[House Report 106-238]
[From the U.S. Government Publishing Office]





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106th Congress                                                   Report
 1st Session            HOUSE OF REPRESENTATIVES                106-238

_______________________________________________________________________




 
                     FINANCIAL FREEDOM ACT OF 1999

                               __________

                              R E P O R T

                                 of the

                      COMMITTEE ON WAYS AND MEANS

                        HOUSE OF REPRESENTATIVES

                              to accompany

                               H.R. 2488

 A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SECTIONS 105 AND 211 
    OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2000

                             together with

                            DISSENTING VIEWS




 July 16, 1999.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                               --------

                    U.S. GOVERNMENT PRINTING OFFICE                    
57-957                     WASHINGTON : 1999




                            C O N T E N T S

                              ----------                              
                                                                   Page
  I. INTRODUCTION................................................   122
          A. Purpose and Summary.................................   122
          B. Background and Need for Legislation.................   146
          C. Legislative History.................................   146
 II. EXPLANATION OF THE BILL.....................................   147
     Title I. Broad-Based Tax Relief.............................   147
          A. Reduction in Individual Income Tax Rates (sec. 101).   147
          B. Marriage Penalty Relief Provisions..................   149
              1. Standard deduction tax relief (sec. 111)........   149
              2. Adjust student loan interest deduction income 
                  limits (sec. 112)..............................   151
              3. Increase income limit for Roth IRA conversions 
                  (sec. 113).....................................   152
          C. Repeal Individual Alternative Minimum Tax (sec. 121)   153
     Title II. Savings and Investment Tax Relief Provisions......   156
          A. Partial Exclusion for Interest and Dividends (sec. 
              201)...............................................   156
          B. Reduce Individual Capital Gains Rates (sec. 202)....   157
          C. Apply Capital Gains Rates to Capital Gains Earned by 
              Designated Settlement Funds (sec. 203).............   160
          D. 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 or Certain 
              Other Individuals Relocated Outside of the United 
              States (sec. 204)..................................   160
          E. Clarify the Tax Treatment of Income and Losses on 
              Derivatives (sec. 205).............................   161
          F. Treatment of Loss on Worthless Stock of Subsidiary 
              (sec. 206).........................................   164
     Title III. Business Investment and Job Creation.............   165
          A. Alternative Tax for Corporate Capital Gains (sec. 
              301)...............................................   165
          B. Repeal Corporate Alternative Minimum Tax (sec. 302a)   165
          C. Repeal of Limitation of Foreign Tax Credit under 
              Alternative Minimum Tax (sec. 302(b))..............   168
     Title IV. Education Tax Relief Provisions...................   169
          A. Expand Education Savings Accounts (sec. 401)........   169
          B. Allow Tax-Free Distributions from State and Private 
              Education Programs (sec. 402)......................   175
          C. Eliminate Tax on Awards Under National Health 
              Service Corps Scholarship Program, F. Edward Hebert 
              Armed Forces Health Professions Scholarship and 
              Financial Assistance Program, National Institutes 
              of Health Undergraduate Scholarship Program and 
              Certain State-Sponsored Scholarship Programs (sec. 
              403)...............................................   178
          D. Liberalize Tax-Exempt Bond Arbitrage Rebate 
              Exceptions for Public School Construction Bonds 
              (secs. 404-405)....................................   180
          E. Eliminate 60-Month Limit on Student Loan Interest 
              Deduction (sec. 406)...............................   182
     Title V. Health Care Tax Relief Provisions..................   183
          A. Above-the-Line Deduction for Health Insurance 
              Expenses (sec. 502)................................   183
          B. Provisions Relating to Long-Term Care Insurance 
              (secs. 501 and 502)................................   185
          C. Extend Availability of Medical Savings Accounts 
              (sec. 503).........................................   187
          D. Additional Personal Exemption for Caretakers (sec. 
              504)...............................................   192
          E. Expand Human Clinical Trials Expenses Qualifying for 
              the Orphan Drug Tax Credit (sec. 505)..............   194
          F. Add Certain Vaccines Against Streptococcus 
              Pneumoniae to the List of Taxable Vaccines (sec. 
              506)...............................................   195
          G. Above-the-Line Deduction for Prescription Drug 
              Insurance Coverage of Medicare Beneficiaries if 
              Certain Medicare and Low-Income Assistance 
              Provisions Are in Effect (sec. 507)................   197
     Title VI. Death Tax Relief Provisions.......................   198
          A. Phase in Repeal of Estate, Gift, and Generation-
              Skipping Taxes (secs. 601-603, 611, and 621).......   198
          B. Modify Generation-Skipping Tax Rules................   200
              1. Deemed allocation of the generation-skipping 
                  transfer (``GST'') tax exemption to lifetime 
                  transfers to trusts that are not direct skips 
                  (sec. 631).....................................   200
              2. Retroactive allocation of the GST tax exemption 
                  (sec. 631).....................................   203
              3. Severing of trusts holding property having an 
                  inclusion ratio of greater than zero (sec. 632)   204
              4. Modification of certain valuation rules (sec. 
                  633)...........................................   205
              5. Relief from late elections (sec. 634)...........   206
              6. Substantial compliance (sec. 634)...............   206
     Title VII. Distressed Communities and Industries Provisions.   207
          A. Renewal Community Provisions (secs. 701-706)........   207
          B. Provide That Federal Production Payments to Farmers 
              Are Taxable in the Year Received (secs. 711).......   216
          C. Allow Net Operating Losses From Oil and Gas 
              Properties to be Carried Back for Up to Five Years 
              (sec. 721).........................................   217
          D. Deduction for Delay Rental Payments (sec. 722)......   218
          E. Election to Expense Geological and Geophysical 
              Expenditures (sec. 723)............................   219
          F. Temporary Suspension of Limitation Based on 65 
              Percent of Taxable Income (sec. 724)...............   221
          G. Determination of Small Refiner Exception to Oil 
              Depletion Deduction (sec. 725).....................   223
          H. Increase the Maximum Dollar Amount of Reforestation 
              Expenditures Eligible for Amortization and Credit 
              (sec. 731).........................................   223
          I. Capital Gain Treatment Under Section 631(b) to Apply 
              to Outright Sales by Landowners (sec. 732).........   225
          J. Minimum Tax Relief for the Steel Industry (sec. 741)   226
     Title VIII. Small Business Tax Relief Provisions............   228
          A. Accelerate 100-Percent Self-Employed Health 
              Insurance Deduction (sec. 801).....................   228
          B. Increase Section 179 Expensing (sec. 802)...........   229
          C. Repeal of Temporary Federal Unemployment Surtax 
              (sec. 803).........................................   230
          D. Restore 80-Percent Meals Deduction (sec. 804).......   230
     Title IX. International Tax Relief Provisions...............   231
          A. Allocate Interest Expense on Worldwide Basis (sec. 
              901)...............................................   231
          B. Look-Through Rules to Apply to Dividends from 
              Noncontrolled Section 902 Corporations (sec. 902)..   239
          C. Subpart F Treatment of Pipeline Transportation 
              Income and Income from Transmission of High Voltage 
              Electricity (secs. 903-904)........................   241
          D. Recharacterization Overall Domestic Loss (sec. 905).   243
          E. Treatment of Military Property of Foreign Sales 
              Corporations (sec. 906)............................   245
          F. Modify Treatment of RIC Dividends Paid to Foreign 
              Persons (sec. 907).................................   246
          G. Repeal of Special Rules for Applying Foreign Tax 
              Credit in Case of Foreign Oil And Gas Income (sec. 
              908)...............................................   252
          H. Study of Proper Treatment of European Union under 
              Subpart F Same Country Exceptions (sec. 909).......   254
          I. Provide Waiver From Denial of Foreign Tax Credits 
              (sec. 910).........................................   255
          J. Prohibit Disclosure of APAs and APA Background Files 
              (sec. 911).........................................   256
          K. Increase Dollar Limitation on Section 911 Exclusion 
              (sec. 912).........................................   261
     Title X. Tax-Exempt Organization Provisions.................   263
          A. Provide Tax Exemption for Organizations Created by a 
              State to Provide Property and Casualty Insurance 
              Coverage for Property for Which Such Coverage Is 
              Otherwise Unavailable (sec. 1001)..................   263
          B. Conform Provisions Relating to Arbitrage Treatment 
              to Reflect Proposed State Constitutional Amendments 
              (sec. 1002)........................................   266
          C. Denial of Charitable Contribution Deduction for 
              Transfers Associated with Split-Dollar Insurance 
              Arrangements (sec. 1003)...........................   267
          D. Authorize Secretary of Treasury to Grant Waivers 
              from Section 4941 Prohibitions (sec. 1004).........   272
          E. Extend Declaratory Judgment Procedures to Non-
              501(c)(3) Tax-Exempt Organizations (sec. 1005).....   274
          F. Modify Section 512(b)(13) (sec. 1006)...............   276
     Title XI. Real Estate Tax Relief Provisions.................   277
          A. Provisions Relating to REITs (secs. 1101-1106, 1111, 
              1121, 1131, 1141, and 1151)........................   277
          B. Modify At-Risk Rules for Publicly Traded Nonrecourse 
              Debt (sec. 1161)...................................   283
          C. Qualified Lessee Construction Allowances Not Limited 
              to Short-Term Leases for Certain Retailers (sec. 
              1171)..............................................   284
          D. Exclusion From Gross Income for Certain 
              Contributions to the Capital of Certain Retailers 
              (sec. 1172)........................................   286
     Title XII. Pension Reform Provisions........................   288
          A. Expanding Coverage..................................   288
              1. Increase contribution and benefit limits (sec. 
                  1201)..........................................   288
              2. Plans loans for Subchapter S shareholders, 
                  partners, and sole proprietors (sec. 1202).....   291
              3. Modification of top-heavy rules (sec. 1203).....   292
              4. Elective deferrals not taken into account for 
                  purposes of deduction limits (sec. 1204).......   296
              5. Reduce PBGC premiums for small and new plans 
                  (secs. 1205-1206)..............................   297
              6. Repeal of coordination requirements for deferred 
                  compensation plans of State and local 
                  governments and tax-exempt organizations (sec. 
                  1207)..........................................   298
              7. Eliminate IRS user fees for determination letter 
                  requests regarding small employer plans (sec. 
                  1208)..........................................   299
              8. Definition of compensation for purposes of 
                  deduction limits (sec. 1209)...................   300
              9. Option to treat elective deferrals as after-tax 
                  contributions (sec. 1210)......................   301
              10. Increase minimum benefit under defined benefit 
                  plans (sec. 1211)..............................   303
          B. Enhancing Fairness for Women........................   304
              1. Additional salary reduction catch-up 
                  contributions (sec. 1221)......................   304
              2. Equitable treatment for contributions of 
                  employees to defined contribution plans (sec. 
                  1222)..........................................   305
              3. Faster vesting of employer matching 
                  contributions (sec. 1223)......................   307
              4. Simplify and update the minimum distribution 
                  rules (secs. 1224 and 1239)....................   308
              5. Clarification of tax treatment of division of 
                  section 457 plan benefits upon divorce (sec. 
                  1225)..........................................   311
          C. Increasing Portability for Participants.............   312
              1. Rollovers of retirement plan and IRA 
                  distributions (secs. 1231-1233 and 1239).......   312
              2. Waiver of 60-day rule (sec. 1234)...............   316
              3. Treatment of forms of distribution (sec. 1235)..   316
              4. Rationalization of restrictions on distributions 
                  (sec. 1236)....................................   318
              5. Purchase of service credit under governmental 
                  pension plans (sec. 1237)......................   319
              6. Employers may disregard rollovers for purposes 
                  of cash-out rules (sec. 1238)..................   320
          D. Strengthening Pension Security and Enforcement......   321
              1. Phase in repeal of 150 percent of current 
                  liability funding limit; deduction for 
                  contributions to fund termination liability 
                  (secs. 1241-1242)..............................   321
              2. Extension of PBGC missing participants program 
                  (sec. 1243)....................................   322
              3. Excise tax relief for sound pension funding 
                  (sec. 1244)....................................   323
              4. Notice of significant reduction in plan benefit 
                  accruals (sec. 1245)...........................   325
          E. Reducing Regulatory Burdens.........................   327
              1. Repeal of the multiple use test (sec. 1251).....   327
              2. Flexibility in nondiscrimination and line of 
                  business rules (sec. 1253).....................   328
              3. Modification of timing of plan valuations (sec. 
                  1252)..........................................   329
              4. Rules for substantial owner benefits in 
                  terminated plans (sec. 1254)...................   330
              5. ESOP dividends may be reinvested without loss of 
                  dividend deduction (sec. 1255).................   331
              6. Notice and consent period regarding 
                  distributions (sec. 1256)......................   332
              7. Repeal transition rule relating to certain 
                  highly compensated employees (sec. 1257).......   333
              8. Employees of tax-exempt entities (sec. 1258)....   334
              9. Treatment of employer-provided retirement advice 
                  (sec. 1259)....................................   335
              10. Provisions relating to plan amendments (sec. 
                  1260)..........................................   336
              11. Reporting simplification (sec. 1262)...........   336
              12. Model plans for small businesses (sec. 1261)...   337
              13. Improvement to Employer Plans Compliance 
                  Resolution System (sec. 1263)..................   338
     Title XIII. Miscellaneous Provisions........................   340
          A. Expand the Exclusion from Income for Certain Foster 
              Care Payments (sec. 1301)..........................   340
          B. Provide Exclusion for Mileage Reimbursements by 
              Charitable Organizations (sec. 1302)...............   341
          C. Expand Employer Reporting on Annual Wage and Tax 
              Statements (sec. 1303).............................   342
          D. Survivor Benefits of Public Safety Officers Killed 
              in the Line of Duty (sec. 1304)....................   343
          E. Distributions from Publicly Traded Partnerships 
              Treated as Qualifying Income of Regulated 
              Investment Companies (secs. 1311-1312).............   344
          F. Equalize the Tax Treatment of ``Clean Fuel'' 
              Vehicles and Oversized Vehicles (sec. 1313)........   345
          G. Nuclear Decommissioning Costs (sec. 1314)...........   346
          H. Permit Consolidation of Life and Nonlife Insurance 
              Companies (sec. 1315)..............................   349
          I. Consolidate Code Provisions Governing the Hazardous 
              Substance Superfund and the Leaking Underground 
              Storage Tank Trust Fund (sec. 1321)................   350
          J. Repeal Certain Excise Taxes on Rail Diesel Fuel and 
              Inland Waterway Barge Fuels (sec. 1322)............   351
          K. Repeal Excise Tax on Fishing Tackle Boxes (sec. 
              1323)..............................................   353
          L. Modify Excise Tax on Arrow Components and 
              Accessories (sec. 1324)............................   353
          M. Increase in Low-Income Housing Tax Credit Cap and 
              Make Other Modifications (secs. 1331-1337).........   354
          N. Entrepreneurial Equity Capital Formation (secs. 
              1341-1347).........................................   358
          O. Accelerate Scheduled Increase in State Volume Limits 
              on Tax-Exempt Private Activity Bonds (sec. 1351)...   359
          P. Tax Treatment of Alaska Native Settlement Trusts 
              (sec. 1352)........................................   360
          Q. Increase Joint Committee on Taxation Refund Review 
              Threshold to $2 Million (sec. 1353)................   362
          R. Clarification of Depreciation Study (sec. 1354).....   363
          S. Tax Court Provisions................................   363
              1. Tax Court filing fee (sec. 1361)................   363
              2. Use of practitioner fee (sec. 1362).............   364
              3. Tax Court authority to apply equitable 
                  recoupment (sec. 1363).........................   364
          T. Allow Certain Wholesaled Distributors and Control 
              State Entities to Elect to Be Treated as Distilled 
              Spirits Plants Operators (secs. 1371-1380).........   365
     Title XIV. Extension of Expiring Tax Provisions.............   368
          A. Extension of Research and Experimentation Credit and 
              Increase in the Rates for the Alternative 
              Incremental Research Credit (sec. 1401)............   368
          B. Extend Exceptions Under Subpart F for Active 
              Financing Income (sec. 1402).......................   371
          C. Extend Suspension of Net Income Limitation on 
              Percentage Depletion From Marginal Oil and Gas 
              Wells (sec. 1403)..................................   373
          D. Extend the Work Opportunity Tax Credit (sec. 1404)..   374
          E. Extend the Welfare-to-Work Tax Credit (sec. 1404)...   375
     Title XV. Revenue Offset Provisions.........................   376
          A. Expand Reporting of Cancellation of Indebtedness 
              Income (sec. 1501).................................   376
          B. Extension of IRS User Fees (sec. 1502)..............   377
          C. Impose Limitation on Prefunding of Certain Employee 
              Benefits (sec. 1503)...............................   378
          D. Increase Elective Withholding Rate for Nonperiodic 
              Distributions from Deferred Compensation Plans 
              (sec. 1504)........................................   379
          E. Modify Treatment of Closely-Held REITs (sec. 1505)..   381
          F. Limit Conversion of Character of Income from 
              Constructive Ownership Transactions (sec. 1506)....   383
          G. Treatment of Excess Pension Assets Used for Retiree 
              Health Benefits (sec. 1507)........................   386
          H. Modify Installment Method and Prohibit its Use by 
              Accrual Method Taxpayers (sec. 1508)...............   389
          I. Limitation on Use of Nonaccrual Experience Method of 
              Accounting (sec. 1509).............................   391
          J. Deny the Exclusion of Gain on the Sale of a 
              Principal Residence Which Was Acquired in a Like-
              Kind Exchange Within the Prior Five Years..........   392
     Title XVI. Tax Technical Corrections (secs. 1601-1605)......   393
III.  VOTES OF THE COMMITTEE.....................................   397
 IV.  BUDGET EFFECTS OF THE BILL.................................   401
          A. Committee Estimates of Budgetary Effects............   401
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures.......................................   415
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................   415
  V. OTHER MATTERS TO BE DISCUSSED UNDER RULES OF THE HOUSE......   415
          A. Committee Oversight Findings and Recommendations....   415
          B. Summary of Findings and Recommendations of the 
              Committee on Government Reform.....................   415
          C. Constitutional Authority Statement..................   416
          D. Information Relating to Unfunded Mandates...........   416
          E. Applicability of House Rule XXI5(b).................   417
          F. Tax Complexity Analysis.............................   417
 VI. CHANGES IN EXISTING LAW OF THE BILL, AS REPORTED............   425
VII. MINORITY/DISSENTING VIEWS...................................   427




106th Congress                                                   Report
  1st Session           HOUSE OF REPRESENTATIVES                106-238

======================================================================




                     FINANCIAL FREEDOM ACT OF 1999
                                _______


 July 16, 1999.--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. 2488]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Ways and Means, to whom was referred the 
bill (H.R. 2488) to amend the Internal Revenue Code of 1986 to 
reduce individual income tax rates, to provide marriage penalty 
relief, to reduce taxes on savings and investments, to provide 
estate and gift tax relief, to provide incentives for education 
savings and health care, and for other purposes, having 
considered the same, report favorably thereon with amendments 
and recommend that the bill as amended do pass.
  The amendments are 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 ``Financial Freedom 
Act of 1999''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly provided, 
whenever in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986.
  (c) Section 15 Not To Apply.--No amendment made by this Act shall be 
treated as a change in a rate of tax for purposes of section 15 of the 
Internal Revenue Code of 1986.
  (d) Table of Contents.--The table of contents for this Act is as 
follows:
Sec. 1. Short title; etc.

                    TITLE I--BROAD-BASED TAX RELIEF

    Subtitle A--10-Percent Reduction in Individual Income Tax Rates

Sec. 101. 10-percent reduction in individual income tax rates.

                Subtitle B--Marriage Penalty Tax Relief

Sec. 111. Elimination of marriage penalty in standard deduction.
Sec. 112. Elimination of marriage penalty in deduction for interest on 
education loans.
Sec. 113. Rollover from regular IRA to Roth IRA.

      Subtitle C--Repeal of Alternative Minimum Tax on Individuals

Sec. 121. Repeal of alternative minimum tax on individuals.

       TITLE II--RELIEF FROM TAXATION ON SAVINGS AND INVESTMENTS

Sec. 201. Exemption of certain interest and dividend income from tax.
Sec. 202. Reduction in individual capital gain tax rates.
Sec. 203. Capital gains tax rates applied to capital gains of 
designated settlement funds.
Sec. 204. Special rule for members of uniformed services and foreign 
service, and other employees, in determining exclusion of gain from 
sale of principal residence.
Sec. 205. Treatment of certain dealer derivative financial instruments, 
hedging transactions, and supplies as ordinary assets.
Sec. 206. Worthless securities of financial institutions.

     TITLE III--INCENTIVES FOR BUSINESS INVESTMENT AND JOB CREATION

Sec. 301. Reduction in corporate capital gain tax rate.
Sec. 302. Repeal of alternative minimum tax on corporations.

                 TITLE IV--EDUCATION SAVINGS INCENTIVES

Sec. 401. Modifications to education individual retirement accounts.
Sec. 402. Modifications to qualified tuition programs.
Sec. 403. Exclusion of certain amounts received under the National 
Health Service Corps scholarship program, the F. Edward Hebert Armed 
Forces Health Professions Scholarship and Financial Assistance Program, 
and certain other programs.
Sec. 404. Additional increase in arbitrage rebate exception for 
governmental bonds used to finance educational facilities.
Sec. 405. Modification of arbitrage rebate rules applicable to public 
school construction bonds.
Sec. 406. Repeal of 60-month limitation on deduction for interest on 
education loans.

                    TITLE V--HEALTH CARE PROVISIONS

Sec. 501. Deduction for health and long-term care insurance costs of 
individuals not participating in employer-subsidized health plans.
Sec. 502. Long-term care insurance permitted to be offered under 
cafeteria plans and flexible spending arrangements.
Sec. 503. Expansion of availability of medical savings accounts.
Sec. 504. Additional personal exemption for taxpayer caring for elderly 
family member in taxpayer's home.
Sec. 505. Expanded human clinical trials qualifying for orphan drug 
credit.
Sec. 506. Inclusion of certain vaccines against streptococcus 
pneumoniae to list of taxable vaccines.
Sec. 507. Above-the-line deduction for prescription drug insurance 
coverage of medicare beneficiaries if certain medicare and low-income 
assistance provisions in effect.

                      TITLE VI--ESTATE TAX RELIEF

  Subtitle A--Repeal of Estate, Gift, and Generation-Skipping Taxes; 
                  Repeal of Step Up in Basis At Death

Sec. 601. Repeal of estate, gift, and generation-skipping taxes.
Sec. 602. Termination of step up in basis at death.
Sec. 603. Carryover basis at death.

  Subtitle B--Reductions of Estate and Gift Tax Rates Prior to Repeal

Sec. 611. Additional reductions of estate and gift tax rates.

   Subtitle C--Unified Credit Replaced With Unified Exemption Amount

Sec. 621. Unified credit against estate and gift taxes replaced with 
unified exemption amount.

     Subtitle D--Modifications of Generation-Skipping Transfer Tax

Sec. 631. Deemed allocation of GST exemption to lifetime transfers to 
trusts; retroactive allocations.
Sec. 632. Severing of trusts.
Sec. 633. Modification of certain valuation rules.
Sec. 634. Relief provisions.

    TITLE VII--TAX RELIEF FOR DISTRESSED COMMUNITIES AND INDUSTRIES

           Subtitle A--American Community Renewal Act of 1999

Sec. 701. Short title.
Sec. 702. Designation of and tax incentives for renewal communities.
Sec. 703. Extension of expensing of environmental remediation costs to 
renewal communities.
Sec. 704. Extension of work opportunity tax credit for renewal 
communities
Sec. 705. Conforming and clerical amendments.
Sec. 706. Evaluation and reporting requirements.

                     Subtitle B--Farming Incentive

Sec. 711. Production flexibility contract payments.

                   Subtitle C--Oil and Gas Incentives

Sec. 721. 5-year net operating loss carryback for losses attributable 
to operating mineral interests of independent oil and gas producers.
Sec. 722. Deduction for delay rental payments.
Sec. 723. Election to expense geological and geophysical expenditures.
Sec. 724. Temporary suspension of limitation based on 65 percent of 
taxable income.
Sec. 725. Determination of small refiner exception to oil depletion 
deduction.

                     Subtitle D--Timber Incentives

Sec. 731. Temporary suspension of maximum amount of amortizable 
reforestation expenditures.
Sec. 732. Capital gain treatment under section 631(b) to apply to 
outright sales by land owner.

                  Subtitle E--Steel Industry Incentive

Sec. 741. Minimum tax relief for steel industry.

                TITLE VIII--RELIEF FOR SMALL BUSINESSES

Sec. 801. Deduction for 100 percent of health insurance costs of self-
employed individuals.
Sec. 802. Increase in expense treatment for small businesses.
Sec. 803. Repeal of Federal unemployment surtax.
Sec. 804. Restoration of 80 percent deduction for meal expenses.

                   TITLE IX--INTERNATIONAL TAX RELIEF

Sec. 901. Interest allocation rules.
Sec. 902. Look-thru rules to apply to dividends from noncontrolled 
section 902 corporations.
Sec. 903. Clarification of treatment of pipeline transportation income.
Sec. 904. Subpart F treatment of income from transmission of high 
voltage electricity.
Sec. 905. Recharacterization of overall domestic loss.
Sec. 906. Treatment of military property of foreign sales corporations.
Sec. 907. Treatment of certain dividends of regulated investment 
companies.
Sec. 908. Repeal of special rules for applying foreign tax credit in 
case of foreign oil and gas income.
Sec. 909. Study of proper treatment of European Union under same 
country exceptions.
Sec. 910. Application of denial of foreign tax credit with respect to 
certain foreign countries.
Sec. 911. Advance pricing agreements treated as confidential taxpayer 
information.
Sec. 912. Increase in dollar limitation on section 911 exclusion.

        TITLE X--PROVISIONS RELATING TO TAX-EXEMPT ORGANIZATIONS

Sec. 1001. Exemption from income tax for State-created organizations 
providing property and casualty insurance for property for which such 
coverage is otherwise unavailable.
Sec. 1002. Modification of special arbitrage rule for certain funds.
Sec. 1003. Charitable split-dollar life insurance, annuity, and 
endowment contracts.
Sec. 1004. Exemption procedure from taxes on self-dealing.
Sec. 1005. Expansion of declaratory judgment remedy to tax-exempt 
organizations.
Sec. 1006. Modifications to section 512(b)(13).

                    TITLE XI--REAL ESTATE PROVISIONS

    Subtitle A--Provisions Relating to Real Estate Investment Trusts

   Part I--Treatment of Income and Services Provided by Taxable REIT 
                              Subsidiaries

Sec. 1101. Modifications to asset diversification test.
Sec. 1102. Treatment of income and services provided by taxable REIT 
subsidiaries.
Sec. 1103. Taxable REIT subsidiary.
Sec. 1104. Limitation on earnings stripping.
Sec. 1105. 100 percent tax on improperly allocated amounts.
Sec. 1106. Effective date.

                       Part II--Health Care REITs

Sec. 1111. Health care REITs.

      Part III--Conformity With Regulated Investment Company Rules

Sec. 1121. Conformity with regulated investment company rules.

 Part IV--Clarification of Exception From Impermissible Tenant Service 
                                 Income

Sec. 1131. Clarification of exception for independent operators.

           Part V--Modification of Earnings and Profits Rules

Sec. 1141. Modification of earnings and profits rules.

          Part VI--Study Relating to Taxable REIT Subsidiaries

Sec. 1151. Study relating to taxable REIT subsidiaries.

     Subtitle B--Modification of At-Risk Rules for Publicly Traded 
                            Nonrecourse Debt

Sec. 1161. Treatment under at-risk rules of publicly traded nonrecourse 
debt.

     Subtitle C--Treatment of Construction Allowances and Certain 
                 Contributions to Capital of Retailers

Sec. 1171. Exclusion from gross income of qualified lessee construction 
allowances not limited for certain retailers to short-term leases.
Sec. 1172. Exclusion from gross income for certain contributions to the 
capital of certain retailers.

               TITLE XII--PROVISIONS RELATING TO PENSIONS

                     Subtitle A--Expanding Coverage

Sec. 1201. Increase in benefit and contribution limits.
Sec. 1202. Plan loans for subchapter S owners, partners, and sole 
proprietors.
Sec. 1203. Modification of top-heavy rules.
Sec. 1204. Elective deferrals not taken into account for purposes of 
deduction limits.
Sec. 1205. Reduced PBGC premium for new plans of small employers.
Sec. 1206. Reduction of additional PBGC premium for new and small 
plans.
Sec. 1207. Repeal of coordination requirements for deferred 
compensation plans of State and local governments and tax-exempt 
organizations.
Sec. 1208. Elimination of user fee for requests to IRS regarding 
pension plans.
Sec. 1209. Deduction limits.
Sec. 1210. Option to treat elective deferrals as after-tax 
contributions.
Sec. 1211. Increase in minimum defined benefit limit under section 415.

                Subtitle B--Enhancing Fairness for Women

Sec. 1221. Additional salary reduction catch-up contributions.
Sec. 1222. Equitable treatment for contributions of employees to 
defined contribution plans.
Sec. 1223. Faster vesting of certain employer matching contributions.
Sec. 1224. Simplify and update the minimum distribution rules.
Sec. 1225. Clarification of tax treatment of division of section 457 
plan benefits upon divorce.

          Subtitle C--Increasing Portability for Participants

Sec. 1231. Rollovers allowed among various types of plans.
Sec. 1232. Rollovers of IRAs into workplace retirement plans.
Sec. 1233. Rollovers of after-tax contributions.
Sec. 1234. Hardship exception to 60-day rule.
Sec. 1235. Treatment of forms of distribution.
Sec. 1236. Rationalization of restrictions on distributions.
Sec. 1237. Purchase of service credit in governmental defined benefit 
plans.
Sec. 1238. Employers may disregard rollovers for purposes of cash-out 
amounts.
Sec. 1239. Minimum distribution and inclusion requirements for section 
457 plans.

       Subtitle D--Strengthening Pension Security and Enforcement

Sec. 1241. Repeal of 150 percent of current liability funding limit.
Sec. 1242. Maximum contribution deduction rules modified and applied to 
all defined benefit plans.
Sec. 1243. Missing participants.
Sec. 1244. Excise tax relief for sound pension funding.
Sec. 1245. Excise tax on failure to provide notice by defined benefit 
plans significantly reducing future benefit accruals.

                Subtitle E--Reducing Regulatory Burdens

Sec. 1251. Repeal of the multiple use test.
Sec. 1252. Modification of timing of plan valuations.
Sec. 1253. Flexibility and nondiscrimination and line of business 
rules.
Sec. 1254. Substantial owner benefits in terminated plans.
Sec. 1255. ESOP dividends may be reinvested without loss of dividend 
deduction.
Sec. 1256. Notice and consent period regarding distributions.
Sec. 1257. Repeal of transition rule relating to certain highly 
compensated employees.
Sec. 1258. Employees of tax-exempt entities.
Sec. 1259. Clarification of treatment of employer-provided retirement 
advice.
Sec. 1260. Provisions relating to plan amendments.
Sec. 1261. Model plans for small businesses.
Sec. 1262. Simplified annual filing requirement for plans with fewer 
than 25 employees.
Sec. 1263. Improvement of Employee Plans Compliance Resolution System.

                  TITLE XIII--MISCELLANEOUS PROVISIONS

         Subtitle A--Provisions Primarily Affecting Individuals

Sec. 1301. Exclusion for foster care payments to apply to payments by 
qualified placement agencies.
Sec. 1302. Mileage reimbursements to charitable volunteers excluded 
from gross income.
Sec. 1303. W-2 to include employer social security taxes.
Sec. 1304. Consistent treatment of survivor benefits for public safety 
officers killed in the line of duty.

         Subtitle B--Provisions Primarily Affecting Businesses

Sec. 1311. Distributions from publicly traded partnerships treated as 
qualifying income of regulated investment companies.
Sec. 1312. Special passive activity rule for publicly traded 
partnerships to apply to regulated investment companies.
Sec. 1313. Large electric trucks, vans, and buses eligible for 
deduction for clean-fuel vehicles in lieu of credit. 
Sec. 1314. Modifications to special rules for nuclear decommissioning 
costs.
Sec. 1315. Consolidation of life insurance companies with other 
corporations.

            Subtitle C--Provisions Relating to Excise Taxes

Sec. 1321. Consolidation of Hazardous Substance Superfund and Leaking 
Underground Storage Tank Trust Fund.
Sec. 1322. Repeal of certain motor fuel excise taxes on fuel used by 
railroads and on inland waterway transportation.
Sec. 1323. Repeal of excise tax on fishing tackle boxes.
Sec. 1324. Clarification of excise tax imposed on arrow components.

         Subtitle D--Improvements in Low-Income Housing Credit

Sec. 1331. Increase in State ceiling on low-income housing credit.
Sec. 1332. Modification of criteria for allocating housing credits 
among projects.
Sec. 1333. Additional responsibilities of housing credit agencies.
Sec. 1334. Modifications to rules relating to basis of building which 
is eligible for credit.
Sec. 1335. Other modifications.
Sec. 1336. Carryforward rules.
Sec. 1337. Effective date.

          Subtitle E--Entrepreneurial Equity Capital Formation

 Part I--Tax-free Conversions of Specialized Small Business Investment 
                   Companies Into Pass-thru Entities

Sec. 1341. Modifications to provisions relating to regulated investment 
companies.
Sec. 1342. Tax-free reorganization of specialized small business 
investment company as a partnership.

  Part II--Additional Incentives Related to Investing in Specialized 
                  Small Business Investment Companies

Sec. 1346. Expansion of nonrecognition treatment for securities gain 
rolled over into specialized small business investment companies.
Sec. 1347. Modifications to exclusion for gain from qualified small 
business stock.

                      Subtitle F--Other Provisions

Sec. 1351. Increase in volume cap on private activity bonds.
Sec. 1352. Tax treatment of Alaska Native Settlement Trusts.
Sec. 1353. Increase in threshold for Joint Committee reports on refunds 
and credits.
Sec. 1354. Clarification of depreciation study.

                    Subtitle G--Tax Court Provisions

Sec. 1361. Tax Court filing fee in all cases commenced by filing 
petition.
Sec. 1362. Expanded use of Tax Court practice fee.
Sec. 1363. Confirmation of authority of Tax Court to apply doctrine of 
equitable recoupment.

 Subtitle H--Tax-Free Transfer of Bottled Distilled Spirits to Bonded 
                                Dealers

Sec. 1371. Tax-free transfer of bottled distilled spirits from 
distilled spirits plant to bonded dealer.
Sec. 1372. Establishment of distilled spirits plant.
Sec. 1373. Distilled spirits plants.
Sec. 1374. Bonded dealers.
Sec. 1375. Time for collecting tax on distilled spirits.
Sec. 1376. Exemption from occupational tax not applicable.
Sec. 1377. Technical, conforming, and clerical amendments.
Sec. 1378. Cooperative agreements.
Sec. 1379. Effective date.
Sec. 1380. Study.

              TITLE XIV--EXTENSIONS OF EXPIRING PROVISIONS

Sec. 1401. Research credit.
Sec. 1402. Subpart F exemption for active financing income.
Sec. 1403. Taxable income limit on percentage depletion for marginal 
production.
Sec. 1404. Work opportunity credit and welfare-to-work credit.

                       TITLE XV--REVENUE OFFSETS

Sec. 1501. Returns relating to cancellations of indebtedness by 
organizations lending money.
Sec. 1502. Extension of Internal Revenue Service user fees.
Sec. 1503. Limitations on welfare benefit funds of 10 or more employer 
plans.
Sec. 1504. Increase in elective withholding rate for nonperiodic 
distributions from deferred compensation plans.
Sec. 1505. Controlled entities ineligible for REIT status.
Sec. 1506. Treatment of gain from constructive ownership transactions.
Sec. 1507. Transfer of excess defined benefit plan assets for retiree 
health benefits.
Sec. 1508. Modification of installment method and repeal of installment 
method for accrual method taxpayers.
Sec. 1509. Limitation on use of nonaccrual experience method of 
accounting.
Sec. 1510. Exclusion of like-kind exchange property from nonrecognition 
treatment on the sale of a principal residence.

                    TITLE XVI--TECHNICAL CORRECTIONS

Sec. 1601. Amendments related to Tax and Trade Relief Extension Act of 
1998.
Sec. 1602. Amendments related to Internal Revenue Service Restructuring 
and Reform Act of 1998.
Sec. 1603. Amendments related to Taxpayer Relief Act of 1997.
Sec. 1604. Other technical corrections.
Sec. 1605. Clerical changes.

                    TITLE I--BROAD-BASED TAX RELIEF

    Subtitle A--10-Percent Reduction in Individual Income Tax Rates

SEC. 101. 10-PERCENT REDUCTION IN INDIVIDUAL INCOME TAX RATES.

  (a) Regular Income Tax Rates.--
          (1) In general.--Subsection (f) of section 1 is amended by 
        adding at the end the following new paragraph:
          ``(8) Rate reductions.--In prescribing the tables under 
        paragraph (1) which apply with respect to taxable years 
        beginning in a calendar year after 2000, each rate in such 
        tables (without regard to this paragraph) shall be reduced by 
        the number of percentage points (rounded to the next lowest 
        tenth) equal to the applicable percentage (determined in 
        accordance with the following table) of such rate:
                ``For taxable years beginning
                                                         The applicable
                  in calendar year--
                                                        percentage is--
                  2001 through 2004........................        2.5 
                  2005 through 2007........................        5.0 
                  2008.....................................        7.5 
                  2009 and thereafter......................    10.0.'' 
          (2) Technical amendments.--
                  (A) Subparagraph (B) of section 1(f)(2) is amended by 
                inserting ``except as provided in paragraph (8),'' 
                before ``by not changing''.
                  (B) Subparagraph (C) of section 1(f)(2) is amended by 
                inserting ``and the reductions under paragraph (8) in 
                the rates of tax'' before the period.
                  (C) The heading for subsection (f) of section 1 is 
                amended by inserting ``Rate Reductions;'' before 
                ``Adjustments''.
                  (D) Section 1(g)(7)(B)(ii)(II) is amended by striking 
                ``15 percent'' and inserting ``the percentage 
                applicable to the lowest income bracket in subsection 
                (c)''.
                  (E) Subparagraphs (A)(ii)(I) and (B)(i) of section 
                1(h)(1) are each amended by striking ``28 percent'' and 
                inserting ``25.2 percent''.
                  (F) Section 531 is amended by striking ``39.6 percent 
                of the accumulated taxable income'' and inserting ``the 
                product of the accumulated taxable income and the 
                percentage applicable to the highest income bracket in 
                section 1(c)''.
                  (G) Section 541 is amended by striking ``39.6 percent 
                of the undistributed personal holding company income'' 
                and inserting ``the product of the undistributed 
                personal holding company income and the percentage 
                applicable to the highest income bracket in section 
                1(c)''.
                  (H) Section 3402(p)(1)(B) is amended by striking 
                ``specified is 7, 15, 28, or 31 percent'' and all that 
                follows and inserting ``specified is--
                          ``(i) 7 percent,
                          ``(ii) a percentage applicable to 1 of the 3 
                        lowest income brackets in section 1(c), or
                          ``(iii) such other percentage as is permitted 
                        under regulations prescribed by the 
                        Secretary.''
                  (I) Section 3402(p)(2) is amended by striking ``15 
                percent of such payment'' and inserting ``the product 
                of such payment and the percentage applicable to the 
                lowest income bracket in section 1(c)''.
                  (J) Section 3402(q)(1) is amended by striking ``28 
                percent of such payment'' and inserting ``the product 
                of such payment and the percentage applicable to the 
                next to the lowest income bracket in section 1(c)''.
                  (K) Section 3402(r)(3) is amended by striking ``31 
                percent'' and inserting ``the rate applicable to the 
                third income bracket in such section''.
                  (L) Section 3406(a)(1) is amended by striking ``31 
                percent of such payment'' and inserting ``the product 
                of such payment and the percentage applicable to the 
                third income bracket in section 1(c)''.
  (b) Minimum Tax Rates.--Subparagraph (A) of section 55(b)(1) is 
amended by adding at the end the following new clause:
                          ``(iv) Rate reduction.--In the case of 
                        taxable years beginning after 2000, each rate 
                        in clause (i) (without regard to this clause) 
                        shall be reduced by the number of percentage 
                        points (rounded to the next lowest tenth) equal 
                        to the applicable percentage (determined in 
                        accordance with section 1(f)(8)) of such 
                        rate.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

                Subtitle B--Marriage Penalty Tax Relief

SEC. 111. 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) Phase-in.--Subsection (c) of section 63 is amended by adding at 
the end the following new paragraph:
          ``(7) Phase-in of increase in basic standard deduction.--In 
        the case of taxable years beginning before January 1, 2003--
                  ``(A) paragraph (2)(A) shall be applied by 
                substituting for `twice'--
                          ``(i) `1.778 times' in the case of taxable 
                        years beginning during 2001, and
                          ``(ii) `1.889 times' in the case of taxable 
                        years beginning during 2002, and
                  ``(B) the basic standard deduction for a married 
                individual filing a separate return shall be one-half 
                of the amount applicable under paragraph (2)(A).
        If any amount determined under subparagraph (A) is not a 
        multiple of $50, such amount shall be rounded to the next 
        lowest multiple of $50.''.
  (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, 2000.

SEC. 112. ELIMINATION OF MARRIAGE PENALTY IN DEDUCTION FOR INTEREST ON 
                    EDUCATION LOANS.

  (a) In General.--Subparagraph (B) of section 221(b)(2) (relating to 
limitation based on modified adjusted gross income) is amended--
          (1) by striking ``$60,000'' in clause (i)(II) and inserting 
        ``twice such amount'', and
          (2) by inserting ``($30,000 in the case of a joint return)'' 
        after ``$15,000'' in clause (ii).
  (b) Conforming Amendment.--Paragraph (1) of section 221(g) is amended 
by striking ``and $60,000 amounts in subsection (b)(2) shall each'' and 
inserting ``amount in subsection (b)(2) shall''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 113. ROLLOVER FROM REGULAR IRA TO ROTH IRA.

  (a) In General.--Clause (i) of section 408A(c)(3)(B) is amended by 
inserting ``($160,000 in the case of a joint return)'' after 
``$100,000''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1999.

      Subtitle C--Repeal of Alternative Minimum Tax on Individuals

SEC. 121. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDIVIDUALS.

