by section 122(b)(2) of the Taxpayer Relief Act of 
1998, shall continue to apply to the recomputation of a primary 
insurance amount computed under subsection (a) or (d) as in 
effect (without regard to the table in subsection (a)) in that 
month, and, where appropriate, under subsection (d) as in 
effect in December 1977, including a primary insurance amount 
computed under any suchsubsection whose operation is modified 
as a result of the amendments made by section 5117 of the Omnibus 
Budget Reconciliation Act of 1990. For purposes of recomputing a 
primary insurance amount determined under subsection (a) or (d) (as so 
in effect) in the case of an individual to whom those subsections apply 
by reason of subsection (a)(4)(B) as in effect after December 1978, no 
remuneration shall be taken into account for the year in which the 
individual initially became eligible for an old-age or disability 
insurance benefit or died, or for any year thereafter, and (effective 
January 1982) the recomputation shall be modified by the application of 
subsection (a)(6) where applicable.

           *       *       *       *       *       *       *


                 DISABILITY INSURANCE BENEFIT PAYMENTS

                     Disability Insurance Benefits

  Sec. 223. (a) * * *

           *       *       *       *       *       *       *


                        Definition of Disability

  (d)(1) * * *

           *       *       *       *       *       *       *

  (4)(A) The Commissioner of Social Security shall by 
regulations prescribe the criteria for determining when 
services performed or earnings derived from services 
demonstrate an individual's ability to engage in substantial 
gainful activity. No individual who is blind shall be regarded 
as having demonstrated an ability to engage in substantial 
gainful activity on the basis of earnings that do not exceed an 
amount equal to the exempt amount which would be applicable 
under section 203(f)(8), to individuals described in 
subparagraph (D) thereof, if section 102 of the Senior 
Citizens' Right to Work Act of 1996 and section 121 of the 
Taxpayer Relief Act of 1998 had not been enacted. 
Notwithstanding the provisions of paragraph (2), an individual 
whose services or earnings meet such criteria shall, except for 
purposes of section 222(c), be found not to be disabled. In 
determining whether an individual is able to engage in 
substantial gainful activity by reason of his earnings, where 
his disability is sufficiently severe to result in a functional 
limitation requiring assistance in order for him to work, there 
shall be excluded from such earnings an amount equal to the 
cost (to such individual) of any attendant care services, 
medical devices, equipment, prostheses, and similar items and 
services (not including routine drugs or routine medical 
services unless such drugs or services are necessary for the 
control of the disabling condition) which are necessary (as 
determined by the Commissioner of Social Security in 
regulations) for that purpose, whether or not such assistance 
is also needed to enable him to carry out his normal daily 
functions; except that the amount to be excluded shall be 
subject to such reasonable limits as the Commissioner of Social 
Security may prescribe.

           *       *       *       *       *       *       *

                              ----------                              


                      TAXPAYER RELIEF ACT OF 1997



           *       *       *       *       *       *       *
TITLE IX--MISCELLANEOUS PROVISIONS

           *       *       *       *       *       *       *


Subtitle B--Revisions Relating to Disasters

           *       *       *       *       *       *       *


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

  (a) * * *
  (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 or 1998 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.]
  (d) Effective Date.--This section shall apply to taxable 
years ending with or within calendar year 1997.

           *       *       *       *       *       *       *


Subtitle D--Provisions Relating to Small Businesses

           *       *       *       *       *       *       *


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

  (a) * * *

           *       *       *       *       *       *       *

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

           *       *       *       *       *       *       *

                              ----------                              


                  SECTION 505 OF THE TRADE ACT OF 1974

SEC. 505. DATE OF TERMINATION.

  No duty-free treatment provided under this title shall remain 
in effect after [June 30, 1998] February 29, 2000.
                              ----------                              


     INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998



           *       *       *       *       *       *       *
TITLE III--TAXPAYER PROTECTION AND RIGHTS

           *       *       *       *       *       *       *


       Subtitle D--Provisions Relating to Interest and Penalties

SEC. 3301. ELIMINATION OF INTEREST RATE DIFFERENTIAL ON OVERLAPPING 
                    PERIODS OF INTEREST ON TAX OVERPAYMENTS AND 
                    UNDERPAYMENTS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Effective Dates.--
          (1) In general.--Except as provided under paragraph 
        (2), the amendments made by this section shall apply to 
        interest for periods beginning after the date of the 
        enactment of this Act.
          (2) Special rule.--[The amendments] Subject to any 
        applicable statute of limitation not having expired 
        with regard to either a tax underpayment or a tax 
        overpayment, the amendments made by this section shall 
        apply to interest for periods beginning before the date 
        of the enactment of this Act if the taxpayer--
                  (A) reasonably identifies and establishes 
                periods of such tax overpayments and 
                underpayments for which the zero rate applies; 
                and
                  (B) not later than December 31, 1999, 
                requests the Secretary of the Treasury to apply 
                section 6621(d) of the Internal Revenue Code of 
                1986, as added by subsection (a), to such 
                periods.

           *       *       *       *       *       *       *


 Subtitle E--Protections for Taxpayers Subject to Audit or Collection 
                               Activities

                      PART I--DUE PROCESS

SEC. 3401. DUE PROCESS IN INTERNAL REVENUE SERVICE COLLECTION ACTIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Review by Special Trial Judges Allowed.--
          (1) In general.--Section [7443(b)] 7443A(b) (relating 
        to proceedings which may be assigned to special trial 
        judges) is amended by striking ``and'' at the end of 
        paragraph (3), by redesignating paragraph (4) as 
        paragraph (5), and by inserting after paragraph (3) the 
        following new paragraph:
          ``(4) any proceeding under section 6320 or 6330, 
        and''.
          (2) Authority to make decisions.--Section [7443(c)] 
        7443A(c) (relating to authority to make court 
        decisions) is amended by striking ``or (3)'' and 
        inserting ``(3), or (4)''.