  (a) In General.--Subsection (a) of section 55 is amended by adding at 
the end the following new flush sentence:
``For purposes of this title, the tentative minimum tax on any taxpayer 
other than a corporation for any taxable year beginning after December 
31, 2007, shall be zero.''
  (b) Reduction of Tax on Individuals Prior to Repeal.--Section 55 is 
amended by adding at the end the following new subsection:
  ``(f) Phaseout of Tax on Individuals.--
          ``(1) In general.--The tax imposed by this section on a 
        taxpayer other than a corporation for any taxable year 
        beginning after December 31, 2002, and before January 1, 2008, 
        shall be the applicable percentage of the tax which would be 
        imposed but for this subsection.
          ``(2) Applicable percentage.--For purposes of paragraph (1), 
        the applicable percentage shall be determined in accordance 
        with the following table:
        ``For taxable years beginning
                                                         The applicable
          in calendar year--
                                                        percentage is--
          2003.............................................        80  
          2004.............................................        70  
          2005.............................................        60  
          2006 or 2007.....................................     50.''  
  (c) Nonrefundable Personal Credits Fully Allowed Against Regular Tax 
Liability.--
          (1) In general.--Subsection (a) of section 26 (relating to 
        limitation based on amount of tax) 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 taxpayer's regular tax liability for the taxable year.''
          (2) Child credit.--Subsection (d) of section 24 is amended by 
        striking paragraph (2) and by redesignating paragraph (3) as 
        paragraph (2).
  (d) Limitation on Use of Credit for Prior Year Minimum Tax 
Liability.--Subsection (c) of section 53 is amended to read as follows:
  ``(c) Limitation.--
          ``(1) In general.--Except as otherwise provided in this 
        subsection, the credit allowable under subsection (a) for any 
        taxable year shall not exceed the excess (if any) of--
                  ``(A) the regular tax liability of the taxpayer for 
                such taxable year reduced by the sum of the credits 
                allowable under subparts A, B, D, E, and F of this 
                part, over
                  ``(B) the tentative minimum tax for the taxable year.
          ``(2) Taxable years beginning after 2007.--In the case of any 
        taxable year beginning after 2007, the credit allowable under 
        subsection (a) to a taxpayer other than a corporation for any 
        taxable year shall not exceed 90 percent of the excess (if any) 
        of--
                  ``(A) regular tax liability of the taxpayer for such 
                taxable year, over
                  ``(B) the sum of the credits allowable under subparts 
                A, B, D, E, and F of this part.''
  (e) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1998.

       TITLE II--RELIEF FROM TAXATION ON SAVINGS AND INVESTMENTS

SEC. 201. 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 otherwise includible in gross income which are 
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--
                  ``(A) in the case of any taxable year beginning in 
                2001 or 2002, $100 ($200 in the case of a joint 
                return), and
                  ``(B) in the case of any taxable year beginning after 
                2002, $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 is a 
        corporation exempt from tax under 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 in determining the taxes imposed for the 
        taxable year pursuant to sections 871(b)(1) and 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) Subparagraph (C) of section 32(c)(5) is amended by 
        striking ``or'' at the end of clause (i), by striking the 
        period at the end of clause (ii) and inserting ``; or'', and by 
        inserting after clause (ii) the following new clause:
                          ``(iii) interest and dividends received 
                        during the taxable year which are excluded from 
                        gross income under section 116.''.
          (2) Subparagraph (A) of section 32(i)(2) is amended by 
        inserting ``(determined without regard to section 116)'' before 
        the comma.
          (3) Subparagraph (B) of section 86(b)(2) is amended to read 
        as follows:
                  ``(B) increased by the sum of--
                          ``(i) the amount of interest received or 
                        accrued by the taxpayer during the taxable year 
                        which is exempt from tax, and
                          ``(ii) the amount of interest and dividends 
                        received during the taxable year which are 
                        excluded from gross income under section 
                        116.''.
          (4) 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.''.
          (5) 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''.
          (6) Subsection (c) of section 584 is amended by adding at the 
        end 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.''.
          (7) 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.''.
          (8) 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''.
          (9) 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.''.
          (10) 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, 2000.

SEC. 202. REDUCTION IN INDIVIDUAL CAPITAL GAIN TAX RATES.

  (a) In General.--
          (1) Sections 1(h)(1)(B) and 55(b)(3)(B) are each amended by 
        striking ``10 percent'' and inserting ``7.5 percent''.
          (2) The following sections are each amended by striking ``20 
        percent'' and inserting ``15 percent'':
                  (A) Section 1(h)(1)(C).
                  (B) Section 55(b)(3)(C).
                  (C) Section 1445(e)(1).
                  (D) The second sentence of section 7518(g)(6)(A).
                  (E) The second sentence of section 607(h)(6)(A) of 
                the Merchant Marine Act, 1936.
          (3) Sections 1(h)(1)(D) and 55(b)(3)(D) are each amended by 
        striking ``25 percent'' and inserting ``20 percent''.
  (b) Conforming Amendments.--
          (1) Section 311 of the Taxpayer Relief Act of 1997 is amended 
        by striking subsection (e).
          (2) Section 1(h) is amended--
                  (A) by striking paragraphs (2), (9), and (13),
                  (B) by redesignating paragraphs (3) through (8) as 
                paragraphs (2) through (7), respectively, and
                  (C) by redesignating paragraphs (10), (11), and (12) 
                as paragraphs (8), (9), and (10), respectively.
          (3) Paragraph (3) of section 55(b) is amended by striking 
        ``In the case of taxable years beginning after December 31, 
        2000, rules similar to the rules of section 1(h)(2) shall apply 
        for purposes of subparagraphs (B) and (C).''.
          (4) Paragraph (7) of section 57(a) is amended--
                  (A) by striking ``42 percent'' and inserting ``6 
                percent'', and
                  (B) by striking the last sentence.
  (c) Transitional Rules for Taxable Years Which Include July 1, 
1999.--For purposes of applying section 1(h) of the Internal Revenue 
Code of 1986 in the case of a taxable year which includes July 1, 
1999--
          (1) The amount of tax determined under subparagraph (B) of 
        section 1(h)(1) of such Code shall be the sum of--
                  (A) 7.5 percent of the lesser of--
                          (i) the net capital gain taking into account 
                        only gain or loss properly taken into account 
                        for the portion of the taxable year on or after 
                        such date (determined without regard to 
                        collectibles gain or loss, gain described in 
                        section (1)(h)(6)(A)(i) of such Code, and 
                        section 1202 gain), or
                          (ii) the amount on which a tax is determined 
                        under such subparagraph (without regard to this 
                        subsection), plus
                  (B) 10 percent of the excess (if any) of--
                          (i) the amount on which a tax is determined 
                        under such subparagraph (without regard to this 
                        subsection), over
                          (ii) the amount on which a tax is determined 
                        under subparagraph (A).
          (2) The amount of tax determined under subparagraph (C) of 
        section (1)(h)(1) of such Code shall be the sum of--
                  (A) 15 percent of the lesser of--
                          (i) the excess (if any) of the amount of net 
                        capital gain determined under subparagraph 
                        (A)(i) of paragraph (1) of this subsection over 
                        the amount on which a tax is determined under 
                        subparagraph (A) of paragraph (1) of this 
                        subsection, or
                          (ii) the amount on which a tax is determined 
                        under such subparagraph (C) (without regard to 
                        this subsection), plus
                  (B) 20 percent of the excess (if any) of--
                          (i) the amount on which a tax is determined 
                        under such subparagraph (C) (without regard to 
                        this subsection), over
                          (ii) the amount on which a tax is determined 
                        under subparagraph (A) of this paragraph.
          (3) The amount of tax determined under subparagraph (D) of 
        section (1)(h)(1) of such Code shall be the sum of--
                  (A) 20 percent of the lesser of--
                          (i) the amount which would be determined 
                        under section 1(h)(6)(A)(i) of such Code taking 
                        into account only gain properly taken into 
                        account for the portion of the taxable year on 
                        or after such date, or
                          (ii) the amount on which a tax is determined 
                        under such subparagraph (D) (without regard to 
                        this subsection), plus  
                  (B) 25 percent of the excess (if any) of--
                          (i) the amount on which a tax is determined 
                        under such subparagraph (D) (without regard to 
                        this subsection), over
                          (ii) the amount on which a tax is determined 
                        under subparagraph (A) of this paragraph.  
          (4) For purposes of applying section 55(b)(3) of such Code, 
        rules similar to the rules of paragraphs (1), (2), and (3) of 
        this subsection shall apply.
          (5) In applying this subsection with respect to any pass-thru 
        entity, the determination of when gains and loss are properly 
        taken into account shall be made at the entity level.
          (6) Terms used in this subsection which are also used in 
        section 1(h) of such Code shall have the respective meanings 
        that such terms have in such section.
  (d) Effective Dates.--
          (1) In general.--Except as otherwise provided by this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after June 30, 1999.
          (2) Withholding.--The amendment made by subsection (a)(2)(C) 
        shall apply to amounts paid after the date of the enactment of 
        this Act.
          (3) Small business stock.--The amendments made by subsection 
        (b)(4) shall apply to dispositions on or after July 1, 1999.

SEC. 203. CAPITAL GAINS TAX RATES APPLIED TO CAPITAL GAINS OF 
                    DESIGNATED SETTLEMENT FUNDS.

  (a) In General.--Paragraph (1) of section 468B(b) (relating to 
taxation of designated settlement funds) is amended by inserting 
``(subject to section 1(h))'' after ``maximum rate''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 204. SPECIAL RULE FOR MEMBERS OF UNIFORMED SERVICES AND FOREIGN 
                    SERVICE, AND OTHER EMPLOYEES, 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 paragraphs:
          ``(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 Financial Freedom Act of 1999.
                          ``(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 Financial Freedom Act 
                        of 1999.
                          ``(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.
          ``(10) Other employees.--
                  ``(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 as an 
                employee for a period in excess of 90 days in an 
                assignment by the such employee's employer outside the 
                United States.
                  ``(B) Limitations and special rules.--
                          ``(i) Maximum period of suspension.--The 
                        suspension under subparagraph (A) with respect 
                        to a principal residence shall not exceed (in 
                        the aggregate) 5 years.
                          ``(ii) Members of uniformed services and 
                        foreign service.--Subparagraph (A) shall not 
                        apply to an individual to whom paragraph (9) 
                        applies.
                          ``(iii) Self-employed individual not 
                        considered an employee.--For purposes of this 
                        paragraph, the term `employee' does not include 
                        an individual who is an employee within the 
                        meaning of section 401(c)(1) (relating to self-
                        employed individuals).''.
  (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. 205. TREATMENT OF CERTAIN DEALER DERIVATIVE FINANCIAL INSTRUMENTS, 
                    HEDGING TRANSACTIONS, AND SUPPLIES AS ORDINARY 
                    ASSETS.

  (a) In General.--Section 1221 (defining capital assets) is amended--
          (1) by striking ``For purposes'' and inserting the following:
  ``(a) In General.--For purposes'',
          (2) by striking the period at the end of paragraph (5) and 
        inserting a semicolon, and
          (3) by adding at the end the following:
          ``(6) any commodities derivative financial instrument held by 
        a commodities derivatives dealer, unless--
                  ``(A) it is established to the satisfaction of the 
                Secretary that such instrument has no connection to the 
                activities of such dealer as a dealer, and
                  ``(B) such instrument is clearly identified in such 
                dealer's records as being described in subparagraph (A) 
                before the close of the day on which it was acquired, 
                originated, or entered into (or such other time as the 
                Secretary may by regulations prescribe);
          ``(7) any hedging transaction which is clearly identified as 
        such before the close of the day on which it was acquired, 
        originated, or entered into (or such other time as the 
        Secretary may by regulations prescribe); or
          ``(8) supplies of a type regularly used or consumed by the 
        taxpayer in the ordinary course of a trade or business of the 
        taxpayer.
  ``(b) Definitions and Special Rules.--
          ``(1) Commodities derivative financial instruments.--For 
        purposes of subsection (a)(6)--
                  ``(A) Commodities derivatives dealer.--The term 
                `commodities derivatives dealer' means a person which 
                regularly offers to enter into, assume, offset, assign, 
                or terminate positions in commodities derivative 
                financial instruments with customers in the ordinary 
                course of a trade or business.
                  ``(B) Commodities derivative financial instrument.--
                          ``(i) In general.--The term `commodities 
                        derivative financial instrument' means any 
                        contract or financial instrument with respect 
                        to commodities (other than a share of stock in 
                        a corporation, a beneficial interest in a 
                        partnership or trust, a note, bond, debenture, 
                        or other evidence of indebtedness, or a section 
                        1256 contract (as defined in section 1256(b)) 
                        the value or settlement price of which is 
                        calculated by or determined by reference to a 
                        specified index.
                          ``(ii) Specified index.--The term `specified 
                        index' means any one or more or any combination 
                        of--
                                  ``(I) a fixed rate, price, or amount, 
                                or
                                  ``(II) a variable rate, price, or 
                                amount,
                        which is based on any current, objectively 
                        determinable financial or economic information 
                        with respect to commodities which is not within 
                        the control of any of the parties to the 
                        contract or instrument and is not unique to any 
                        of the parties' circumstances.
          ``(2) Hedging transaction.--
                  ``(A) In general.--For purposes of this section, the 
                term `hedging transaction' means any transaction 
                entered into by the taxpayer in the normal course of 
                the taxpayer's trade or business primarily--
                          ``(i) to manage risk of price changes or 
                        currency fluctuations with respect to ordinary 
                        property which is held or to be held by the 
                        taxpayer, or
                          ``(ii) to manage risk of interest rate or 
                        price changes or currency fluctuations with 
                        respect to borrowings made or to be made, or 
                        ordinary obligations incurred or to be 
                        incurred, by the taxpayer.
                  ``(B) Treatment of nonidentification or improper 
                identification of hedging transactions.--
                Notwithstanding subsection (a)(7), the Secretary shall 
                prescribe regulations to properly characterize of any 
                income, gain, expense, or loss arising from a 
                transaction--
                          ``(i) which is a hedging transaction but 
                        which was not identified as such in accordance 
                        with subsection (a)(7), or
                          ``(ii) which was so identified but is not a 
                        hedging transaction.
          ``(3) Regulations.--The Secretary shall prescribe such 
        regulations as are appropriate to carry out the purposes of 
        paragraph (6) and (7) of subsection (a) in the case of 
        transactions involving related parties.''.
  (b) Management of Risk.--
          (1) Section 475(c)(3) is amended by striking ``reduces'' and 
        inserting ``manages''.
          (2) Section 871(h)(4)(C)(iv) is amended by striking ``to 
        reduce'' and inserting ``to manage''.
          (3) Clauses (i) and (ii) of section 988(d)(2)(A) are each 
        amended by striking ``to reduce'' and inserting ``to manage''.
          (4) Paragraph (2) of section 1256(e) is amended to read as 
        follows:
          ``(2) Definition of hedging transaction.--For purposes of 
        this subsection, the term `hedging transaction' means any 
        hedging transaction (as defined in section 1221(b)(2)(A)) if, 
        before the close of the day on which such transaction was 
        entered into (or such earlier time as the Secretary may 
        prescribe by regulations), the taxpayer clearly identifies such 
        transaction as being a hedging transaction.''
  (c) Effective Date.--The amendments made by this section shall apply 
to any instrument held, acquired, or entered into, any transaction 
entered into, and supplies held or acquired on or after the date of 
enactment of this Act.

SEC. 206. WORTHLESS SECURITIES OF FINANCIAL INSTITUTIONS.

  (a) In General.--The first sentence following section 165(g)(3)(B) 
(relating to securities of affiliated corporation) is amended to read 
as follows: ``In computing gross receipts for purposes of the preceding 
sentence, (i) gross receipts from sales or exchanges of stocks and 
securities shall be taken into account only to the extent of gains 
therefrom, and (ii) gross receipts from royalties, rents, dividends, 
interest, annuities, and gains from sales or exchanges of stocks and 
securities derived from (or directly related to) the conduct of an 
active trade or business of an insurance company subject to tax under 
subchapter L or a qualified financial institution (as defined in 
subsection (l)(3)) shall be treated as from such sources other than 
royalties, rents, dividends, interest, annuities, and gains.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to securities which become worthless in taxable years beginning after 
December 31, 1999.

     TITLE III--INCENTIVES FOR BUSINESS INVESTMENT AND JOB CREATION

SEC. 301. REDUCTION IN CORPORATE CAPITAL GAIN TAX RATE.

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

``SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.

  ``(a) General Rule.--If for any taxable year a corporation has a net 
capital gain, then, in lieu of the tax imposed by sections 11, 511, or 
831(a) or (b), there is hereby imposed a tax (if such tax is less than 
the tax imposed by such sections) which shall consist of the sum of--
          ``(1) a tax computed on the taxable income reduced by the net 
        capital gain, at the rates and in the manner as if this 
        subsection had not been enacted, plus
          ``(2) the applicable percentage of the net capital gain (or, 
        if less, taxable income).
  ``(b) Applicable Percentage.--For purposes of subsection (a), the 
applicable percentage shall be determined in accordance with the 
following table:

``For taxable years beginning
                                                         The applicable
  in calendar year--
                                                        percentage is--
  2000.....................................................      34.1  
  2001.....................................................      33.9  
  2002.....................................................      32.7  
  2003.....................................................      31.7  
  2004.....................................................      30.8  
  2005.....................................................      29.8  
  2006.....................................................      29.2  
  2007.....................................................      28.0  
  2008.....................................................      27.4  
  2009.....................................................      26.2  
  2010 and thereafter......................................     25.0.  

  ``(c) Cross References.--For computation of the alternative tax--
          ``(1) in the case of life insurance companies, see section 
        801(a)(2),
          ``(2) in the case of regulated investment companies and their 
        shareholders, see section 852(b)(3)(A) and (D), and
          ``(3) in the case of real estate investment trusts, see 
        section 857(b)(3)(A).''
  (b) Technical Amendments.--
          (1) Paragraphs (1) and (2) of section 1445(e) are each 
        amended by striking ``35 percent'' and inserting ``the 
        applicable percentage determined under section 1201(b) for the 
        calendar year in which the payment is made''.
          (2)(A) The second sentence of section 7518(g)(6)(A) is 
        amended by striking ``34 percent'' and inserting ``the 
        applicable percentage (within the meaning of section 
        1201(b))''.
          (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936, is amended by striking ``34 
        percent'' and inserting ``the applicable percentage (within the 
        meaning of section 1201(b) of the Internal Revenue Code of 
        1986)''.
  (c) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 1999.
          (2) Withholding.--The amendment made by subsection (b)(1) 
        shall apply to amounts paid after December 31, 1999.

SEC. 302. REPEAL OF ALTERNATIVE MINIMUM TAX ON CORPORATIONS.

  (a) In General.--The last sentence of section 55(a), as amended by 
section 121, is amended by striking ``on any taxpayer other than a 
corporation''.
  (b) Repeal of 90 Percent Limitation on Foreign Tax Credit.--
          (1) In general.--Section 59(a) (relating to alternative 
        minimum tax foreign tax credit) is amended by striking 
        paragraph (2) and by redesignating paragraphs (3) and (4) as 
        paragraphs (2) and (3), respectively.
          (2) Conforming amendment.--Section 53(d)(1)(B)(i)(II) is 
        amended by striking ``and if section 59(a)(2) did not apply''.
  (c) Limitation on Use of Credit for Prior Year Minimum Tax 
Liability.--
          (1) In general.--Subsection (c) of section 53, as amended by 
        section 121, is amended by redesignating paragraph (2) as 
        paragraph (3) and by inserting after paragraph (1) the 
        following new paragraph:
          ``(2) Corporations for taxable years beginning after 2002.--
        In the case of corporation for any taxable year beginning after 
        2002 and before 2008, the limitation under paragraph (1) shall 
        be increased by the applicable percentage (determined in 
        accordance with the following table) of the tentative minimum 
        tax for the taxable year.

        ``For taxable years beginning
                                                         The applicable
          in calendar year--
                                                        percentage is--
          2003.............................................        20  
          2004.............................................        30  
          2005.............................................        40  
          2006 or 2007.....................................       50.  

        In no event shall the limitation determined under this 
        paragraph be greater than the sum of the tax imposed by section 
        55 and the regular tax reduced by the sum of the credits 
        allowed under subparts A, B, D, E, and F of this part.''
          (2) Conforming amendments.--
                  (A) Section 55(e) is amended by striking paragraph 
                (5).
                  (B) Paragraph (3) of section 53(c), as redesignated 
                by paragraph (1), is amended by striking ``to a 
                taxpayer other than a corporation''.
  (d) Effective Date.--
          (1) In general.--Except as provided in paragraphs (2) and 
        (3), the amendments made by this section shall apply to taxable 
        years beginning after December 31, 2002.
          (2) Repeal of 90 percent limitation on foreign tax credit.--
        The amendments made by subsection (b) shall apply to taxable 
        years beginning after December 31, 2001.
          (3) Subsection (c)(2)(A).--The amendment made by subsection 
        (c)(2)(A) shall apply to taxable years beginning after December 
        31, 2007.

                 TITLE IV--EDUCATION SAVINGS INCENTIVES

SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

  (a) Maximum Annual Contributions.--
          (1) In general.--Section 530(b)(1)(A)(iii) (defining 
        education individual retirement account) is amended by striking 
        ``$500'' and inserting ``$2,000''.
          (2) Conforming amendment.--Section 4973(e)(1)(A) is amended 
        by striking ``$500'' and inserting ``$2,000''.
  (b) Tax-Free Expenditures for Elementary and Secondary School 
Expenses.--
          (1) In general.--Section 530(b)(2) (defining qualified higher 
        education expenses) is amended to read as follows:
          ``(2) Qualified education expenses.--
                  ``(A) In general.--The term `qualified education 
                expenses' means--
                          ``(i) qualified higher education expenses (as 
                        defined in section 529(e)(3)), and
                          ``(ii) qualified elementary and secondary 
                        education expenses (as defined in paragraph 
                        (4)).
                  ``(B) Qualified state tuition programs.--Such term 
                shall include any contribution to a qualified State 
                tuition program (as defined in section 529(b)) on 
                behalf of the designated beneficiary (as defined in 
                section 529(e)(1)); 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 subsection (d)(2).''
          (2) Qualified elementary and secondary education expenses.--
        Section 530(b) (relating to definitions and special rules) is 
        amended by adding at the end the following new paragraph:
          ``(4) Qualified elementary and secondary education 
        expenses.--
                  ``(A) In general.--The term `qualified elementary and 
                secondary education expenses' means--
                          ``(i) expenses for tuition, fees, academic 
                        tutoring, special needs services, books, 
                        supplies, computer equipment (including related 
                        software and services), and other equipment 
                        which are incurred in connection with the 
                        enrollment or attendance of the designated 
                        beneficiary of the trust as an elementary or 
                        secondary school student at a public, private, 
                        or religious school, and
                          ``(ii) expenses for room and board, uniforms, 
                        transportation, and supplementary items and 
                        services (including extended day programs) 
                        which are required or provided by a public, 
                        private, or religious school in connection with 
                        such enrollment or attendance.
                  ``(B) Special rule for homeschooling.--Such term 
                shall include expenses described in subparagraph (A)(i) 
                in connection with education provided by homeschooling 
                if the requirements of any applicable State or local 
                law are met with respect to such education.
                  ``(C) School.--The term `school' means any school 
                which provides elementary education or secondary 
                education (kindergarten through grade 12), as 
                determined under State law.''
          (3) Conforming amendments.--Section 530 is amended--
                  (A) by striking ``higher'' each place it appears in 
                subsections (b)(1) and (d)(2), and
                  (B) by striking ``higher'' in the heading for 
                subsection (d)(2).
  (c) Waiver of Age Limitations for Children With Special Needs.--
Section 530(b)(1) (defining education individual retirement account) is 
amended by adding at the end the following flush sentence:
        ``The age limitations in subparagraphs (A)(ii) and (E) and 
        paragraphs (5) and (6) of subsection (d) shall not apply to any 
        designated beneficiary with special needs (as determined under 
        regulations prescribed by the Secretary).''
  (d) Entities Permitted To Contribute to Accounts.--Section 530(c)(1) 
(relating to reduction in permitted contributions based on adjusted 
gross income) is amended by striking ``The maximum amount which a 
contributor'' and inserting ``In the case of a contributor who is an 
individual, the maximum amount the contributor''.
  (e) Time When Contributions Deemed Made.--
          (1) In general.--Section 530(b) (relating to definitions and 
        special rules), as amended by subsection (b)(2), is amended by 
        adding at the end the following new paragraph:
          ``(5) Time when contributions deemed made.--An individual 
        shall be deemed to have made a contribution to an education 
        individual retirement 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).''
          (2) Extension of time to return excess contributions.--
        Subparagraph (C) of section 530(d)(4) (relating to additional 
        tax for distributions not used for educational expenses) is 
        amended--
                  (A) by striking clause (i) and inserting the 
                following new clause:
                          ``(i) such distribution is made before the 
                        1st day of the 6th month of the taxable year 
                        following the taxable year, and'', and
                  (B) by striking ``due date of return'' in the heading 
                and inserting ``certain date''.
  (f) Coordination With Hope and Lifetime Learning Credits and 
Qualified Tuition Programs.--
          (1) In general.--Section 530(d)(2)(C) is amended to read as 
        follows:
                  ``(C) Coordination with hope and lifetime learning 
                credits and qualified tuition programs.--For purposes 
                of subparagraph (A)--
                          ``(i) Credit coordination.--The total amount 
                        of qualified higher education expenses with 
                        respect to an individual for the taxable year 
                        shall be reduced--
                                  ``(I) as provided in section 
                                25A(g)(2), and
                                  ``(II) by the amount of such expenses 
                                which were taken into account in 
                                determining the credit allowed to the 
                                taxpayer or any other person under 
                                section 25A.
                          ``(ii) Coordination with qualified tuition 
                        programs.--If, with respect to an individual 
                        for any taxable year--
                                  ``(I) the aggregate distributions 
                                during such year to which subparagraph 
                                (A) and section 529(c)(3)(B) apply, 
                                exceed
                                  ``(II) the total amount of qualified 
                                education expenses (after the 
                                application of clause (i)) for such 
                                year,
                        the taxpayer shall allocate such expenses among 
                        such distributions for purposes of determining 
                        the amount of the exclusion under subparagraph 
                        (A) and section 529(c)(3)(B).''
          (2) Conforming amendments.--
                  (A) Subsection (e) of section 25A is amended to read 
                as follows:
  ``(e) Election Not To Have Section Apply.--A taxpayer may elect not 
to have this section apply with respect to the qualified tuition and 
related expenses of an individual for any taxable year.''
                  (B) Section 135(d)(2)(A) is amended by striking 
                ``allowable'' and inserting ``allowed''.
                  (C) Section 530(d)(2)(D) is amended--
                          (i) by striking ``or credit'', and
                          (ii) by striking ``credit or'' in the 
                        heading.
                  (D) Section 4973(e)(1) is amended by adding ``and'' 
                at the end of subparagraph (A), by striking 
                subparagraph (B), and by redesignating subparagraph (C) 
                as subparagraph (B).
  (g) Renaming Education Individual Retirement Accounts as Education 
Savings Accounts.--
          (1) In general.--
                  (A) Section 530 (as amended by the preceding 
                provisions of this section) is amended by striking 
                ``education individual retirement account'' each place 
                it appears and inserting ``education savings account''.
                  (B) The heading for paragraph (1) of section 530(b) 
                is amended by striking ``Education individual 
                retirement account'' and inserting ``Education savings 
                account''.
                  (C) The heading for section 530 is amended to read as 
                follows:

``SEC. 530. EDUCATION SAVINGS ACCOUNTS.''.

                  (D) The item in the table of contents for part VII of 
                subchapter F of chapter 1 relating to section 530 is 
                amended to read as follows:

                              ``Sec. 530. Education savings 
                                        accounts.''.

          (2) Conforming amendments.--
                  (A) The following provisions are each amended by 
                striking ``education individual retirement'' each place 
                it appears and inserting ``education savings'':
                          (i) Section 25A(e)(2).
                          (ii) Section 26(b)(2)(E).
                          (iii) Section 72(e)(9).
                          (iv) Section 135(c)(2)(C).
                          (v) Subsections (a) and (e) of section 4973.
                          (vi) Subsections (c) and (e) of section 4975.
                          (vii) Section 6693(a)(2)(D).
                  (B) The headings for each of the following provisions 
                are amended by striking ``education individual 
                retirement accounts'' each place it appears and 
                inserting ``education savings accounts''.
                          (i) Section 72(e)(9).
                          (ii) Section 135(c)(2)(C).
                          (iii) Section 4973(e).
                          (iv) Section 4975(c)(5).
  (h) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2000.
          (2) Subsection (g).--The amendments made by subsection (g) 
        shall take effect on the date of the enactment of this Act.

SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

  (a) Eligible Educational Institutions Permitted To Maintain Qualified 
Tuition Programs.--
          (1) In general.--Section 529(b)(1) (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 ''.
          (2) Private qualified tuition programs limited to benefit 
        plans.--Clause (ii) of section 529(b)(1)(A) is amended by 
        inserting ``in the case of a program established and maintained 
        by a State or agency or instrumentality thereof,'' before ``may 
        make''.
          (3) Conforming amendments.--
                  (A) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 
                529, 530(b)(2)(B), 4973(e), and 6693(a)(2)(C) are each 
                amended by striking ``qualified State tuition'' each 
                place it appears and inserting ``qualified tuition''.
                  (B) The headings for sections 72(e)(9) and 
                135(c)(2)(C) are each amended by striking ``qualified 
                state tuition'' and inserting ``qualified tuition''.
                  (C) The headings for sections 529(b) and 530(b)(2)(B) 
                are each amended by striking ``Qualified state 
                tuition'' and inserting ``Qualified tuition''.
                  (D) The heading for section 529 is amended by 
                striking ``state''.
                  (E) 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''.
  (b) Exclusion From Gross Income of Education Distributions From 
Qualified Tuition Programs.--
          (1) In general.--Section 529(c)(3)(B) (relating to 
        distributions) is amended to read as follows:
                  ``(B) Distributions for qualified higher education 
                expenses.--
                          ``(i) In general.--For purposes of this 
                        paragraph--
                                  ``(I) no amount shall be includible 
                                in gross income under subparagraph (A) 
                                by reason of a distribution which 
                                consists of providing a benefit to the 
                                distributee which, if paid for by the 
                                distributee, would constitute payment 
                                of a qualified higher education 
                                expense, and
                                  ``(II) in the case of distributions 
                                not described in subclause (I), the 
                                amount otherwise includible in gross 
                                income under subparagraph (A) shall be 
                                reduced by an amount which bears the 
                                same ratio to the otherwise includible 
                                amount as the qualified higher 
                                education expenses (other than expenses 
                                paid by distributions described in 
                                subclause (I)) bear to the aggregate of 
                                such distributions.
                          ``(ii) Exception for institutional 
                        programs.--In the case of any taxable year 
                        beginning before January 1, 2004, clause (i) 
                        shall not apply with respect to any 
                        distribution during such taxable year under a 
                        qualified tuition program established and 
                        maintained by 1 or more eligible educational 
                        institutions.
                          ``(iii) In-kind distributions.--Any benefit 
                        furnished to a designated beneficiary under a 
                        qualified tuition program shall be treated as a 
                        distribution to the beneficiary for purposes of 
                        this paragraph.
                          ``(iv) Coordination with hope and lifetime 
                        learning credits.--The total amount of 
                        qualified higher education expenses with 
                        respect to an individual for the taxable year 
                        shall be reduced--
                                  ``(I) as provided in section 
                                25A(g)(2), and
                                  ``(II) by the amount of such expenses 
                                which were taken into account in 
                                determining the credit allowed to the 
                                taxpayer or any other person under 
                                section 25A.
                          ``(v) Coordination with education savings 
                        accounts.--If, with respect to an individual 
                        for any taxable year--
                                  ``(I) the aggregate distributions to 
                                which clause (i) and section 
                                530(d)(2)(A) apply, exceed
                                  ``(II) the total amount of qualified 
                                higher education expenses otherwise 
                                taken into account under clause (i) 
                                (after the application of clause (iv)) 
                                for such year,
                        the taxpayer shall allocate such expenses among 
                        such distributions for purposes of determining 
                        the amount of the exclusion under clause (i) 
                        and section 530(d)(2)(A).''
          (2) Conforming amendments.--
                  (A) Section 135(d)(2)(B) is amended by striking ``the 
                exclusion under section 530(d)(2)'' and inserting ``the 
                exclusions under sections 529(c)(3)(B)(i) and 
                530(d)(2)''.
                  (B) Section 221(e)(2)(A) is amended by inserting 
                ``529,'' after ``135,''.
  (c) Rollover to Different Program for Benefit of Same Designated 
Beneficiary.--Section 529(c)(3)(C) (relating to change in 
beneficiaries) is amended--
          (1) by striking ``transferred to the credit'' in clause (i) 
        and inserting ``transferred--
                                  ``(I) to another qualified tuition 
                                program for the benefit of the 
                                designated beneficiary, or
                                  ``(II) to the credit'',
          (2) by adding at the end the following new clause:
                          ``(iii) Limitation on certain rollovers.--
                        Clause (i)(I) shall not apply to any amount 
                        transferred with respect to a designated 
                        beneficiary if, at any time during the 1-year 
                        period ending on the day of such transfer, any 
                        other amount was transferred which was not 
                        includible in gross income by reason of clause 
                        (i)(I).'', and
          (3) by inserting ``or programs'' after ``beneficiaries'' in 
        the heading.
  (d) Member of Family Includes First Cousin.--Section 529(e)(2) 
(defining member of family) is amended by striking ``and'' at the end 
of subparagraph (B), by striking the period at the end of subparagraph 
(C) and by inserting ``; and'', and by adding at the end the following 
new subparagraph:
                  ``(D) any first cousin of such beneficiary.''
  (e) Definition of Qualified Higher Education Expenses.--
          (1) In general.--Subparagraph (A) of section 529(e)(3) 
        (relating to definition of qualified higher education expenses) 
        is amended to read as follows:
                  ``(A) In general.--The term `qualified higher 
                education expenses' means--
                          ``(i) tuition and fees required for the 
                        enrollment or attendance of a designated 
                        beneficiary at an eligible educational 
                        institution for courses of instruction of such 
                        beneficiary at such institution, and
                          ``(ii) expenses for books, supplies, and 
                        equipment which are incurred in connection with 
                        such enrollment or attendance, but not to 
                        exceed the allowance for books and supplies 
                        included 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 enactment of the Financial Freedom Act 
                        of 1999) as determined by the eligible 
                        educational institution.''.
          (2) Exception for education involving sports, etc..--
        Paragraph (3) of section 529(e) (relating to qualified higher 
        education expenses) is amended by adding at the end the 
        following new subparagraph:
                  ``(C) Exception for education involving sports, 
                etc..--The term `qualified higher education expenses' 
                shall not include expenses with respect to any course 
                or other education involving sports, games, or hobbies 
                unless such course or other education is part of the 
                beneficiary's degree program or is taken to acquire or 
                improve job skills of the beneficiary.''.
  (f) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2000.
          (2) Qualified higher education expenses.--The amendments made 
        by subsection (e) shall apply to amounts paid for education 
        furnished after December 31, 1999.

SEC. 403. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE NATIONAL 
                    HEALTH SERVICE CORPS SCHOLARSHIP PROGRAM, THE F. 
                    EDWARD HEBERT ARMED FORCES HEALTH PROFESSIONS 
                    SCHOLARSHIP AND FINANCIAL ASSISTANCE PROGRAM, AND 
                    CERTAIN OTHER PROGRAMS.

  (a) In General.--Section 117(c) (relating to the exclusion from gross 
income amounts received as a qualified scholarship) is amended--
          (1) by striking ``Subsections (a)'' and inserting the 
        following:
          ``(1) In general.--Except as provided in paragraph (2), 
        subsections (a)'', and
          (2) by adding at the end the following new paragraph:
          ``(2) Exceptions.--Paragraph (1) shall not apply to any 
        amount received by an individual under--
                  ``(A) the National Health Service Corps Scholarship 
                program under section 338A(g)(1)(A) of the Public 
                Health Service Act,
                  ``(B) the Armed Forces Health Professions Scholarship 
                and Financial Assistance program under subchapter I of 
                chapter 105 of title 10, United States Code,
                  ``(C) the National Institutes of Health Undergraduate 
                Scholarship program under section 487D of the Public 
                Health Service Act, or
                  ``(D) any State program determined by the Secretary 
                to have substantially similar objectives as such 
                programs.''
  (b) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by subsection (a) shall apply to amounts 
        received in taxable years beginning after December 31, 1993.
          (2) State programs.--Section 117(c)(2)(D) of the Internal 
        Revenue Code of 1986 (as added by the amendments made by 
        subsection (a)) shall apply to amounts received in taxable 
        years beginning after December 31, 1999.

SEC. 404. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION FOR 
                    GOVERNMENTAL BONDS USED TO FINANCE EDUCATIONAL 
                    FACILITIES.

  (a) In General.--Section 148(f)(4)(D)(vii) (relating to increase in 
exception for bonds financing public school capital expenditures) is 
amended by striking ``$5,000,000'' the second place it appears and 
inserting ``$10,000,000''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to obligations issued in calendar years beginning after December 31, 
1999.

SEC. 405. 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, 60 
                                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, 1999.

SEC. 406. REPEAL OF 60-MONTH LIMITATION ON DEDUCTION FOR INTEREST ON 
                    EDUCATION LOANS.

  (a) In General.--Section 221 (relating to interest on education 
loans) is amended by striking subsection (d) and by redesignating 
subsections (e), (f), and (g) as subsections (d), (e), and (f), 
respectively.
  (b) Conforming Amendment.--Subsection (e) of section 6050S is amended 
by striking ``section 221(e)(1)'' and inserting ``section 221(d)(1)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to loan interest payments made after December 31, 1999, in taxable 
years ending after such date.

                    TITLE V--HEALTH CARE PROVISIONS

SEC. 501. DEDUCTION FOR HEALTH AND LONG-TERM CARE INSURANCE COSTS OF 
                    INDIVIDUALS NOT PARTICIPATING IN EMPLOYER-
                    SUBSIDIZED HEALTH PLANS.

  (a) In General.--Part VII of subchapter B of chapter 1 is amended by 
redesignating section 222 as section 223 and by inserting after section 
221 the following new section:

``SEC. 222. HEALTH AND LONG-TERM CARE INSURANCE COSTS.

  ``(a) In General.--In the case of an individual, there shall be 
allowed as a deduction an amount equal to the applicable percentage of 
the amount paid during the taxable year for insurance which constitutes 
medical care for the taxpayer, the taxpayer's spouse, and dependents.
  ``(b) Applicable Percentage.--For purposes of subsection (a), the 
applicable percentage shall be determined in accordance with the 
following table:

``For taxable years beginning
                                                         The applicable
  in calendar year--
                                                        percentage is--
  2001.....................................................        25  
  2002.....................................................        40  
  2003, 2004, 2005, and 2006...............................        50  
  2007.....................................................        75  
  2008 and thereafter......................................      100.  

  ``(c) Limitation Based on Other Coverage.--
          ``(1) Coverage under certain subsidized employer plans.--
                  ``(A) In general.--Subsection (a) shall not apply to 
                any taxpayer for any calendar month for which the 
                taxpayer participates in any health plan maintained by 
                any employer of the taxpayer or of the spouse of the 
                taxpayer if 50 percent or more of the cost of coverage 
                under such plan (determined under section 4980B) is 
                paid or incurred by the employer.
                  ``(B) Employer contributions to cafeteria plans, 
                flexible spending arrangements, and medical savings 
                accounts.--Employer contributions to a cafeteria plan, 
                a flexible spending or similar arrangement, or a 
                medical savings account which are excluded from gross 
                income under section 106 shall be treated for purposes 
                of subparagraph (A) as paid by the employer.
                  ``(C) Aggregation of plans of employer.--A health 
                plan which is not otherwise described in subparagraph 
                (A) shall be treated as described in such subparagraph 
                if such plan would be so described if all health plans 
                of persons treated as a single employer under 
                subsections (b), (c), (m), or (o) of section 414 were 
                treated as one health plan.
                  ``(D) Separate application to health insurance and 
                long-term care insurance.--Subparagraphs (A) and (C) 
                shall be applied separately with respect to--
                          ``(i) plans which include primarily coverage 
                        for qualified long-term care services or are 
                        qualified long-term care insurance contracts, 
                        and
                          ``(ii) plans which do not include such 
                        coverage and are not such contracts.
          ``(2) Coverage under certain federal programs.--
                  ``(A) In general.--Subsection (a) shall not apply to 
                any amount paid for any coverage for an individual for 
                any calendar month if, as of the first day of such 
                month, the individual is covered under any medical care 
                program described in--
                          ``(i) title XVIII, XIX, or XXI of the Social 
                        Security Act,
                          ``(ii) chapter 55 of title 10, United States 
                        Code,
                          ``(iii) chapter 17 of title 38, United States 
                        Code,
                          ``(iv) chapter 89 of title 5, United States 
                        Code, or
                          ``(v) the Indian Health Care Improvement Act.
                  ``(B) Exceptions.--
                          ``(i) Qualified long-term care.--Subparagraph 
                        (A) shall not apply to amounts paid for 
                        coverage under a qualified long-term care 
                        insurance contract.
                          ``(ii) Continuation coverage of fehbp.--
                        Subparagraph (A)(iv) shall not apply to 
                        coverage which is comparable to continuation 
                        coverage under section 4980B.
  ``(d) Long-Term Care Deduction Limited to Qualified Long-Term Care 
Insurance Contracts.--In the case of a qualified long-term care 
insurance contract, only eligible long-term care premiums (as defined 
in section 213(d)(10)) may be taken into account under subsection (a).
  ``(e) Special Rules.--
          ``(1) Coordination with deduction for health insurance costs 
        of self-employed individuals.--The amount taken into account by 
        the taxpayer in computing the deduction under section 162(l) 
        shall not be taken into account under this section.
          ``(2) Coordination with medical expense deduction.--The 
        amount taken into account by the taxpayer in computing the 
        deduction under this section shall not be taken into account 
        under section 213.
  ``(f) Regulations.--The Secretary shall prescribe such regulations as 
may be appropriate to carry out this section, including regulations 
requiring employers to report to their employees and the Secretary such 
information as the Secretary determines to be appropriate.''
  (b) Deduction Allowed Whether or Not Taxpayer Itemizes Other 
Deductions.--Subsection (a) of section 62 is amended by inserting after 
paragraph (17) the following new item:
          ``(18) Health and long-term care insurance costs.--The 
        deduction allowed by section 222.''
  (c) Clerical Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 is amended by striking the last item and 
inserting the following new items:

                              ``Sec. 222. Health and long-term care 
                                        insurance costs.
                              ``Sec. 223. Cross reference.''

  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

SEC. 502. LONG-TERM CARE INSURANCE PERMITTED TO BE OFFERED UNDER 
                    CAFETERIA PLANS AND FLEXIBLE SPENDING ARRANGEMENTS.

  (a) Cafeteria Plans.--Subsection (f) of section 125 (defining 
qualified benefits) is amended by inserting before the period at the 
end ``unless such product is a qualified long-term care insurance 
contract (as defined in section 7702B)''.
  (b) Flexible Spending Arrangements.--Section 106 (relating to 
contributions by employer to accident and health plans) is amended by 
striking subsection (c).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

SEC. 503. EXPANSION OF AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS.

  (a) Repeal of Limitations on Number of Medical Savings Accounts.--
          (1) In general.--Subsections (i) and (j) of section 220 are 
        hereby repealed.
          (2) Conforming amendment.--Paragraph (1) of section 220(c) is 
        amended by striking subparagraph (D).
  (b) All Employers May Offer Medical Savings Accounts.--
          (1) In general.--Subclause (I) of section 220(c)(1)(A)(iii) 
        (defining eligible individual) is amended by striking ``and 
        such employer is a small employer''.
          (2) Conforming amendments.--
                  (A) Paragraph (1) of section 220(c) is amended by 
                striking subparagraph (C).
                  (B) Subsection (c) of section 220 is amended by 
                striking paragraph (4) and by redesignating paragraph 
                (5) as paragraph (4).
  (c) Increase in Amount of Deduction Allowed for Contributions to 
Medical Savings Accounts.--
          (1) In general.--Paragraph (2) of section 220(b) is amended 
        to read as follows:
          ``(2) Monthly limitation.--The monthly limitation for any 
        month is the amount equal to \1/12\ of the annual deductible 
        (as of the first day of such month) of the individual's 
        coverage under the high deductible health plan.''.
          (2) Conforming amendment.--Clause (ii) of section 
        220(d)(1)(A) is amended by striking ``75 percent of''.
  (d) Both Employers and Employees May Contribute to Medical Savings 
Accounts.--Paragraph (5) of section 220(b) is amended to read as 
follows:
          ``(5) Coordination with exclusion for employer 
        contributions.--The limitation which would (but for this 
        paragraph) apply under this subsection to the taxpayer for any 
        taxable year shall be reduced (but not below zero) by the 
        amount which would (but for section 106(b)) be includible in 
        the taxpayer's gross income for such taxable year.''.
  (e) Reduction of Permitted Deductibles Under High Deductible Health 
Plans.--
          (1) In general.--Subparagraph (A) of section 220(c)(2) 
        (defining high deductible health plan) is amended--
                  (A) by striking ``$1,500'' in clause (i) and 
                inserting ``$1,000'', and
                  (B) by striking ``$3,000'' in clause (ii) and 
                inserting ``$2,000''.
          (2) Conforming amendment.--Subsection (g) of section 220 is 
        amended to read as follows:
  ``(g) Cost-of-Living Adjustment.--
          ``(1) In general.--In the case of any taxable year beginning 
        in a calendar year after 1998, each dollar amount in subsection 
        (c)(2) shall be increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment determined under 
                section 1(f)(3) for the calendar year in which such 
                taxable year begins by substituting `calendar year 
                1997' for `calendar year 1992' in subparagraph (B) 
                thereof.
          ``(2) Special rules.--In the case of the $1,000 amount in 
        subsection (c)(2)(A)(i) and the $2,000 amount in subsection 
        (c)(2)(A)(ii), paragraph (1)(B) shall be applied by 
        substituting `calendar year 1999' for `calendar year 1997'.
          ``(3) Rounding.--If any increase under paragraph (1) or (2) 
        is not a multiple of $50, such increase shall be rounded to the 
        nearest multiple of $50.
  (f) Medical Savings Accounts May Be Offered Under Cafeteria Plans.--
Subsection (f) of section 125 is amended by striking ``106(b),''.
  (g) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

SEC. 504. ADDITIONAL PERSONAL EXEMPTION FOR TAXPAYER CARING FOR ELDERLY 
                    FAMILY MEMBER IN TAXPAYER'S HOME.

  (a) In General.--Section 151 (relating to allowance of deductions for 
personal exemptions) is amended by adding at the end redesignating 
subsection (e) as subsection (f) and by inserting after subsection (d) 
the following new subsection:
  ``(e) Additional Exemption for Certain Elderly Family Members 
Residing With Taxpayer.--
          ``(1) In general.--An exemption of the exemption amount for 
        each qualified family member of the taxpayer.
          ``(2) Qualified family member.--For purposes of this 
        subsection, the term `qualified family member' means, with 
        respect to any taxable year, any individual--
                  ``(A) who is an ancestor of the taxpayer or of the 
                taxpayer's spouse or who is the spouse of any such 
                ancestor,
                  ``(B) who is a member for the entire taxable year of 
                a household maintained by the taxpayer, and
                  ``(C) who has been certified, before the due date for 
                filing the return of tax for the taxable year (without 
                extensions), by a physician (as defined in section 
                1861(r)(1) of the Social Security Act) as being an 
                individual with long-term care needs described in 
                paragraph (3) for a period--
                          ``(i) which is at least 180 consecutive days, 
                        and
                          ``(ii) a portion of which occurs within the 
                        taxable year.
        Such term shall not include any individual otherwise meeting 
        the requirements of the preceding sentence unless within the 
        39\1/2\ month period ending on such due date (or such other 
        period as the Secretary prescribes) a physician (as so defined) 
        has certified that such individual meets such requirements.
          ``(3) Individuals with long-term care needs.--An individual 
        is described in this paragraph if the individual--
                  ``(A) is unable to perform (without substantial 
                assistance from another individual) at least 2 
                activities of daily living (as defined in section 
                7702B(c)(2)(B)) due to a loss of functional capacity, 
                or
                  ``(B) requires substantial supervision to protect 
                such individual from threats to health and safety due 
                to severe cognitive impairment and is unable to 
                perform, without reminding or cuing assistance, at 
                least 1 activity of at least 1 activity of daily living 
                (as so defined) or to the extent provided in 
                regulations prescribed by the Secretary (in 
                consultation with the Secretary of Health and Human 
                Services), is unable to engage in age appropriate 
                activities.
          ``(4) Special rules.--Rules similar to the rules of 
        paragraphs (1), (2), (3), (4), and (5) of section 21(e) shall 
        apply for purposes of this subsection.''
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 505. EXPANDED HUMAN CLINICAL TRIALS QUALIFYING FOR ORPHAN DRUG 
                    CREDIT.

  (a) In General.--Subclause (I) of section 45C(b)(2)(A)(ii) is amended 
to read as follows:
                                  ``(I) after the date that the 
                                application is filed for designation 
                                under such section 526, and''.
  (b) Conforming Amendment.--Clause (i) of section 45C(b)(2)(A) is 
amended by inserting ``which is'' before ``being'' and by inserting 
before the comma at the end ``and which is designated under section 526 
of such Act''.
  (c) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred after December 31, 1999.

SEC. 506. INCLUSION OF CERTAIN VACCINES AGAINST STREPTOCOCCUS 
                    PNEUMONIAE TO LIST OF TAXABLE VACCINES.

  (a) In General.--Section 4132(a)(1) (defining taxable vaccine) is 
amended by adding at the end the following new subparagraph:
                  ``(L) Any conjugate vaccine against streptococcus 
                pneumoniae.''
  (b) Effective Date.--
          (1) Sales.--The amendment made by this section shall apply to 
        vaccine sales beginning on the day after the date on which the 
        Centers for Disease Control makes a final recommendation for 
        routine administration to children of any conjugate vaccine 
        against streptococcus pneumoniae.
          (2) Deliveries.--For purposes of paragraph (1), in the case 
        of sales on or before the date described in such paragraph for 
        which delivery is made after such date, the delivery date shall 
        be considered the sale date.
  (c) Report.--Not later than December 31, 1999, the Comptroller 
General of the United States shall prepare and submit a report to the 
Committee on Ways and Means of the House of Representatives and the 
Committee on Finance of the Senate on the operation of the Vaccine 
Injury Compensation Trust Fund and on the adequacy of such Fund to meet 
future claims made under the Vaccine Injury Compensation Program.

SEC. 507. ABOVE-THE-LINE DEDUCTION FOR PRESCRIPTION DRUG INSURANCE 
                    COVERAGE OF MEDICARE BENEFICIARIES IF CERTAIN 
                    MEDICARE AND LOW-INCOME ASSISTANCE PROVISIONS IN 
                    EFFECT.

  (a) In General.--Subsection (a) of section 213 is amended by adding 
at the end the following new sentence: ``The 7.5 percent adjusted gross 
income threshold in the preceding sentence shall not apply to the 
expenses paid during the taxable year for prescription drug insurance 
coverage of a medicare beneficiary who is the taxpayer, the taxpayer's 
spouse, or a dependent (as defined in section 152) if--
          ``(1) the Secretary certifies that, throughout such taxable 
        year, the conditions specified in subsection (e) are met, and
          ``(2) the amount paid for such coverage is either separately 
        stated in the contract or furnished to the policyholder by the 
        insurance company in a separate statement.
Expenses to which the preceding sentence applies shall not be taken 
into account in applying such threshold to other expenses. For purposes 
of this subsection, the term `medicare beneficiary' means an individual 
who is entitled to benefits under part A, B, or C of title XVIII of the 
Social Security Act.''
  (b) Conditions.--Section 213 is amended by redesignating subsection 
(e) as subsection (f) and by inserting after subsection (d) the 
following new subsection:
  ``(e) Conditions for Separate Deduction for Prescription Drug 
Insurance Coverage.--For purposes of subsection (a), the conditions 
specified in this subsection are met if all of the following are in 
effect:
          ``(1) Assistance for prescription drugs for low-income 
        medicare beneficiaries.--
                  ``(A) Low-income assistance to enable the purchase of 
                coverage of prescription drugs as described in 
                paragraph (2) or (3) for medicare beneficiaries with 
                incomes under 135 percent of the applicable Federal 
                poverty level, with such assistance phasing out for 
                beneficiaries with incomes between 135 percent and 150 
                percent of such level.
                  ``(B) The Federal Government provides funding for the 
                costs of such assistance.
          ``(2) Supplemental coverage of prescription drugs.--All 
        policies supplemental to Medicare include coverage for costs of 
        prescription drugs.
          ``(3) Structural medicare reform.--Coverage for outpatient 
        prescription drugs for medicare beneficiaries is provided only 
        through integrated comprehensive health plans which offer 
        current Medicare covered services and maximum limitations on 
        out-of-pocket spending and such comprehensive plans sponsored 
        by the Health Care Financing Administration compete on the same 
        basis as private plans.''
  (c) Deduction for Prescription Drug Insurance Coverage Allowed 
Whether or Not Taxpayer Itemizes Other Deductions.--Subsection (a) of 
section 62 (defining adjusted gross income) is amended by inserting 
after paragraph (18) the following new paragraph:
          ``(19) Prescription drug insurance coverage.--The deduction 
        allowed by section 213(a) to the extent of the expenses 
        described in the second sentence thereof.''
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

                      TITLE VI--ESTATE TAX RELIEF

  Subtitle A--Repeal of Estate, Gift, and Generation-Skipping Taxes; 
                  Repeal of Step Up in Basis At Death

SEC. 601. REPEAL OF ESTATE, GIFT, AND GENERATION-SKIPPING TAXES.

  (a) In General.--Subtitle B is hereby repealed.
  (b) Effective Date.--The repeal made by subsection (a) shall apply to 
the estates of decedents dying, and gifts and generation-skipping 
transfers made, after December 31, 2008.

SEC. 602. TERMINATION OF STEP UP IN BASIS AT DEATH.

  (a) Termination of Application of Section 1014.--Section 1014 
(relating to basis of property acquired from a decedent) is amended by 
adding at the end the following:
  ``(f) Termination.--In the case of a decedent dying after December 
31, 2008, this section shall not apply to property for which basis is 
provided by section 1022.''
  (b) Conforming Amendment.--Subsection (a) of section 1016 (relating 
to adjustments to basis) is amended by striking ``and'' at the end of 
paragraph (26), by striking the period at the end of paragraph (27) and 
inserting ``; and'', and by adding at the end the following:
          ``(28) to the extent provided in section 1022 (relating to 
        basis for certain property acquired from a decedent dying after 
        December 31, 2008).''

SEC. 603. CARRYOVER BASIS AT DEATH.

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

``SEC. 1022. CARRYOVER BASIS FOR CERTAIN PROPERTY ACQUIRED FROM A 
                    DECEDENT DYING AFTER DECEMBER 31, 2008.

  ``(a) Carryover Basis.--Except as otherwise provided in this section, 
the basis of carryover basis property in the hands of a person 
acquiring such property from a decedent shall be determined under 
section 1015.
  ``(b) Carryover Basis Property Defined.--
          ``(1) In general.--For purposes of this section, the term 
        `carryover basis property' means any property--
                  ``(A) which is acquired from or passed from a 
                decedent who died after December 31, 2008, and
                  ``(B) which is not excluded pursuant to paragraph 
                (2).
        The property taken into account under subparagraph (A) shall be 
        determined under section 1014(b) without regard to subparagraph 
        (A) of the last sentence of paragraph (9) thereof.
          ``(2) Certain property not carryover basis property.--The 
        term `carryover basis property' does not include--
                  ``(A) any item of gross income in respect of a 
                decedent described in section 691,
                  ``(B) property which was acquired from the decedent 
                by the surviving spouse of the decedent, the value of 
                which would have been deductible from the value of the 
                taxable estate of the decedent under section 2056, as 
                in effect on the day before the date of enactment of 
                the Financial Freedom Act of 1999, and
                  ``(C) any includible property of the decedent if the 
                aggregate adjusted fair market value of such property 
                does not exceed $2,000,000.
        For purposes of this paragraph and paragraph (3), the term 
        `adjusted fair market value' means, with respect to any 
        property, fair market value reduced by any indebtedness secured 
        by such property.
          ``(3) Phasein of carryover basis if includible property 
        exceeds $1,300,000.--
                  ``(A) In general.--If the adjusted fair market value 
                of the includible property of the decedent exceeds 
                $1,300,000, but does not exceed $2,000,000, the amount 
                of the increase in the basis of such property which 
                would (but for this paragraph) result under section 
                1014 shall be reduced by the amount which bears the 
                same ratio to such increase as such excess bears to 
                $700,000.
                  ``(B) Allocation of reduction.--The reduction under 
                subparagraph (A) shall be allocated among only the 
                includible property having net appreciation and shall 
                be allocated in proportion to the respective amounts of 
                such net appreciation. For purposes of the preceding 
                sentence, the term `net appreciation' means the excess 
                of the adjusted fair market value over the decedent's 
                adjusted basis immediately before such decedent's 
                death.
          ``(4) Includible property.--
                  ``(A) In general.--For purposes of this subsection, 
                the term `includible property' means property which 
                would be included in the gross estate of the decedent 
                under any of the following provisions as in effect on 
                the day before the date of the enactment of the 
                Financial Freedom Act of 1999:
                          ``(i) Section 2033.
                          ``(ii) Section 2038.
                          ``(iii) Section 2040.
                          ``(iv) Section 2041.
                          ``(v) Section 2042(a)(1).
                  ``(B) Exclusion of property acquired by spouse.--Such 
                term shall not include property described in paragraph 
                (2)(B).
  ``(c) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary to carry out the purposes of this section.''
  (b) Miscellaneous Amendments Related To Carryover Basis.--
          (1) Capital gain treatment for inherited art work or similar 
        property.--
                  (A) In general.--Subparagraph (C) of section 1221(3) 
                (defining capital asset) is amended by inserting 
                ``(other than by reason of section 1022)'' after ``is 
                determined''.
                  (B) Coordination with section 170.--Paragraph (1) of 
                section 170(e) (relating to certain contributions of 
                ordinary income and capital gain property) is amended 
                by adding at the end the following: ``For purposes of 
                this paragraph, the determination of whether property 
                is a capital asset shall be made without regard to the 
                exception contained in section 1221(3)(C) for basis 
                determined under section 1022.''
          (2) Definition of Executor.--Section 7701(a) (relating to 
        definitions) is amended by adding at the end the following:
          ``(47) Executor.--The term `executor' means the executor or 
        administrator of the decedent, or, if there is no executor or 
        administrator appointed, qualified, and acting within the 
        United States, then any person in actual or constructive 
        possession of any property of the decedent.''
          (3) Clerical amendment.--The table of sections for part II of 
        subchapter O of chapter 1 is amended by adding at the end the 
        following new item:

                              ``Sec. 1022. Carryover basis for certain 
                                        property acquired from a 
                                        decedent dying after December 
                                        31, 2008.''

  (c) Effective Date.--The amendments made by this section shall apply 
to estates of decedents dying after December 31, 2008.

  Subtitle B--Reductions of Estate and Gift Tax Rates Prior to Repeal

SEC. 611. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.

  (a) Maximum Rate of Tax Reduced to 50 Percent.--The table contained 
in section 2001(c)(1) is amended by striking the 2 highest brackets and 
inserting the following:

    Over $2,500,000
                                        $1,025,800, plus 50% of the 
                                                excess over 
                                                $2,500,000.''

  (b) Repeal of Phaseout of Graduated Rates.--Subsection (c) of section 
2001 is amended by striking paragraph (2).
  (c) Additional Reductions of Rates of Tax.--Subsection (c) of section 
2001, as amended by subsection (b), is amended by adding at the end the 
following new paragraph:
          ``(2) Phasedown of tax.--In the case of estates of decedents 
        dying, and gifts made, during any calendar year after 2001 and 
        before 2009--
                  ``(A) In general.--Except as provided in subparagraph 
                (C), the tentative tax under this subsection shall be 
                determined by using a table prescribed by the Secretary 
                (in lieu of using the table contained in paragraph (1)) 
                which is the same as such table; except that--
                          ``(i) each of the rates of tax shall be 
                        reduced by the number of percentage points 
                        determined under subparagraph (B), and
                          ``(ii) the amounts setting forth the tax 
                        shall be adjusted to the extent necessary to 
                        reflect the adjustments under clause (i).
                  ``(B) Percentage points of reduction.--

                  
                                                        The number of  
                ``For calendar year:
                                                  percentage points is:
                  2002.....................................         1  
                  2003.....................................         2  
                  2004.....................................         3  
                  2005.....................................         5  
                  2006.....................................         7  
                  2007.....................................         9  
                  2008.....................................       11.  

                  ``(C) Coordination with income tax rates.--The 
                reductions under subparagraph (A)--
                          ``(i) shall not reduce any rate under 
                        paragraph (1) below the lowest rate in section 
                        1(c), and
                          ``(ii) shall not reduce the highest rate 
                        under paragraph (1) below the highest rate in 
                        section 1(c).
                  ``(D) Coordination with credit for state death 
                taxes.--Rules similar to the rules of subparagraph (A) 
                shall apply to the table contained in section 2011(b) 
                except that the Secretary shall prescribe percentage 
                point reductions which maintain the proportionate 
                relationship (as in effect before any reduction under 
                this paragraph) between the credit under section 2011 
                and the tax rates under subsection (c).''
  (d) Effective Dates.--
          (1) Subsections (a) and (b).--The amendments made by 
        subsections (a) and (b) shall apply to estates of decedents 
        dying, and gifts made, after December 31, 2000.
          (2) Subsection (c).--The amendment made by subsection (c) 
        shall apply to estates of decedents dying, and gifts made, 
        after December 31, 2001.

   Subtitle C--Unified Credit Replaced With Unified Exemption Amount

SEC. 621. UNIFIED CREDIT AGAINST ESTATE AND GIFT TAXES REPLACED WITH 
                    UNIFIED EXEMPTION AMOUNT.

  (a) In General.--
          (1) Estate tax.--Part IV of subchapter A of chapter 11 is 
        amended by inserting after section 2051 the following new 
        section:

``SEC. 2052. EXEMPTION.

  ``(a) In general.--For purposes of the tax imposed by section 2001, 
the value of the taxable estate shall be determined by deducting from 
the value of the gross estate an amount equal to the excess (if any) 
of--
          ``(1) the exemption amount for the calendar year in which the 
        decedent died, over
          ``(2) the sum of--
                  ``(A) the aggregate amount allowed as an exemption 
                under section 2521 with respect to gifts made by the 
                decedent after December 31, 2000, and
                  ``(B) the aggregate amount of gifts made by the 
                decedent for which credit was allowed by section 2505 
                (as in effect on the day before the date of the 
                enactment of the Financial Freedom Act of 1999).
Gifts which are includible in the gross estate of the decedent shall 
not be taken into account in determining the amounts under paragraph 
(2).
  ``(b) Exemption Amount.--For purposes of subsection (a), the term 
`exemption amount' means the amount determined in accordance with the 
following table:

        ``In the case of
                                                          The exemption
          calendar year:
                                                             amount is:
                  2001...............................         $675,000 
                  2002 and 2003......................         $700,000 
                  2004...............................         $850,000 
                  2005...............................         $950,000 
                  2006 or thereafter.................     $1,000,000.''

          (2) Gift tax.--Subchapter C of chapter 12 (relating to 
        deductions) is amended by inserting before section 2522 the 
        following new section:

``SEC. 2521. EXEMPTION.

  ``(a) In General.--In computing taxable gifts for any calendar year, 
there shall be allowed as a deduction in the case of a citizen or 
resident of the United States an amount equal to the excess of--
          ``(1) the exemption amount determined under section 2052 for 
        such calendar year, over
          ``(2) the sum of--
                  ``(A) the aggregate amount allowed as an exemption 
                under this section for all preceding calendar years 
                after 2000, and
                  ``(B) the aggregate amount of gifts for which credit 
                was allowed by section 2505 (as in effect on the day 
                before the date of the enactment of the Financial 
                Freedom Act of 1999).''
  (b) Repeal of Unified Credits.--
          (1) Section 2010 (relating to unified credit against estate 
        tax) is hereby repealed.
          (2) Section 2505 (relating to unified credit against gift 
        tax) is hereby repealed.
  (c) Conforming Amendments.--
          (1)(A) Subparagraph (B) of section 2001(b)(1) is amended by 
        inserting before the comma ``reduced by the amount of described 
        in section 2052(a)(2)''.
          (B) Subsection (b) of section 2001 is amended by adding at 
        the end the following new sentence: ``For purposes of paragraph 
        (2), the amount of the tax payable under chapter 12 shall be 
        determined without regard to the credit provided by section 
        2505 (as in effect on the day before the date of the enactment 
        of the Financial Freedom Act of 1999).''
          (2) Subsection (f) of section 2011 is amended by striking ``, 
        reduced by the amount of the unified credit provided by section 
        2010''.
          (3) Subsection (a) of section 2012 is amended by striking 
        ``and the unified credit provided by section 2010''.
          (4) Subsection (b) of section 2013 is amended by inserting 
        before the period at the end of the first sentence ``and 
        increased by the exemption allowed under section 2052 or 
        2106(a)(4) (or the corresponding provisions of prior law) in 
        determining the taxable estate of the transferor for purposes 
        of the estate tax''.
          (5) Subparagraph (A) of section 2013(c)(1) is amended by 
        striking ``2010,''.
          (6) Paragraph (2) of section 2014(b) is amended by striking 
        ``2010,''.
          (7) Clause (ii) of section 2056A(b)(12)(C) is amended to read 
        as follows:
                          ``(ii) to treat any reduction in the tax 
                        imposed by paragraph (1)(A) by reason of the 
                        credit allowable under section 2010 (as in 
                        effect on the day before the date of the 
                        enactment of the Financial Freedom Act of 1999) 
                        or the exemption allowable under section 2052 
                        with respect to the decedent as such a credit 
                        or exemption (as the case may be) allowable to 
                        such surviving spouse for purposes of 
                        determining the amount of the exemption 
                        allowable under section 2521 with respect to 
                        taxable gifts made by the surviving spouse 
                        during the year in which the spouse becomes a 
                        citizen or any subsequent year,''.
          (8) Section 2102 is amended by striking subsection (c).
          (9) Subsection (a) of section 2106 is amended by adding at 
        the end the following new paragraph:
          ``(4) Exemption.--
                  ``(A) In general.--An exemption of $60,000.
                  ``(B) Residents of possessions of the United 
                States.--In the case of a decedent who is considered to 
                be a nonresident not a citizen of the United States 
                under section 2209, the exemption under this paragraph 
                shall be the greater of--
                          ``(i) $60,000, or
                          ``(ii) that proportion of $175,000 which the 
                        value of that part of the decedent's gross 
                        estate which at the time of his death is 
                        situated in the United States bears to the 
                        value of his entire gross estate wherever 
                        situated.
                  ``(C) Special rules.--
                          ``(i) Coordination with treaties.--To the 
                        extent required under any treaty obligation of 
                        the United States, the exemption allowed under 
                        this paragraph shall be equal to the amount 
                        which bears the same ratio to the exemption 
                        amount under section 2052 (for the calendar 
                        year in which the decedent died) as the value 
                        of the part of the decedent's gross estate 
                        which at the time of his death is situated in 
                        the United States bears to the value of his 
                        entire gross estate wherever situated. For 
                        purposes of the preceding sentence, property 
                        shall not be treated as situated in the United 
                        States if such property is exempt from the tax 
                        imposed by this subchapter under any treaty 
                        obligation of the United States.
                          ``(ii) Coordination with gift tax exemption 
                        and unified credit.--If an exemption has been 
                        allowed under section 2521 (or a credit has 
                        been allowed under section 2505 as in effect on 
                        the day before the date of the enactment of the 
                        Financial Freedom Act of 1999) with respect to 
                        any gift made by the decedent, each dollar 
                        amount contained in subparagraph (A) or (B) or 
                        the exemption amount applicable under clause 
                        (i) of this subparagraph (whichever applies) 
                        shall be reduced by the exemption so allowed 
                        under 2521 (or, in the case of such a credit, 
                        by the amount of the gift for which the credit 
                        was so allowed).''
          (10) Subsection (c) of section 2107 is amended--
                  (A) by striking paragraph (1) and by redesignating 
                paragraphs (2) and (3) as paragraphs (1) and (2), 
                respectively, and
                  (B) by striking the second sentence of paragraph (2) 
                (as so redesignated).
          (11) Section 2206 is amended by striking ``the taxable 
        estate'' in the first sentence and inserting ``the sum of the 
        taxable estate and the amount of the exemption allowed under 
        section 2052 or 2106(a)(4) in computing the taxable estate''.
          (12) Section 2207 is amended by striking ``the taxable 
        estate'' in the first sentence and inserting ``the sum of the 
        taxable estate and the amount of the exemption allowed under 
        section 2052 or 2106(a)(4) in computing the taxable estate''.
          (13) Subparagraph (B) of section 2207B(a)(1) is amended to 
        read as follows:
                  ``(B) the sum of the taxable estate and the amount of 
                the exemption allowed under section 2052 or 2106(a)(4) 
                in computing the taxable estate.''
          (14) Subsection (a) of section 2503 is amended by striking 
        ``section 2522'' and inserting ``section 2521''.
          (15) Paragraph (1) of section 6018(a) is amended by striking 
        ``$600,000'' and inserting ``the exemption amount under section 
        2052 for the calendar year which includes the date of death''.
          (16) Subparagraph (A) of section 6601(j)(2) is amended to 
        read as follows:
                  ``(A) the amount of the tax which would be imposed by 
                chapter 11 on an amount of taxable estate equal to the 
                excess of $1,000,000 over the exemption amount 
                allowable under section 2052, or''.
          (17) The table of sections for part II of subchapter A of 
        chapter 11 is amended by striking the item relating to section 
        2010.
          (18) The table of sections for subchapter A of chapter 12 is 
        amended by striking the item relating to section 2505.
  (d) Effective Date.--The amendments made by this section--
          (1) insofar as they relate to the tax imposed by chapter 11 
        of the Internal Revenue Code of 1986, shall apply to estates of 
        decedents dying after December 31, 2000, and
          (2) insofar as they relate to the tax imposed by chapter 12 
        of such Code, shall apply to gifts made after December 31, 
        2000.

     Subtitle D--Modifications of Generation-Skipping Transfer Tax

SEC. 631. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME TRANSFERS TO 
                    TRUSTS; RETROACTIVE ALLOCATIONS.

  (a) In General.--Section 2632 (relating to special rules for 
allocation of GST exemption) is amended by redesignating subsection (c) 
as subsection (e) and by inserting after subsection (b) the following 
new subsections:
  ``(c) Deemed Allocation to Certain Lifetime Transfers to GST 
Trusts.--
          ``(1) In general.--If any individual makes an indirect skip 
        during such individual's lifetime, any unused portion of such 
        individual's GST exemption shall be allocated to the property 
        transferred to the extent necessary to make the inclusion ratio 
        for such property zero. If the amount of the indirect skip 
        exceeds such unused portion, the entire unused portion shall be 
        allocated to the property transferred.
          ``(2) Unused portion.--For purposes of paragraph (1), the 
        unused portion of an individual's GST exemption is that portion 
        of such exemption which has not previously been--
                  ``(A) allocated by such individual,
                  ``(B) treated as allocated under subsection (b) with 
                respect to a direct skip occurring during or before the 
                calendar year in which the indirect skip is made, or
                  ``(C) treated as allocated under paragraph (1) with 
                respect to a prior indirect skip.
          ``(3) Definitions.--
                  ``(A) Indirect skip.--For purposes of this 
                subsection, the term `indirect skip' means any transfer 
                of property (other than a direct skip) subject to the 
                tax imposed by chapter 12 made to a GST trust.
                  ``(B) GST trust.--The term `GST trust' means a trust 
                that could have a generation-skipping transfer with 
                respect to the transferor unless--
                          ``(i) the trust instrument provides that more 
                        than 25 percent of the trust corpus must be 
                        distributed to or may be withdrawn by 1 or more 
                        individuals who are non-skip persons--
                                  ``(I) before the date that the 
                                individual attains age 46,
                                  ``(II) on or before 1 or more dates 
                                specified in the trust instrument that 
                                will occur before the date that such 
                                individual attains age 46, or
                                  ``(III) upon the occurrence of an 
                                event that, in accordance with 
                                regulations prescribed by the 
                                Secretary, may reasonably be expected 
                                to occur before the date that such 
                                individual attains age 46;
                          ``(ii) the trust instrument provides that 
                        more than 25 percent of the trust corpus must 
                        be distributed to or may be withdrawn by 1 or 
                        more individuals who are non-skip persons and 
                        who are living on the date of death of another 
                        person identified in the instrument (by name or 
                        by class) who is more than 10 years older than 
                        such individuals;
                          ``(iii) the trust instrument provides that, 
                        if 1 or more individuals who are non-skip 
                        persons die on or before a date or event 
                        described in clause (i) or (ii), more than 25 
                        percent of the trust corpus either must be 
                        distributed to the estate or estates of 1 or 
                        more of such individuals or is subject to a 
                        general power of appointment exercisable by 1 
                        or more of such individuals;
                          ``(iv) the trust is a trust any portion of 
                        which would be included in the gross estate of 
                        a non-skip person (other than the transferor) 
                        if such person died immediately after the 
                        transfer;
                          ``(v) the trust is a charitable lead annuity 
                        trust (within the meaning of section 
                        2642(e)(3)(A)) or a charitable remainder 
                        annuity trust or a charitable remainder 
                        unitrust (within the meaning of section 
                        664(d)); or
                          ``(vi) the trust is a trust with respect to 
                        which a deduction was allowed under section 
                        2522 for the amount of an interest in the form 
                        of the right to receive annual payments of a 
                        fixed percentage of the net fair market value 
                        of the trust property (determined yearly) and 
                        which is required to pay principal to a non-
                        skip person if such person is alive when the 
                        yearly payments for which the deduction was 
                        allowed terminate.
                For purposes of this subparagraph, the value of 
                transferred property shall not be considered to be 
                includible in the gross estate of a non-skip person or 
                subject to a right of withdrawal by reason of such 
                person holding a right to withdraw so much of such 
                property as does not exceed the amount referred to in 
                section 2503(b) with respect to any transferor, and it 
                shall be assumed that powers of appointment held by 
                non-skip persons will not be exercised.
          ``(4) Automatic allocations to certain gst trusts.--For 
        purposes of this subsection, an indirect skip to which section 
        2642(f) applies shall be deemed to have been made only at the 
        close of the estate tax inclusion period. The fair market value 
        of such transfer shall be the fair market value of the trust 
        property at the close of the estate tax inclusion period.
          ``(5) Applicability and effect.--
                  ``(A) In general.--An individual--
                          ``(i) may elect to have this subsection not 
                        apply to--
                                  ``(I) an indirect skip, or
                                  ``(II) any or all transfers made by 
                                such individual to a particular trust, 
                                and
                          ``(ii) may elect to treat any trust as a GST 
                        trust for purposes of this subsection with 
                        respect to any or all transfers made by such 
                        individual to such trust.
                  ``(B) Elections.--
                          ``(i) Elections with respect to indirect 
                        skips.--An election under subparagraph 
                        (A)(i)(I) shall be deemed to be timely if filed 
                        on a timely filed gift tax return for the 
                        calendar year in which the transfer was made or 
                        deemed to have been made pursuant to paragraph 
                        (4) or on such later date or dates as may be 
                        prescribed by the Secretary.
                          ``(ii) Other elections.--An election under 
                        clause (i)(II) or (ii) of subparagraph (A) may 
                        be made on a timely filed gift tax return for 
                        the calendar year for which the election is to 
                        become effective.
  ``(d) Retroactive Allocations.--
          ``(1) In general.--If--
                  ``(A) a non-skip person has an interest or a future 
                interest in a trust to which any transfer has been 
                made,
                  ``(B) such person--
                          ``(i) is a lineal descendant of a grandparent 
                        of the transferor or of a grandparent of the 
                        transferor's spouse or former spouse, and
                          ``(ii) is assigned to a generation below the 
                        generation assignment of the transferor, and
                  ``(C) such person predeceases the transferor,
        then the transferor may make an allocation of any of such 
        transferor's unused GST exemption to any previous transfer or 
        transfers to the trust on a chronological basis.
          ``(2) Special rules.--If the allocation under paragraph (1) 
        by the transferor is made on a gift tax return filed on or 
        before the date prescribed by section 6075(b) for gifts made 
        within the calendar year within which the non-skip person's 
        death occurred--
                  ``(A) the value of such transfer or transfers for 
                purposes of section 2642(a) shall be determined as if 
                such allocation had been made on a timely filed gift 
                tax return for each calendar year within which each 
                transfer was made,
                  ``(B) such allocation shall be effective immediately 
                before such death, and
                  ``(C) the amount of the transferor's unused GST 
                exemption available to be allocated shall be determined 
                immediately before such death.
          ``(3) Future interest.--For purposes of this subsection, a 
        person has a future interest in a trust if the trust may permit 
        income or corpus to be paid to such person on a date or dates 
        in the future.''.
  (b) Conforming Amendment.--Paragraph (2) of section 2632(b) is 
amended by striking ``with respect to a direct skip'' and inserting 
``or subsection (c)(1)''.
  (c) Effective Dates.--
          (1) Deemed allocation.--Section 2632(c) of the Internal 
        Revenue Code of 1986 (as added by subsection (a)), and the 
        amendment made by subsection (b), shall apply to transfers 
        subject to chapter 11 or 12 made after December 31, 1999, and 
        to estate tax inclusion periods ending after December 31, 1999.
          (2) Retroactive allocations.--Section 2632(d) of the Internal 
        Revenue Code of 1986 (as added by subsection (a)) shall apply 
        to deaths of non-skip persons occurring after the date of the 
        enactment of this Act.

SEC. 632. SEVERING OF TRUSTS.

  (a) In General.--Subsection (a) of section 2642 (relating to 
inclusion ratio) is amended by adding at the end the following new 
paragraph:
          ``(3) Severing of trusts.--
                  ``(A) In general.--If a trust is severed in a 
                qualified severance, the trusts resulting from such 
                severance shall be treated as separate trusts 
                thereafter for purposes of this chapter.
                  ``(B) Qualified severance.--For purposes of 
                subparagraph (A)--
                          ``(i) In general.--The term `qualified 
                        severance' means the division of a single trust 
                        and the creation (by any means available under 
                        the governing instrument or under local law) of 
                        2 or more trusts if--
                                  ``(I) the single trust was divided on 
                                a fractional basis, and
                                  ``(II) the terms of the new trusts, 
                                in the aggregate, provide for the same 
                                succession of interests of 
                                beneficiaries as are provided in the 
                                original trust.
                          ``(ii) Trusts with inclusion ratio greater 
                        than zero.--If a trust has an inclusion ratio 
                        of greater than zero and less than 1, a 
                        severance is a qualified severance only if the 
                        single trust is divided into 2 trusts, one of 
                        which receives a fractional share of the total 
                        value of all trust assets equal to the 
                        applicable fraction of the single trust 
                        immediately before the severance. In such case, 
                        the trust receiving such fractional share shall 
                        have an inclusion ratio of zero and the other 
                        trust shall have an inclusion ratio of 1.
                          ``(iii) Regulations.--The term `qualified 
                        severance' includes any other severance 
                        permitted under regulations prescribed by the 
                        Secretary.
                  ``(C) Timing and manner of severances.--A severance 
                pursuant to this paragraph may be made at any time. The 
                Secretary shall prescribe by forms or regulations the 
                manner in which the qualified severance shall be 
                reported to the Secretary.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to severances after the date of the enactment of this Act.

SEC. 633. MODIFICATION OF CERTAIN VALUATION RULES.

  (a) Gifts for Which Gift Tax Return Filed or Deemed Allocation 
Made.--Paragraph (1) of section 2642(b) (relating to valuation rules, 
etc.) is amended to read as follows:
          ``(1) Gifts for which gift tax return filed or deemed 
        allocation made.--If the allocation of the GST exemption to any 
        transfers of property is made on a gift tax return filed on or 
        before the date prescribed by section 6075(b) for such transfer 
        or is deemed to be made under section 2632 (b)(1) or (c)(1)--
                  ``(A) the value of such property for purposes of 
                subsection (a) shall be its value as finally determined 
                for purposes of chapter 12 (within the meaning of 
                section 2001(f)(2)), or, in the case of an allocation 
                deemed to have been made at the close of an estate tax 
                inclusion period, its value at the time of the close of 
                the estate tax inclusion period, and
                  ``(B) such allocation shall be effective on and after 
                the date of such transfer, or, in the case of an 
                allocation deemed to have been made at the close of an 
                estate tax inclusion period, on and after the close of 
                such estate tax inclusion period.''.
  (b) Transfers at Death.--Subparagraph (A) of section 2642(b)(2) is 
amended to read as follows:
                  ``(A) Transfers at death.--If property is transferred 
                as a result of the death of the transferor, the value 
                of such property for purposes of subsection (a) shall 
                be its value as finally determined for purposes of 
                chapter 11; except that, if the requirements prescribed 
                by the Secretary respecting allocation of post-death 
                changes in value are not met, the value of such 
                property shall be determined as of the time of the 
                distribution concerned.''.
  (c) Effective Date.--The amendments made by this section shall take 
effect as if included in the amendments made by section 1431 of the Tax 
Reform Act of 1986.

SEC. 634. RELIEF PROVISIONS.

  (a) In General.--Section 2642 is amended by adding at the end the 
following new subsection:
  ``(g) Relief Provisions.--
          ``(1) Relief for late elections.--
                  ``(A) In general.--The Secretary shall by regulation 
                prescribe such circumstances and procedures under which 
                extensions of time will be granted to make--
                          ``(i) an allocation of GST exemption 
                        described in paragraph (1) or (2) of subsection 
                        (b), and
                          ``(ii) an election under subsection (b)(3) or 
                        (c)(5) of section 2632.
                Such regulations shall include procedures for 
                requesting comparable relief with respect to transfers 
                made before the date of enactment of this paragraph.
                  ``(B) Basis for determinations.--In determining 
                whether to grant relief under this paragraph, the 
                Secretary shall take into account all relevant 
                circumstances, including evidence of intent contained 
                in the trust instrument or instrument of transfer and 
                such other factors as the Secretary deems relevant. For 
                purposes of determining whether to grant relief under 
                this paragraph, the time for making the allocation (or 
                election) shall be treated as if not expressly 
                prescribed by statute.
          ``(2) Substantial compliance.--An allocation of GST exemption 
        under section 2632 that demonstrates an intent to have the 
        lowest possible inclusion ratio with respect to a transfer or a 
        trust shall be deemed to be an allocation of so much of the 
        transferor's unused GST exemption as produces the lowest 
        possible inclusion ratio. In determining whether there has been 
        substantial compliance, all relevant circumstances shall be 
        taken into account, including evidence of intent contained in 
        the trust instrument or instrument of transfer and such other 
        factors as the Secretary deems relevant.''.
  (b) Effective Dates.--
          (1) Relief for late elections.--Section 2642(g)(1) of the 
        Internal Revenue Code of 1986 (as added by subsection (a)) 
        shall apply to requests pending on, or filed after, the date of 
        the enactment of this Act.
          (2) Substantial compliance.--Section 2642(g)(2) of such Code 
        (as so added) shall take effect on the date of the enactment of 
        this Act and shall apply to allocations made prior to such date 
        for purposes of determining the tax consequences of generation-
        skipping transfers with respect to which the period of time for 
        filing claims for refund has not expired. No negative 
        implication is intended with respect to the availability of 
        relief for late elections or the application of a rule of 
        substantial compliance prior to the enactment of this 
        amendment.

    TITLE VII--TAX RELIEF FOR DISTRESSED COMMUNITIES AND INDUSTRIES

           Subtitle A--American Community Renewal Act of 1999

SEC. 701. SHORT TITLE.

  This subtitle may be cited as the ``American Community Renewal Act of 
1999''.

SEC. 702. 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) all shall be chosen from nominated 
                        areas which are empowerment zones or enterprise 
                        communities (and are otherwise eligible for 
                        designation under this section); and
                          ``(ii) 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, 2007,
                  ``(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 nominatedareas 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, 2000, and before January 1, 
                        2008, 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 capital or 
        profits interest in a domestic partnership if--
                  ``(A) such interest is acquired by the taxpayer after 
                December 31, 2000, and before January 1, 2008;
                  ``(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, 2000, and before 
                        January 1, 2008;
                          ``(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, 2008; 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 iras.--No deduction shall be allowed 
        under this section for any taxable year to any person by reason 
        of a payment to an account for the benefit of a qualified 
        individual if any amount is paid for such taxable year 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 section 72(t)(8)).
          ``(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 trade or business other than any 
                trade or business--
                          ``(i) which consists of the operation of any 
                        facility described in section 144(c)(6)(B), or
                          ``(ii) which contravenes 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) Application of Section.--This section shall apply to amounts 
paid to a family development account for any taxable year beginning 
after December 31, 2000, and before January 1, 2008.

``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 renewal 
                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, 2007.

``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, 2007.

                    ``PART IV--ADDITIONAL INCENTIVES

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

``SEC. 1400K. COMMERCIAL REVITALIZATION DEDUCTION.

  ``(a) General Rule.--At the election of the taxpayer, either--
          ``(1) one-half of any qualified revitalization expenditures 
        chargeable to capital account with respect to any qualified 
        revitalization building shall be allowable as a deduction for 
        the taxable year in which the building is placed in service, or
          ``(2) a deduction for all such expenditures shall be 
        allowable ratably over the 120-month period beginning with the 
        month in which the building is placed in service.
The deduction provided by this section with respect to such expenditure 
shall be in lieu of any depreciation deduction otherwise allowable on 
account of such expenditure.
  ``(b) 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, 2000;
                  ``(B) a commercial revitalization deduction amount is 
                allocated to the building under subsection (d); and
                  ``(C) depreciation (or amortization in lieu of 
                depreciation) is allowable with respect to the building 
                (without regard to this section).
          ``(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 (without regard to 
                        this section) and which is--
                                  ``(I) nonresidential real property; 
                                or
                                  ``(II) an addition or improvement to 
                                property described in subclause (I);
                          ``(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; and
                          ``(iii) for land (including land which is 
                        functionally related to such property and 
                        subordinate thereto).
                  ``(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 deduction under this section for all 
                        preceding taxable years.
                  ``(C) Certain expenditures not included.--The term 
                `qualified revitalization expenditure' does not 
                include--
                          ``(i) 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.
                          ``(ii) Credits.--Any expenditure which the 
                        taxpayer may take into account in computing any 
                        credit allowable under this title unless the 
                        taxpayer elects to take the expenditure into 
                        account only for purposes of this section.
  ``(c) When Expenditures Taken Into Account.--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.
  ``(d) Limitation on Aggregate Deductions Allowable With Respect to 
Buildings Located in a State.--
          ``(1) In general.--The amount of the deduction determined 
        under this section for any taxable year with respect to any 
        building shall not exceed the commercial revitalization 
        deduction amount (in the case of an amount determined under 
        subsection (a)(2), the present value of such amount as 
        determined under the rules of section 42(b)(2)(C) by 
        substituting `100 percent' for `72 percent' in clause (ii) 
        thereof) allocated to such building under this subsection by 
        the commercial revitalization 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 deduction amount for 
        agencies.--
                  ``(A) In general.--The aggregate commercial 
                revitalization deduction amount which a commercial 
                revitalization agency may allocate for any calendar 
                year is the amount of the State commercial 
                revitalization deduction ceiling determined under this 
                paragraph for such calendar year for such agency.
                  ``(B) State commercial revitalization deduction 
                ceiling.--The State commercial revitalization deduction 
                ceiling applicable to any State--
                          ``(i) for each calendar year after 2000 and 
                        before 2008 is $6,000,000 for each renewal 
                        community in the State; and
                          ``(ii) zero for each calendar year 
                        thereafter.
                  ``(C) Commercial revitalization agency.--For purposes 
                of this section, the term `commercial revitalization 
                agency' means any agency authorized by a State to carry 
                out this section.
  ``(e) Responsibilities of Commercial Revitalization Agencies.--
          ``(1) Plans for allocation.--Notwithstanding any other 
        provision of this section, the commercial revitalization 
        deduction 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 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 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.
  ``(f) Regulations.--For purposes of this section, the Secretary 
shall, by regulations, provide for the application of rules similar to 
the rules of section 49 and subsections (a) and (b) of section 50.
  ``(g) Termination.--This section shall not apply to any building 
placed in service after December 31, 2007.