           *       *       *       *       *       *       *


   VII. DISSENTING VIEWS ON H.R. 4579 THE TAXPAYER RELIEF ACT OF 1998

    Democratic Members of this Committee have voted for every 
major deficit reduction act signed by a Democratic or 
Republican President--unlike any of the Republicans sitting on 
this panel. The fiscal discipline embodied in these acts has 
helped to spark economic growth and lower interest rates with 
substantial benefits to all working Americans.
    This commitment to fiscal discipline has moved us from an 
economy riddled with annual deficits of up to $300 billion to 
projected unified budget surpluses. We are now at a point where 
we can tackle the most difficult of all long-term budget 
problems, securing Social Security for the long term.
    We should not abandon fiscal discipline or pass up this 
opportunity to preserve Security Social simply because it is 
seven weeks before an election. We agree with Federal Reserve 
Board Chairman Alan Greenspan who has urged caution:

          My first choice is to retire debt as much as we can, 
        because it has a positive economic impact * * * The 
        overall effect of a large surplus is to increase 
        national savings, reduce long-term interest rates, and 
        create positive add-ons to the economy * * * There is 
        no need to rush into any particular action, because the 
        debt will be reduced automatically.

    Republicans will say that our vigilance in protecting 
Social Security is just an excuse to oppose these tax cuts. We 
Democrats do not oppose tax cuts. We support tax cuts. Every 
single one of us voted for significant tax cuts last year. We 
Democrats supported a substitute that provided even more tax 
relief for the middle-class than ultimately was enacted. That 
bill was fiscally responsible--it was paid for.
    Many of the provisions in this tax bill originally were 
sponsored by Democrats. Marriage penalty relief; 100 percent 
deductibility of the self-employed health insurance premiums; 
and simplifying minimum tax rules to ensure that those promised 
the $500-per-child credit will be fully eligible for it--these 
have all been introduced in this Congress by Committee on Ways 
and Means' Democrats. People can check the record and see that 
it is the Republicans on this Committee who voted them down 
last year or refused to take them up.
    So, make no mistake. We support fiscally responsible tax 
cuts, but we do not support using the Social Security surplus 
in order to pay for them. Therefore, we will support the 
Committee bill under the condition that the tax cuts go into 
effect as soon as we have achieved the President's goal of 
saving Social Security first. We offered an amendment to do 
just that. If that amendment had been adopted, the Committee 
bill would have a chance of actually becoming law. Republicans 
defeated it and, therefore, ensured that tax provisions that we 
all support will not become law this year--since the President 
will veto this irresponsible bill.
    The Republicans argue that the projected surpluses are 
sufficient to both cut taxes and preserve Social Security. They 
also argue that they are reserving 90 percent of the surpluses 
for Social Security. These assertions simply are not true.
    The Republicans admit that 10 percent of the surplus is 
being diverted from Social Security under this bill. Moreover, 
there is nothing in the Republican proposal that actually 
reserves the other 90 percent for Social Security. In separate 
legislation, Republicans say they will ``protect'' Social 
Security. However, in that bill they merely require the 
Secretary of the Treasury to make several bookkeeping entries. 
They do not prevent the Congress from using the Social Security 
surplus for further tax cuts or further increases in spending. 
Under their plan, Congress could use the entire amount of the 
Social Security surplus next year for tax cuts or spending 
increases. There is nothing in the Republican proposal that 
would prevent Congress from doing so. With this bill they 
already have their noses under the Social Security tent.
    When we talk about future budget surpluses, we should be 
clear that we are speaking about projections. Hopefully, the 
projections will be accurate, but there are many unforseen 
events in our global economy. It would be foolhardly to assume 
that we can predict all of them. That is why no less an 
authority than Alan Greenspan has warned this Congress that we 
should not spend money we may not have.
    Even if we assume the optimistic projections will come 
true, the so-called surplus over the next 5 years is not really 
a surplus. It is due to the contributions that American workers 
have made to Social Security. It already has been committed to 
the Social Security trust fund. If we treated those 
contributions like all businesses treat their contributions to 
their employees' retirement plans, we would have a $137 billion 
deficit over the next 5 years and only a $31 billion surplus 
over thenext 10 years, even if the optimistic assumptions prove 
to be correct.
    Perhaps spending some of this money would not be so bad if 
it really was not needed to shore up Social Security. We all 
know the challenge that Social Security faces as the baby-
boomers near retirement. The reality is that all of the money 
that Congress has committed to the Social Security program is 
needed, not only 90 percent of the surplus.
    We compliment Chairman Archer for the substance of the tax 
bill. The substitute we offered would have allowed the 
Chairman's bill to take effect after we ensure the solvency of 
the Social Security system. We all have committed to taking 
action early next year on the Social Security problem. Acting 
now would violate our commitment to the Social Security trust 
fund.

                                   Charles B. Rangel.
                                   William J. Coyne.
                                   Ben Cardin.
                                   Jim McDermott.
                                   John Lewis.
                                   John S. Tanner.
                                   Robert T. Matsui.
                                   Pete Stark.
                                   Richard E. Neal.
                                   Sander Levin.
                                   Karen L. Thurman.
                                   Xavier Becerra.
                                   William J. Jefferson.
                                   Jerry Kleczka.

                                
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