``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, 2000, and before January 1, 2008; 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. 703. 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) with 
                respect to expenditures paid or incurred after December 
                31, 2000.''.
  (b) Extension of Termination Date for Renewal Communities.--
Subsection (h) of section 198 is amended by inserting before the period 
``(December 31, 2007, in the case of a renewal community, as defined in 
section 1400E).''.

SEC. 704. 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''.
          (4) Effective date.--The amendments made by this subsection 
        shall apply to individuals who begin work for the employer 
        after December 31, 2000.

SEC. 705. 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 (19) the following new paragraph:
          ``(20) Family development accounts.--The deduction allowed by 
        section 1400H(a)(1).''.
  (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 family development accounts, the term `excess 
contributions' means the sum of--
          ``(1) the excess (if any) of--
                  ``(A) the amount contributed for the taxable year to 
                the accounts (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 accounts 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 accounts 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 
Deduction.--
          (1) Section 172 is amended by redesignating subsection (j) as 
        subsection (k) and by inserting after subsection (i) the 
        following new subsection:
  ``(j) No Carryback of Section 1400k Deduction Before Date of 
Enactment.--No portion of the net operating loss for any taxable year 
which is attributable to any commercial revitalization deduction 
determined under section 1400K may be carried back to a taxable year 
ending before the date of the enactment of section 1400K.''.
          (2) 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.
          (3) Subparagraph (C) of section 469(i)(3) is amended--
                  (A) by inserting ``or section 1400K'' after ``section 
                42''; and
                  (B) by inserting ``and commercial revitalization 
                deduction'' after ``credit'' in the heading.
  (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. 706. 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.

                     Subtitle B--Farming Incentive

SEC. 711. PRODUCTION FLEXIBILITY CONTRACT PAYMENTS.

  Any option to accelerate the receipt of any payment under a 
production flexibility contract which is payable under the Federal 
Agriculture Improvement and Reform Act of 1996 (7 U.S.C. 7200 et seq.), 
as in effect on the date of the enactment of this Act, shall be 
disregarded in determining the taxable year for which such payment is 
properly includible in gross income for purposes of the Internal 
Revenue Code of 1986.

                   Subtitle C--Oil and Gas Incentives

SEC. 721. 5-YEAR NET OPERATING LOSS CARRYBACK FOR LOSSES ATTRIBUTABLE 
                    TO OPERATING MINERAL INTERESTS OF INDEPENDENT OIL 
                    AND GAS PRODUCERS.

  (a) In General.--Paragraph (1) of section 172(b) (relating to years 
to which loss may be carried) is amended by adding at the end the 
following new subparagraph:
                  ``(H) Losses on operating mineral interests of 
                independent oil and gas producers.--In the case of a 
                taxpayer--
                          ``(i) which has an eligible oil and gas loss 
                        (as defined in subsection (j)) for a taxable 
                        year, and
                          ``(ii) which is not an integrated oil company 
                        (as defined in section 291(b)(4)),
                such eligible oil and gas loss shall be a net operating 
                loss carryback to each of the 5 taxable years preceding 
                the taxable year of such loss.''
  (b) Eligible Oil and Gas Loss.--Section 172 is amended by 
redesignating subsection (j) as subsection (k) and by inserting after 
subsection (i) the following new subsection:
  ``(j) Eligible Oil and Gas Loss.--For purposes of this section--
          ``(1) In general.--The term `eligible oil and gas 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 operating mineral interests (as defined 
                in section 614(d)) in oil and gas wells 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), an eligible oil and gas 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)(H) from any loss year may elect to have 
        the carryback period with respect to such loss year determined 
        without regard to subsection (b)(1)(H).''
  (c) Effective Date.--The amendments made by this section shall apply 
to net operating losses for taxable years beginning after December 31, 
1998.

SEC. 722. DEDUCTION FOR DELAY RENTAL PAYMENTS.

  (a) In General.--Section 263 (relating to capital expenditures) is 
amended by adding after subsection (i) the following new subsection:
  ``(j) Delay Rental Payments for Domestic Oil and Gas Wells.--
          ``(1) In general.--Notwithstanding subsection (a), a taxpayer 
        may elect to treat delay rental payments incurred in connection 
        with the development of oil or gas within the United States (as 
        defined in section 638) as payments which are not chargeable to 
        capital account. Any payments so treated shall be allowed as a 
        deduction in the taxable year in which paid or incurred.
          ``(2) Delay rental payments.--For purposes of paragraph (1), 
        the term `delay rental payment' means an amount paid for the 
        privilege of deferring development of an oil or gas well.''
  (b) Conforming Amendment.--Section 263A(c)(3) is amended by inserting 
``263(j),'' after ``263(i),''.
  (c) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred in taxable years beginning after December 
31, 1999.

SEC. 723. ELECTION TO EXPENSE GEOLOGICAL AND GEOPHYSICAL EXPENDITURES.

  (a) In General.--Section 263 (relating to capital expenditures) is 
amended by adding after subsection (j) the following new subsection:
  ``(k) Geological and Geophysical Expenditures for Domestic Oil and 
Gas Wells.--Notwithstanding subsection (a), a taxpayer may elect to 
treat geological and geophysical expenses incurred in connection with 
the exploration for, or development of, oil or gas within the United 
States (as defined in section 638) as expenses which are not chargeable 
to capital account. Any expenses so treated shall be allowed as a 
deduction in the taxable year in which paid or incurred.''
  (b) Conforming Amendment.--Section 263A(c)(3) is amended by inserting 
``263(k),'' after ``263(j),''.
  (c) Effective Date.--The amendments made by this section shall apply 
to costs paid or incurred in taxable years beginning after December 31, 
1999.

SEC. 724. TEMPORARY SUSPENSION OF LIMITATION BASED ON 65 PERCENT OF 
                    TAXABLE INCOME.

  (a) In General.--Subsection (d) of section 613A (relating to 
limitation on percentage depletion in case of oil and gas wells) is 
amended by adding at the end the following new paragraph:
          ``(6) Temporary suspension of taxable income limit.--
        Paragraph (1) shall not apply to taxable years beginning after 
        December 31, 1998, and before January 1, 2005, including with 
        respect to amounts carried under the second sentence of 
        paragraph (1) to such taxable years.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1998.

SEC. 725. DETERMINATION OF SMALL REFINER EXCEPTION TO OIL DEPLETION 
                    DEDUCTION.

  (a) In General.--Paragraph (4) of section 613A(d) (relating to 
certain refiners excluded) is amended to read as follows:
          ``(4) Certain refiners excluded.--If the taxpayer or a 
        related person engages in the refining of crude oil, subsection 
        (c) shall not apply to the taxpayer for a taxable year if the 
        average daily refinery runs of the taxpayer and the related 
        person for the taxable year exceed 50,000 barrels. For purposes 
        of this paragraph, the average daily refinery runs for any 
        taxable year shall be determined by dividing the aggregate 
        refinery runs for the taxable year by the number of days in the 
        taxable year.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1999.

                     Subtitle D--Timber Incentives

SEC. 731. TEMPORARY SUSPENSION OF MAXIMUM AMOUNT OF AMORTIZABLE 
                    REFORESTATION EXPENDITURES.

  (a) Increase in Dollar Limitation.--Paragraph (1) of section 194(b) 
(relating to amortization of reforestation expenditures) is amended by 
striking ``$10,000 ($5,000'' and inserting ``$25,000 ($12,500''.
  (b) Temporary Suspension of Increased Dollar Limitation.--Subsection 
(b) of section 194(b) (relating to amortization of reforestation 
expenditures) is amended by adding at the end the following new 
paragraph:
          ``(5) Suspension of dollar limitation.--Paragraph (1) shall 
        not apply to taxable years beginning after December 31, 1999, 
        and before January 1, 2004.
  (c) Conforming Amendment.--Paragraph (1) of section 48(b) is amended 
by striking ``section 194(b)(1)'' and inserting ``section 194(b)(1) and 
without regard to section 194(b)(5)''.''.
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1998.

SEC. 732. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO APPLY TO 
                    OUTRIGHT SALES BY LAND OWNER.

  (a) In General.--Subsection (b) of section 631 (relating to disposal 
of timber with a retained economic interest) is amended--
          (1) by inserting ``and Outright Sales of Timber'' after 
        Economic Interest'' in the subsection heading, and
          (2) by adding before the last sentence the following new 
        sentence: ``The requirement in the first sentence of this 
        subsection to retain an economic interest in timber shall not 
        apply to an outright sale of such timber by the owner thereof 
        if such owner owned the land (at the time of such sale) from 
        which the timber is cut.''
  (b) Effective Date.--The amendment made by this section shall apply 
to sales after the date of the enactment of this Act.

                  Subtitle E--Steel Industry Incentive

SEC. 741. MINIMUM TAX RELIEF FOR STEEL INDUSTRY.

  (a) In General.--Subsection (c) of section 53 (as amended by section 
302) is amended by adding at the end the following new paragraph:
          ``(4) Steel companies.--
                  ``(A) In general.--In the case of a corporation 
                engaged in the trade or business of manufacturing steel 
                in the United States for sale to customers, in lieu of 
                applying paragraph (2), the limitation under paragraph 
                (1) for any taxable year beginning after December 31, 
                1998, shall be increased (subject to the rule of the 
                last sentence of paragraph (2)) by 90 percent of the 
                tentative minimum tax.
                  ``(B) Limitation.--The increase in the credit allowed 
                by this section by reason of this paragraph for any 
                taxable year shall not exceed the increase in the 
                credit which would be so allowed if the trade or 
                business of such corporation of manufacturing steel in 
                the United States for sale to customers were a separate 
                taxpayer.
                  ``(C) Regulations.--The Secretary shall prescribe 
                regulations to prevent the abuse of the purposes of 
                this paragraph, including regulations to prevent the 
                benefits of this paragraph from becoming available to 
                any other corporation through any reorganization or 
                other acquisition.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1998.

                TITLE VIII--RELIEF FOR SMALL BUSINESSES

SEC. 801. DEDUCTION FOR 100 PERCENT OF HEALTH INSURANCE COSTS OF SELF-
                    EMPLOYED INDIVIDUALS.

  (a) In General.--Paragraph (1) of section 162(l) 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, 1999.

 SEC. 802. INCREASE IN EXPENSE TREATMENT FOR SMALL BUSINESSES.

  (a) In General.--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 $30,000.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 803. REPEAL OF FEDERAL UNEMPLOYMENT SURTAX.

  (a) In General.--Section 3301 (relating to rate of Federal 
unemployment tax) is amended--
          (1) by striking ``2007'' and inserting ``2004'', and
          (2) by striking ``2008'' and inserting ``2005''.
  (b) Effective Date.--The amendment made by this section shall apply 
to calendar years beginning after the date of the enactment of this 
Act.

SEC. 804. RESTORATION OF 80 PERCENT DEDUCTION FOR MEAL EXPENSES.

  (a) In General.--Paragraph (1) of section 274(n) (relating to only 50 
percent of meal and entertainment expenses allowed as deduction) is 
amended by striking ``50 percent'' in the text and inserting ``the 
allowable percentage''.
  (b) Allowable Percentages.--Subsection (n) of section 274 is amended 
by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), 
respectively, and by inserting after paragraph (2) the following new 
paragraph:
          ``(2) Allowable percentage.--For purposes of paragraph (1), 
        the allowable percentage is--
                  ``(A) in the case of amounts for items described in 
                paragraph (1)(B), 50 percent, and
                  ``(B) in the case of expenses for food or beverages, 
                the percentage determined in accordance with the 
                following table:

                ``For taxable years beginning
                                                          The allowable
                  in calendar year--
                                                        percentage is--
                  2000 through 2004........................        50  
                  2005.....................................        55  
                  2006.....................................        60  
                  2007.....................................        65  
                  2008.....................................        70  
                  2009.....................................        75  
                  2010 and thereafter......................     80.''  

  (b) Conforming Amendments.--
          (1) The heading for subsection (n) of section 274 is amended 
        by striking ``50 Percent'' and inserting ``Limited 
        Percentages''.
          (2) Subparagraph (A) of section 274(n)(4), as redesignated by 
        subsection (a), is amended by striking ``50 percent'' and 
        inserting ``the allowable percentage''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1999.

                   TITLE IX--INTERNATIONAL TAX RELIEF

SEC. 901. INTEREST ALLOCATION RULES.

  (a) Election To Allocate Interest on a Worldwide Basis.--Subsection 
(e) of section 864 (relating to rules for allocating interest, etc.) is 
amended by redesignating paragraphs (6) and (7) as paragraphs (7) and 
(8), respectively, and by inserting after paragraph (5) the following 
new paragraph:
          ``(6) Election to allocate interest on a worldwide basis.--
                  ``(A) In general.--Except as provided in this 
                paragraph, this subsection shall be applied by treating 
                each worldwide affiliated group for which an election 
                under this paragraph is in effect as an affiliated 
                group solely for purposes of allocating and 
                apportioning interest expense of domestic corporations 
                which are members of such group.
                  ``(B) Worldwide affiliated group.--For purposes of 
                this paragraph, the term `worldwide affiliated group' 
                means the group of corporations which consists of--
                          ``(i) all corporations in an affiliated group 
                        (as defined in paragraph (5)), and
                          ``(ii) all foreign corporations (other than a 
                        FSC, as defined in section 922(a)) with respect 
                        to which corporations described in clause (i) 
                        own stock meeting the ownership requirements of 
                        section 957(a) (without regard to stock 
                        considered as owned under section 958(b)).
                  ``(C) Allocation.--
                          ``(i) In general.--For purposes of paragraph 
                        (1), only the applicable percentage of the 
                        interest expense and assets of a foreign 
                        corporation described in subparagraph (B)(ii) 
                        shall be taken into account.
                          ``(ii) Applicable percentage.--For purposes 
                        of this paragraph, the term `applicable 
                        percentage' means, with respect to any foreign 
                        corporation, the percentage equal to the ratio 
                        which the value of the stock in such 
                        corporation taken into account under 
                        subparagraph (B)(ii) bears to the aggregate 
                        value of all stock in such corporation.
                  ``(D) Treatment of foreign interest expense.--
                Interest expense of domestic corporations which are 
                members of an electing worldwide affiliated group which 
                is allocated to foreign source income under this 
                subsection shall be reduced (but not below zero) by the 
                applicable percentage of the interest expense incurred 
                by any foreign corporation in the electing worldwide 
                affiliated group to the extent such interest expense of 
                such foreign corporation would have been allocated and 
                apportioned to foreign source income of such foreign 
                corporation if this subsection were applied to a group 
                consisting of all the foreign corporations in such 
                affiliated group.
                  ``(E) Election.--An election under this paragraph 
                with respect to any worldwide affiliated group may be 
                made only by the common parent of the affiliated group 
                referred to in subparagraph (B)(i) and may be made only 
                for the first taxable year beginning after December 31, 
                2001, in which a worldwide affiliated group exists 
                which includes such affiliated group and at least 1 
                corporation described in subparagraph (B)(ii). Such an 
                election, once made, shall apply to such parent and all 
                other corporations which are included in such worldwide 
                affiliated group for such taxable year and all 
                subsequent years unless revoked with the consent of the 
                Secretary.''.
  (b) Election to Allocate Interest Within Financial Institution Groups 
and Subsidiary Groups.--Section 864 is amended by redesignating 
subsection (f) as subsection (g) and by inserting after subsection (e) 
the following new subsection:
  ``(f) Election To Apply Subsection (e) on Basis of Financial 
Institution Group and Subsidiary Groups.--
          ``(1) In general.--Subsection (e) shall be applied--
                  ``(A) as if the electing financial institution group 
                were a separate affiliated group, and
                  ``(B) for purposes of allocating interest expense 
                with respect to qualified indebtedness of members of an 
                electing subsidiary group, as if each electing 
                subsidiary group were a separate affiliated group.
        Subsection (e) shall apply to any such electing group in the 
        same manner as subsection (e) applies to the pre-election 
        affiliated group of which such electing group is a part.
          ``(2) Electing financial institution group.--For purposes of 
        this subsection--
                  ``(A) In general.--The term `electing financial 
                institution group' means any group of corporations if--
                          ``(i) such group consists only of all of the 
                        financial corporations in the pre-election 
                        affiliated group, and
                          ``(ii) an election under this paragraph is in 
                        effect for such group of corporations.
                  ``(B) Financial corporation.--The term `financial 
                corporation' means any corporation if at least 80 
                percent of its gross income is income described in 
                section 904(d)(2)(C)(ii) and the regulations 
                thereunder. To the extent provided in regulations 
                prescribed by the Secretary, such term includes a 
bankholding company (within the meaning of section 2(a) of the Bank 
Holding Company Act of 1956).
                  ``(C) Effect of certain transactions.--Rules similar 
                to the rules of paragraph (3)(D) shall apply to 
                transactions between any member of the electing 
                financial institution group and any member of the pre-
                election affiliated group (other than a member of the 
                electing financial institution group).
                  ``(D) Election.--An election under this paragraph 
                with respect to any financial institution group may be 
                made only by the common parent of the pre-election 
                affiliated group. Such an election, once made, shall 
                apply only to the taxable year for which made.
          ``(3) Electing subsidiary groups.--
                  ``(A) In general.--The term `electing subsidiary 
                group' means any group of corporations if--
                          ``(i) such group consists only of 
                        corporations in the pre-election affiliated 
                        group,
                          ``(ii) such group includes--
                                  ``(I) a domestic corporation (which 
                                is not the common parent of the pre-
                                election affiliated group or a member 
                                of an electing financial institution 
                                group) which incurs interest expense 
                                with respect to qualified indebtedness, 
                                and
                                  ``(II) every other corporation (other 
                                than a member of an electing financial 
                                institution group) which is in the pre-
                                election affiliated group and which 
                                would be a member of an affiliated 
                                group having such domestic corporation 
                                as the common parent, and
                          ``(iii) an election under this paragraph is 
                        in effect for such group.
                  ``(B) Equalization rule.--All interest expense of a 
                domestic corporation which is a member of a pre-
                election affiliated group (other than subsidiary group 
                interest expense) shall be treated as allocated to 
                foreign source income to the extent such expense does 
                not exceed the excess (if any) of--
                          ``(i) the interest expense of the pre-
                        election affiliated group (including subsidiary 
                        group interest expense) which would (but for 
                        any election under this paragraph) be allocated 
                        to foreign source income, over
                          ``(ii) the subsidiary group interest expense 
                        allocated to foreign source income.
                For purposes of the preceding sentence, the subsidiary 
                group interest expense is the interest expense to which 
                subsection (e) applies separately by reason of 
                paragraph (1)(B).
                  ``(C) Qualified indebtedness.--For purposes of this 
                subsection, the term `qualified indebtedness' means any 
                indebtedness of a domestic corporation--
                          ``(i) which is held by an unrelated person, 
                        and
                          ``(ii) which is not guaranteed (or otherwise 
                        supported) by any corporation which is a member 
                        of the pre-election affiliated group other than 
                        a corporation which is a member of the electing 
                        subsidiary group.
                For purposes of this subparagraph, the term `unrelated 
                person' means any person not bearing a relationship 
                specified in section 267(b) or 707(b)(1) to the 
                corporation.
                  ``(D) Effect of certain transactions on qualified 
                indebtedness.--In the case of a corporation which is a 
                member of an electing subsidiary group, to the extent 
                that such corporation--
                          ``(i) distributes dividends or makes other 
                        distributions with respect to its stock after 
                        the date of the enactment of this paragraph to 
                        any member of the pre-election affiliated group 
                        (other than to a member of the electing 
                        subsidiary group) in excess of the greater of--
                                  ``(I) its average annual dividend 
                                (expressed as a percentage of current 
                                earnings and profits) during the 5-
                                taxable-year period ending with the 
                                taxable year preceding the taxable 
                                year, or
                                  ``(II) 25 percent of its average 
                                annual earnings and profits for such 5 
                                taxable year period, or
                          ``(ii) deals with any person in any manner 
                        not clearly reflecting the income of the 
                        corporation (as determined under principles 
                        similar to the principles of section 482),
                an amount of qualified indebtedness equal to the excess 
                distribution or the understatement or overstatement of 
                income, as the case may be, shall be recharacterized 
                (for the taxable year and subsequent taxable years) for 
                purposes of this subsection as indebtedness which is 
                not qualified indebtedness. If a corporation has not 
                been in existence for 5 taxable years, this 
                subparagraph shall be applied with respect to the 
                period it was in existence.
                  ``(E) Election.--An election under this paragraph 
                with respect to any electing subsidiary group may be 
                made only by the common parent of the pre-election 
                affiliated group. Such an election, once made, shall 
                apply only to the taxable year for which made. No 
                election may be made under this paragraph if the effect 
                of the election would be to have the same member of the 
                pre-election affiliated group included in more than 1 
                electing subsidiary group.
          ``(4) Pre-election affiliated group.--For purposes of this 
        subsection, the term `pre-election affiliated group' means, 
        with respect to a corporation, the affiliated group or electing 
        worldwide affiliated group of which such corporation would (but 
        for an election under this subsection) be a member for purposes 
        of applying subsection (e).
          ``(5) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out this subsection 
        and subsection (e), including regulations--
                  ``(A) providing for the direct allocation of interest 
                expense in other circumstances where such allocation 
                would be appropriate to carry out the purposes of this 
                subsection,
                  ``(B) preventing assets or interest expense from 
                being taken into account more than once, and
                  ``(C) dealing with changes in members of any group 
                (through acquisitions or otherwise) treated under this 
                subsection as an affiliated group for purposes of 
                subsection (e).''
  (c) Insurance Companies Included in Affiliated Groups.--Paragraph (5) 
of section 864(e) is amended to read as follows:
          ``(5) Affiliated group.--The term `affiliated group' has the 
        meaning given such term by section 1504 (determined without 
        regard to paragraphs (2) and (4) of section 1504(b)).''.
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2001.

SEC. 902. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED 
                    SECTION 902 CORPORATIONS.

  (a) In General.--Section 904(d)(4) (relating to application of look-
thru rules to dividends from noncontrolled section 902 corporations) is 
amended to read as follows:
          ``(4) Look-thru applies to dividends from noncontrolled 
        section 902 corporations.--
                  ``(A) In general.--For purposes of this subsection, 
                any dividend from a noncontrolled section 902 
                corporation with respect to the taxpayer shall be 
                treated as income in a separate category in proportion 
                to the ratio of--
                          ``(i) the portion of earnings and profits 
                        attributable to income in such category, to
                          ``(ii) the total amount of earnings and 
                        profits.
                  ``(B) Special rules.--For purposes of this 
                paragraph--
                          ``(i) In general.--Rules similar to the rules 
                        of paragraph (3)(F) shall apply; except that 
                        the term `separate category' shall include the 
                        category of income described in paragraph 
                        (1)(I).
                          ``(ii) Earnings and profits.--
                                  ``(I) In general.--The rules of 
                                section 316 shall apply.
                                  ``(II) Regulations.--The Secretary 
                                may prescribe regulations regarding the 
                                treatment of distributions out of 
                                earnings and profits for periods before 
                                the taxpayer's acquisition of the stock 
                                to which the distributions relate.
                          ``(iii) Dividends not allocable to separate 
                        category.--The portion of any dividend from a 
                        noncontrolled section 902 corporation which is 
                        not treated as income in a separate category 
                        under subparagraph (A) shall be treated as a 
                        dividend to which subparagraph (A) does not 
                        apply.
                          ``(iv) Look-thru with respect to 
                        carryforwards of credit.--Rules similar to 
                        subparagraph (A) also shall apply to any 
                        carryforward under subsection (c) from a 
                        taxable year beginning before January 1, 2002, 
                        of tax allocable to a dividend from a 
                        noncontrolled section 902 corporation with 
                        respect to the taxpayer.''
  (b) Conforming Amendments.--
          (1) Subparagraph (E) of section 904(d)(1), as in effect both 
        before and after the amendments made by section 1105 of the 
        Taxpayer Relief Act of 1997, is hereby repealed.
          (2) Section 904(d)(2)(C)(iii), as so in effect, is amended by 
        striking subclause (II) and by redesignating subclause (III) as 
        subclause (II).
          (3) The last sentence of section 904(d)(2)(D), as so in 
        effect, is amended to read as follows: ``Such term does not 
        include any financial services income.''
          (4) Section 904(d)(2)(E) is amended by striking clauses (ii) 
        and (iv) and by redesignating clause (iii) as clause (ii).
          (5) Section 904(d)(3)(F) is amended by striking ``(D), or 
        (E)'' and inserting ``or (D)''.
          (6) Section 864(d)(5)(A)(i) is amended by striking 
        ``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2001.

SEC. 903. CLARIFICATION OF TREATMENT OF PIPELINE TRANSPORTATION INCOME.

  (a) In General.--Section 954(g)(1) (defining foreign base company oil 
related income) is amended by striking ``or'' at the end of 
subparagraph (A), by striking the period at the end of subparagraph (B) 
and inserting ``, or'', and by inserting after subparagraph (B) the 
following new subparagraph:
                  ``(C) the pipeline transportation of oil or gas 
                within such foreign country.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of controlled foreign corporations beginning after 
December 31, 2001, and taxable years of United States shareholders with 
or within which such taxable years of controlled foreign corporations 
end.

SEC. 904. SUBPART F TREATMENT OF INCOME FROM TRANSMISSION OF HIGH 
                    VOLTAGE ELECTRICITY.

  (a) In General.--Paragraph (2) of section 954(e) (relating to foreign 
base company services income) is amended by striking ``or'' at the end 
of subparagraph (A), by striking the period at the end of subparagraph 
(B) and inserting ``, or'', and by inserting after subparagraph (B) the 
following new subparagraph:
                  ``(C) the transmission of high voltage electricity.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of controlled foreign corporations beginning after 
December 31, 2001, and taxable years of United States shareholders with 
or within which such taxable years of controlled foreign corporations 
end.

SEC. 905. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

  (a) General Rule.--Section 904 is amended by redesignating 
subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j), 
(k), and (l), respectively, and by inserting after subsection (f) the 
following new subsection:
  ``(g) Recharacterization of Overall Domestic Loss.--
          ``(1) General rule.--For purposes of this subpart and section 
        936, in the case of any taxpayer who sustains an overall 
        domestic loss for any taxable year beginning after December 31, 
        2004, that portion of the taxpayer's taxable income from 
        sources within the United States for each succeeding taxable 
        year which is equal to the lesser of--
                  ``(A) the amount of such loss (to the extent not used 
                under this paragraph in prior taxable years), or
                  ``(B) 50 percent of the taxpayer's taxable income 
                from sources within the United States for such 
                succeeding taxable year,
        shall be treated as income from sources without the United 
        States (and not as income from sources within the United 
        States).
          ``(2) Overall domestic loss defined.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `overall domestic loss' 
                means any domestic loss to the extent such loss offsets 
                taxable income from sources without the United States 
                for the taxable year or for any preceding taxable year 
                by reason of a carryback. For purposes of the preceding 
                sentence, the term `domestic loss' means the amount by 
                which the gross income for the taxable year from 
                sources within the United States is exceeded by the sum 
                of the deductions properly apportioned or allocated 
                thereto (determined without regard to any carryback 
                from a subsequent taxable year).
                  ``(B) Taxpayer must have elected foreign tax credit 
                for year of loss.--The term `overall domestic loss' 
                shall not include any loss for any taxable year unless 
                the taxpayer chose the benefits of this subpart for 
                such taxable year.
          ``(3) Characterization of subsequent income.--
                  ``(A) In general.--Any income from sources within the 
                United States that is treated as income from sources 
                without the United States under paragraph (1) shall be 
                allocated among and increase the income categories in 
                proportion to the loss from sources within the United 
                States previously allocated to those income categories.
                  ``(B) Income category.--For purposes of this 
                paragraph, the term `income category' has the meaning 
                given such term by subsection (f)(5)(E)(i).
          ``(4) Coordination with subsection (f).--The Secretary shall 
        prescribe such regulations as may be necessary to coordinate 
        the provisions of this subsection with the provisions of 
        subsection (f).''
  (b) Conforming Amendments.--
          (1) Section 535(d)(2) is amended by striking ``section 
        904(g)(6)'' and inserting ``section 904(h)(6)''.
          (2) Subparagraph (A) of section 936(a)(2) is amended by 
        striking ``section 904(f)'' and inserting ``subsections (f) and 
        (g) of section 904''.
  (c) Effective Date.--The amendments made by this section shall apply 
to losses for taxable years beginning after December 31, 2004.

SEC. 906. TREATMENT OF MILITARY PROPERTY OF FOREIGN SALES CORPORATIONS.

  (a) In General.--Section 923(a) (defining exempt foreign trade 
income) is amended by striking paragraph (5) and by redesignating 
paragraph (6) as paragraph (5).
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2001.

SEC. 907. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT 
                    COMPANIES.

  (a) Treatment of Certain Dividends.--
          (1) Nonresident alien individuals.--Section 871 (relating to 
        tax on nonresident alien individuals) is amended by 
        redesignating subsection (k) as subsection (l) and by inserting 
        after subsection (j) the following new subsection:
  ``(k) Exemption for Certain Dividends of Regulated Investment 
Companies.--
          ``(1) Interest-related dividends.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), no tax shall be imposed under paragraph (1)(A) of 
                subsection (a) on any interest-related dividend 
                received from a regulated investment company.
                  ``(B) Exceptions.--Subparagraph (A) shall not apply--
                          ``(i) to any interest-related dividend 
                        received from a regulated investment company by 
                        a person to the extent such dividend is 
                        attributable to interest (other than interest 
                        described in clause (i), (iii), or the last 
                        sentence of subparagraph (E)) received by such 
                        company on indebtedness issued by such person 
                        or by any corporation or partnership with 
                        respect to which such person is a 10-percent 
                        shareholder,
                          ``(ii) to any interest-related dividend with 
                        respect to stock of a regulated investment 
                        company unless the person who would otherwise 
                        be required to deduct and withhold tax from 
                        such dividend under chapter 3 receives a 
                        statement (which meets requirements similar to 
                        the requirements of subsection (h)(5)) that the 
                        beneficial owner of such stock is not a United 
                        States person, and
                          ``(iii) to any interest-related dividend paid 
                        to any person within a foreign country (or any 
                        interest-related dividend payment addressed to, 
                        or for the account of, persons within such 
                        foreign country) during any period described in 
                        subsection (h)(6) with respect to such country.
                Clause (iii) shall not apply to any dividend with 
                respect to any stock the holding period of which begins 
                on or before the date of the publication of the 
                Secretary's determination under subsection (h)(6).
                  ``(C) Interest-related dividend.--For purposes of 
                this paragraph, an interest-related dividend is any 
                dividend (or part thereof) which is designated by the 
                regulated investment company as an interest-related 
                dividend in a written notice mailed to its shareholders 
                not later than 60 days after the close of its taxable 
                year. If the aggregate amount so designated with 
                respect to a taxable year of the company (including 
                amounts so designated with respect to dividends paid 
                after the close of the taxable year described in 
                section 855) is greater than the qualified net interest 
                income of the company for such taxable year, the 
                portion of each distribution which shall be an 
                interest-related dividend shall be only that portion of 
                the amounts so designated which such qualified net 
                interest income bears to the aggregate amount so 
                designated.
                  ``(D) Qualified net interest income.--For purposes of 
                subparagraph (C), the term `qualified net interest 
                income' means the qualified interest income of the 
                regulated investment company reduced by the deductions 
                properly allocable to such income.
                  ``(E) Qualified interest income.--For purposes of 
                subparagraph (D), the term `qualified interest income' 
                means the sum of the following amounts derived by the 
                regulated investment company from sources within the 
                United States:
                          ``(i) Any amount includible in gross income 
                        as original issue discount (within the meaning 
                        of section 1273) on an obligation payable 183 
                        days or less from the date of original issue 
                        (without regard to the period held by the 
                        company).
                          ``(ii) Any interest includible in gross 
                        income (including amounts recognized as 
                        ordinary income in respect of original issue 
                        discount or market discount or acquisition 
                        discount under part V of subchapter P and such 
                        other amounts as regulations may provide) on an 
                        obligation which is in registered form; except 
                        that this clause shall not apply to--
                                  ``(I) any interest on an obligation 
                                issued by a corporation or partnership 
                                if the regulated investment company is 
                                a 10-percent shareholder in such 
                                corporation or partnership, and
                                  ``(II) any interest which is treated 
                                as not being portfolio interest under 
                                the rules of subsection (h)(4).
                          ``(iii) Any interest referred to in 
                        subsection (i)(2)(A) (without regard to the 
                        trade or business of the regulated investment 
                        company).
                          ``(iv) Any interest-related dividend 
                        includable in gross income with respect to 
                        stock of another regulated investment company.
                Such term includes any interest derived by the 
                regulated investment company from sources outside the 
                United States other than interest that is subject to a 
                tax imposed by a foreign jurisdiction if the amount of 
                such tax is reduced (or eliminated) by a treaty with 
                the United States.
                  ``(F) 10-percent shareholder.--For purposes of this 
                paragraph, the term `10-percent shareholder' has the 
                meaning given such term by subsection (h)(3)(B).
          ``(2) Short-term capital gain dividends.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), no tax shall be imposed under paragraph (1)(A) of 
                subsection (a) on any short-term capital gain dividend 
                received from a regulated investment company.
                  ``(B) Exception for aliens taxable under subsection 
                (a)(2).--Subparagraph (A) shall not apply in the case 
                of any nonresident alien individual subject to tax 
                under subsection (a)(2).
                  ``(C) Short-term capital gain dividend.--For purposes 
                of this paragraph, a short-term capital gain dividend 
                is any dividend (or part thereof) which is designated 
                by the regulated investment company as a short-term 
                capital gain dividend in a written notice mailed to its 
                shareholders not later than 60 days after the close of 
                its taxable year. If the aggregate amount so designated 
                with respect to a taxable year of the company 
                (including amounts so designated with respect to 
                dividends paid after the close of the taxable year 
                described in section 855) is greater than the qualified 
                short-term gain of the company for such taxable year, 
                the portion of each distribution which shall be a 
                short-term capital gain dividend shall be only that 
                portion of the amounts so designated which such 
                qualified short-term gain bears to the aggregate amount 
                so designated.
                  ``(D) Qualified short-term gain.--For purposes of 
                subparagraph (C), the term `qualified short-term gain' 
                means the excess of the net short-term capital gain of 
                the regulated investment company for the taxable year 
                over the net long-term capital loss (if any) of such 
                company for such taxable year. For purposes of this 
                subparagraph--
                          ``(i) the net short-term capital gain of the 
                        regulated investment company shall be computed 
                        by treating any short-term capital gain 
                        dividend includible in gross income with 
                        respect to stock of another regulated 
                        investment company as a short-term capital 
                        gain, and
                          ``(ii) the excess of the net short-term 
                        capital gain for a taxable year over the net 
                        long-term capital loss for a taxable year (to 
                        which an election under section 4982(e)(4) does 
                        not apply) shall be determined without regard 
                        to any net capital loss or net short-term 
                        capital loss attributable to transactions after 
                        October 31 of such year, and any such net 
                        capital loss or net short-term capital loss 
                        shall be treated as arising on the 1st day of 
                        the next taxable year.
                To the extent provided in regulations, clause (ii) 
                shall apply also for purposes of computing the taxable 
                income of the regulated investment company.''
          (2) Foreign corporations.--Section 881 (relating to tax on 
        income of foreign corporations not connected with United States 
        business) is amended by redesignating subsection (e) as 
        subsection (f) and by inserting after subsection (d) the 
        following new subsection:
  ``(e) Tax Not To Apply to Certain Dividends of Regulated Investment 
Companies.--
          ``(1) Interest-related dividends.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), no tax shall be imposed under paragraph (1) of 
                subsection (a) on any interest-related dividend (as 
                defined in section 871(k)(1)) received from a regulated 
                investment company.
                  ``(B) Exception.--Subparagraph (A) shall not apply--
                          ``(i) to any dividend referred to in section 
                        871(k)(1)(B), and
                          ``(ii) to any interest-related dividend 
                        received by a controlled foreign corporation 
                        (within the meaning of section 957(a)) to the 
                        extent such dividend is attributable to 
                        interest received by the regulated investment 
                        company from a person who is a related person 
                        (within the meaning of section 864(d)(4)) with 
                        respect to such controlled foreign corporation.
                  ``(C) Treatment of dividends received by controlled 
                foreign corporations.--The rules of subsection 
                (c)(5)(A) shall apply to any interest-related dividend 
                received by a controlled foreign corporation (within 
                the meaning of section 957(a)) to the extent such 
                dividend is attributable to interest received by the 
                regulated investment company which is described in 
                clause (ii) of section 871(k)(1)(E) (and not described 
                in clause (i), (iii), or the last sentence of such 
                section).
          ``(2) Short-term capital gain dividends.--No tax shall be 
        imposed under paragraph (1) of subsection (a) on any short-term 
        capital gain dividend (as defined in section 871(k)(2)) 
        received from a regulated investment company.''
          (3) Withholding taxes.--
                  (A) Section 1441(c) (relating to exceptions) is 
                amended by adding at the end the following new 
                paragraph:
          ``(12) Certain dividends received from regulated investment 
        companies.--
                  ``(A) In general.--No tax shall be required to be 
                deducted and withheld under subsection (a) from any 
                amount exempt from the tax imposed by section 
                871(a)(1)(A) by reason of section 871(k).
                  ``(B) Special rule.--For purposes of subparagraph 
                (A), clause (i) of section 871(k)(1)(B) shall not apply 
                to any dividend unless the regulated investment company 
                knows that such dividend is a dividend referred to in 
                such clause. A similar rule shall apply with respect to 
                the exception contained in section 871(k)(2)(B).''
                  (B) Section 1442(a) (relating to withholding of tax 
                on foreign corporations) is amended--
                          (i) by striking ``and the reference in 
                        section 1441(c)(10)'' and inserting ``the 
                        reference in section 1441(c)(10)'', and
                          (ii) by inserting before the period at the 
                        end the following: ``, and the references in 
                        section 1441(c)(12) to sections 871(a) and 
                        871(k) shall be treated as referring to 
                        sections 881(a) and 881(e) (except that for 
                        purposes of applying subparagraph (A) of 
                        section 1441(c)(12), as so modified, clause 
                        (ii) of section 881(e)(1)(B) shall not apply to 
                        any dividend unless the regulated investment 
                        company knows that such dividend is a dividend 
                        referred to in such clause)''.
  (b) Estate Tax Treatment of Interest in Certain Regulated Investment 
Companies.--Section 2105 (relating to property without the United 
States for estate tax purposes) is amended by adding at the end the 
following new subsection:
  ``(d) Stock in a RIC.--
          ``(1) In general.--For purposes of this subchapter, stock in 
        a regulated investment company (as defined in section 851) 
        owned by a nonresident not a citizen of the United States shall 
        not be deemed property within the United States in the 
        proportion that, at the end of the quarter of such investment 
        company's taxable year immediately preceding a decedent's date 
        of death (or at such other time as the Secretary may designate 
        in regulations), the assets of the investment company that were 
        qualifying assets with respect to the decedent bore to the 
        total assets of the investment company.
          ``(2) Qualifying assets.--For purposes of this subsection, 
        qualifying assets with respect to a decedent are assets that, 
        if owned directly by the decedent, would have been--
                  ``(A) amounts, deposits, or debt obligations 
                described in subsection (b) of this section,
                  ``(B) debt obligations described in the last sentence 
                of section 2104(c), or
                  ``(C) other property not within the United States.''
  (c) Treatment of Regulated Investment Companies Under Section 897.--
          (1) Paragraph (1) of section 897(h) is amended by striking 
        ``REIT'' each place it appears and inserting ``qualified 
        investment entity''.
          (2) Paragraphs (2) and (3) of section 897(h) are amended to 
        read as follows:
          ``(2) Sale of stock in domestically controlled entity not 
        taxed.--The term `United States real property interest' does 
        not include any interest in a domestically controlled qualified 
        investment entity.
          ``(3) Distributions by domestically controlled qualified 
        investment entities.--In the case of a domestically controlled 
        qualified investment entity, rules similar to the rules of 
        subsection (d) shall apply to the foreign ownership percentage 
        of any gain.''
          (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
        amended to read as follows:
                  ``(A) Qualified investment entity.--The term 
                `qualified investment entity' means any real estate 
                investment trust and any regulated investment company.
                  ``(B) Domestically controlled.--The term 
                `domestically controlled qualified investment entity' 
                means any qualified investment entity in which at all 
                times during the testing period less than 50 percent in 
                value of the stock was held directly or indirectly by 
                foreign persons.''
          (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
        amended by striking ``REIT'' and inserting ``qualified 
        investment entity''.
          (5) The subsection heading for subsection (h) of section 897 
        is amended by striking ``REITS'' and inserting ``Certain 
        Investment Entities''.
  (d) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        dividends with respect to taxable years of regulated investment 
        companies beginning after December 31, 2004.
          (2) Estate tax treatment.--The amendment made by subsection 
        (b) shall apply to estates of decedents dying after December 
        31, 2004.
          (3) Certain other provisions.--The amendments made by 
        subsection (c) (other than paragraph (1) thereof) shall take 
        effect on January 1, 2005.

SEC. 908. REPEAL OF SPECIAL RULES FOR APPLYING FOREIGN TAX CREDIT IN 
                    CASE OF FOREIGN OIL AND GAS INCOME.

  (a) In General.--Section 907 (relating to special rules in case of 
foreign oil and gas income) is repealed.
  (b) Conforming Amendments.--
          (1) Each of the following provisions are amended by striking 
        ``907,'':
                  (A) Section 245(a)(10).
                  (B) Section 865(h)(1)(B).
                  (C) Section 904(d)(1).
                  (D) Section 904(g)(10)(A).
          (2) Section 904(f)(5)(E)(iii) is amended by inserting ``, as 
        in effect before its repeal by the Financial Freedom Act of 
        1999'' after ``section 907(c)(4)(B)''.
          (3) Section 954(g)(1) is amended by inserting ``, as in 
        effect before its repeal by the Financial Freedom Act of 1999'' 
        after ``907(c)''.
          (4) Section 6501(i) is amended--
                  (A) by striking ``, or under section 907(f) (relating 
                to carryback and carryover of disallowed oil and gas 
                extraction taxes)'', and
                  (B) by striking ``or 907(f)''.
          (5) The table of sections for subpart A of part III of 
        subchapter N of chapter 1 is amended by striking the item 
        relating to section 907.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 909. STUDY OF PROPER TREATMENT OF EUROPEAN UNION UNDER SAME 
                    COUNTRY EXCEPTIONS.

  (a) Study.--The Secretary of the Treasury or the Secretary's delegate 
shall conduct a study on the feasibility of treating all countries 
included in the European Union as 1 country for purposes of applying 
the same country exceptions under subpart F of part III of subchapter N 
of chapter 1 of the Internal Revenue Code of 1986.
  (b) Report.--Not later than 6 months after the date of the enactment 
of this Act, the Secretary of the Treasury shall report to the 
Committee on Ways and Means of the House of Representatives and the 
Committee on Finance of the Senate the results of the study conducted 
under subsection (a), including recommendations (if any) for 
legislation.

SEC. 910. APPLICATION OF DENIAL OF FOREIGN TAX CREDIT WITH RESPECT TO 
                    CERTAIN FOREIGN COUNTRIES.

  (a) In General.--Clause (ii) of section 901(j)(2)(B) (relating to 
denial of foreign tax credit, etc., with respect to certain foreign 
countries) is amended by inserting before the period ``or, if earlier, 
ending on the date that the President determines that the application 
of this subsection to such foreign country is no longer in the national 
interests of the United States''.
  (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 911. ADVANCE PRICING AGREEMENTS TREATED AS CONFIDENTIAL TAXPAYER 
                    INFORMATION.

  (a) In General.--
          (1) Treatment as return information.--Paragraph (2) of 
        section 6103(b) (defining return information) is amended by 
        striking ``and'' at the end of subparagraph (A), by inserting 
        ``and'' at the end of subparagraph (B), and by inserting after 
        subparagraph (B) the following new subparagraph:
                  ``(C) any advance pricing agreement entered into by a 
                taxpayer and the Secretary and any background 
                information related to such agreement or any 
                application for an advance pricing agreement,''.
          (2) Exception from public inspection as written 
        determination.--Paragraph (1) of section 6110(b) (defining 
        written determination) is amended by adding at the end the 
        following new sentence: ``Such term shall not include any 
        advance pricing agreement entered into by a taxpayer and the 
        Secretary and any background information related to such 
        agreement or any application for an advance pricing 
        agreement.''.
          (3) Effective date.--The amendments made by this subsection 
        shall take effect on the date of the enactment of this Act.
  (b) Annual Report Regarding Advance Pricing Agreements.--
          (1) In general.--Not later than 90 days after the end of each 
        calendar year, the Secretary of the Treasury shall prepare and 
        publish a report regarding advance pricing agreements.
          (2) Contents of report.--The report shall include the 
        following for the calendar year to which such report relates:
                  (A) Information about the structure, composition, and 
                operation of the advance pricing agreement program 
                office.
                  (B) A copy of each model advance pricing agreement.
                  (C) The number of--
                          (i) applications filed during such calendar 
                        year for advanced pricing agreements;
                          (ii) advance pricing agreements executed 
                        cumulatively to date and during such calendar 
                        year;
                          (iii) renewals of advanced pricing agreements 
                        issued;
                          (iv) pending requests for advance pricing 
                        agreements;
                          (v) pending renewals of advance pricing 
                        agreements;
                          (vi) for each of the items in clauses (ii) 
                        through (v), the number that are unilateral, 
                        bilateral, and multilateral, respectively;
                          (vii) advance pricing agreements revoked or 
                        canceled, and the number of withdrawals from 
                        the advance pricing agreement program; and
                          (viii) advanced pricing agreements finalized 
                        or renewed by industry.
                  (D) General descriptions of--
                          (i) the nature of the relationships between 
                        the related organizations, trades, or 
                        businesses covered by advance pricing 
                        agreements;
                          (ii) the covered transactions and the 
                        business functions performed and risks assumed 
                        by such organizations, trades, or businesses;
                          (iii) the related organizations, trades, or 
                        businesses whose prices or results are tested 
                        to determine compliance with transfer pricing 
                        methodologies prescribed in advanced pricing 
                        agreements;
                          (iv) methodologies used to evaluate tested 
                        parties and transactions and the circumstances 
                        leading to the use of those methodologies;
                          (v) critical assumptions made and sources of 
                        comparables used;
                          (vi) comparable selection criteria and the 
                        rationale used in determining such criteria;
                          (vii) the nature of adjustments to 
                        comparables or tested parties;
                          (viii) the nature of any ranges agreed to, 
                        including information regarding when no range 
                        was used and why, when interquartile ranges 
                        were used, and when there was a statistical 
                        narrowing of the comparables;
                          (ix) adjustment mechanisms provided to 
                        rectify results that fall outside of the agreed 
                        upon advance pricing agreement range;
                          (x) the various term lengths for advance 
                        pricing agreements, including rollback years, 
                        and the number of advance pricing agreements 
                        with each such term length;
                          (xi) the nature of documentation required; 
                        and
                          (xii) approaches for sharing of currency or 
                        other risks.
                  (E) Statistics regarding the amount of time taken to 
                complete new and renewal advance pricing agreements.
          (3) Confidentiality.--The reports required by this subsection 
        shall be treated as authorized by the Internal Revenue Code of 
        1986 for purposes of section 6103 of such Code, but the reports 
        shall not include information--
                  (A) which would not be permitted to be disclosed 
                under section 6110(c) of such Code if such report were 
                a written determination as defined in section 6110 of 
                such Code, or
                  (B) which can be associated with, or otherwise 
                identify, directly or indirectly, a particular 
                taxpayer.
          (4) First report.--The report for calendar year 1999 shall 
        include prior calendar years after 1990.
  (c) User Fee.--Section 7527, as added by title XV of this Act, is 
amended by redesignating subsection (c) as subsection (d) and by 
inserting after subsection (b) the following new subsection:
  ``(c) Advance Pricing Agreements.--
          ``(1) In general.--In addition to any fee otherwise imposed 
        under this section, the fee imposed for requests for advance 
        pricing agreements shall be increased by $500.
          ``(2) Reduced fee for small businesses.--The Secretary shall 
        provide an appropriate reduction in the amount imposed by 
        reason of paragraph (1) for requests for advance pricing 
        agreements for small businesses.''
  (d) Regulations.--The Secretary of the Treasury or the Secretary's 
delegate shall prescribe such regulations as may be necessary or 
appropriate to carry out the purposes of section 6103(b)(2)(C), and the 
last sentence of section 6110(b)(1), of the Internal Revenue Code of 
1986, as added by this section.

SEC. 912. INCREASE IN DOLLAR LIMITATION ON SECTION 911 EXCLUSION.

  (a) General Rule.--The table contained in clause (i) of section 
911(b)(2)(D) is amended to read as follows:

``For calendar year--                         The exclusion amount is--
    2000..........................................             $76,000 
    2001..........................................              78,000 
    2002..........................................              80,000 
    2003..........................................              83,000 
    2004..........................................              86,000 
    2005..........................................              89,000 
    2006..........................................              92,000 
    2007 and thereafter...........................            95,000.''

  (b) Conforming Amendment.--Clause (ii) of section 911(b)(2)(D) is 
amended by striking ``$80,000'' and inserting ``$95,000''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1999.

        TITLE X--PROVISIONS RELATING TO TAX-EXEMPT ORGANIZATIONS

SEC. 1001. EXEMPTION FROM INCOME TAX FOR STATE-CREATED ORGANIZATIONS 
                    PROVIDING PROPERTY AND CASUALTY INSURANCE FOR 
                    PROPERTY FOR WHICH SUCH COVERAGE IS OTHERWISE 
                    UNAVAILABLE.

  (a) In General.--Subsection (c) of section 501 (relating to exemption 
from tax on corporations, certain trusts, etc.) is amended by adding at 
the end the following new paragraph:
          ``(28)(A) Any association created before January 1, 1999, by 
        State law and organized and operated exclusively to provide 
        property and casualty insurance coverage for property located 
        within the State for which the State has determined that 
        coverage in the authorized insurance market is limited or 
        unavailable at reasonable rates, if--
                  ``(i) no part of the net earnings of which inures to 
                the benefit of any private shareholder or individual,
                  ``(ii) except as provided in clause (v), no part of 
                the assets of which may be used for, or diverted to, 
                any purpose other than--
                          ``(I) to satisfy, in whole or in part, the 
                        liability of the association for, or with 
                        respect to, claims made on policies written by 
                        the association,
                          ``(II) to invest in investments authorized by 
                        applicable law,
                          ``(III) to pay reasonable and necessary 
                        administration expenses in connection with the 
                        establishment and operation of the association 
                        and the processing of claims against the 
                        association, or
                          ``(IV) to make remittances pursuant to State 
                        law to be used by the State to provide for the 
                        payment of claims on policies written by the 
                        association, purchase reinsurance covering 
                        losses under such policies, or to support 
                        governmental programs to prepare for or 
                        mitigate the effects of natural catastrophic 
                        events,
                  ``(iii) the State law governing the association 
                permits the association to levy assessments on 
                insurance companies authorized to sell property and 
                casualty insurance in the State, or on property and 
                casualty insurance policyholders with insurable 
                interests in property located in the State to fund 
                deficits of the association, including the creation of 
                reserves,
                  ``(iv) the plan of operation of the association is 
                subject to approval by the chief executive officer or 
                other official of the State, by the State legislature, 
                or both, and
                  ``(v) the assets of the association revert upon 
                dissolution to the State, the State's designee, or an 
                entity designated by the State law governing the 
                association, or State law does not permit the 
                dissolution of the association.
          ``(B)(i) An entity described in clause (ii) shall be 
        disregarded as a separate entity and treated as part of the 
        association described in subparagraph (A) from which it 
        receives remittances described in clause (ii) if an election is 
        made within 30 days after the date that such association is 
        determined to be exempt from tax.
          ``(ii) An entity is described in this clause if it is an 
        entity or fund created before January 1, 1999, pursuant to 
        State law and organized and operated exclusively to receive, 
        hold, and invest remittances from an association described in 
        subparagraph (A) and exempt from tax under subsection (a), to 
        make disbursements to pay claims on insurance contracts issued 
        by such association, and to make disbursements to support 
        governmental programs to prepare for or mitigate the effects of 
        natural catastrophic events.''
  (b) Unrelated Business Taxable Income.--Subsection (a) of section 512 
(relating to unrelated business taxable income) is amended by adding at 
the end the following new paragraph:
          ``(6) Special rule applicable to organizations described in 
        section 501(c)(28).--In the case of an organization described 
        in section 501(c)(28), the term `unrelated business taxable 
        income' means taxable income for a taxable year computed 
        without the application of section 501(c)(28) if at the end of 
        the immediately preceding taxable year the organization's net 
        equity exceeded 15 percent of the total coverage in force under 
        insurance contracts issued by the organization and outstanding 
        at the end of such preceding year.''
  (c) Transitional Rule.--No income or gain shall be recognized by an 
association as a result of a change in status to that of an association 
described by section 501(c)(28) of the Internal Revenue Code of 1986, 
as amended by subsection (a).
  (d) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 1999.

SEC. 1002. MODIFICATION OF SPECIAL ARBITRAGE RULE FOR CERTAIN FUNDS.

  (a) In General.--Paragraph (1) of section 648 of the Tax Reform Act 
of 1984 is amended to read as follows:
          ``(1) such securities or obligations are held in a fund--
                  ``(A) which, except to the extent of the investment 
                earnings on such securities or obligations, cannot be 
                used, under State constitutional or statutory 
                restrictions continuously in effect since October 9, 
                1969, through the date of issue of the bond issue, to 
                pay debt service on the bond issue or tofinance the 
facilities that are to be financed with the proceeds of the bonds, or
                  ``(B) the annual distributions from which cannot 
                exceed 7 percent of the average fair market value of 
                the assets held in such fund except to the extent 
                distributions are necessary to pay debt service on the 
                bond issue,''.
  (b) Conforming Amendment.--Paragraph (3) of such section is amended 
by striking ``the investment earnings of'' and inserting 
``distributions from''.
  (c) Effective Date.--The amendments made by this section shall take 
effect on January 1, 2000.

SEC. 1003. CHARITABLE SPLIT-DOLLAR LIFE INSURANCE, ANNUITY, AND 
                    ENDOWMENT CONTRACTS.

  (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules) is 
amended by adding at the end the following new paragraph:
          ``(10) Split-dollar life insurance, annuity, and endowment 
        contracts.--
                  ``(A) In general.--Nothing in this section or in 
                section 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), 
                or 2522 shall be construed to allow a deduction, and no 
                deduction shall be allowed, for any transfer to or for 
                the use of an organization described in subsection (c) 
                if in connection with such transfer--
                          ``(i) the organization directly or indirectly 
                        pays, or has previously paid, any premium on 
                        any personal benefit contract with respect to 
                        the transferor, or
                          ``(ii) there is an understanding or 
                        expectation that any person will directly or 
                        indirectly pay any premium on any personal 
                        benefit contract with respect to the 
                        transferor.
                  ``(B) Personal benefit contract.--For purposes of 
                subparagraph (A), the term `personal benefit contract' 
                means, with respect to the transferor, any life 
                insurance, annuity, or endowment contract if any direct 
                or indirect beneficiary under such contract is the 
                transferor, any member of the transferor's family, or 
                any other person (other than an organization described 
                in subsection (c)) designated by the transferor.
                  ``(C) Application to charitable remainder trusts.--In 
                the case of a transfer to a trust referred to in 
                subparagraph (E), references in subparagraphs (A) and 
                (F) to an organization described in subsection (c) 
                shall be treated as a reference to such trust.
                  ``(D) Exception for certain annuity contracts.--If, 
                in connection with a transfer to or for the use of an 
                organization described in subsection (c), such 
                organization incurs an obligation to pay a charitable 
                gift annuity (as defined in section 501(m)) and such 
                organization purchases any annuity contract to fund 
                such obligation, persons receiving payments under the 
                charitable gift annuity shall not be treated for 
                purposes of subparagraph (B) as indirect beneficiaries 
                under such contract if--
                          ``(i) such organization possesses all of the 
                        incidents of ownership under such contract,
                          ``(ii) such organization is entitled to all 
                        the payments under such contract, and
                          ``(iii) the timing and amount of payments 
                        under such contract are substantially the same 
                        as the timing and amount of payments to each 
                        such person under such obligation (as such 
                        obligation is in effect at the time of such 
                        transfer).
                  ``(E) Exception for certain contracts held by 
                charitable remainder trusts.--A person shall not be 
                treated for purposes of subparagraph (B) as an indirect 
                beneficiary under any life insurance, annuity, or 
                endowment contract held by a charitable remainder 
                annuity trust or a charitable remainder unitrust (as 
                defined in section 664(d)) solely by reason of being 
                entitled to any payment referred to in paragraph (1)(A) 
                or (2)(A) of section 664(d) if--
                          ``(i) such trust possesses all of the 
                        incidents of ownership under such contract, and
                          ``(ii) such trust is entitled to all the 
                        payments under such contract.
                  ``(F) Excise tax on premiums paid.--
                          ``(i) In general.--There is hereby imposed on 
                        any organization described in subsection (c) an 
                        excise tax equal to the premiums paid by such 
                        organization on any life insurance, annuity, or 
                        endowment contract if the payment of premiums 
                        on such contract is in connection with a 
                        transfer for which a deduction is not allowable 
                        under subparagraph (A), determined without 
                        regard to when such transfer is made.
                          ``(ii) Payments by other persons.--For 
                        purposes of clause (i), payments made by any 
                        other person pursuant to an understanding or 
                        expectation referred to in subparagraph (A) 
                        shall be treated as made by the organization.
                          ``(iii) Reporting.--Any organization on which 
                        tax is imposed by clause (i) with respect to 
                        any premium shall file an annual return which 
                        includes--
                                  ``(I) the amount of such premiums 
                                paid during the year and the name and 
                                TIN of each beneficiary under the 
                                contract to which the premium relates, 
                                and
                                  ``(II) such other information as the 
                                Secretary may require.
                        The penalties applicable to returns required 
                        under section 6033 shall apply to returns 
                        required under this clause. Returns required 
                        under this clause shall be furnished at such 
                        time and in such manner as the Secretary shall 
                        by forms or regulations require.
                          ``(iv) Certain rules to apply.--The tax 
                        imposed by this subparagraph shall be treated 
                        as imposed by chapter 42 for purposes of this 
                        title other than subchapter B of chapter 42.
                  ``(G) Special rule where state requires specification 
                of charitable gift annuitant in contract.--In the case 
                of an obligation to pay a charitable gift annuity 
                referred to in subparagraph (D) which is entered into 
                under the laws of a State which requires, in order for 
                the charitable gift annuity to be exempt from insurance 
                regulation by such State, that each beneficiary under 
                the charitable gift annuity be named as a beneficiary 
                under an annuity contract issued by an insurance 
                company authorized to transact business in such State, 
                the requirements of clauses (i) and (ii) of 
                subparagraph (D) shall be treated as met if--
                          ``(i) such State law requirement was in 
                        effect on February 8, 1999,
                          ``(ii) each such beneficiary under the 
                        charitable gift annuity is a bona fide resident 
                        of such State at the time the obligation to pay 
                        a charitable gift annuity is entered into, and
                          ``(iii) the only persons entitled to payments 
                        under such contract are persons entitled to 
                        payments as beneficiaries under such obligation 
                        on the date such obligation is entered into.
                  ``(H) Member of family.--For purposes of this 
                paragraph, an individual's family consists of the 
                individual's grandparents, the grandparents of such 
                individual's spouse, the lineal descendants of such 
                grandparents, and any spouse of such a lineal 
                descendant.
                  ``(I) Regulations.--The Secretary shall prescribe 
                such regulations as may be necessary or appropriate to 
                carry out the purposes of this paragraph, including 
                regulations to prevent the avoidance of such 
                purposes.''
  (b) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        section, the amendment made by this section shall apply to 
        transfers made after February 8, 1999.
          (2) Excise tax.--Except as provided in paragraph (3) of this 
        subsection, section 170(f)(10)(F) of the Internal Revenue Code 
        of 1986 (as added by this section) shall apply to premiums paid 
        after the date of the enactment of this Act.
          (3) Reporting.--Clause (iii) of such section 170(f)(10)(F) 
        shall apply to premiums paid after February 8, 1999 (determined 
        as if the tax imposed by such section applies to premiums paid 
        after such date).

SEC. 1004. EXEMPTION PROCEDURE FROM TAXES ON SELF-DEALING.

  (a) In General.--Subsection (d) of section 4941 (relating to taxes on 
self-dealing) is amended by adding at the end the following new 
paragraph:
          ``(3) Special exemption.--The Secretary shall establish an 
        exemption procedure for purposes of this subsection. Pursuant 
        to such procedure, the Secretary may grant a conditional or 
        unconditional exemption of any disqualified person or 
        transaction or class of disqualified persons or transactions, 
        from all or part of the restrictions imposed by paragraph (1). 
        The Secretary may not grant an exemption under this paragraph 
        unless he finds that such exemption is--
                  ``(A) administratively feasible,
                  ``(B) in the interests of the private foundation, and
                  ``(C) protective of the rights of the private 
                foundation.
        Before granting an exemption under this paragraph, the 
        Secretary shall require adequate notice to be given to 
        interested persons and shall publish notice in the Federal 
        Register of the pendency of such exemption and shall afford 
        interested persons an opportunity to present views.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to transactions occurring after the date of the enactment of this Act.

SEC. 1005. EXPANSION OF DECLARATORY JUDGMENT REMEDY TO TAX-EXEMPT 
                    ORGANIZATIONS.

  (a) In General.--Subsection (a) of section 7428 (relating to creation 
of remedy) is amended--
          (1) in subparagraph (B) by inserting after ``509(a))'' the 
        following: ``or as a private operating foundation (as defined 
        in section 4942(j)(3))'', and
          (2) by amending subparagraph (C) to read as follows:
                  ``(C) with respect to the initial qualification or 
                continuing qualification of an organization as an 
                organization described in section 501(c) (other than 
                paragraph (3)) which is exempt from tax under section 
                501(a), or''.
  (b) Court Jurisdiction.--Subsection (a) of section 7428 is amended in 
the material following paragraph (2) by striking ``United States Tax 
Court, the United States Claims Court, or the district court of the 
United States for the District of Columbia'' and inserting the 
following: ``United States Tax Court (in the case of any such 
determination or failure) or the United States Claims Court or the 
district court of the United States for the District of Columbia (in 
the case of a determination or failure with respect to an issue 
referred to in subparagraph (A) or (B) of paragraph (1)),''.
  (c) Effective Date.--The amendments made by this section shall apply 
to pleadings filed with respect to determinations (or requests for 
determinations) made after the date of the enactment of this Act.

SEC. 1006. MODIFICATIONS TO SECTION 512(B)(13).

  (a) In General.--Paragraph (13) of section 512(b) is amended by 
redesignating subparagraph (E) as subparagraph (F) and by inserting 
after subparagraph (D) the following new paragraph:
                  ``(E) Paragraph to apply only to excess payments.--
                          ``(i) In general.--Subparagraph (A) shall 
                        apply only to the portion of a specified 
                        payment received by the controlling 
                        organization that exceeds the amount which 
                        would have been paid if such payment met the 
                        requirements prescribed under section 482.
                          ``(ii) Addition to tax for valuation 
                        misstatements.--The tax imposed by this chapter 
                        on the controlling organization shall be 
                        increased by an amount equal to 20 percent of 
                        such excess.''
  (b) Effective Date.--
          (1) In general.--The amendment made by this section shall 
        apply to payments received or accrued after December 31, 1999.
          (2) Payments subject to binding contract transition rule.--If 
        the amendments made by section 1041 of the Taxpayer Relief Act 
        of 1997 do not apply to any amount received or accrued after 
        the date of the enactment of this Act under any contract 
        described in subsection (b)(2) of such section, such amendments 
        also shall not apply to amounts received or accrued under such 
        contract before January 1, 2000.

                    TITLE XI--REAL ESTATE PROVISIONS

    Subtitle A--Provisions Relating to Real Estate Investment Trusts

   PART I--TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE REIT 
                              SUBSIDIARIES

SEC. 1101. MODIFICATIONS TO ASSET DIVERSIFICATION TEST.

  (a) In General.--Subparagraph (B) of section 856(c)(4) is amended to 
read as follows:
                  ``(B)(i) not more than 25 percent of the value of its 
                total assets is represented by securities (other than 
                those includible under subparagraph (A)), and
                  ``(ii) except with respect to a taxable REIT 
                subsidiary and securities includible under subparagraph 
                (A)--
                          ``(I) not more than 5 percent of the value of 
                        its total assets is represented by securities 
                        of any 1 issuer,
                          ``(II) the trust does not hold securities 
                        possessing more than 10 percent of the total 
                        voting power of the outstanding securities of 
                        any 1 issuer, and
                          ``(III) the trust does not hold securities 
                        having a value of more than 10 percent of the 
                        total value of the outstanding securities of 
                        any 1 issuer.''
  (b) Exception for Straight Debt Securities.--Subsection (c) of 
section 856 is amended by adding at the end the following new 
paragraph:
          ``(7) Straight debt safe harbor in applying paragraph (4).--
        Securities of an issuer which are straight debt (as defined in 
        section 1361(c)(5) without regard to subparagraph (B)(iii) 
        thereof) shall not be taken into account in applying paragraph 
        (4)(B)(ii)(III) if--
                  ``(A) the only securities of such issuer which are 
                held by the trust or a taxable REIT subsidiary of the 
                trust are straight debt (as so defined), or
                  ``(B) the issuer is a partnership and the trust holds 
                at least a 20 percent profits interest in the 
                partnership.''

SEC. 1102. TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE REIT 
                    SUBSIDIARIES.

  (a) Income From Taxable REIT Subsidiaries Not Treated as 
Impermissible Tenant Service Income.--Clause (i) of section 
856(d)(7)(C) (relating to exceptions to impermissible tenant service 
income) is amended by inserting ``or through a taxable REIT subsidiary 
of such trust'' after ``income''.
  (b) Certain Income From Taxable REIT Subsidiaries Not Excluded From 
Rents From Real Property.--
          (1) In general.--Subsection (d) of section 856 (relating to 
        rents from real property defined) is amended by adding at the 
        end the following new paragraphs:
          ``(8) Special rule for taxable reit subsidiaries.--For 
        purposes of this subsection, amounts paid to a real estate 
        investment trust by a taxable REIT subsidiary of such trust 
        shall not be excluded from rents from real property by reason 
        of paragraph (2)(B) if the requirements of subparagraph (A) or 
        (B) are met.
                  ``(A) Limited rental exception.--The requirements of 
                this subparagraph are met with respect to any property 
                if at least 90 percent of the leased space of the 
                property is rented to persons other than taxable REIT 
                subsidiaries of such trust and other than persons 
                described in section 856(d)(2)(B). The preceding 
                sentence shall apply only to the extent that the 
                amounts paid to the trust as rents from real property 
                (as defined in paragraph (1) without regard to 
                paragraph (2)(B)) from such property are substantially 
                comparable to such rents made by the other tenants of 
                the trust's property for comparable space.
                  ``(B) Exception for certain lodging facilities.--The 
                requirements of this subparagraph are met with respect 
                to an interest in real property which is a qualified 
                lodging facility leased by the trust to a taxable REIT 
                subsidiary of the trust if the property is operated on 
                behalf of such subsidiary by a person who is an 
                eligible independent contractor.
          ``(9) Eligible independent contractor.--For purposes of 
        paragraph (8)(B)--
                  ``(A) In general.--The term `eligible independent 
                contractor' means, with respect to any qualified 
                lodging facility, any independent contractor if, at the 
                time such contractor enters into a management agreement 
                or other similar service contract with the taxable REIT 
                subsidiary to operate the facility, such contractor (or 
                any related person) is actively engaged in the trade or 
                business of operating qualified lodging facilities for 
                any person who is not a related person with respect to 
                the real estate investment trust or the taxable REIT 
                subsidiary.
                  ``(B) Special rules.--Solely for purposes of this 
                paragraph and paragraph (8)(B), a person shall not fail 
                to be treated as an independent contractor with respect 
                to any qualified lodging facility by reason of any of 
                the following:
                          ``(i) The taxable REIT subsidiary bears the 
                        expenses for the operation of the facility 
                        pursuant to the management agreement or other 
                        similar service contract.
                          ``(ii) The taxable REIT subsidiary receives 
                        the revenues from the operation of such 
                        facility, net of expenses for such operation 
                        and fees payable to the operator pursuant to 
                        such agreement or contract.
                          ``(iii) The real estate investment trust 
                        receives income from such person with respect 
                        to another property that is attributable to a 
                        lease of such other property to such person 
                        that was in effect as on the later of--
                                  ``(I) January 1, 1999, or
                                  ``(II) the earliest date that any 
                                taxable REIT subsidiary of such trust 
                                entered into a management agreement or 
                                other similar service contract with 
                                such person with respect to such 
                                qualified lodging facility.
                  ``(C) Renewals, etc., of existing leases.--For 
                purposes of subparagraph (B)(iii)--
                          ``(i) a lease shall be treated as in effect 
                        on January 1, 1999, without regard to its 
                        renewal after such date, so long as such 
                        renewal is pursuant to the terms of such lease 
                        as in effect on whichever of the dates under 
                        subparagraph (B)(iii) is the latest, and
                          ``(ii) a lease of a property entered into 
                        after whichever of the dates under subparagraph 
                        (B)(iii) is the latest shall be treated as in 
                        effect on such date if--
                                  ``(I) on such date, a lease of such 
                                property from the trust was in effect, 
                                and
                                  ``(II) under the terms of the new 
                                lease, such trust receives a 
                                substantially similar or lesser benefit 
                                in comparison to the lease referred to 
                                in subclause (I).
                  ``(D) Qualified lodging facility.--For purposes of 
                this paragraph--
                          ``(i) In general.--The term `qualified 
                        lodging facility' means any lodging facility 
                        unless wagering activities are conducted at or 
                        in connection with such facility by any person 
                        who is engaged in the business of accepting 
                        wagers and who is legally authorized to engage 
                        in such business at or in connection with such 
                        facility.
                          ``(ii) Lodging facility.--The term `lodging 
                        facility' means a hotel, motel, or other 
                        establishment more than one-half of the 
                        dwelling units in which are used on a transient 
                        basis.
                          ``(iii) Customary amenities and facilities.--
                        The term `lodging facility' includes customary 
                        amenities and facilities operated as part of, 
                        or associated with, the lodging facility so 
                        long as such amenities and facilities are 
                        customary for other properties of a comparable 
                        size and class owned by other owners unrelated 
                        to such real estate investment trust.
                  ``(E) Operate includes manage.--References in this 
                paragraph to operating a property shall be treated as 
                including a reference to managing the property.
                  ``(F) Related person.--Persons shall be treated as 
                related to each other if such persons are treated as a 
                single employer under subsection (a) or (b) of section 
                52.''.
          (2) Conforming amendment.--Subparagraph (B) of section 
        856(d)(2) is amended by inserting ``except as provided in 
        paragraph (8),'' after ``(B)''.

SEC. 1103. TAXABLE REIT SUBSIDIARY.

  (a) In General.--Section 856 is amended by adding at the end the 
following new subsection:
  ``(l) Taxable REIT Subsidiary.--For purposes of this part--
          ``(1) In general.--The term `taxable REIT subsidiary' means, 
        with respect to a real estate investment trust, a corporation 
        (other than a real estate investment trust) if--
                  ``(A) such trust directly or indirectly owns stock in 
                such corporation, and
                  ``(B) such trust and such corporation jointly elect 
                that such corporation shall be treated as a taxable 
                REIT subsidiary of such trust for purposes of this 
                part.
        Such an election, once made, shall be irrevocable unless both 
        such trust and corporation consent to its revocation. Such 
        election, and any revocation thereof, may be made without the 
        consent of the Secretary.
          ``(2) 35 percent ownership in another taxable reit 
        subsidiary.--The term `taxable REIT subsidiary' includes, with 
        respect to any real estate investment trust, any corporation 
        (other than a real estate investment trust) with respect to 
        which a taxable REIT subsidiary of such trust owns directly or 
        indirectly--
                  ``(A) securities possessing more than 35 percent of 
                the total voting power of the outstanding securities of 
                such corporation, or
                  ``(B) securities having a value of more than 35 
                percent of the total value of the outstanding 
                securities of such corporation.
        The preceding sentence shall not apply to a qualified REIT 
        subsidiary (as defined in subsection (i)(2)). The rule of 
        section 856(c)(7) shall apply for purposes of subparagraph (B).
          ``(3) Exceptions.--The term `taxable REIT subsidiary' shall 
        not include--
                  ``(A) any corporation which directly or indirectly 
                operates or manages a lodging facility or a health care 
                facility, and
                  ``(B) any corporation which directly or indirectly 
                provides to any other person (under a franchise, 
                license, or otherwise) rights to any brand name under 
                which any lodging facility or health care facility is 
                operated.
        Subparagraph (B) shall not apply to rights provided to an 
        eligible independent contractor to operate or manage a lodging 
        facility if such rights are held by such corporation as a 
        franchisee, licensee, or in a similar capacity and such lodging 
        facility is either owned by such corporation or is leased to 
        such corporation from the real estate investment trust.
          ``(4) Definitions.--For purposes of paragraph (3)--
                  ``(A) Lodging facility.--The term `lodging facility' 
                has the meaning given to such term by paragraph 
                (9)(D)(ii).
                  ``(B) Health care facility.--The term `health care 
                facility' has the meaning given to such term by 
                subsection (e)(6)(D)(ii).''.
  (b) Conforming Amendment.--Paragraph (2) of section 856(i) is amended 
by adding at the end the following new sentence: ``Such term shall not 
include a taxable REIT subsidiary.''

SEC. 1104. LIMITATION ON EARNINGS STRIPPING.

  Paragraph (3) of section 163(j) (relating to limitation on deduction 
for interest on certain indebtedness) is amended by striking ``and'' at 
the end of subparagraph (A), by striking the period at the end of 
subparagraph (B) and inserting ``, and'', and by adding at the end the 
following new subparagraph:
                  ``(C) any interest paid or accrued (directly or 
                indirectly) by a taxable REIT subsidiary (as defined in 
                section 856(l)) of a real estate investment trust to 
                such trust.''.

SEC. 1105. 100 PERCENT TAX ON IMPROPERLY ALLOCATED AMOUNTS.

  (a) In General.--Subsection (b) of section 857 (relating to method of 
taxation of real estate investment trusts and holders of shares or 
certificates of beneficial interest) is amended by redesignating 
paragraphs (7) and (8) as paragraphs (8) and (9), respectively, and by 
inserting after paragraph (6) the following new paragraph:
          ``(7) Income from redetermined rents, redetermined 
        deductions, and excess interest.--
                  ``(A) Imposition of tax.--There is hereby imposed for 
                each taxable year of the real estate investment trust a 
                tax equal to 100 percent of redetermined rents, 
                redetermined deductions, and excess interest.
                  ``(B) Redetermined rents.--
                          ``(i) In general.--The term `redetermined 
                        rents' means rents from real property (as 
                        defined in subsection 856(d)) the amount of 
                        which would (but for subparagraph (E)) be 
                        reduced on distribution, apportionment, or 
                        allocation under section 482 to clearly reflect 
                        income as a result of services furnished or 
                        rendered by a taxable REIT subsidiary of the 
                        real estate investment trust to a tenant of 
                        such trust.
                          ``(ii) Exception for certain services.--
                        Clause (i) shall not apply to amounts received 
                        directly or indirectly by a real estate 
                        investment trust for services described in 
                        paragraph (1)(B) or (7)(C)(i) of section 
                        856(d).
                          ``(iii) Exception for de minimis amounts.--
                        Clause (i) shall not apply to amounts described 
                        in section 856(d)(7)(A) with respect to a 
                        property to the extent such amounts do not 
                        exceed the one percent threshold described in 
                        section 856(d)(7)(B) with respect to such 
                        property.
                          ``(iv) Exception for comparably priced 
                        services.--Clause (i) shall not apply to any 
                        service rendered by a taxable REIT subsidiary 
                        of a real estate investment trust to a tenant 
                        of such trust if--
                                  ``(I) such subsidiary renders a 
                                significant amount of similar services 
                                to persons other than such trust and 
                                tenants of such trustwho are unrelated 
(within the meaning of section 856(d)(8)(F)) to such subsidiary, trust, 
and tenants, but
                                  ``(II) only to the extent the charge 
                                for such service so rendered is 
                                substantially comparable to the charge 
                                for the similar services rendered to 
                                persons referred to in subclause (I).
                          ``(v) Exception for certain separately 
                        charged services.--Clause (i) shall not apply 
                        to any service rendered by a taxable REIT 
                        subsidiary of a real estate investment trust to 
                        a tenant of such trust if--
                                  ``(I) the rents paid to the trust by 
                                tenants (leasing at least 25 percent of 
                                the net leasable space in the trust's 
                                property) who are not receiving such 
                                service from such subsidiary are 
                                substantially comparable to the rents 
                                paid by tenants leasing comparable 
                                space who are receiving such service 
                                from such subsidiary, and
                                  ``(II) the charge for such service 
                                from such subsidiary is separately 
                                stated.
                          ``(vi) Exception for certain services based 
                        on subsidiary's income from the services.--
                        Clause (i) shall not apply to any service 
                        rendered by a taxable REIT subsidiary of a real 
                        estate investment trust to a tenant of such 
                        trust if the gross income of such subsidiary 
                        from such service is not less than 150 percent 
                        of such subsidiary's direct cost in furnishing 
                        or rendering the service.
                          ``(vii) Exceptions granted by secretary.--The 
                        Secretary may waive the tax otherwise imposed 
                        by subparagraph (A) if the trust establishes to 
                        the satisfaction of the Secretary that rents 
                        charged to tenants were established on an arms' 
                        length basis even though a taxable REIT 
                        subsidiary of the trust provided services to 
                        such tenants.
                  ``(C) Redetermined deductions.--The term 
                `redetermined deductions' means deductions (other than 
                redetermined rents) of a taxable REIT subsidiary of a 
                real estate investment trust if the amount of such 
                deductions would (but for subparagraph (E)) be 
                increased on distribution, apportionment, or allocation 
                under section 482 to clearly reflect income as between 
                such subsidiary and such trust.
                  ``(D) Excess interest.--The term `excess interest' 
                means any deductions for interest payments by a taxable 
                REIT subsidiary of a real estate investment trust to 
                such trust to the extent that the interest payments are 
                in excess of a rate that is commercially reasonable.
                  ``(E) Coordination with section 482.--The imposition 
                of tax under subparagraph (A) shall be in lieu of any 
                distribution, apportionment, or allocation under 
                section 482.
                  ``(F) Regulatory authority.--The Secretary shall 
                prescribe such regulations as may be necessary or 
                appropriate to carry out the purposes of this 
                paragraph. Until the Secretary prescribes such 
                regulations, real estate investment trusts and their 
                taxable REIT subsidiaries may base their allocations on 
                any reasonable method.''.
  (b) Amount Subject to Tax Not Required To Be Distributed.--
Subparagraph (E) of section 857(b)(2) (relating to real estate 
investment trust taxable income) is amended by striking ``paragraph 
(5)'' and inserting ``paragraphs (5) and (7)''.

SEC. 1106. EFFECTIVE DATE.

  (a) In General.--The amendments made by this part shall apply to 
taxable years beginning after December 31, 2000.
  (b) Transitional Rules Related to Section 1101.--
          (1) Existing arrangements.--
                  (A) In general.--Except as otherwise provided in this 
                paragraph, the amendment made by section 1101 shall not 
                apply to a real estate investment trust with respect 
                to--
                          (i) securities of a corporation held directly 
                        or indirectly by such trust on July 12, 1999,
                          (ii) securities of a corporation held by an 
                        entity on July 12, 1999, if such trust acquires 
                        control of such entity pursuant to a written 
                        binding contract in effect on such date and at 
                        all times thereafter before such acquisition,
                          (iii) securities received by such trust (or a 
                        successor) in exchange for, or with respect to, 
                        securities described in clause (i) or (ii) in a 
                        transaction in which gain or loss is not 
                        recognized, and
                          (iv) securities acquired directly or 
                        indirectly by such trust as part of a 
                        reorganization (as defined in section 368(a)(1) 
                        of the Internal Revenue Code of 1986) with 
                        respect to such trust if such securities are 
                        described in clause (i), (ii), or (iii) with 
                        respect to any other real estate investment 
                        trust.
                  (B) New trade or business or substantial new 
                assets.--Subparagraph (A) shall cease to apply to 
                securities of a corporation as of the first day after 
                July 12, 1999, on which such corporation engages in a 
                substantial new line of business, or acquires any 
                substantial asset, other than--
                          (i) pursuant to a binding contract in effect 
                        on such date and at all times thereafter before 
                        the acquisition of such asset,
                          (ii) in a transaction in which gain or loss 
                        is not recognized by reason of section 1031 or 
                        1033 of the Internal Revenue Code of 1986, or
                          (iii) in a reorganization (as so defined) 
                        with another corporation the securities of 
                        which are described in paragraph (1)(A) of this 
                        subsection.
          (2) Tax-free conversion.--If--
                  (A) at the time of an election for a corporation to 
                become a taxable REIT subsidiary, the amendment made by 
                section 1101 does not apply to such corporation by 
                reason of paragraph (1), and
                  (B) such election first takes effect before January 
                1, 2004,
        such election shall be treated as a reorganization qualifying 
        under section 368(a)(1)(A) of such Code.

                       PART II--HEALTH CARE REITS

SEC. 1111. HEALTH CARE REITS.

  (a) Special Foreclosure Rule for Health Care Properties.--Subsection 
(e) of section 856 (relating to special rules for foreclosure property) 
is amended by adding at the end the following new paragraph:
          ``(6) Special rule for qualified health care properties.--For 
        purposes of this subsection--
                  ``(A) Acquisition at expiration of lease.--The term 
                `foreclosure property' shall include any qualified 
                health care property acquired by a real estate 
                investment trust as the result of the termination of a 
                lease of such property (other than a termination by 
                reason of a default, or the imminence of a default, on 
                the lease).
                  ``(B) Grace period.--In the case of a qualified 
                health care property which is foreclosure property 
                solely by reason of subparagraph (A), in lieu of 
                applying paragraphs (2) and (3)--
                          ``(i) the qualified health care property 
                        shall cease to be foreclosure property as of 
                        the close of the second taxable year after the 
                        taxable year in which such trust acquired such 
                        property, and
                          ``(ii) if the real estate investment trust 
                        establishes to the satisfaction of the 
                        Secretary that an extension of the grace period 
                        in clause (i) is necessary to the orderly 
                        leasing or liquidation of the trust's interest 
                        in such qualified health care property, the 
                        Secretary may grant 1 or more extensions of the 
                        grace period for such qualified health care 
                        property.
                Any such extension shall not extend the grace period 
                beyond the close of the 6th year after the taxable year 
                in which such trust acquired such qualified health care 
                property.
                  ``(C) Income from independent contractors.--For 
                purposes of applying paragraph (4)(C) with respect to 
                qualified health care property which is foreclosure 
                property by reason of subparagraph (A) or paragraph 
                (1), income derived or received by the trust from an 
                independent contractor shall be disregarded to the 
                extent such income is attributable to--
                          ``(i) any lease of property in effect on the 
                        date the real estate investment trust acquired 
                        the qualified health care property (without 
                        regard to its renewal after such date so long 
                        as such renewal is pursuant to the terms of 
                        such lease as in effect on such date), or
                          ``(ii) any lease of property entered into 
                        after such date if--
                                  ``(I) on such date, a lease of such 
                                property from the trust was in effect, 
                                and
                                  ``(II) under the terms of the new 
                                lease, such trust receives a 
                                substantially similar or lesser benefit 
                                in comparison to the lease referred to 
                                in subclause (I).
                  ``(D) Qualified health care property.--
                          ``(i) In general.--The term `qualified health 
                        care property' means any real property 
                        (including interests therein), and any personal 
                        property incident to such real property, 
                        which--
                                  ``(I) is a health care facility, or
                                  ``(II) is necessary or incidental to 
                                the use of a health care facility.
                          ``(ii) Health care facility.--For purposes of 
                        clause (i), the term `health care facility' 
                        means a hospital, nursing facility, assisted 
                        living facility, congregate care facility, 
                        qualified continuing care facility (as defined 
                        in section 7872(g)(4)), or other licensed 
                        facility which extends medical or nursing or 
                        ancillary services to patients and which, 
                        immediately before the termination, expiration, 
                        default, or breach of the lease of or mortgage 
                        secured by such facility, was operated by a 
                        provider of such services which was eligible 
                        for participation in the medicare program under 
                        title XVIII of the Social Security Act with 
                        respect to such facility.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2000.

      PART III--CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES

SEC. 1121. CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES.

  (a) Distribution Requirement.--Clauses (i) and (ii) of section 
857(a)(1)(A) (relating to requirements applicable to real estate 
investment trusts) are each amended by striking ``95 percent (90 
percent for taxable years beginning before January 1, 1980)'' and 
inserting ``90 percent''.
  (b) Imposition of Tax.--Clause (i) of section 857(b)(5)(A) (relating 
to imposition of tax in case of failure to meet certain requirements) 
is amended by striking ``95 percent (90 percent in the case of taxable 
years beginning before January 1, 1980)'' and inserting ``90 percent''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

 PART IV--CLARIFICATION OF EXCEPTION FROM IMPERMISSIBLE TENANT SERVICE 
                                 INCOME

SEC. 1131. CLARIFICATION OF EXCEPTION FOR INDEPENDENT OPERATORS.

  (a) In General.--Paragraph (3) of section 856(d) (relating to 
independent contractor defined) is amended by adding at the end the 
following flush sentence:
        ``In the event that any class of stock of either the real 
        estate investment trust or such person is regularly traded on 
        an established securities market, only persons who own, 
        directly or indirectly, more than 5 percent of such class of 
        stock shall be taken into account as owning any of the stock of 
        such class for purposes of applying the 35 percent limitation 
        set forth in subparagraph (B) (but all of the outstanding stock 
        of such class shall be considered outstanding in order to 
        compute the denominator for purpose of determining the 
        applicable percentage of ownership).''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2000.

           PART V--MODIFICATION OF EARNINGS AND PROFITS RULES

SEC. 1141. MODIFICATION OF EARNINGS AND PROFITS RULES.

  (a) Rules for Determining Whether Regulated Investment Company Has 
Earnings and Profits From Non-RIC Year.--Subsection (c) of section 852 
is amended by adding at the end the following new paragraph:
          ``(3) Distributions to meet requirements of subsection 
        (a)(2)(B).--Any distribution which is made in order to comply 
        with the requirements of subsection (a)(2)(B)--
                  ``(A) shall be treated for purposes of this 
                subsection and subsection (a)(2)(B) as made from the 
                earliest earnings and profits accumulated in any 
                taxable year to which the provisions of this part did 
                not apply rather than the most recently accumulated 
                earnings and profits, and
                  ``(B) to the extent treated under subparagraph (A) as 
                made from accumulated earnings and profits, shall not 
                be treated as a distribution for purposes of subsection 
                (b)(2)(D) and section 855.''.
  (b) Clarification of Application of REIT Spillover Dividend Rules to 
Distributions To Meet Qualification Requirement.--Subparagraph (B) of 
section 857(d)(3) is amended by inserting before the period ``and 
section 858''.
  (c) Application of Deficiency Dividend Procedures.--Paragraph (1) of 
section 852(e) is amended by adding at the end the following new 
sentence: ``If the determination under subparagraph (A) is solely as a 
result of the failure to meet the requirements of subsection (a)(2), 
the preceding sentence shall also apply for purposes of applying 
subsection (a)(2) to the non-RIC year.''
  (d) Effective Date.--The amendments made by this section shall apply 
to distributions after December 31, 2000.

          PART VI--STUDY RELATING TO TAXABLE REIT SUBSIDIARIES

SEC. 1151. STUDY RELATING TO TAXABLE REIT SUBSIDIARIES.

  The Commissioner of the Internal Revenue shall conduct a study to 
determine how many taxable REIT subsidiaries are in existence and the 
aggregate amount of taxes paid by such subsidiaries. The Secretary 
shall submit a report to the Congress describing the results of such 
study.

     Subtitle B--Modification of At-Risk Rules for Publicly Traded 
                            Nonrecourse Debt

SEC. 1161. TREATMENT UNDER AT-RISK RULES OF PUBLICLY TRADED NONRECOURSE 
                    DEBT.

  (a) In General.--Subparagraph (A) of section 465(b)(6) (relating to 
qualified nonrecourse financing treated as amount at risk) is amended 
by striking ``share of'' and all that follows and inserting ``share 
of--
                          ``(i) any qualified nonrecourse financing 
                        which is secured by real property used in such 
                        activity, and
                          ``(ii) any other financing which--
                                  ``(I) would (but for subparagraph 
                                (B)(ii)) be qualified nonrecourse 
                                financing,
                                  ``(II) is qualified publicly traded 
                                debt, and
                                  ``(III) is not borrowed by the 
                                taxpayer from a person described in 
                                subclause (I), (II), or (III) of 
                                section 49(a)(1)(D)(iv).''
  (b) Qualified Publicly Traded Debt.--Paragraph (6) of section 465(b) 
is amended by adding at the end the following new subparagraph:
                  ``(F) Qualified publicly traded debt.--For purposes 
                of subparagraph (A), the term `qualified publicly 
                traded debt' means any debt instrument which is readily 
                tradable on an established securities market. Such term 
                shall not include any debt instrument which has a yield 
                to maturity which equals or exceeds the limitation in 
                section 163(i)(1)(B).''
  (c) Effective Date.--The amendments made by this section shall apply 
to debt instruments issued after December 31, 1999.

     Subtitle C--Treatment of Construction Allowances and Certain 
                 Contributions to Capital of Retailers

SEC. 1171. EXCLUSION FROM GROSS INCOME OF QUALIFIED LESSEE CONSTRUCTION 
                    ALLOWANCES NOT LIMITED FOR CERTAIN RETAILERS TO 
                    SHORT-TERM LEASES.

  (a) In General.--Subsection (a) section 110 (relating to qualified 
lessee construction allowances for short-term leases) is amended by 
adding at the end the following new sentence: ``Paragraph (1) shall not 
apply if the lessee is a qualified retail business (as defined by 
section 118(d)(3) without regard to the proximity requirement in 
subparagraph (A) thereof).''.
  (b) Effective Date.--The amendment made by this section shall apply 
to leases entered into after December 31, 1999.

SEC. 1172. EXCLUSION FROM GROSS INCOME FOR CERTAIN CONTRIBUTIONS TO THE 
                    CAPITAL OF CERTAIN RETAILERS.

  (a) In General.--Section 118 (relating to contributions to the 
capital of a corporation) is amended by redesignating subsections (d) 
and (e) as subsections (e) and (f), respectively, and by inserting 
after subsection (c) the following new subsection:
  ``(d) Safe Harbor for Contributions to Certain Retailers.--
          ``(1) General rule.--For purposes of this section, the term 
        `contribution to the capital of the taxpayer' includes any 
        amount of money or other property received by the taxpayer if--
                  ``(A) the taxpayer has entered into an agreement to 
                operate (or cause to be operated) a qualified retail 
                business at a particular location for a period of at 
                least 15 years,
                  ``(B)(i) immediately after the receipt of such money 
                or other property, the taxpayer owns the land and the 
                structure to be used by the taxpayer in carrying on a 
                qualified retail business at such location, or
                  ``(ii) the taxpayer uses such amount to acquire 
                ownership of at least such land and structure,
                  ``(C) such amount meets the requirements of the 
                expenditure rule of paragraph (2), and
                  ``(D) the contributor of such amount does not hold a 
                beneficial interest in any property located on the 
                premises of such qualified retail business other than 
                de minimis amounts of property associated with the 
                operation of property adjacent to such premises.
          ``(2) Expenditure rule.--An amount meets the requirements of 
        this paragraph if--
                  ``(A) an amount equal to such amount is expended for 
                the acquisition of land or for acquisition or 
                construction of other property described in section 
                1231(b)--
                          ``(i) which was the purpose motivating the 
                        contribution, and
                          ``(ii) which is used predominantly in a 
                        qualified retail business at the location 
                        referred to in paragraph (1)(A),
                  ``(B) the expenditure referred to in subparagraph (A) 
                occurs before the end of the second taxable year after 
                the year in which such amount was received, and
                  ``(C) accurate records are kept of the amounts 
                contributed and expenditures made on the basis of the 
                project for which the contribution was made and on the 
                basis of the year of the contribution expenditure.
          ``(3) Definition of qualified retail business.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), the term `qualified retail business' means a trade 
                or business of selling tangible personal property to 
                the general public if the premises on which such trade 
                or business is conducted is in close proximity to 
                property that the contributor of the amount referred to 
                in paragraph (1) is developing or operating for profit 
                (or, in the case of a contributor which is a 
                governmental entity, is attempting to revitalize).
                  ``(B) Services.--A trade or business shall not fail 
                to be treated as a qualified retail business by reason 
                of sales of services if such sales are incident to the 
                sale of tangible personal property or if the services 
                are de minimis in amount.
          ``(4) Special rules.--
                  ``(A) Leases.--For purposes of paragraph (1)(B)(i), 
                property shall be treated as owned by the taxpayer if 
                the taxpayer is the lessee of such property under a 
                lease having a term of at least 30 years and on which 
                only nominal rent is required.
                  ``(B) Controlled groups.--For purposes of this 
                subsection, all persons treated as a single employer 
                under subsection (a) or (b) of section 52 shall be 
                treated as 1 person.
          ``(5) Disallowance of deductions and credits; adjusted 
        basis.--Notwithstanding any other provision of this subtitle, 
        no deduction or credit shall be allowed for, or by reason of, 
        any amount received by the taxpayer which constitutes a 
        contribution to capital to which this subsection applies. The 
        adjusted basis of any property acquired with the contributions 
        to which this subsection applies shall be reduced by the amount 
        of the contributions to which this subsection applies.
          ``(6) Regulations.--The Secretary shall prescribe such 
        regulations are appropriate to prevent the abuse of the 
        purposes of the subsection, including regulations which 
        allocate income and deductions (or adjust the amount excludable 
        under this subsection) in cases in which--
                  ``(A) payments in excess of fair market value are 
                paid to the contributor by the taxpayer, or
                  ``(B) the contributor and the taxpayer are related 
                parties.''
  (b) Conforming Amendment.--Subsection (e) of section 118 (as 
redesignated by subsection (a)) is amended by adding at the end the 
following flush sentence:
``Rules similar to the rules of the preceding sentence shall apply to 
any amount treated as a contribution to the capital of the taxpayer 
under subsection (d).''
  (c) Effective Date.--The amendments made by this section shall apply 
to amounts received after December 31, 1999.

               TITLE XII--PROVISIONS RELATING TO PENSIONS

                     Subtitle A--Expanding Coverage

SEC. 1201. INCREASE IN BENEFIT AND CONTRIBUTION LIMITS.

  (a) Defined Benefit Plans.--
          (1) Dollar limit.--
                  (A) Subparagraph (A) of section 415(b)(1) (relating 
                to limitation for defined benefit plans) is amended by 
                striking ``$90,000'' and inserting ``$160,000''.
          (B) Subparagraphs (C) and (D) of section 415(b)(2) are each 
        amended by striking ``$90,000'' each place it appears in the 
        headings and the text and inserting ``$160,000''.
          (C) Paragraph (7) of section 415(b) (relating to benefits 
        under certain collectively bargained plans) is amended by 
        striking ``the greater of $68,212 or one-half the amount 
        otherwise applicable for such year under paragraph (1)(A) for 
        `$90,000' '' and inserting ``one-half the amount otherwise 
        applicable for such year under paragraph (1)(A) for `$160,000' 
        ''.
          (2) Limit reduced when benefit begins before age 62.--
        Subparagraph (C) of section 415(b)(2) is amended by striking 
        ``the social security retirement age'' each place it appears in 
        the heading and text and inserting ``age 62''.
          (3) Limit increased when benefit begins after age 65.--
        Subparagraph (D) of section 415(b)(2) is amended by striking 
        ``the social security retirement age'' each place it appears in 
        the heading and text and inserting ``age 65''.
          (4) Cost-of-living adjustments.--Subsection (d) of section 
        415 (related to cost-of-living adjustments) is amended--
                  (A) in paragraph (1)(A) by striking ``$90,000'' and 
                inserting ``$160,000'', and
                  (B) in paragraph (3)(A)--
                          (i) by striking ``$90,000'' in the heading 
                        and inserting ``$160,000'', and
                          (ii) by striking ``October 1, 1986'' and 
                        inserting ``July 1, 2000''.
          (5) Conforming amendment.--Section 415(b)(2) is amended by 
        striking subparagraph (F).
  (b) Defined Contribution Plans.--
          (1) Dollar limit.--Subparagraph (A) of section 415(c)(1) 
        (relating to limitation for defined contribution plans) is 
        amended by striking ``$30,000'' and inserting ``$40,000''.
          (2) Cost-of-living adjustments.--Subsection (d) of section 
        415 (related to cost-of-living adjustments) is amended--
                  (A) in paragraph (1)(C) by striking ``$30,000'' and 
                inserting ``$40,000'', and
                  (B) in paragraph (3)(D)--
                          (i) by striking ``$30,000'' in the heading 
                        and inserting ``$40,000'', and
                          (ii) by striking ``October 1, 1993'' and 
                        inserting ``July 1, 2000''.
  (c) Qualified Trusts.--
          (1) Compensation limit.--Sections 401(a)(17), 404(l), 408(k), 
        and 505(b)(7) are each amended by striking ``$150,000'' each 
        place it appears and inserting ``$200,000''.
          (2) Base period and rounding of cost-of-living adjustment.--
        Subparagraph (B) of section 401(a)(17) is amended--
                  (A) by striking ``October 1, 1993'' and inserting 
                ``July 1, 2000'', and
                  (B) by striking ``$10,000'' both places it appears 
                and inserting ``$5,000''.
  (d) Elective Deferrals.--
          (1) In general.--Paragraph (1) of section 402(g) (relating to 
        limitation on exclusion for elective deferrals) is amended to 
        read as follows:
          ``(1) In general.--
                  ``(A) Limitation.--Notwithstanding subsections (e)(3) 
                and (h)(1)(B), the elective deferrals of any individual 
                for any taxable year shall be included in such 
                individual's gross income to the extent the amount of 
                such deferrals for the taxable year exceeds the 
                applicable dollar amount.
                  ``(B) Applicable dollar amount.--For purposes of 
                subparagraph (A), the applicable dollar amount shall be 
                the amount determined in accordance with the following 
                table:

                ``Taxable year:
                                              Applicable dollar amount:
                  2001.....................................    $11,000 
                  2002.....................................    $12,000 
                  2003.....................................    $13,000 
                  2004.....................................    $14,000 
                  2005 or thereafter....................... $15,000.''.

          (2) Cost-of-living adjustment.--Paragraph (5) of section 
        402(g) is amended to read as follows:
          ``(5) Cost-of-living adjustment.--In the case of taxable 
        years beginning after December 31, 2005, the Secretary shall 
        adjust the $15,000 amount under paragraph (1)(B) at the same 
        time and in the same manner as under section 415(d); except 
        that the base period shall be the calendar quarter beginning 
        July 1, 2004, and any increase under this paragraph which is 
        not a multiple of $500 shall be rounded to the next lowest 
        multiple of $500.''.
          (3) Conforming amendments.--
                  (A) Section 402(g) (relating to limitation on 
                exclusion for elective deferrals), as amended by 
                paragraphs (1) and (2), is further amended by striking 
                paragraph (4) and redesignating paragraphs (5), (6), 
                (7), (8), and (9) as paragraphs (4), (5), (6), (7), and 
                (8), respectively.
                  (B) Paragraph (2) of section 457(c) is amended by 
                striking ``402(g)(8)(A)(iii)'' and inserting 
                ``402(g)(7)(A)(iii)''.
                  (C) Clause (iii) of section 501(c)(18)(D) is amended 
                by striking ``(other than paragraph (4) thereof)''.
  (e) Deferred Compensation Plans of State and Local Governments and 
Tax-Exempt Organizations.--
          (1) In general.--Section 457 (relating to deferred 
        compensation plans of State and local governments and tax-
        exempt organizations) is amended--
                  (A) in subsections (b)(2)(A) and (c)(1) by striking 
                ``$7,500'' each place it appears and inserting ``the 
                applicable dollar amount'', and
                  (B) in subsection (b)(3)(A) by striking ``$15,000'' 
                and inserting ``twice the dollar amount in effect under 
                subsection (b)(2)(A)''.
          (2) Applicable dollar amount; cost-of-living adjustment.--
        Paragraph (15) of section 457(e) is amended to read as follows:
          ``(15) Applicable dollar amount.--
                  ``(A) In general.--The applicable dollar amount shall 
                be the amount determined in accordance with the 
                following table:

                ``Taxable year:
                                              Applicable dollar amount:
                  2001.....................................    $11,000 
                  2002.....................................    $12,000 
                  2003.....................................    $13,000 
                  2004.....................................    $14,000 
                        2005 or thereafter.................    $15,000.

                  ``(B) Cost-of-living adjustments.--In the case of 
                taxable years beginning after December 31, 2005, the 
                Secretary shall adjust the $15,000 amount specified in 
                the table in subparagraph (A) at the same time and in 
                the same manner as under section 415(d), except that 
                the base period shall be the calendar quarter beginning 
                July 1, 2004, and any increase under this paragraph 
                which is not a multiple of $500 shall be rounded to the 
                next lowest multiple of $500.''.
  (f) Simple Retirement Accounts.--
          (1) Limitation.--Clause (ii) of section 408(p)(2)(A) 
        (relating to general rule for qualified salary reduction 
        arrangement) is amended by striking ``$6,000'' and inserting 
        ``the applicable dollar amount''.
          (2) Applicable dollar amount.--Subparagraph (E) of 408(p)(2) 
        is amended to read as follows:
                  ``(E) Applicable dollar amount; cost-of-living 
                adjustment.--
                          ``(i) In general.--For purposes of 
                        subparagraph (A)(ii), the applicable dollar 
                        amount shall be the amount determined in 
                        accordance with the following table:

                  ``Year:
                                              Applicable dollar amount:
                          2001.............................     $7,000 
                          2002.............................     $8,000 
                          2003.............................     $9,000 
                          2004 or thereafter...............    $10,000.

                          ``(ii) Cost-of-living adjustment.--In the 
                        case of a year beginning after December 31, 
                        2004, the Secretary shall adjust the $10,000 
                        amount under clause (i) at the same time and in 
                        the same manner as under section 415(d), except 
                        that the base period taken into account shall 
                        be the calendar quarter beginning July 1, 2003, 
                        and any increase under this subparagraph which 
                        is not a multiple of $500 shall be rounded to 
                        the next lower multiple of $500.''.
          (3) Conforming amendments.--
                  (A) Clause (I) of section 401(k)(11)(B)(i) is amended 
                by striking ``$6,000'' and inserting ``the amount in 
                effect under section 408(p)(2)(A)(ii)''.
                  (B) Section 401(k)(11) is amended by striking 
                subparagraph (E).
  (g) Rounding Rule Relating to Defined Benefit Plans and Defined 
Contribution Plans.--Paragraph (4) of section 415(d) is amended to read 
as follows:
          ``(4) Rounding.--
                  ``(A) $160,000 amount.--Any increase under 
                subparagraph (A) of paragraph (1) which is not a 
                multiple of $5,000 shall be rounded to the next lowest 
                multiple of $5,000.
                  ``(B) $40,000 amount.--Any increase under 
                subparagraph (C) of paragraph (1) which is not a 
                multiple of $1,000 shall be rounded to the next lowest 
                multiple of $1,000.''.
  (h) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to years beginning after December 31, 2000.
          (2) Collective bargaining agreements.--In the case of a plan 
        maintained pursuant to 1 or more collective bargaining 
        agreements between employee representatives and 1 or more 
        employers ratified by the date of enactment of this Act, the 
        amendments made by this section shall not apply to 
        contributions or benefits pursuant to any such agreement for 
        years beginning before the earlier of--
                  (A) the later of--
                          (i) the date on which the last of such 
                        collective bargaining agreements terminates 
                        (determined without regard to any extension 
                        thereof on or after such date of enactment), or
                          (ii) January 1, 2001, or
                  (B) January 1, 2005.

SEC. 1202. PLAN LOANS FOR SUBCHAPTER S OWNERS, PARTNERS, AND SOLE 
                    PROPRIETORS.

  (a) In General.--Subparagraph (B) of section 4975(f)(6) (relating to 
exemptions not to apply to certain transactions) is amended by adding 
at the end the following new clause:
                          ``(iii) Loan exception.--For purposes of 
                        subparagraph (A)(i), the term `owner-employee' 
                        shall only include a person described in 
                        subclause (II) or (III) of clause (i).''
  (b) Effective Date.--The amendment made by this section shall apply 
to loans made after December 31, 2000.

SEC. 1203. MODIFICATION OF TOP-HEAVY RULES.

  (a) Simplification of Definition of Key Employee.--
          (1) In general.--Section 416(i)(1)(A) (defining key employee) 
        is amended--
                  (A) by striking ``or any of the 4 preceding plan 
                years'' in the matter preceding clause (i),
                  (B) by striking clause (i) and inserting the 
                following:
                          ``(i) an officer of the employer having an 
                        annual compensation greater than $150,000,'',
                  (C) by striking clause (ii) and redesignating clauses 
                (iii) and (iv) as clauses (ii) and (iii), respectively, 
                and
                  (D) by striking the second sentence in the matter 
                following clause (iii), as redesignated by subparagraph 
                (C).
          (2) Conforming amendment.--Section 416(i)(1)(B)(iii) is 
        amended by striking ``and subparagraph (A)(ii)''.
  (b) Matching Contributions Taken Into Account for Minimum 
Contribution Requirements.--Section 416(c)(2)(A) (relating to defined 
contribution plans) is amended by adding at the end the following: 
``Employer matching contributions (as defined in section 401(m)(4)(A)) 
shall be taken into account for purposes of this subparagraph.''.
  (c) Distributions During Last Year Before Determination Date Taken 
Into Account.--
          (1) In general.--Paragraph (3) of section 416(g) is amended 
        to read as follows:
          ``(3) Distributions during last year before determination 
        date taken into account.--
                  ``(A) In general.--For purposes of determining--
                          ``(i) the present value of the cumulative 
                        accrued benefit for any employee, or
                          ``(ii) the amount of the account of any 
                        employee,
                such present value or amount shall be increased by the 
                aggregate distributions made with respect to such 
                employee under the plan during the 1-year period ending 
                on the determination date. The preceding sentence shall 
                also apply to distributions under a terminated plan 
                which if it had not been terminated would have been 
                required to be included in an aggregation group.
                  ``(B) 5-year period in case of in-service 
                distribution.--In the case of any distribution made for 
                a reason other than separation from service, death, or 
                disability, subparagraph (A) shall be applied by 
                substituting `5-year period' for `1-year period'.''.
          (2) Benefits not taken into account.--Subparagraph (E) of 
        section 416(g)(4) is amended--
                  (A) by striking ``last 5 years'' in the heading and 
                inserting ``last year before determination date'', and
                  (B) by striking ``5-year period'' and inserting ``1-
                year period''.
  (d) Definition of Top-Heavy Plans.--Paragraph (4) of section 416(g) 
(relating to other special rules for top-heavy plans) is amended by 
adding at the end the following new subparagraph:
                  ``(H) Cash or deferred arrangements using alternative 
                methods of meeting nondiscrimination requirements.--The 
                term `top-heavy plan' shall not include a plan which 
                consists solely of--
                          ``(i) a cash or deferred arrangement which 
                        meets the requirements of section 401(k)(12), 
                        and
                          ``(ii) matching contributions with respect to 
                        which the requirements of section 401(m)(11) 
                        are met.
                If, but for this subparagraph, a plan would be treated 
                as a top-heavy plan because it is a member of an 
                aggregation group which is a top-heavy group, 
                contributions under the plan may be taken into account 
                in determining whether any other plan in the group 
                meets the requirements of subsection (c)(2).''
  (e) Frozen Plan Exempt From Minimum Benefit Requirement.--
Subparagraph (C) of section 416(c)(1) (relating to defined benefit 
plans) is amended--
                  (A) in clause (i), by striking ``clause (ii)'' and 
                inserting ``clause (ii) or (iii)'', and
                  (B) by adding at the end the following:
                          ``(iii) Exception for frozen plan.--For 
                        purposes of determining an employee's years of 
                        service with the employer, any service with the 
                        employer shall be disregarded to the extent 
                        that such service occurs during a plan year 
                        when the plan benefits (within the meaning of 
                        section 410(b)) no employee or former 
                        employee.''.
  (f) Effective Date.--The amendments made by this section shall apply 
to years beginning after December 31, 2000.

SEC. 1204. ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF 
                    DEDUCTION LIMITS.

  (a) In General.--Section 404 (relating to deduction for contributions 
of an employer to an employees' trust or annuity plan and compensation 
under a deferred payment plan) is amended by adding at the end the 
following new subsection:
  ``(n) Elective Deferrals Not Taken Into Account for Purposes of 
Deduction Limits.--Elective deferrals (as defined in section 402(g)(3)) 
shall not be subject to any limitation contained in paragraph (3), (7), 
or (9) of subsection (a), and such elective deferrals shall not be 
taken into account in applying any such limitation to any other 
contributions.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to years beginning after December 31, 2000.

SEC. 1205. REDUCED PBGC PREMIUM FOR NEW PLANS OF SMALL EMPLOYERS.

  (a) In General.--Subparagraph (A) of section 4006(a)(3) of the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 
1306(a)(3)(A)) is amended--
          (1) in clause (i), by inserting ``other than a new single-
        employer plan (as defined in subparagraph (F)) maintained by a 
        small employer (as so defined),'' after ``single-employer 
        plan,'',
          (2) in clause (iii), by striking the period at the end and 
        inserting ``, and'', and
          (3) by adding at the end the following new clause:
          ``(iv) in the case of a new single-employer plan (as defined 
        in subparagraph (F)) maintained by a small employer (as so 
        defined) for the plan year, $5 for each individual who is a 
        participant in such plan during the plan year.''.
  (b) Definition of New Single-Employer Plan.--Section 4006(a)(3) of 
the Employee Retirement Income Security Act of 1974 (29 U.S.C. 
1306(a)(3)) is amended by adding at the end the following new 
subparagraph:
  ``(F)(i) For purposes of this paragraph, a single-employer plan 
maintained by a contributing sponsor shall be treated as a new single-
employer plan for each of its first 5 plan years if, during the 36-
month period ending on the date of the adoption of such plan, the 
sponsor or any member of such sponsor's controlled group (or any 
predecessor of either) had not established or maintained a plan to 
which this title applies with respect to which benefits were accrued 
for substantially the same employees as are in the new single-employer 
plan.
  ``(ii)(I) For purposes of this paragraph, the term `small employer' 
means an employer which on the first day of any plan year has, in 
aggregation with all members of the controlled group of such employer, 
100 or fewer employees.
  ``(II) In the case of a plan maintained by 2 or more contributing 
sponsors that are not part of the same controlled group, the employees 
of all contributing sponsors and controlled groups of such sponsors 
shall be aggregated for purposes of determining whether any 
contributing sponsor is a small employer.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to plans established after December 31, 2000.

SEC. 1206. REDUCTION OF ADDITIONAL PBGC PREMIUM FOR NEW AND SMALL 
                    PLANS.

  (a) New Plans.--Subparagraph (E) of section 4006(a)(3) of the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 
1306(a)(3)(E)) is amended by adding at the end the following new 
clause:
  ``(v) In the case of a new defined benefit plan, the amount 
determined under clause (ii) for any plan year shall be an amount equal 
to the product of the amount determined under clause (ii) and the 
applicable percentage. For purposes of this clause, the term 
`applicable percentage' means--
          ``(I) 0 percent, for the first plan year.
          ``(II) 20 percent, for the second plan year.
          ``(III) 40 percent, for the third plan year.
          ``(IV) 60 percent, for the fourth plan year.
          ``(V) 80 percent, for the fifth plan year.
For purposes of this clause, a defined benefit plan (as defined in 
section 3(35)) maintained by a contributing sponsor shall be treated as 
a new defined benefit plan for its first 5 plan years if, during the 
36-month period ending on the date of the adoption of the plan, the 
sponsor and each member of any controlled group including the sponsor 
(or any predecessor of either) did not establish or maintain a plan to 
which this title applies with respect to which benefits were accrued 
for substantially the same employees as are in the new plan.''.
  (b) Small Plans.--Paragraph (3) of section 4006(a) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1306(a)) is amended--
          (1) in subparagraph (E)(i) by striking ``The'' and inserting 
        ``Except as provided in subparagraph (G), the'', and
          (2) by inserting after subparagraph (F) the following new 
        subparagraph:
  ``(G)(i) In the case of an employer who has 25 or fewer employees on 
the first day of the plan year, the additional premium determined under 
subparagraph (E) for each participant shall not exceed $5 multiplied by 
the number of participants in the plan as of the close of the preceding 
plan year.
  ``(ii) For purposes of clause (i), whether an employer has 25 or 
fewer employees on the first day of the plan year is determined taking 
into consideration all of the employees of all members of the 
contributing sponsor's controlled group. In the case of a plan 
maintained by 2 or more contributing sponsors, the employees of all 
contributing sponsors and their controlled groups shall be aggregated 
for purposes of determining whether 25-or-fewer-employees limitation 
has been satisfied.''.
  (c) Effective Dates.--
          (1) Subsection (a).--The amendments made by subsection (a) 
        shall apply to plans established after December 31, 2000.
          (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to plan years beginning after December 31, 2000.

SEC. 1207. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED 
                    COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS 
                    AND TAX-EXEMPT ORGANIZATIONS.

  (a) In General.--Subsection (c) of section 457 (relating to deferred 
compensation plans of State and local governments and tax-exempt 
organizations), as amended by section 1201(e), is amended to read as 
follows:
  ``(c) Limitation.--The maximum amount of the compensation of any one 
individual which may be deferred under subsection (a) during any 
taxable year shall not exceed the amount in effect under subsection 
(b)(2)(A) (as modified by any adjustment provided under subsection 
(b)(3)).''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to years beginning after December 31, 2000.

SEC. 1208. ELIMINATION OF USER FEE FOR REQUESTS TO IRS REGARDING 
                    PENSION PLANS.

  (a) Elimination of Certain User Fees.--The Secretary of the Treasury 
or the Secretary's delegate shall not require payment of user fees 
under the program established under section 7527 of the Internal 
Revenue Code of 1986 for requests to the Internal Revenue Service for 
determination letters with respect to the qualified status of a pension 
benefit plan maintained solely by one or more eligible employers or any 
trust which is part of the plan. The preceding sentence shall not apply 
to any request made by the sponsor of any prototype or similar plan 
which the sponsor intends to market to participating employers.
  (b) Pension Benefit Plan.--For purposes of this section, the term 
``pension benefit plan'' means a pension, profit-sharing, stock bonus, 
annuity, or employee stock ownership plan.
  (c) Eligible Employer.--For purposes of this section, the term 
``eligible employer'' has the same meaning given such term in section 
408(p)(2)(C)(i)(I) of the Internal Revenue Code of 1986. The 
determination of whether an employer is an eligible employer under this 
section shall be made as of the date of the request described in 
subsection (a).
  (d) Effective Date.--The provisions of this section shall apply with 
respect to requests made after December 31, 2000.

SEC. 1209. DEDUCTION LIMITS.

  (a) In General.--Section 404(a) (relating to general rule) is amended 
by adding at the end the following:
          ``(12) Definition of compensation.--For purposes of 
        paragraphs (3), (7), (8), and (9), the term `compensation' 
        shall include amounts treated as participant's compensation 
        under subparagraph (C) or (D) of section 415(c)(3).''.
  (b) Conforming Amendment.--Subparagraph (B) of section 404(a)(3) is 
amended by striking the last sentence thereof.
  (c) Effective Date.--The amendments made by this section shall apply 
to years beginning after December 31, 2000.

SEC. 1210. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX 
                    CONTRIBUTIONS.

  (a) In General.--Subpart A of part I of subchapter D of chapter 1 
(relating to deferred compensation, etc.) is amended by inserting after 
section 402 the following new section:

``SEC. 402A. OPTIONAL TREATMENT OF ELECTIVE DEFERRALS AS PLUS 
                    CONTRIBUTIONS.

  ``(a) General Rule.--If an applicable retirement plan includes a 
qualified plus contribution program--
          ``(1) any designated plus contribution made by an employee 
        pursuant to the program shall be treated as an elective 
        deferral for purposes of this chapter, except that such 
        contribution shall not be excludable from gross income, and
          ``(2) such plan (and any arrangement which is part of such 
        plan) shall not be treated as failing to meet any requirement 
        of this chapter solely by reason of including such program.
  ``(b) Qualified Plus Contribution Program.--For purposes of this 
section--
          ``(1) In general.--The term `qualified plus contribution 
        program' means a program under which an employee may elect to 
        make designated plus contributions in lieu of all or a portion 
        of elective deferrals the employee is otherwise eligible to 
        make under the applicable retirement plan.
          ``(2) Separate accounting required.--A program shall not be 
        treated as a qualified plus contribution program unless the 
        applicable retirement plan--
                  ``(A) establishes separate accounts (`designated plus 
                accounts') for the designated plus contributions of 
                each employee and any earnings properly allocable to 
                the contributions, and
                  ``(B) maintains separate recordkeeping with respect 
                to each account.
  ``(c) Definitions and Rules Relating to Designated Plus 
Contributions.--For purposes of this section--
          ``(1) Designated plus contribution.--The term `designated 
        plus contribution' means any elective deferral which--
                  ``(A) is excludable from gross income of an employee 
                without regard to this section, and
                  ``(B) the employee designates (at such time and in 
                such manner as the Secretary may prescribe) as not 
                being so excludable.
          ``(2) Designation limits.--The amount of elective deferrals 
        which an employee may designate under paragraph (1) shall not 
        exceed the excess (if any) of--
                  ``(A) the maximum amount of elective deferrals 
                excludable from gross income of the employee for the 
                taxable year (without regard to this section), over
                  ``(B) the aggregate amount of elective deferrals of 
                the employee for the taxable year which the employee 
                does not designate under paragraph (1).
          ``(3) Rollover contributions.--
                  ``(A) In general.--A rollover contribution of any 
                payment or distribution from a designated plus account 
                which is otherwise allowable under this chapter may be 
                made only if the contribution is to--
                          ``(i) another designated plus account of the 
                        individual from whose account the payment or 
                        distribution was made, or
                          ``(ii) a Roth IRA of such individual.
                  ``(B) Coordination with limit.--Any rollover 
                contribution to a designated plus account under 
                subparagraph (A) shall not be taken into account for 
                purposes of paragraph (1).
  ``(d) Distribution Rules.--For purposes of this title--
          ``(1) Exclusion.--Any qualified distribution from a 
        designated plus account shall not be includible in gross 
        income.
          ``(2) Qualified distribution.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `qualified distribution' 
                has the meaning given such term by section 
                408A(d)(2)(A) (without regard to clause (iv) thereof).
                  ``(B) Distributions within nonexclusion period.--A 
                payment or distribution from a designated plus account 
                shall not be treated as a qualified distribution if 
                such payment or distribution is made within the 5-
                taxable-year period beginning with the earlier of--
                          ``(i) the 1st taxable year for which the 
                        individual made a designated plus contribution 
                        to any designated plus account established for 
                        such individual under the same applicable 
                        retirement plan, or
                          ``(ii) if a rollover contribution was made to 
                        such designated plus account from a designated 
                        plus account previously established for such 
                        individual under another applicable retirement 
                        plan, the 1st taxable year for which the 
                        individual made a designated plus contribution 
                        to such previously established account.
                  ``(C) Distributions of excess deferrals and 
                earnings.--The term `qualified distribution' shall not 
                include any distribution of any excess deferral under 
                section 402(g)(2) and any income on the excess 
                deferral.
          ``(3) Aggregation rules.--Section 72 shall be applied 
        separately with respect to distributions and payments from a 
        designated plus account and other distributions and payments 
        from the plan.
  ``(e) Other Definitions.--For purposes of this section--
          ``(1) Applicable retirement plan.--The term `applicable 
        retirement plan' means--
                  ``(A) an employees' trust described in section 401(a) 
                which is exempt from tax under section 501(a), and
                  ``(B) a plan under which amounts are contributed by 
                an individual's employer for an annuity contract 
                described in section 403(b).
          ``(2) Elective deferral.--The term `elective deferral' means 
        any elective deferral described in subparagraph (A) or (C) of 
        section 402(g)(3).''
  (b) Excess Deferrals.--Section 402(g) (relating to limitation on 
exclusion for elective deferrals) is amended--
          (1) by adding at the end of paragraph (1) the following new 
        sentence: ``The preceding sentence shall not apply to so much 
        of such excess as does not exceed the designated plus 
        contributions of the individual for the taxable year.'', and
          (2) by inserting ``(or would be included but for the last 
        sentence thereof)'' after ``paragraph (1)'' in paragraph 
        (2)(A).
  (c) Rollovers.--Subparagraph (B) of section 402(c)(8) is amended by 
adding at the end the following:
                ``If any portion of an eligible rollover distribution 
                is attributable to payments or distributions from a 
                designated plus account (as defined in section 402A), 
                an eligible retirement plan with respect to such 
                portion shall include only another designated plus 
                account and a Roth IRA.''
  (d) Reporting Requirements.--
          (1) W-2 information.--Section 6051(a)(8) is amended by 
        inserting ``, including the amount of designated plus 
        contributions (as defined in section 402A)'' before the comma 
        at the end.
          (2) Information.--Section 6047 is amended by redesignating 
        subsection (f) as subsection (g) and by inserting after 
        subsection (e) the following new subsection:
  ``(f) Designated Plus Contributions.--The Secretary shall require the 
plan administrator of each applicable retirement plan (as defined in 
section 402A) to make such returns and reports regarding designated 
plus contributions (as so defined) to the Secretary, participants and 
beneficiaries of the plan, and such other persons as the Secretary may 
prescribe.''
  (e) Conforming Amendments.--
          (1) Section 408A(e) is amended by adding after the first 
        sentence the following new sentence: ``Such term includes a 
        rollover contribution described in section 402A(c)(3)(A).''
          (2) The table of sections for subpart A of part I of 
        subchapter D of chapter 1 is amended by inserting after the 
        item relating to section 402 the following new item:

``Sec. 402A. Optional treatment of elective deferrals as plus 
contributions.''

  (f) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

SEC. 1211. INCREASE IN MINIMUM DEFINED BENEFIT LIMIT UNDER SECTION 415.

  (a) In General.--Paragraph (4) of section 415(b) (relating to total 
annual benefits not in excess of $10,000) is amended to read as 
follows:
          ``(4) Total annual benefits not in excess of $40,000.--
        Notwithstanding the preceding provisions of this subsection, 
        the benefits payable with respect to a participant under any 
        defined benefit plan shall be deemed not to exceed the 
        limitation of this subsection if the retirement benefits 
        payable with respect to such participant under such plan and 
        under all other defined benefit plans of the employer do not 
        exceed $40,000 for the plan year or any prior plan year. The 
        preceding sentence shall be applied by substituting for 
        `$40,000'--
                  ``(A) $20,000 if the plan year begins during 2001, 
                and
                  ``(B) $30,000 if the plan year begins during 2002.''
  (b) Effective Date.--The amendment made by this section shall apply 
to years beginning after December 31, 2000.

                Subtitle B--Enhancing Fairness for Women

SEC. 1221. ADDITIONAL SALARY REDUCTION CATCH-UP CONTRIBUTIONS.

  (a) Limitation on Exclusion for Elective Deferrals.--
          (1) In general.--Subsection (g) of section 402 (as amended by 
        section 1201(d)) is further amended by adding at the end the 
        following:
          ``(9) Catch-up contributions for those approaching 
        retirement.--
                  ``(A) In general.--In the case of an individual who 
                is at least age 50 as of the end of any taxable year, 
                the limitation of paragraph (1) for such year, after 
                the application of paragraph (7), shall be increased by 
                the applicable catch-up amount.
                  ``(B) Applicable catch-up amount.--For purposes of 
                subparagraph (A), the applicable catch-up amount shall 
                be the amount determined in accordance with the 
                following table:

                ``Taxable year:
                                            Applicable catch-up amount:
                  2001.....................................     $1,000 
                  2002.....................................     $2,000 
                  2003.....................................     $3,000 
                  2004.....................................     $4,000 
                  2005 or thereafter.......................  $5,000.''.

          (2) Cost-of-living adjustments.--Paragraph (4) of section 
        402(g) (relating to cost-of-living adjustment), as amended by 
        section 1201(d), is further amended by inserting ``and the 
        $5,000 dollar amount in paragraph (9)'' after ``paragraph 
        (1)(B)''.
  (b) Simple Retirement Accounts.--Paragraph (2) of section 408(p) 
(relating to qualified salary reduction arrangement) is amended by 
inserting at the end of the following new subparagraph:
                  ``(F) Catch-up contributions for those approaching 
                retirement.--In the case of an individual who is at 
                least age 50 as of the end of any taxable year, the 
                limitation of subparagraph (A)(ii) for such year shall 
                be increased by the applicable catch-up amount. For 
                purposes of the preceding sentence, the applicable 
                catch-up amount is the amount in effect under section 
                402(g)(9) for such taxable year.''.
  (c) Deferred Compensation Plans of State and Local Governments and 
Tax-Exempt Organizations.--Subsection (e) of section 457 (relating to 
other definitions and special rules) is amended by adding after 
paragraph (16) the following new paragraph:
          ``(17) Catch-up amounts.--In the case of an individual who is 
        at least age 50 as of the end of any taxable year, the 
        limitation of subsection (b)(2)(A) for such year shall be 
        increased by the applicable catch-up amount (as in effect under 
        section 402(g)(9) for such taxable year), except that this 
        paragraph shall not apply to any taxable year to which 
        subsection (b)(3) applies.''.
  (d) Effective Date.--The amendments made by this section shall apply 
to years beginning after December 31, 2000.

SEC. 1222. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF EMPLOYEES TO 
                    DEFINED CONTRIBUTION PLANS.

  (a) Equitable Treatment.--
          (1) In general.--Subparagraph (B) of section 415(c)(1) 
        (relating to limitation for defined contribution plans) is 
        amended by striking ``25 percent'' and inserting ``100 
        percent''.
          (2) Application to section 403(b).--Section 403(b) is 
        amended--
                  (A) by striking ``the exclusion allowance for such 
                taxable year'' in paragraph (1) and inserting ``the 
                applicable limit under section 415'',
                  (B) by striking paragraph (2), and
                  (C) by inserting ``or any amount received by a former 
                employee after the 5th taxable year following the 
                taxable year in which such employee was terminated'' 
                before the period at the end of the second sentence of 
                paragraph (3).
          (3) Conforming amendments.--
                  (A) Subsection (f) of section 72 is amended by 
                striking ``section 403(b)(2)(D)(iii))'' and inserting 
                ``section 403(b)(2)(D)(iii), as in effect on December 
                31, 2000)''.
                  (B) Section 404(a)(10)(B) is amended by striking ``, 
                the exclusion allowance under section 403(b)(2),''.
                  (C) Section 415(a)(2) is amended by striking ``, and 
                the amount of the contribution for such portion shall 
                reduce the exclusion allowance as provided in section 
                403(b)(2)''.
                  (D) Section 415(c)(3) is amended by adding at the end 
                the following new subparagraph:
                  ``(E) Annuity contracts.--In the case of an annuity 
                contract described in section 403(b), the term 
                `participant's compensation' means the participant's 
                includible compensation determined under section 
                403(b)(3).''.
                  (E) Section 415(c) is amended by striking paragraph 
                (4).
                  (F) Section 415(c)(7) is amended to read as follows:
          ``(7) Certain contributions by church plans not treated as 
        exceeding limit.--
                  ``(A) In general.--Notwithstanding any other 
                provision of this subsection, at the election of a 
                participant who is an employee of a church or a 
                convention or association of churches, including an 
                organization described in section 414(e)(3)(B)(ii), 
                contributions and other additions for an annuity 
                contract or retirement income account described in 
                section 403(b) with respect to such participant, when 
                expressed as an annual addition to such participant's 
                account, shall be treated as not exceeding the 
                limitation of paragraph (1) if such annual addition is 
                not in excess of $10,000.
                  ``(B) $40,000 aggregate limitation.--The total amount 
                of additions with respect to any participant which may 
                be taken into account for purposes of this subparagraph 
                for all years may not exceed $40,000.
                  ``(C) Annual addition.--For purposes of this 
                paragraph, the term `annual addition' has the meaning 
                given such term by paragraph (2).''.
                  (G) Subparagraph (B) of section 402(g)(7) (as amended 
                by section 1201(d)) is amended by inserting before the 
                period at the end the following: ``(as in effect on the 
                date of the enactment of the Financial Freedom Act of 
                1999)''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply to years beginning after December 31, 2000.
  (b) Special Rules for Sections 403(b) and 408.--
          (1) In general.--Subsection (k) of section 415 is amended by 
        adding at the end the following new paragraph:
          ``(4) Special rules for sections 403(b) and 408.--For 
        purposes of this section, any annuity contract described in 
        section 403(b) for the benefit of a participant shall be 
        treated as a defined contribution plan maintained by each 
        employer with respect to which the participant has the control 
        required under subsection (b) or (c) of section 414 (as 
        modified by subsection (h)). For purposes of this section, any 
        contribution by an employer to a simplified employee pension 
        plan for an individual for a taxable year shall be treated as 
        an employer contribution to a defined contribution plan for 
        such individual for such year.''.
          (2) Effective date.--
                  (A) In general.--The amendment made by paragraph (1) 
                shall apply to limitation years beginning after 
                December 31, 1999.
                  (B) Exclusion allowance.--Effective for limitation 
                years beginning in 2000, in the case of any annuity 
                contract described in section 403(b) of the Internal 
                Revenue Code of 1986, the amount of the contribution 
                disqualified by reason of section 415(g) of such Code 
                shall reduce the exclusion allowance as provided in 
                section 403(b)(2) of such Code.
  (c) Deferred Compensation Plans of State and Local Governments and 
Tax-Exempt Organizations.--
          (1) In general.--Subparagraph (B) of section 457(b)(2) 
        (relating to salary limitation on eligible deferred 
        compensation plans) is amended by striking ``33\1/3\ percent'' 
        and inserting ``100 percent''.
          (2) Effective date.--The amendment made by this subsection 
        shall apply to years beginning after December 31, 2000.

SEC. 1223. FASTER VESTING OF CERTAIN EMPLOYER MATCHING CONTRIBUTIONS.

  (a) In General.--Section 411(a) (relating to minimum vesting 
standards) is amended--
          (1) in paragraph (2), by striking ``A plan'' and inserting 
        ``Except as provided in paragraph (12), a plan'', and
          (2) by adding at the end the following:
          ``(12) Faster vesting for matching contributions.--In the 
        case of matching contributions (as defined in section 
        401(m)(4)(A)), paragraph (2) shall be applied--
                  ``(A) by substituting `3 years' for `5 years' in 
                subparagraph (A), and
                  ``(B) by substituting the following table for the 
                table contained in subparagraph (B):

                  
                                                     The nonforfeitable
                ``Years of service:
                                                       percentage is:  
                        2..................................         20 
                        3..................................         40 
                        4..................................         60 
                        5..................................         80 
                        6 or more..........................     100.''.

  (b) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to plan years 
        beginning after December 31, 2000.
          (2) Collective bargaining agreements.--In the case of a plan 
        maintained pursuant to 1 or more collective bargaining 
        agreements between employee representatives and 1 or more 
        employers ratified by the date of the enactment of this Act, 
        the amendments made by this section shall not apply to plan 
        years beginning before the earlier of--
                  (A) the later of--
                          (i) the date on which the last of such 
                        collective bargaining agreements terminates 
                        (determined without regard to any extension 
                        thereof on or after such date of enactment), or
                          (ii) January 1, 2001, or
                  (B) January 1, 2005.
          (3) Service required.--With respect to any plan, the 
        amendments made by this section shall not apply to any employee 
        before the date that such employee has 1 hour of service under 
        such plan in any plan year to which the amendments made by this 
        section apply.

SEC. 1224. SIMPLIFY AND UPDATE THE MINIMUM DISTRIBUTION RULES.

  (a) Simplification and Finalization of Minimum Distribution 
Requirements.--
          (1) In general.--The Secretary of the Treasury shall--
                  (A) simplify and finalize the regulations relating to 
                minimum distribution requirements under sections 
                401(a)(9), 408(a)(6) and (b)(3), 403(b)(10), and 
                457(d)(2) of the Internal Revenue Code of 1986, and
                  (B) modify such regulations to--
                          (i) reflect current life expectancy, and
                          (ii) revise the required distribution methods 
                        so that, under reasonable assumptions, the 
                        amount of the required minimum distribution 
                        does not decrease over a participant's life 
                        expectancy.
          (2) Fresh start.--Notwithstanding subparagraph (D) of section 
        401(a)(9) of such Code, during the first year that regulations 
        are in effect under this subsection, required distributions for 
        future years may be redetermined to reflect changes under such 
        regulations. Such redetermination shall include the opportunity 
        to choose a new designated beneficiary and to elect a new 
        method of calculating life expectancy.
          (3) Effective date for regulations.--Regulations referred to 
        in paragraph (1) shall be effective for years beginning after 
        December 31, 2000, and shall apply in such years without regard 
        to whether an individual had previously begun receiving minimum 
        distributions.
  (b) Repeal of Rule Where Distributions Had Begun Before Death 
Occurs.--
          (1) In general.--Subparagraph (B) of section 401(a)(9) is 
        amended by striking clause (i) and redesignating clauses (ii), 
        (iii), and (iv) as clauses (i), (ii), and (iii), respectively.
          (2) Conforming changes.--
                  (A) Clause (i) of section 401(a)(9)(B) (as so 
                redesignated) is amended--
                          (i) by striking ``for other cases'' in the 
                        heading, and
                          (ii) by striking ``the distribution of the 
                        employee's interest has begun in accordance 
                        with subparagraph (A)(ii)'' and inserting ``his 
                        entire interest has been distributed to him,''.
                  (B) Clause (ii) of section 401(a)(9)(B) (as so 
                redesignated) is amended by striking ``clause (ii)'' 
                and inserting ``clause (i)''.
                  (C) Clause (iii) of section 401(a)(9)(B) (as so 
                redesignated) is amended--
                          (i) by striking ``clause (iii)(I)'' and 
                        inserting ``clause (ii)(I)'',
                          (ii) in subclause (I) by striking ``clause 
                        (iii)(III)'' and inserting ``clause 
                        (ii)(III)'',
                          (iii) in subclause (I) by striking ``the date 
                        on which the employee would have attained the 
                        age 70\1/2\,'' and inserting ``April 1 of the 
                        calendar year following the calendar year in 
                        which the spouse attains 70\1/2\,'', and
                          (iv) in subclause (II) by striking ``the 
                        distributions to such spouse begin,'' and 
                        inserting ``his entire interest has been 
                        distributed to him,''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply to years beginning after December 31, 2000.
  (c) Reduction in Excise Tax.--
          (1) In general.--Subsection (a) of section 4974 is amended by 
        striking ``50 percent'' and inserting ``10 percent''.
          (2) Effective date.--The amendment made by this subsection 
        shall apply to years beginning after December 31, 2000.

SEC. 1225. CLARIFICATION OF TAX TREATMENT OF DIVISION OF SECTION 457 
                    PLAN BENEFITS UPON DIVORCE.

  (a) In General.--Section 414(p)(11) (relating to application of rules 
to governmental and church plans) is amended--
          (1) by inserting ``or an eligible deferred compensation plan 
        (within the meaning of section 457(b))'' after ``subsection 
        (e))'', and
          (2) in the heading, by striking ``governmental and church 
        plans'' and inserting ``certain other plans''.
  (b) Waiver of Certain Distribution Requirements.--Paragraph (10) of 
section 414(p) is amended by striking ``and section 409(d)'' and 
inserting ``section 409(d), and section 457(d)''.
  (c) Tax Treatment of Payments From a Section 457 Plan.--Subsection 
(p) of section 414 is amended by redesignating paragraph (12) as 
paragraph (13) and inserting after paragraph (11) the following new 
paragraph:
          ``(12) Tax treatment of payments from a section 457 plan.--If 
        a distribution or payment from an eligible deferred 
        compensation plan described in section 457(b) is made pursuant 
        to a qualified domestic relations order, rules similar to the 
        rules of section 402(e)(1)(A) shall apply to such distribution 
        or payment.''.
  (d) Effective Date.--The amendments made by this section shall apply 
to transfers, distributions, and payments made after December 31, 2000.

          Subtitle C--Increasing Portability for Participants

SEC. 1231. ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS.

  (a) Rollovers From and to Section 457 Plans.--
          (1) Rollovers from section 457 plans.--
                  (A) In general.--Section 457(e) (relating to other 
                definitions and special rules) is amended by adding at 
                the end the following:
          ``(16) Rollover amounts.--
                  ``(A) General rule.--In the case of an eligible 
                deferred compensation plan established and maintained 
                by an employer described in subsection (e)(1)(A), if--
                          ``(i) any portion of the balance to the 
                        credit of an employee in such plan is paid to 
                        such employee in an eligible rollover 
                        distribution (within the meaning of section 
                        402(c)(4) without regard to subparagraph (C) 
                        thereof),
                          ``(ii) the employee transfers any portion of 
                        the property such employee receives in such 
                        distribution to an eligible retirement plan 
                        described in section 402(c)(8)(B), and
                          ``(iii) in the case of a distribution of 
                        property other than money, the amount so 
                        transferred consists of the property 
                        distributed,
                then such distribution (to the extent so transferred) 
                shall not be includible in gross income for the taxable 
                year in which paid.
                  ``(B) Certain rules made applicable.--The rules of 
                paragraphs (2) through (7) (other than paragraph 
                (4)(C)) and (9) of section 402(c) and section 402(f) 
                shall apply for purposes of subparagraph (A).
                  ``(C) Reporting.--Rollovers under this paragraph 
                shall be reported to the Secretary in the same manner 
                as rollovers from qualified retirement plans (as 
                defined in section 4974(c)).''.
                  (B) Deferral limit determined without regard to 
                rollover amounts.--Section 457(b)(2) (defining eligible 
                deferred compensation plan) is amended by inserting 
                ``(other than rollover amounts)'' after ``taxable 
                year''.
                  (C) Direct rollover.--Paragraph (1) of section 457(d) 
                is amended by striking ``and'' at the end of 
                subparagraph (A), by striking the period at the end of 
                subparagraph (B) and inserting ``, and'', and by 
                inserting after subparagraph (B) the following:
                  ``(C) in the case of a plan maintained by an employer 
                described in subsection (e)(1)(A), the plan meets 
                requirements similar to the requirements of section 
                401(a)(31).
        Any amount transferred in a direct trustee-to-trustee transfer 
        in accordance with section 401(a)(31) shall not be includible 
        in gross income for the taxable year of transfer.''.
                  (D) Withholding.--
                          (i) Paragraph (12) of section 3401(a) is 
                        amended by adding at the end the following:
                  ``(E) under or to an eligible deferred compensation 
                plan which, at the time of such payment, is a plan 
                described in section 457(b) maintained by an employer 
                described in section 457(e)(1)(A); or''.
                          (ii) Paragraph (3) of section 3405(c) is 
                        amended to read as follows:
          ``(3) Eligible rollover distribution.--For purposes of this 
        subsection, the term `eligible rollover distribution' has the 
        meaning given such term by section 402(f)(2)(A).''.
                          (iii) Liability for withholding.--
                        Subparagraph (B) of section 3405(d)(2) is 
                        amended by striking ``or'' at the end of clause 
                        (ii), by striking the period at the end of 
                        clause (iii) and inserting ``, or'', and by 
                        adding at the end the following:
                          ``(iv) section 457(b).''.
          (2) Rollovers to section 457 plans.--
                  (A) In general.--Section 402(c)(8)(B) (defining 
                eligible retirement plan) is amended by striking 
                ``and'' at the end of clause (iii), by striking the 
                period at the end of clause (iv) and inserting ``, 
                and'', and by inserting after clause (iv) the following 
                new clause:
                          ``(v) an eligible deferred compensation plan 
                        described in section 457(b) of an employer 
                        described in section 457(e)(1)(A).''.
                  (B) Separate accounting.--Section 402(c) is amended 
                by adding at the end the following new paragraph:
          ``(11) Separate accounting.--Unless a plan described in 
        clause (v) of paragraph (8)(B) agrees to separately account for 
        amounts rolled into such plan from eligible retirement plans 
        not described in such clause, the plan described in such clause 
        may not accept transfers or rollovers from such retirement 
        plans.''.
                  (C) 10 percent additional tax.--Subsection (t) of 
                section 72 (relating to 10-percent additional tax on 
                early distributions from qualified retirement plans) is 
                amended by adding at the end the following new 
                paragraph:
          ``(9) Special rule for rollovers to section 457 plans.--For 
        purposes of this subsection, a distribution from an eligible 
        deferred compensation plan (as defined in section 457(b)) of an 
        employer described in section 457(e)(1)(A) shall be treated as 
        a distribution from a qualified retirement plan described in 
        4974(c)(1) to the extent that such distribution is attributable 
        to an amount transferred to an eligible deferred compensation 
        plan from a qualified retirement plan (as defined in section 
        4974(c)).''.
  (b) Allowance of Rollovers From and to 403(b) Plans.--
          (1) Rollovers from section 403(b) plans.--Section 
        403(b)(8)(A)(ii) (relating to rollover amounts) is amended by 
        striking ``such distribution'' and all that follows and 
        inserting ``such distribution to an eligible retirement plan 
        described in section 402(c)(8)(B), and''.
          (2) Rollovers to section 403(b) plans.--Section 402(c)(8)(B) 
        (defining eligible retirement plan), as amended by subsection 
        (a), is amended by striking ``and'' at the end of clause (iv), 
        by striking the period at the end of clause (v) and inserting 
        ``, and'', and by inserting after clause (v) the following new 
        clause:
                          ``(vi) an annuity contract described in 
                        section 403(b).''
  (c) Expanded Explanation to Recipients of Rollover Distributions.--
Paragraph (1) of section 402(f) (relating to written explanation to 
recipients of distributions eligible for rollover treatment) 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) of the provisions under which distributions 
                from the eligible retirement plan receiving the 
                distribution may be subject to restrictions and tax 
                consequences which are different from those applicable 
                to distributions from the plan making such 
                distribution.''.
  (d) Spousal Rollovers.--Section 402(c)(9) (relating to rollover where 
spouse receives distribution after death of employee) is amended by 
striking ``; except that'' and all that follows up to the end period.
  (e) Conforming Amendments.--
          (1) Section 72(o)(4) is amended by striking ``and 408(d)(3)'' 
        and inserting ``403(b)(8), 408(d)(3), and 457(e)(16)''.
          (2) Section 219(d)(2) is amended by striking ``or 408(d)(3)'' 
        and inserting ``408(d)(3), or 457(e)(16)''.
          (3) Section 401(a)(31)(B) is amended by striking ``and 
        403(a)(4)'' and inserting ``, 403(a)(4), 403(b)(8), and 
        457(e)(16)''.
          (4) Subparagraph (A) of section 402(f)(2) is amended by 
        striking ``or paragraph (4) of section 403(a)'' and inserting 
        ``, paragraph (4) of section 403(a), subparagraph (A) of 
        section 403(b)(8), or subparagraph (A) of section 457(e)(16)''.
          (5) Paragraph (1) of section 402(f) is amended by striking 
        ``from an eligible retirement plan''.
          (6) Subparagraphs (A) and (B) of section 402(f)(1) are 
        amended by striking ``another eligible retirement plan'' and 
        inserting ``an eligible retirement plan''.
          (7) Subparagraph (B) of section 403(b)(8) is amended to read 
        as follows:
                  ``(B) Certain rules made applicable.--The rules of 
                paragraphs (2) through (7) and (9) of section 402(c) 
                and section 402(f) shall apply for purposes of 
                subparagraph (A), except that section 402(f) shall be 
                applied to the payor in lieu of the plan 
                administrator.''.
          (8) Section 408(a)(1) is amended by striking ``or 403(b)(8)'' 
        and inserting ``, 403(b)(8), or 457(e)(16)''.
          (9) Subparagraphs (A) and (B) of section 415(b)(2) are each 
        amended by striking ``and 408(d)(3)'' and inserting 
        ``403(b)(8), 408(d)(3), and 457(e)(16)''.
          (10) Section 415(c)(2) is amended by striking ``and 
        408(d)(3)'' and inserting ``408(d)(3), and 457(e)(16)''.
          (11) Section 4973(b)(1)(A) is amended by striking ``or 
        408(d)(3)'' and inserting ``408(d)(3), or 457(e)(16)''.
  (f) Effective Date; Special Rule.--
          (1) Effective date.--The amendments made by this section 
        shall apply to distributions after December 31, 2000.
          (2) Special rule.--Notwithstanding any other provision of 
        law, subsections (h)(3) and (h)(5) of section 1122 of the Tax 
        Reform Act of 1986 shall not apply to any distribution from an 
        eligible retirement plan (as defined in clause (iii) or (iv) of 
        section 402(c)(8)(B) of the Internal Revenue Code of 1986) on 
        behalf of an individual if there was a rollover to such plan on 
        behalf of such individual which is permitted solely by reason 
        of any amendment made by this section.

SEC. 1232. ROLLOVERS OF IRAS INTO WORKPLACE RETIREMENT PLANS.

  (a) In General.--Subparagraph (A) of section 408(d)(3) (relating to 
rollover amounts) is amended by adding ``or'' at the end of clause (i), 
by striking clauses (ii) and (iii), and by adding at the end the 
following:
                          ``(ii) the entire amount received (including 
                        money and any other property) is paid into an 
                        eligible retirement plan for the benefit of 
                        such individual not later than the 60th day 
                        after the date on which the payment or 
                        distribution is received, except that the 
                        maximum amount which may be paid into such plan 
                        may not exceed the portion of the amount 
                        received which is includible in gross income 
                        (determined without regard to this paragraph).
                For purposes of clause (ii), the term `eligible 
                retirement plan' has the meaning given such term by 
                clauses (iii), (iv), (v), and (vi) of section 
                402(c)(8)(B).''.
  (b) Conforming Amendments.--
          (1) Paragraph (1) of section 403(b) is amended by striking 
        ``section 408(d)(3)(A)(iii)'' and inserting ``section 
        408(d)(3)(A)(ii)''.
          (2) Clause (i) of section 408(d)(3)(D) is amended by striking 
        ``(i), (ii), or (iii)'' and inserting ``(i) or (ii)''.
          (3) Subparagraph (G) of section 408(d)(3) is amended to read 
        as follows:
                  ``(G) Simple retirement accounts.--In the case of any 
                payment or distribution out of a simple retirement 
                account (as defined in subsection (p)) to which section 
                72(t)(6) applies, this paragraph shall not apply unless 
                such payment or distribution is paid into another 
                simple retirement account.''.
  (c) Effective Date; Special Rule.--
          (1) Effective date.--The amendments made by this section 
        shall apply to distributions after December 31, 2000.
          (2) Special rule.--Notwithstanding any other provision of 
        law, subsections (h)(3) and (h)(5) of section 1122 of the Tax 
        Reform Act of 1986 shall not apply to any distribution from an 
        eligible retirement plan (as defined in clause (iii) or (iv) of 
        section 402(c)(8)(B) of the Internal Revenue Code of 1986) on 
        behalf of an individual if there was a rollover to such plan on 
        behalf of such individual which is permitted solely by reason 
        of the amendments made by this section.

SEC. 1233. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.

  (a) Rollovers From Exempt Trusts.--Paragraph (2) of section 402(c) 
(relating to maximum amount which may be rolled over) is amended by 
adding at the end the following: ``The preceding sentence shall not 
apply to such distribution to the extent--
                  ``(A) such portion is transferred in a direct 
                trustee-to-trustee transfer to a qualified trust which 
                is part of a plan which is a defined contribution plan 
                and which agrees to separately account for amounts so 
                transferred, including separately accounting for the 
                portion of such distribution which is includible in 
                gross income and the portion of such distribution which 
                is not so includible, or
                  ``(B) such portion is transferred to an eligible 
                retirement plan described in clause (i) or (ii) of 
                paragraph (8)(B).''.
  (b) Optional Direct Transfer of Eligible Rollover Distributions.--
Subparagraph (B) of section 401(a)(31) (relating to limitation) is 
amended by adding at the end the following: ``The preceding sentence 
shall not apply to such distribution if the plan to which such 
distribution is transferred--
                          ``(i) agrees to separately account for 
                        amounts so transferred, including separately 
                        accounting for the portion of such distribution 
                        which is includible in gross income and the 
                        portion of such distribution which is not so 
                        includible, or
                          ``(ii) is an eligible retirement plan 
                        described in clause (i) or (ii) of section 
                        402(c)(8)(B).''.
  (c) Rules for Applying Section 72 to IRAs.--Paragraph (3) of section 
408(d) (relating to special rules for applying section 72) is amended 
by inserting at the end the following:
                  ``(H) Application of section 72.--
                          ``(i) In general.--If--
                                  ``(I) a distribution is made from an 
                                individual retirement plan, and
                                  ``(II) a rollover contribution is 
                                made to an eligible retirement plan 
                                described in section 402(c)(8)(B)(iii), 
                                (iv), (v), or (vi) with respect to all 
                                or part of such distribution,
                        then, notwithstanding paragraph (2), the rules 
                        of clause (ii) shall apply for purposes of 
                        applying section 72.
                          ``(ii) Applicable rules.--In the case of a 
                        distribution described in clause (i)--
                                  ``(I) section 72 shall be applied 
                                separately to such distribution,
                                  ``(II) notwithstanding the pro rata 
                                allocation of income on, and investment 
                                in the contract, to distributions under 
                                section 72, the portion of such 
                                distribution rolled over to an eligible 
                                retirement plan described in clause (i) 
                                shall be treated as from income on the 
                                contract (to the extent of the 
                                aggregate income on the contract from 
                                all individual retirement plans of the 
                                distributee), and
                                  ``(III) appropriate adjustments shall 
                                be made in applying section 72 to other 
                                distributions in such taxable year and 
                                subsequent taxable years.''
  (d) Effective Date.--The amendments made by this section shall apply 
to distributions made after December 31, 2000.

SEC. 1234. HARDSHIP EXCEPTION TO 60-DAY RULE.

  (a) Exempt Trusts.--Paragraph (3) of section 402(c) (relating to 
transfer must be made within 60 days of receipt) is amended to read as 
follows:
          ``(3) Transfer must be made within 60 days of receipt.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), paragraph (1) shall not apply to any transfer of a 
                distribution made after the 60th day following the day 
                on which the distributee received the property 
                distributed.
                  ``(B) Hardship exception.--The Secretary may waive 
                the 60-day requirement under subparagraph (A) where the 
                failure to waive such requirement would be against 
                equity or good conscience, including casualty, 
                disaster, or other events beyond the reasonable control 
                of the individual subject to such requirement.''.
  (b) IRAs.--Paragraph (3) of section 408(d) (relating to rollover 
contributions) is amended by adding after subparagraph (H) the 
following new subparagraph:
                  ``(I) Waiver of 60-day requirement.--The Secretary 
                may waive the 60-day requirement under subparagraphs 
                (A) and (D) where the failure to waive such requirement 
                would be against equity or good conscience, including 
                casualty, disaster, or other events beyond the 
                reasonable control of the individual subject to such 
                requirement.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to distributions after December 31, 2000.

SEC. 1235. TREATMENT OF FORMS OF DISTRIBUTION.

  (a) Plan Transfers.--
          (1) In general.--Paragraph (6) of section 411(d) (relating to 
        accrued benefit not to be decreased by amendment) is amended by 
        adding at the end the following:
                  ``(D) Plan transfers.--
                          ``(i) A defined contribution plan (in this 
                        subparagraph referred to as the `transferee 
                        plan') shall not be treated as failing to meet 
                        the requirements of this subsection merely 
                        because the transferee plan does not provide 
                        some or all of the forms of distribution 
                        previously available under another defined 
                        contribution plan (in this subparagraph 
                        referred to as the `transferor plan') to the 
                        extent that--
                                  ``(I) the forms of distribution 
                                previously available under the 
                                transferor plan applied to the account 
                                of a participant or beneficiary under 
                                the transferor plan that was 
                                transferred from the transferor plan to 
                                the transferee plan pursuant to a 
                                direct transfer rather than pursuant to 
                                a distribution from the transferor 
                                plan;
                                  ``(II) the terms of both the 
                                transferor plan and the transferee plan 
                                authorize the transfer described in 
                                subclause (I);
                                  ``(III) the transfer described in 
                                subclause (I) was made pursuant to a 
                                voluntary election by the participant 
                                or beneficiary whose account was 
                                transferred to the transferee plan;
                                  ``(IV) the election described in 
                                subclause (III) was made after the 
                                participant or beneficiary received a 
                                notice describing the consequences of 
                                making the election;
                                  ``(V) if the transferor plan provides 
                                for an annuity as the normal form of 
                                distribution under the plan in 
                                accordance with section 417, the 
                                transfer is made with the consent of 
                                the participant's spouse (if any), and 
                                such consent meets requirements similar 
                                to the requirements imposed by section 
                                417(a)(2); and
                                  ``(VI) the transferee plan allows the 
                                participant or beneficiary described in 
                                subclause (III) to receive any 
                                distribution to which the participant 
                                or beneficiary is entitled under the 
                                transferee plan in the form of a single 
                                sum distribution.
                          ``(ii) Clause (i) shall apply to plan mergers 
                        and other transactions having the effect of a 
                        direct transfer, including consolidations of 
                        benefits attributable to different employers 
                        within a multiple employer plan.
                  ``(E) Elimination of form of distribution.--Except to 
                the extent provided in regulations, a defined 
                contribution plan shall not be treated as failing to 
                meet the requirements of this section merely because of 
                the elimination of a form of distribution previously 
                available thereunder. This subparagraph shall not apply 
                to the elimination of a form of distribution with 
                respect to any participant unless--
                          ``(i) a single sum payment is available to 
                        such participant at the same time or times as 
                        the form of distribution being eliminated; and
                          ``(ii) such single sum payment is based on 
                        the same or greater portion of the 
                        participant's account as the form of 
                        distribution being eliminated.''.
          (2) Effective date.--The amendment made by this subsection 
        shall apply to years beginning after December 31, 2000.
  (b) Regulations.--
          (1) In general.--The last sentence of paragraph (6)(B) of 
        section 411(d) (relating to accrued benefit not to be decreased 
        by amendment) is amended to read as follows: ``The Secretary 
        may by regulations provide that this subparagraph shall not 
        apply to any plan amendment that does not adversely affect the 
        rights of participants in a material manner.''.
          (2) Secretary directed.--Not later than December 31, 2001, 
        the Secretary of the Treasury is directed to issue final 
        regulations under section 411(d)(6) of the Internal Revenue 
        Code of 1986. Such regulations shall apply to plan years 
        beginning after December 31, 2001, or such earlier date as is 
        specified by the Secretary of the Treasury.

SEC. 1236. RATIONALIZATION OF RESTRICTIONS ON DISTRIBUTIONS.

  (a) Modification of Same Desk Exception.--
          (1) Section 401(k).--
                  (A) Section 401(k)(2)(B)(i)(I) (relating to qualified 
                cash or deferred arrangements) is amended by striking 
                ``separation from service'' and inserting ``severance 
                from employment''.
                  (B) Subparagraph (A) of section 401(k)(10) (relating 
                to distributions upon termination of plan or 
                disposition of assets or subsidiary) is amended to read 
                as follows:
                  ``(A) In general.--An event described in this 
                subparagraph is the termination of the plan without 
                establishment or maintenance of another defined 
                contribution plan (other than an employee stock 
                ownership plan as defined in section 4975(e)(7)).''.
                  (C) Section 401(k)(10) is amended--
                          (i) in subparagraph (B)--
                                  (I) by striking ``An event'' in 
                                clause (i) and inserting ``A 
                                termination'', and
                                  (II) by striking ``the event'' in 
                                clause (i) and inserting ``the 
                                termination'',
                          (ii) by striking subparagraph (C), and
                          (iii) by striking ``or disposition of assets 
                        or subsidiary'' in the heading.
          (2) Section 403(b).--
                  (A) Paragraphs (7)(A)(ii) and (11)(A) of section 
                403(b) are each amended by striking ``separates from 
                service'' and inserting ``has a severance from 
                employment''.
                  (B) The heading for paragraph (11) of section 403(b) 
                is amended by striking ``separation from service'' and 
                inserting ``severance from employment''.
          (3) Section 457.--Clause (ii) of section 457(d)(1)(A) is 
        amended by striking ``is separated from service'' and inserting 
        ``has a severance from employment''.
  (b) Effective Date.--The amendments made by this section shall apply 
to distributions after December 31, 2000.

SEC. 1237. PURCHASE OF SERVICE CREDIT IN GOVERNMENTAL DEFINED BENEFIT 
                    PLANS.

  (a) 403(b) Plans.--Subsection (b) of section 403 is amended by adding 
at the end the following new paragraph:
          ``(13) Trustee-to-trustee transfers to purchase permissive 
        service credit.--No amount shall be includible in gross income 
        by reason of a direct trustee-to-trustee transfer to a defined 
        benefit governmental plan (as defined in section 414(d)) if 
        such transfer is--
                  ``(A) for the purchase of permissive service credit 
                (as defined in section 415(n)(3)(A)) under such plan, 
                or
                  ``(B) a repayment to which section 415 does not apply 
                by reason of subsection (k)(3) thereof.''.
  (b) 457 Plans.--
          (1) Subsection (e) of section 457 is amended by adding after 
        paragraph (17) the following new paragraph:
          ``(18) Trustee-to-trustee transfers to purchase permissive 
        service credit.--No amount shall be includible in gross income 
        by reason of a direct trustee-to-trustee transfer to a defined 
        benefit governmental plan (as defined in section 414(d)) if 
        such transfer is--
                  ``(A) for the purchase of permissive service credit 
                (as defined in section 415(n)(3)(A)) under such plan, 
                or
                  ``(B) a repayment to which section 415 does not apply 
                by reason of subsection (k)(3) thereof.''.
          (2) Section 457(b)(2) is amended by striking ``(other than 
        rollover amounts)'' and inserting ``(other than rollover 
        amounts and amounts received in a transfer referred to in 
        subsection (e)(16))''.
  (c) Effective Date.--The amendments made by this section shall apply 
to trustee-to-trustee transfers after December 31, 2000.

SEC. 1238. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES OF CASH-OUT 
                    AMOUNTS.

  (a) In General.--Section 411(a)(11) (relating to restrictions on 
certain mandatory distributions) is amended by adding at the end the 
following:
                  ``(D) Special rule for rollover contributions.--A 
                plan shall not fail to meet the requirements of this 
                paragraph if, under the terms of the plan, the present 
                value of the nonforfeitable accrued benefit is 
                determined without regard to that portion of such 
                benefit which is attributable to rollover contributions 
                (and earnings allocable thereto). For purposes of this 
                subparagraph, the term `rollover contributions' means 
                any rollover contribution under sections 402(c), 
                403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 
                457(e)(16).''.
  (b) Eligible Deferred Compensation Plans.--Clause (i) of section 
457(e)(9)(A) is amended by striking ``such amount'' and inserting ``the 
portion of such amount which is not attributable to rollover 
contributions (as defined in section 411(a)(11)(D))''.
  (c) Effective Date.--The amendments made by this section shall apply 
to distributions after December 31, 2000.

SEC. 1239. MINIMUM DISTRIBUTION AND INCLUSION REQUIREMENTS FOR SECTION 
                    457 PLANS.

  (a) Minimum Distribution Requirements.--Paragraph (2) of section 
457(d) (relating to distribution requirements) is amended to read as 
follows:
          ``(2) Minimum distribution requirements.--A plan meets the 
        minimum distribution requirements of this paragraph if such 
        plan meets the requirements of section 401(a)(9).''
  (b) Inclusion in Gross Income.--
          (1) Year of inclusion.--Subsection (a) of section 457 
        (relating to year of inclusion in gross income) is amended to 
        read as follows:
  ``(a) Year of inclusion in gross income.--
          ``(1) In general.--Any amount of compensation deferred under 
        an eligible deferred compensation plan, and any income 
        attributable to the amounts so deferred, shall be includible in 
        gross income only for the taxable year in which such 
        compensation or other income--
                  ``(A) is paid to the participant or other 
                beneficiary, in the case of a plan of an eligible 
                employer described in subsection (e)(1)(A), and
                  ``(B) is paid or otherwise made available to the 
                participant or other beneficiary, in the case of a plan 
                of an eligible employer described in subsection 
                (e)(1)(B).
          ``(2) Special rule for rollover amounts.--To the extent 
        provided in section 72(t)(9), section 72(t) shall apply to any 
        amount includible in gross income under this subsection.''.
          (2) Conforming amendment.--So much of paragraph (9) of 
        section 457(e) as precedes subparagraph (A) is amended to read 
        as follows:
          ``(9) Benefits of tax exempt organization plans not treated 
        as made available by reason of certain elections, etc.--In the 
        case of an eligible deferred compensation plan of an employer 
        described in subsection (e)(1)(B)--''.
  (c) Effective Date.--The amendments made by this section shall apply 
to distributions after December 31, 2000.

       Subtitle D--Strengthening Pension Security and Enforcement

SEC. 1241. REPEAL OF 150 PERCENT OF CURRENT LIABILITY FUNDING LIMIT.

  (a) In General.--Section 412(c)(7) (relating to full-funding 
limitation) is amended--
          (1) by striking ``the applicable percentage'' in subparagraph 
        (A)(i)(I) and inserting ``in the case of plan years beginning 
        before January 1, 2004, the applicable percentage'', and
          (2) by amending subparagraph (F) to read as follows:
                  ``(F) Applicable percentage.--For purposes of 
                subparagraph (A)(i)(I), the applicable percentage shall 
                be determined in accordance with the following table:

                ``In the case of any plan year
                                                         The applicable
                  beginning in--
                                                        percentage is--
                  2001.....................................        160 
                  2002.....................................        165 
                  2003.....................................     170.''.

  (b) Effective Date.--The amendments made by this section shall apply 
to plan years beginning after December 31, 2000.

SEC. 1242. MAXIMUM CONTRIBUTION DEDUCTION RULES MODIFIED AND APPLIED TO 
                    ALL DEFINED BENEFIT PLANS.

  (a) In General.--Subparagraph (D) of section 404(a)(1) (relating to 
special rule in case of certain plans) is amended to read as follows:
                  ``(D) Special rule in case of certain plans.--
                          ``(i) In general.--In the case of any defined 
                        benefit plan, except as provided in 
                        regulations, the maximum amount deductible 
                        under the limitations of this paragraph shall 
                        not be less than the unfunded termination 
                        liability (determined as if the proposed 
                        termination date referred to in section 
                        4041(b)(2)(A)(i)(II) of the Employee Retirement 
                        Income Security Act of 1974 were the last day 
                        of the plan year).
                          ``(ii) Plans with less than 100 
                        participants.--For purposes of this 
                        subparagraph, in the case of a plan which has 
                        less than 100 participants for the plan year, 
                        termination liability shall not include the 
                        liability attributable to benefit increases for 
                        highly compensated employees (as defined in 
                        section 414(q)) resulting from a plan amendment 
                        which is made or becomes effective, whichever 
                        is later, within the last 2 years before the 
                        termination date.
                          ``(iii) Rule for determining number of 
                        participants.--For purposes of determining 
                        whether a plan has more than 100 participants, 
                        all defined benefit plans maintained by the 
                        same employer (or any member of such employer's 
                        controlled group (within the meaning of section 
                        412(l)(8)(C))) shall be treated as 1 plan, but 
                        only employees of such member or employer shall 
                        be taken into account.
                          ``(iv) Plans established and maintain by 
                        professional service employers.--Clause (i) 
                        shall not apply to a plan described in section 
                        4021(b)(13) of the Employee Retirement Income 
                        Security Act of 1974.''.
  (b) Conforming Amendment.--Paragraph (6) of section 4972(c) is 
amended to read as follows:
          ``(6) Exceptions.--In determining the amount of nondeductible 
        contributions for any taxable year, there shall not be taken 
        into account so much of the contributions to 1 or more defined 
        contribution plans which are not deductible when contributed 
        solely because of section 404(a)(7) as does not exceed the 
        greater of--
                  ``(A) the amount of contributions not in excess of 6 
                percent of compensation (within the meaning of section 
                404(a)) paid or accrued (during the taxable year for 
                which the contributions were made) to beneficiaries 
                under the plans, or
                  ``(B) the sum of--
                          ``(i) the amount of contributions described 
                        in section 401(m)(4)(A), plus
                          ``(ii) the amount of contributions described 
                        in section 402(g)(3)(A).
        For purposes of this paragraph, the deductible limits under 
        section 404(a)(7) shall first be applied to amounts contributed 
        to a defined benefit plan and then to amounts described in 
        subparagraph (B).''.
  (c) Effective Date.--The amendments made by this section shall apply 
to plan years beginning after December 31, 2000.

SEC. 1243. MISSING PARTICIPANTS.

  (a) In General.--Section 4050 of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1350) is amended by redesignating 
subsection (c) as subsection (e) and by inserting after subsection (b) 
the following:
  ``(c) Multiemployer Plans.--The corporation shall prescribe rules 
similar to the rules in subsection (a) for multiemployer plans covered 
by this title that terminate under section 4041A.
  ``(d) Plans Not Otherwise Subject to Title.--
          ``(1) Transfer to corporation.--The plan administrator of a 
        plan described in paragraph (4) may elect to transfer a missing 
        participant's benefits to the corporation upon termination of 
        the plan.
          ``(2) Information to the corporation.--To the extent provided 
        in regulations, the plan administrator of a plan described in 
        paragraph (4) shall, upon termination of the plan, provide the 
        corporation information with respect to benefits of a missing 
        participant if the plan transfers such benefits--
                  ``(A) to the corporation, or
                  ``(B) to an entity other than the corporation or a 
                plan described in paragraph (4)(B)(ii).
          ``(3) Payment by the corporation.--If benefits of a missing 
        participant were transferred to the corporation under paragraph 
        (1), the corporation shall, upon location of the participant or 
        beneficiary, pay to the participant or beneficiary the amount 
        transferred (or the appropriate survivor benefit) either--
                  ``(A) in a single sum (plus interest), or
                  ``(B) in such other form as is specified in 
                regulations of the corporation.
          ``(4) Plans described.--A plan is described in this paragraph 
        if--
                  ``(A) the plan is a pension plan (within the meaning 
                of section 3(2))--
                          ``(i) to which the provisions of this section 
                        do not apply (without regard to this 
                        subsection), and
                          ``(ii) which is not a plan described in 
                        paragraphs (2) through (11) of section 4021(b), 
                        and
                  ``(B) at the time the assets are to be distributed 
                upon termination, the plan--
                          ``(i) has missing participants, and
                          ``(ii) has not provided for the transfer of 
                        assets to pay the benefits of all missing 
                        participants to another pension plan (within 
                        the meaning of section 3(2)).
          ``(5) Certain provisions not to apply.--Subsections (a)(1) 
        and (a)(3) shall not apply to a plan described in paragraph 
        (4).''.
  (b) Effective Date.--The amendment made by this section shall apply 
to distributions made after final regulations implementing subsections 
(c) and (d) of section 4050 of the Employee Retirement Income Security 
Act of 1974 (as added by subsection (a)), respectively, are prescribed.

SEC. 1244. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING.

  (a) In General.--Subsection (c) of section 4972 (relating to 
nondeductible contributions) is amended by adding at the end the 
following new paragraph:
          ``(7) Defined benefit plan exception.--In determining the 
        amount of nondeductible contributions for any taxable year, an 
        employer may elect for such year not to take into account any 
        contributions to a defined benefit plan except to the extent 
        that such contributions exceed the full-funding limitation (as 
        defined in section 412(c)(7), determined without regard to 
        subparagraph (A)(i)(I) thereof). For purposes of this 
        paragraph, the deductible limits under section 404(a)(7) shall 
        first be applied to amounts contributed to defined contribution 
        plans and then to amounts described in this paragraph. If an 
        employer makes an election under this paragraph for a taxable 
        year, paragraph (6) shall not apply to such employer for such 
        taxable year.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to years beginning after December 31, 2000.

SEC. 1245. EXCISE TAX ON FAILURE TO PROVIDE NOTICE BY DEFINED BENEFIT 
                    PLANS SIGNIFICANTLY REDUCING FUTURE BENEFIT 
                    ACCRUALS.

  (a) In General.--Chapter 43 of subtitle D (relating to qualified 
pension, etc., plans) is amended by adding at the end the following new 
section:

``SEC. 4980F. FAILURE OF APPLICABLE PLANS REDUCING BENEFIT ACCRUALS TO 
                    SATISFY NOTICE REQUIREMENTS.

  ``(a) Imposition of Tax.--There is hereby imposed a tax on the 
failure of any applicable pension plan to meet the requirements of 
subsection (e) with respect to any applicable individual.
  ``(b) Amount of Tax.--
          ``(1) In general.--The amount of the tax imposed by 
        subsection (a) on any failure with respect to any applicable 
        individual shall be $100 for each day in the noncompliance 
        period with respect to such failure.
          ``(2) Noncompliance period.--For purposes of this section, 
        the term `noncompliance period' means, with respect to any 
        failure, the period beginning on the date the failure first 
        occurs and ending on the date the failure is corrected.
  ``(c) Limitations on Amount of Tax.--
          ``(1) Overall limitation for unintentional failures.--In the 
        case of failures that are due to reasonable cause and not to 
        willful neglect, the tax imposed by subsection (a) for failures 
        during the taxable year of the employer (or, in the case of a 
        multiemployer plan, the taxable year of the trust forming part 
        of the plan) shall not exceed $500,000. For purposes of the 
        preceding sentence, all multiemployer plans of which the same 
        trust forms a part shall be treated as 1 plan. For purposes of 
        this paragraph, if not all persons who are treated as a single 
        employer for purposes of this section have the same taxable 
        year, the taxable years taken into account shall be determined 
        under principles similar to the principles of section 1561.
          ``(2) Waiver by secretary.--In the case of a failure which is 
        due to reasonable cause and not to willful neglect, the 
        Secretary may waive part or all of the tax imposed by 
        subsection (a) to the extent that the payment of such tax would 
        be excessive relative to the failure involved.
  ``(d) Liability for Tax.--The following shall be liable for the tax 
imposed by subsection (a):
          ``(1) In the case of a plan other than a multiemployer plan, 
        the employer.
          ``(2) In the case of a multiemployer plan, the plan.
  ``(e) Notice Requirements for Plans Significantly Reducing Benefit 
Accruals.--
          ``(1) In general.--If an applicable pension plan is amended 
        to provide for a significant reduction in the rate of future 
        benefit accrual, the plan administrator shall provide written 
        notice to each applicable individual (and to each employee 
        organization representing applicable individuals).
          ``(2) Notice.--The notice required by paragraph (1) shall be 
        written in a manner calculated to be understood by the average 
        plan participant and shall provide sufficient information (as 
        determined in accordance with regulations prescribed by the 
        Secretary) to allow applicable individuals to understand the 
        effect of the plan amendment.
          ``(3) Timing of notice.--Except as provided in regulations, 
        the notice required by paragraph (1) shall be provided within a 
        reasonable time before the effective date of the plan 
        amendment.
          ``(4) Designees.--Any notice under paragraph (1) may be 
        provided to a person designated, in writing, by the person to 
        which it would otherwise be provided.
          ``(5) Notice before adoption of amendment.--A plan shall not 
        be treated as failing to meet the requirements of paragraph (1) 
        merely because notice is provided before the adoption of the 
        plan amendment if no material modification of the amendment 
        occurs before the amendment is adopted.
  ``(f) Applicable Individual; Applicable Pension Plan.--For purposes 
of this section--
          ``(1) Applicable individual.--The term `applicable 
        individual' means, with respect to any plan amendment--
                  ``(A) any participant in the plan, and
                  ``(B) any beneficiary who is an alternate payee 
                (within the meaning of section 414(p)(8)) under an 
                applicable qualified domestic relations order (within 
                the meaning of section 414(p)(1)(A)),
        who may reasonably be expected to be affected by such plan 
        amendment.
          ``(2) Applicable pension plan.--The term `applicable pension 
        plan' means--
                  ``(A) any defined benefit plan, or
                  ``(B) an individual account plan which is subject to 
                the funding standards of section 412,
        which had 100 or more participants who had accrued a benefit, 
        or with respect to whom contributions were made, under the plan 
        (whether or not vested) as of the last day of the plan year 
        preceding the plan year in which the plan amendment becomes 
        effective.''
  (b) Clerical Amendment.--The table of sections for chapter 43 of 
subtitle D is amended by adding at the end the following new item:

``Sec. 4980F. Failure of applicable plans reducing benefit accruals to 
satisfy notice requirements.''

  (c) Effective Dates.--
          (1) In general.--The amendments made by this section shall 
        apply to plan amendments taking effect on or after the date of 
        the enactment of this Act.
          (2) Transition.--Until such time as the Secretary of the 
        Treasury issues regulations under sections 4980F(e)(2) and (3) 
        of the Internal Revenue Code of 1986 (as added by the amendment 
        made by subsection (a)), a plan shall be treated as meeting the 
        requirements of such section if it makes a good faith effort to 
        comply with such requirements.
          (3) Special rule.--The period for providing any notice 
        required by the amendments made by this section shall not end 
        before the date which is 3 months after the date of the 
        enactment of this Act.

                Subtitle E--Reducing Regulatory Burdens

SEC. 1251. REPEAL OF THE MULTIPLE USE TEST.

  (a) In General.--Paragraph (9) of section 401(m) is amended to read 
as follows:
          ``(9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the purposes of 
        this subsection and subsection (k), including regulations 
        permitting appropriate aggregation of plans and 
        contributions.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to years beginning after December 31, 2000.

SEC. 1252. MODIFICATION OF TIMING OF PLAN VALUATIONS.

  (a) In General.--Section 412(c)(9) (relating to annual valuation) is 
amended--
          (1) by striking ``For purposes'' and inserting the following:
                  ``(A) In general.--For purposes'', and
          (2) by adding at the end the following:
                  ``(B) Election to use prior year valuation.--
                          ``(i) In general.--Except as provided in 
                        clause (ii), if, for any plan year--
                                  ``(I) an election is in effect under 
                                this subparagraph with respect to a 
                                plan, and
                                  ``(II) the assets of the plan are not 
                                less than 125 percent of the plan's 
                                current liability (as defined in 
                                paragraph (7)(B)), determined as of the 
                                valuation date for the preceding plan 
                                year,
                        then this section shall be applied using the 
                        information available as of such valuation 
                        date.
                          ``(ii) Exceptions.--
                                  ``(I) Actual valuation every 3 
                                years.--Clause (i) shall not apply for 
                                more than 2 consecutive plan years and 
                                valuation shall be under subparagraph 
                                (A) with respect to any plan year to 
                                which clause (i) does not apply by 
                                reason of this clause.
                                  ``(II) Regulations.--Subclause (I) 
                                shall not apply to the extent that more 
                                frequent valuations are required under 
                                the regulations under subparagraph (A).
                          ``(iii) Adjustments.--Information under 
                        clause (i) shall, in accordance with 
                        regulations, be actuarially adjusted to reflect 
                        significant differences in participants.
                          ``(iv) Election.--An election under this 
                        subparagraph, once made, shall be irrevocable 
                        without the consent of the Secretary.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to plan years beginning after December 31, 2000.

SEC. 1253. FLEXIBILITY AND NONDISCRIMINATION AND LINE OF BUSINESS 
                    RULES.

  The Secretary of the Treasury shall, on or before December 31, 2000, 
modify the existing regulations issued under section 401(a)(4) and 
section 414(r) of the Internal Revenue Code of 1986 in order to expand 
(to the extent that the Secretary determines appropriate) the ability 
of a pension plan to demonstrate compliance with the nondiscrimination 
and line of business requirements based upon the facts and 
circumstances surrounding the design and operation of the plan, even 
though the plan is unable to satisfy the mechanical tests currently 
used to determine compliance.

SEC. 1254. SUBSTANTIAL OWNER BENEFITS IN TERMINATED PLANS.

  (a) Modification of Phase-In of Guarantee.--Section 4022(b)(5) of the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1322(b)(5)) 
is amended to read as follows:
  ``(5)(A) For purposes of this paragraph, the term `majority owner' 
means an individual who, at any time during the 60-month period ending 
on the date the determination is being made--
          ``(i) owns the entire interest in an unincorporated trade or 
        business,
          ``(ii) in the case of a partnership, is a partner who owns, 
        directly or indirectly, 50 percent or more of either the 
        capital interest or the profits interest in such partnership, 
        or
          ``(iii) in the case of a corporation, owns, directly or 
        indirectly, 50 percent or more in value of either the voting 
        stock of that corporation or all the stock of that corporation.
For purposes of clause (iii), the constructive ownership rules of 
section 1563(e) of the Internal Revenue Code of 1986 shall apply 
(determined without regard to section 1563(e)(3)(C)).
  ``(B) In the case of a participant who is a majority owner, the 
amount of benefits guaranteed under this section shall equal the 
product of--
          ``(i) a fraction (not to exceed 1) the numerator of which is 
        the number of years from the later of the effective date or the 
        adoption date of the plan to the termination date, and the 
        denominator of which is 10, and
          ``(ii) the amount of benefits that would be guaranteed under 
        this section if the participant were not a majority owner.''.
  (b) Modification of Allocation of Assets.--
          (1) Section 4044(a)(4)(B) of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1344(a)(4)(B)) is amended by 
        striking ``section 4022(b)(5)'' and inserting ``section 
        4022(b)(5)(B)''.
          (2) Section 4044(b) of such Act (29 U.S.C. 1344(b)) is 
        amended--
                  (A) by striking ``(5)'' in paragraph (2) and 
                inserting ``(4), (5),'', and
                  (B) by redesignating paragraphs (3) through (6) as 
                paragraphs (4) through (7), respectively, and by 
                inserting after paragraph (2) the following:
          ``(3) If assets available for allocation under paragraph (4) 
        of subsection (a) are insufficient to satisfy in full the 
        benefits of all individuals who are described in that 
        paragraph, the assets shall be allocated first to benefits 
        described in subparagraph (A) of that paragraph. Any remaining 
        assets shall then be allocated to benefits described in 
        subparagraph (B) of that paragraph. If assets allocated to such 
        subparagraph (B) are insufficient to satisfy in full the 
        benefits described in that subparagraph, the assets shall be 
        allocated pro rata among individuals on the basis of the 
        present value (as of the termination date) of their respective 
        benefits described in that subparagraph.''.
  (c) Conforming Amendments.--
          (1) Section 4021 of the Employee Retirement Income Security 
        Act of 1974 (29 U.S.C. 1321) is amended--
                  (A) in subsection (b)(9), by striking ``as defined in 
                section 4022(b)(6)'', and
                  (B) by adding at the end the following:
  ``(d) For purposes of subsection (b)(9), the term `substantial owner' 
means an individual who, at any time during the 60-month period ending 
on the date the determination is being made--
          ``(1) owns the entire interest in an unincorporated trade or 
        business,
          ``(2) in the case of a partnership, is a partner who owns, 
        directly or indirectly, more than 10 percent of either the 
        capital interest or the profits interest in such partnership, 
        or
          ``(3) in the case of a corporation, owns, directly or 
        indirectly, more than 10 percent in value of either the voting 
        stock of that corporation or all the stock of that corporation.
For purposes of paragraph (3), the constructive ownership rules of 
section 1563(e) of the Internal Revenue Code of 1986 shall apply 
(determined without regard to section 1563(e)(3)(C)).''.
  (2) Section 4043(c)(7) of such Act (29 U.S.C. 1343(c)(7)) is amended 
by striking ``section 4022(b)(6)'' and inserting ``section 4021(d)''.
  (d) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to plan 
        terminations--
                  (A) under section 4041(c) of the Employee Retirement 
                Income Security Act of 1974 (29 U.S.C. 1341(c)) with 
                respect to which notices of intent to terminate are 
                provided under section 4041(a)(2) of such Act (29 
                U.S.C. 1341(a)(2)) after December 31, 2000, and
                  (B) under section 4042 of such Act (29 U.S.C. 1342) 
                with respect to which proceedings are instituted by the 
                corporation after such date.
          (2) Conforming amendments.--The amendments made by subsection 
        (c) shall take effect on the date of enactment of this Act.

SEC. 1255. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF DIVIDEND 
                    DEDUCTION.

  (a) In General.--Section 404(k)(2)(A) (defining applicable dividends) 
is amended by striking ``or'' at the end of clause (ii), by 
redesignating clause (iii) as clause (iv), and by inserting after 
clause (ii) the following new clause:
                          ``(iii) is, at the election of such 
                        participants or their beneficiaries--
                                  ``(I) payable as provided in clause 
                                (i) or (ii), or
                                  ``(II) paid to the plan and 
                                reinvested in qualifying employer 
                                securities, or''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

SEC. 1256. NOTICE AND CONSENT PERIOD REGARDING DISTRIBUTIONS.

  (a) Expansion of Period.--
          (1) In general.--Subparagraph (A) of section 417(a)(6) is 
        amended by striking ``90-day'' and inserting ``180-day''.
          (2) Modification of regulations.--The Secretary of the 
        Treasury shall modify the regulations under sections 402(f), 
        411(a)(11), and 417 of the Internal Revenue Code of 1986 to 
        substitute ``180 days'' for ``90 days'' each place it appears 
        in Treasury Regulations sections 1.402(f)-1, 1.411(a)-11(c), 
        and 1.417(e)-1(b).
          (3) Effective date.--The amendments made by paragraph (1) and 
        the modifications required by paragraph (2) shall apply to 
        years beginning after December 31, 2000.
  (b) Consent Regulation Inapplicable to Certain Distributions.--
          (1) In general.--The Secretary of the Treasury shall modify 
        the regulations under section 411(a)(11) of the Internal 
        Revenue Code of 1986 to provide that the description of a 
        participant's right, if any, to defer receipt of a distribution 
        shall also describe the consequences of failing to defer such 
        receipt.
          (2) Effective date.--The modifications required by paragraph 
        (1) shall apply to years beginning after December 31, 2000.

SEC. 1257. REPEAL OF TRANSITION RULE RELATING TO CERTAIN HIGHLY 
                    COMPENSATED EMPLOYEES.

  (a) In General.--Paragraph (4) of section 1114(c) of the Tax Reform 
Act of 1986 is hereby repealed.
  (b) Effective Date.--The repeal made by subsection (a) shall apply to 
plan years beginning after December 31, 2000.

SEC. 1258. EMPLOYEES OF TAX-EXEMPT ENTITIES.

  (a) In General.--The Secretary of the Treasury shall modify Treasury 
Regulations section 1.410(b)-6(g) to provide that employees of an 
organization described in section 403(b)(1)(A)(i) of the Internal 
Revenue Code of 1986 who are eligible to make contributions under 
section 403(b) pursuant to a salary reduction agreement may be treated 
as excludable with respect to a plan under section 401(k), or section 
401(m) of such Code that is provided under the same general arrangement 
as a plan under such section 401(k), if--
          (1) no employee of an organization described in section 
        403(b)(1)(A)(i) of such Code is eligible to participate in such 
        section 401(k) plan or section 401(m) plan, and
          (2) 95 percent of the employees who are not employees of an 
        organization described in section 403(b)(1)(A)(i) of such Code 
        are eligible to participate in such section 401(k) plan or 
        section 401(m) plan.
  (b) Effective Date.--The modification required by subsection (a) 
shall apply as of the same date set forth in section 1426(b) of the 
Small Business Job Protection Act of 1996.

SEC. 1259. CLARIFICATION OF TREATMENT OF EMPLOYER-PROVIDED RETIREMENT 
                    ADVICE.

  (a) In General.--Subsection (a) of section 132 (relating to exclusion 
from gross income) is amended by striking ``or'' at the end of 
paragraph (5), by striking the period at the end of paragraph (6) and 
inserting ``, or'', and by adding at the end the following new 
paragraph:
          ``(7) qualified retirement planning services.''.
  (b) Qualified Retirement Planning Services Defined.--Section 132 is 
amended by redesignating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following:
  ``(m) Qualified Retirement Planning Services.--
          ``(1) In general.--For purposes of this section, the term 
        `qualified retirement planning services' means any retirement 
        planning service provided to an employee and his spouse by an 
        employer maintaining a retirement plan.
          ``(2) Nondiscrimination rule.--Subsection (a)(7) shall apply 
        in the case of highly compensated employees only if such 
        services are available on substantially the same terms to each 
        member of the group of employees normally provided education 
        and information regarding the employer's pension plan.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to years beginning after December 31, 2000.

SEC. 1260. PROVISIONS RELATING TO PLAN AMENDMENTS.

  (a) In General.--If this section applies to any plan or contract 
amendment--
          (1) such plan or contract shall be treated as being operated 
        in accordance with the terms of the plan during the period 
        described in subsection (b)(2)(A), and
          (2) such plan shall not fail to meet the requirements of 
        section 411(d)(6) of the Internal Revenue Code of 1986 by 
        reason of such amendment.
  (b) Amendments to Which Section Applies.--
          (1) In general.--This section shall apply to any amendment to 
        any plan or annuity contract which is made--
                  (A) pursuant to any amendment made by this title, or 
                pursuant to any regulation issued under this title, and
                  (B) on or before the last day of the first plan year 
                beginning on or after January 1, 2003.
        In the case of a government plan (as defined in section 414(d) 
        of the Internal Revenue Code of 1986, this paragraph shall be 
        applied by substituting ``2005'' for ``2003''.
          (2) Conditions.--This section shall not apply to any 
        amendment unless--
                  (A) during the period--
                          (i) beginning on the date the legislative or 
                        regulatory amendment described in paragraph 
                        (1)(A) takes effect (or in the case of a plan 
                        or contract amendment not required by such 
                        legislative or regulatory amendment, the 
                        effective date specified by the plan), and
                          (ii) ending on the date described in 
                        paragraph (1)(B) (or, if earlier, the date the 
                        plan or contract amendment is adopted),
                the plan or contract is operated as if such plan or 
                contract amendment were in effect, and
                  (B) such plan or contract amendment applies 
                retroactively for such period.

SEC. 1261. MODEL PLANS FOR SMALL BUSINESSES.

  (a) In General.--Not later than December 31, 2000, the Secretary of 
the Treasury is directed to issue at least one model defined 
contribution plan and at least one model defined benefit plan that fit 
the needs of small businesses and that shall be treated as meeting the 
requirements of section 401(a) of the Internal Revenue Code of 1986 
with respect to the form of the plan. To the extent that the 
requirements of section 401(a) of such Code are modified after the 
issuance of such plans, the Secretary of the Treasury shall, in a 
timely manner, issue model amendments that, if adopted in a timely 
manner by an employer that has a model plan in effect, shall cause such 
model plan to be treated as meeting the requirements of section 401(a) 
of such Code, as modified, with respect to the form of the plan.
  (b) Prototype Plan Alternative.--The Secretary of the Treasury may 
satisfy the requirements of subsection (a) through the enhancement and 
simplification of the Secretary's programs for prototype plans in such 
a manner as to achieve the purposes of subsection (a).

SEC. 1262. SIMPLIFIED ANNUAL FILING REQUIREMENT FOR PLANS WITH FEWER 
                    THAN 25 EMPLOYEES.

  (a) In General.--In the case of a retirement plan which covers less 
than 25 employees on the 1st day of the plan year and meets the 
requirements described in subsection (b), the Secretary of the Treasury 
shall provide for the filing of a simplified annual return that is 
substantially similar to the annual return required to be filed by a 
one-participant retirement plan.
  (b) Requirements.--A plan meets the requirements of this subsection 
if it--
          (1) meets the minimum coverage requirements of section 410(b) 
        of the Internal Revenue Code of 1986 without being combined 
        with any other plan of the business that covers the employees 
        of the business,
          (2) does not cover a business that is a member of an 
        affiliated service group, a controlled group of corporations, 
        or a group of businesses under common control, and
          (3) does not cover a business that leases employees.

SEC. 1263. IMPROVEMENT OF EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM.

  The Secretary of the Treasury shall continue to update and improve 
the Employee Plans Compliance Resolution System (or any successor 
program) giving special attention to--
          (1) increasing the awareness and knowledge of small employers 
        concerning the availability and use of the program,
          (2) taking into account special concerns and circumstances 
        that small employers face with respect to compliance and 
        correction of compliance failures,
          (3) extending the duration of the self-correction period 
        under the Administrative Policy Regarding Self-Correction for 
        significant compliance failures,
          (4) expanding the availability to correct insignificant 
        compliance failures under the Administrative Policy Regarding 
        Self-Correction during audit, and
          (5) assuring that any tax, penalty, or sanction that is 
        imposed by reason of a compliance failure is not excessive and 
        bears a reasonable relationship to the nature, extent, and 
        severity of the failure.

                  TITLE XIII--MISCELLANEOUS PROVISIONS

         Subtitle A--Provisions Primarily Affecting Individuals

SEC. 1301. EXCLUSION FOR FOSTER CARE PAYMENTS TO APPLY TO PAYMENTS BY 
                    QUALIFIED PLACEMENT AGENCIES.

  (a) In General.--The matter preceding subparagraph (B) of section 
131(b)(1) (defining qualified foster care payment) is amended to read 
as follows:
          ``(1) In general.--The term `qualified foster care payment' 
        means any payment made pursuant to a foster care program of a 
        State or political subdivision thereof--
                  ``(A) which is paid by--
                          ``(i) a State or political subdivision 
                        thereof, or
                          ``(ii) a qualified foster care placement 
                        agency, and''.
  (b) Qualified Foster Individuals To Include Individuals Placed by 
Qualified Placement Agencies.--Subparagraph (B) of section 131(b)(2) 
(defining qualified foster individual) is amended to read as follows:
                  ``(B) a qualified foster care placement agency.''
  (c) Qualified Foster Care Placement Agency Defined.--Subsection (b) 
of section 131 is amended by redesignating paragraph (3) as paragraph 
(4) and by inserting after paragraph (2) the following new paragraph:
          ``(3) Qualified foster care placement agency.--The term 
        `qualified foster care placement agency' means any placement 
        agency which is licensed or certified by--
                  ``(A) a State or political subdivision thereof, or
                  ``(B) an entity designated by a State or political 
                subdivision thereof,
        for the foster care program of such State or political 
        subdivision to make foster care payments to providers of foster 
        care.''
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 1302. MILEAGE REIMBURSEMENTS TO CHARITABLE VOLUNTEERS EXCLUDED 
                    FROM GROSS INCOME.

  (A) In General.--Part III of subchapter B of chapter 1 is amended by 
inserting after section 138 the following new section:

``SEC. 138A. MILEAGE REIMBURSEMENTS TO CHARITABLE VOLUNTEERS.

  ``(a) In General.--Gross income of an individual does not include 
amounts received, from an organization described in section 170(c), as 
reimbursement of operating expenses with respect to use of a passenger 
automobile for the benefit of such organization. The preceding sentence 
shall apply only to the extent that such reimbursement would be 
deductible under section 274(d) (determined by applying the standard 
business mileage rate established pursuant to section 274(d)) if the 
organization were not so described and such individual were an employee 
of such organization.
  ``(b) No Double Benefit.--Subsection (a) shall not apply with respect 
to any expenses if the individual claims a deduction or credit for such 
expenses under any other provision of this title.
  ``(c) Exemption From Reporting Requirements.--Section 6041 shall not 
apply with respect to reimbursements excluded from income under 
subsection (a).''
  (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 is amended by inserting after the item 
relating to section 138 the following new items:

                              ``Sec. 138A. Reimbursement for use of 
                                        passenger automobile for 
                                        charity.''

  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 1303. W-2 TO INCLUDE EMPLOYER SOCIAL SECURITY TAXES.

  (a) In General.--Subsection (a) of section 6051 (relating to receipts 
for employees) is amended by striking ``and'' at the end of paragraph 
(10), by striking the period at the end of paragraph (11) and inserting 
a comma, and by inserting after paragraph (11) the following new 
paragraphs:
          ``(12) the amount of tax imposed by section 3111(a), and
          ``(13) the amount of tax imposed by section 3111(b).''
  (b) Effective Date.--The amendment made by this section shall apply 
with respect to remuneration paid after December 31, 1999.

SEC. 1304. CONSISTENT TREATMENT OF SURVIVOR BENEFITS FOR PUBLIC SAFETY 
                    OFFICERS KILLED IN THE LINE OF DUTY.

  Subsection (b) of section 1528 of the Taxpayer Relief Act of 1997 
(Public Law 105-34) is amended by striking the period and inserting `, 
and to amounts received in taxable years beginning after December 31, 
1999, with respect to individuals dying on or before December 31, 
1996.''

         Subtitle B--Provisions Primarily Affecting Businesses

SEC. 1311. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS TREATED AS 
                    QUALIFYING INCOME OF REGULATED INVESTMENT 
                    COMPANIES.

  (a) In General.--Paragraph (2) of section 851(b) (defining regulated 
investment company) is amended by inserting ``income derived from an 
interest in a publicly traded partnership (as defined in section 
7704(b)),'' after ``dividends, interest,''.
  (b) Source Flow-Through Rule Not To Apply.--The last sentence of 
section 851(b) is amended by inserting ``(other than a publicly traded 
partnership (as defined in section 7704(b)))'' after ``derived from a 
partnership''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

SEC. 1312. SPECIAL PASSIVE ACTIVITY RULE FOR PUBLICLY TRADED 
                    PARTNERSHIPS TO APPLY TO REGULATED INVESTMENT 
                    COMPANIES.

  (a) In General.--Subsection (k) of section 469 (relating to separate 
application of section in case of publicly traded partnerships) is 
amended by adding at the end the following new paragraph:
          ``(4) Application to regulated investment companies.--For 
        purposes of this section, a regulated investment company (as 
        defined in section 851) holding an interest in a publicly 
        traded partnership shall be treated as a taxpayer described in 
        subsection (a)(2) with respect to items attributable to such 
        interest.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2000.

SEC. 1313. LARGE ELECTRIC TRUCKS, VANS, AND BUSES ELIGIBLE FOR 
                    DEDUCTION FOR CLEAN-FUEL VEHICLES IN LIEU OF 
                    CREDIT.

  (a) In General.--Paragraph (1) of section 30(c) (relating to credit 
for qualified electric vehicles) is amended by adding at the end the 
following new flush sentence:
        ``Such term shall not include any vehicle described in 
        subclause (I) or (II) of section 179A(b)(1)(A)(iii).''
  (b) Effective Date.--The amendment made by this section shall apply 
to property placed in service after December 31, 1999.

SEC. 1314. MODIFICATIONS TO SPECIAL RULES FOR NUCLEAR DECOMMISSIONING 
                    COSTS.

  (a) Repeal of Limitation on Deposits Into Fund Based on Cost of 
Service.--Subsection (b) of section 468A is amended to read as follows:
  ``(b) Limitation on Amounts Paid Into Fund.--The amount which a 
taxpayer may pay into the Fund for any taxable year shall not exceed 
the ruling amount applicable to such taxable year.''
  (b) Clarification of Treatment of Fund Transfers.--Subsection (e) of 
section 468A is amended by adding at the end the following new 
paragraph:
          ``(8) Treatment of fund transfers.--If, in connection with 
        the transfer of the taxpayer's interest in a nuclear 
        powerplant, the taxpayer transfers the Fund with respect to 
        such powerplant to the transferee of such interest and the 
        transferee elects to continue the application of this section 
        to such Fund--
                  ``(A) the transfer of such Fund shall not cause such 
                Fund to be disqualified from the application of this 
                section, and
                  ``(B) no amount shall be treated as distributed from 
                such Fund, or be includible in gross income, by reason 
                of such transfer.''
  (c) Transfers of Balances in Nonqualified Funds.--Section 468A is 
amended by redesignating subsections (f) and (g) as subsections (g) and 
(h), respectively, and by inserting after subsection (e) the following 
new subsection:
  ``(f) Transfers of Balances in Nonqualified Funds Into Qualified 
Funds.--
          ``(1) In general.--Notwithstanding subsection (b), any 
        taxpayer maintaining a Fund to which this section applies with 
        respect to a nuclear powerplant may transfer into such Fund 
        amounts held in any nonqualified fund of such taxpayer with 
        respect to such powerplant.
          ``(2) Maximum amount permitted to be transferred.--The amount 
        permitted to be transferred under paragraph (1) shall not 
        exceed the balance in the nonqualified fund as of December 31, 
        1998.
          ``(3) Deduction for amounts transferred.--
                  ``(A) In general.--The deduction allowed by 
                subsection (a) for any transfer permitted by this 
                subsection shall be allowed ratably over the remaining 
                estimated useful life (within the meaning of subsection 
                (d)(2)(A)) of the nuclear powerplant, beginning with 
                the later of the taxable year during which the transfer 
                is made or the taxpayer's first taxable year beginning 
                after December 31, 2001.
                  ``(B) Denial of deduction for previously deducted 
                amounts.--No deduction shall be allowed for any 
                transfer under this subsection of an amount for which a 
                deduction was allowed when such amount was paid into 
                the nonqualified fund. For purposes of the preceding 
                sentence, a ratable portion of each transfer shall be 
                treated as being from previously deducted amounts to 
                the extent thereof.
                  ``(C) Transfers of qualified funds.--If--
                          ``(i) any transfer permitted by this 
                        subsection is made to any Fund to which this 
                        section applies, and
                          ``(ii) such Fund is transferred thereafter,
                any deduction under this subsection for taxable years 
                ending after the date that such Fund is transferred 
                shall be allowed to the transferee and not to the 
                transferor. The preceding sentence shall not apply if 
                the transferor is an organization exempt from tax 
                imposed by this chapter.
          ``(4) New ruling amount required.--Paragraph (1) shall not 
        apply to any transfer unless the taxpayer requests from the 
        Secretary a new schedule of ruling amounts in connection with 
        such transfer.
          ``(5) Nonqualified fund.--For purposes of this subsection, 
        the term `nonqualified fund' means, with respect to any nuclear 
        powerplant, any fund in which amounts are irrevocably set aside 
        pursuant to the requirements of any State or Federal agency 
        exclusively for the purpose of funding the decommissioning of 
        such powerplant.
          ``(6) No basis in qualified funds.--Notwithstanding any other 
        provision of law, the basis of any Fund to which this section 
        applies shall not be increased by reason of any transfer 
        permitted by this subsection.''
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 1315. CONSOLIDATION OF LIFE INSURANCE COMPANIES WITH OTHER 
                    CORPORATIONS.

  (a) In General.--Section 1504(b) (defining includible corporation) is 
amended by striking paragraph (2).
  (b) Conforming Amendments.--
          (1) Subsection (c) of section 1503 is amended by striking 
        paragraph (2) (relating to losses of recent nonlife 
        affiliates).
          (2) Section 1504 is amended by striking subsection (c) and by 
        redesignating subsections (d), (e), and (f) as subsections (c), 
        (d), and (e), respectively.
          (3) Section 1503(c)(1) (relating to special rule for 
        application of certain losses against income of insurance 
        companies taxed under section 801) is amended by striking ``an 
        election under section 1504(c)(2) is in effect for the taxable 
        year and''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2004.
  (d) No Carryback Before January 1, 2005.--To the extent that a 
consolidated net operating loss is allowed or increased by reason of 
the amendments made by this section, such loss may not be carried back 
to a taxable year beginning before January 1, 2005.
  (e) Nontermination of Group.--No affiliated group shall terminate 
solely as a result of the amendments made by this section.
  (f) Waiver of 5-Year Waiting Period.--Under regulations prescribed by 
the Secretary of the Treasury or his delegate, an automatic waiver from 
the 5-year waiting period for reconsolidation provided in section 
1504(a)(3) of such Code shall be granted to any corporation which was 
previously an includible corporation but was subsequently deemed a 
nonincludible corporation as a result of becoming a subsidiary of a 
corporation which was not an includible corporation solely by operation 
of section 1504(c)(2) of such Code (as in effect on the day before the 
date of enactment of this Act).

            Subtitle C--Provisions Relating to Excise Taxes

SEC. 1321. CONSOLIDATION OF HAZARDOUS SUBSTANCE SUPERFUND AND LEAKING 
                    UNDERGROUND STORAGE TANK TRUST FUND.

  (a) In General.--Subchapter A of chapter 98 (relating to trust fund 
code) is amended by striking sections 9507 and 9508 and inserting the 
following new section:

``SEC. 9507. ENVIRONMENTAL REMEDIATION TRUST FUND.

  ``(a) Creation of Trust Fund.--There is established in the Treasury 
of the United States a trust fund to be known as the `Environmental 
Remediation Trust Fund' consisting of such amounts as may be--
          ``(1) appropriated to the Environmental Remediation Trust 
        Fund as provided in this section,
          ``(2) appropriated to the Environmental Remediation Trust 
        Fund pursuant to section 517(b) of the Superfund Revenue Act of 
        1986, or
          ``(3) credited to the Environmental Remediation Trust Fund as 
        provided in section 9602(b).
  ``(b) Transfers to Environmental Remediation Trust Fund.--
          ``(1) In general.--There are hereby appropriated to the 
        Environmental Remediation Trust Fund amounts equivalent to--
                  ``(A) the taxes received in the Treasury under--
                          ``(i) section 59A, 4611, 4661, or 4671 
                        (relating to environmental taxes),
                          ``(ii) section 4041(d) (relating to 
                        additional taxes on motor fuels),
                          ``(iii) section 4081 (relating to tax on 
                        gasoline, diesel fuel, and kerosene) to the 
                        extent attributable to the Environmental 
                        Remediation Trust Fund financing rate under 
                        such section,
                          ``(iv) section 4091 (relating to tax on 
                        aviation fuel) to the extent attributable to 
                        the Environmental Remediation Trust Fund 
                        financing rate under such section, and
                          ``(v) section 4042 (relating to tax on fuel 
                        used in commercial transportation on inland 
                        waterways) to the extent attributable to the 
                        Environmental Remediation Trust Fund financing 
                        rate under such section,
                  ``(B) amounts recovered on behalf of the 
                Environmental Remediation Trust Fund under the 
                Comprehensive Environmental Response, Compensation, and 
                Liability Act of 1980 (hereinafter in this section 
                referred to as `CERCLA'),
                  ``(C) all moneys recovered or collected under section 
                311(b)(6)(B) of the Clean Water Act,
                  ``(D) penalties assessed under title I of CERCLA,
                  ``(E) punitive damages under section 107(c)(3) of 
                CERCLA, and
                  ``(F) amounts received in the Treasury and collected 
                under section 9003(h)(6) of the Solid Waste Disposal 
                Act.
          ``(2) Limitation on transfers.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), no amount may be appropriated or credited to the 
                Environmental Remediation Trust Fund on and after the 
                date of any expenditure from any such Trust Fund which 
                is not permitted by this section. The determination of 
                whether an expenditure is so permitted shall be made 
                without regard to--
                          ``(i) any provision of law which is not 
                        contained or referenced in this title or in a 
                        revenue Act, and
                          ``(ii) whether such provision of law is a 
                        subsequently enacted provision or directly or 
                        indirectly seeks to waive the application of 
                        this paragraph.
                  ``(B) Exception for prior obligations.--Subparagraph 
                (A) shall not apply to any expenditure to liquidate any 
                contract entered into (or for any amount otherwise 
                obligated) in accordance with the provisions of this 
                section.''
  ``(c) Expenditures From Environmental Remediation Trust Fund.--
          ``(1) In general.--Amounts in the Environmental Remediation 
        Trust Fund shall be available, as provided in appropriation 
        Acts, only for purposes of making expenditures--
                  ``(A) to carry out the purposes of--
                          ``(i) paragraphs (1), (2), (5), and (6) of 
                        section 111(a) of CERCLA as in effect on July 
                        12, 1999,
                          ``(ii) section 111(c) of CERCLA (as so in 
                        effect), other than paragraphs (1) and (2) 
                        thereof, and
                          ``(iii) section 111(m) of CERCLA (as so in 
                        effect), or
                  ``(B) to carry out section 9003(h) of the Solid Waste 
                Disposal Act as in effect on July 12, 1999.
          ``(2) Exception for certain transfers, etc., of hazardous 
        substances.--No amount in the Environmental Remediation Trust 
        Fund or derived from the Environmental Remediation Trust Fund 
        shall be available or used for the transfer or disposal of 
        hazardous waste carried out pursuant to a cooperative agreement 
        between the Administrator of the Environmental Protection 
        Agency and a State if the following conditions apply--
                  ``(A) the transfer or disposal, if made on December 
                13, 1985, would not comply with a State or local 
                requirement,
                  ``(B) the transfer is to a facility for which a final 
                permit under section 3005(a) of the Solid Waste 
                Disposal Act was issued after January 1, 1983, and 
                before November 1, 1984, and
                  ``(C) the transfer is from a facility identified as 
                the McColl Site in Fullerton, California.
          ``(3) Transfers from trust fund for certain repayments and 
        credits.--
                  ``(A) In general.--The Secretary shall pay from time 
                to time from the Environmental Remediation Trust Fund 
                into the general fund of the Treasury amounts 
                equivalent to--
                          ``(i) amounts paid under--
                                  ``(I) section 6420 (relating to 
                                amounts paid in respect of gasoline 
                                used on farms),
                                  ``(II) section 6421 (relating to 
                                amounts paid in respect of gasoline 
                                used for certain nonhighway purposes or 
                                by local transit systems), and
                                  ``(III) section 6427 (relating to 
                                fuels not used for taxable purposes), 
                                and
                          ``(ii) credits allowed under section 34,
                with respect to the taxes imposed by section 4041(d) or 
                by sections 4081 and 4091 (to the extent attributable 
                to the Leaking Underground Storage Tank Trust Fund 
                financing rate or the Environmental Remediation Trust 
                Fund financing rate under such sections).
                  ``(B) Transfers based on estimates.--Transfers under 
                subparagraph (A) shall be made on the basis of 
                estimates by the Secretary, and proper adjustments 
                shall be made in amounts subsequently transferred to 
                the extent prior estimates were in excess of or less 
                than the amounts required to be transferred.
  ``(d) Liability of United States Limited to Amount in Trust Fund.--
          ``(1) General rule.--Any claim filed against the 
        Environmental Remediation Trust Fund may be paid only out of 
        the Environmental Remediation Trust Fund.
          ``(2) Coordination with other provisions.--Nothing in CERCLA 
        or the Superfund Amendments and Reauthorization Act of 1986 (or 
        in any amendment made by either of such Acts) shall authorize 
        the payment by the United States Government of any amount with 
        respect to any such claim out of any source other than the 
        Environmental Remediation Trust Fund.
          ``(3) Order in which unpaid claims are to be paid.--If at any 
        time the Environmental Remediation Trust Fund has insufficient 
        funds to pay all of the claims payable out of the Environmental 
        Remediation Trust Fund at such time, such claims shall, to the 
        extent permitted under paragraph (1), be paid in full in the 
        order in which they were finally determined.''
  (b) Conforming Amendments.--
          (1) Subsections (c) and (d) of section 4611 are each amended 
        by striking ``Hazardous Substance Superfund'' each place it 
        appears and inserting ``Environmental Remediation Trust Fund''.
          (2) Subsection (c) of section 4661 is amended by striking 
        ``Hazardous Substance Superfund'' and inserting ``Environmental 
        Remediation Trust Fund''.
          (3) Sections 4041(d), 4042(b), 4081(a)(2)(B), 4081(d)(3), 
        4091(b), 4092(b), 6421(f), and 6427(l) are each amended by 
        striking ``Leaking Underground Storage Tank'' each place it 
        appears (other than the headings) and inserting ``Environmental 
        Remediation''.
          (4) The heading for subsection (d) of section 4041 is amended 
        by striking ``Leaking Underground Storage Tank'' and inserting 
        ``Environmental Remediation''.
          (5) The headings for subsections (a)(2)(B) and (d)(3) of 
        section 4081 and section 4091(b)(2) are each amended by 
        striking ``Leaking underground storage tank'' and inserting 
        ``Environmental remediation''.
  (c) Effective Date.--The amendments made by this section shall take 
effect on October 1, 1999.
  (d) Environmental Remediation Trust Fund Treated as Continuation of 
Old Trust Funds.--The Environmental Remediation Trust Fund established 
by the amendments made by this section shall be treated for all 
purposes of law as a continuation of both the Hazardous Substance 
Superfund and the Leaking Underground Storage Tank Trust Fund. Any 
reference in any law to the Hazardous

Substance Superfund or the Leaking Underground Storage Tank Trust Fund 
shall be deemed to include (wherever appropriate) a reference to the 
Environmental Remediation Trust Fund established by such amendments.

SEC. 1322. REPEAL OF CERTAIN MOTOR FUEL EXCISE TAXES ON FUEL USED BY 
                    RAILROADS AND ON INLAND WATERWAY TRANSPORTATION.

  (a) Repeal of Leaking Underground Storage Tank Trust Fund Taxes on 
Fuel Used in Trains.--
          (1) In general.--Paragraph (1) of section 4041(d) is amended 
        by adding at the end the following new sentence: ``The 
        preceding sentence shall not apply to any sale for use, or use, 
        of fuel in a diesel-powered train.''
          (2) Conforming amendments.--
                  (A) Paragraph (3) of section 6421(f) is amended by 
                striking ``with respect to--'' and all that follows 
                through ``so much of'' and inserting ``with respect to 
                so much of''.
                  (B) Paragraph (3) of section 6427(l) is amended by 
                striking ``with respect to--'' and all that follows 
                through ``so much of'' and inserting ``with respect to 
                so much of''.
  (b) Repeal of 4.3-Cent Motor Fuel Excise Taxes on Railroads and 
Inland Waterway Transportation Which Remain in General Fund.--
          (1) Taxes on trains.--
                  (A) In general.--Subparagraph (A) of section 
                4041(a)(1) is amended by striking ``or a diesel-powered 
                train'' each place it appears and by striking ``or 
                train''.
                  (B) Conforming amendments.--
                          (i) Subparagraph (C) of section 4041(a)(1) is 
                        amended by striking clause (ii) and by 
                        redesignating clause (iii) as clause (ii).
                          (ii) Subparagraph (C) of section 4041(b)(1) 
                        is amended by striking all that follows 
                        ``section 6421(e)(2)'' and inserting a period.
                          (iii) Paragraph (3) of section 4083(a) is 
                        amended by striking ``or a diesel-powered 
                        train''.
                          (iv) Section 6421(f) is amended by striking 
                        paragraph (3).
                          (v) Section 6427(l) is amended by striking 
                        paragraph (3).
          (2) Fuel used on inland waterways.--
                  (A) In general.--Paragraph (1) of section 4042(b) is 
                amended by adding ``and'' at the end of subparagraph 
                (A), by striking ``, and'' at the end of subparagraph 
                (B) and inserting a period, and by striking 
                subparagraph (C).
                  (B) Conforming amendment.--Paragraph (2) of section 
                4042(b) is amended by striking subparagraph (C).
  (c) Effective Date.--The amendments made by this subsection shall 
take effect on October 1, 1999 (October 1, 2003, in the case of the 
amendments made by subsection (b)), but shall not take effect if 
section 1321 does not take effect.

SEC. 1323. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.

  (a) In General.--Paragraph (6) of section 4162(a) (defining sport 
fishing equipment) is amended by striking subparagraph (C) and by 
redesignating subparagraphs (D) through (J) as subparagraphs (C) 
through (I), respectively.
  (b) Effective Date.--The amendment made by this section shall apply 
to articles sold by the manufacturer, producer, or importer more than 
30 days after the date of the enactment of this Act.

SEC. 1324. CLARIFICATION OF EXCISE TAX IMPOSED ON ARROW COMPONENTS.

  (a) In General.--Paragraph (2) of section 4161(b) (relating to bows 
and arrows, etc.) is amended to read as follows:
          ``(2) Arrows.--
                  ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                shaft, point, article used to attach a point to a 
                shaft, nock, or vane of a type used in the manufacture 
                of any arrow which after its assembly--
                          ``(i) measures 18 inches overall or more in 
                        length, or
                          ``(ii) measures less than 18 inches overall 
                        in length but is suitable for use with a bow 
                        described in paragraph (1)(A),
                a tax equal to 12.4 percent of the price for which so 
                sold.
                  ``(B) Reduced rate on certain hunting points.--
                Subparagraph (A) shall be applied by substituting `11 
                percent' for `12.4 percent' in the case of a point 
                which is designed primarily for use in hunting fish or 
                large animals.''
  (b) Effective Date.--The amendment made by this section shall apply 
to articles sold by the manufacturer, producer, or importer after the 
close of the first calendar month ending more than 30 days after the 
date of the enactment of this Act.

         Subtitle D--Improvements in Low-Income Housing Credit

SEC. 1331. INCREASE IN STATE CEILING ON LOW-INCOME HOUSING CREDIT.

  (a) Increase in State Ceiling.--Clause (i) of section 42(h)(3)(C) 
(relating to State housing credit ceiling) is amended by striking 
``$1.25'' and inserting ``the applicable amount under subparagraph 
(H)''.
  (b) Applicable Amount; Adjustment of State Ceiling for Increases in 
Cost-of-Living.--Paragraph (3) of section 42(h) (relating to housing 
credit dollar amount for agencies) is amended by adding at the end the 
following new subparagraphs:
                  ``(H) Initial Amount of State Ceiling.--For purposes 
                of subparagraph (C)(i), the applicable amount shall be 
                determined under the following table:

                ``For calendar year
                                               The applicable amount is
                  2000.....................................     $1.35  
                  2001.....................................      1.45  
                  2002.....................................      1.55  
                  2003.....................................      1.65  
                  2004 and thereafter......................     1.75.  

                  ``(I) Cost-of-living adjustment.--
                          ``(i) In general.--In the case of a calendar 
                        year after 2004 the $1.75 amount in 
                        subparagraph (H) shall be increased by an 
                        amount equal to--
                                  ``(I) such dollar amount, multiplied 
                                by
                                  ``(II) the cost-of-living adjustment 
                                determined under section 1(f)(3) for 
                                such calendar year by substituting 
                                `calendar year 2003' for `calendar year 
                                1992' in subparagraph (B) thereof.
                          ``(ii) Rounding.--Any increase under clause 
                        (i) which is not a multiple of 5 cents shall be 
                        rounded to the next lowest multiple of 5 
                        cents.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to calendar years after 1999.

SEC. 1332. MODIFICATION OF CRITERIA FOR ALLOCATING HOUSING CREDITS 
                    AMONG PROJECTS.

  (a) Selection Criteria.--Subparagraph (C) of section 42(m)(1) 
(relating to certain selection criteria must be used) is amended--
          (1) by inserting ``, including whether the project includes 
        the use of existing housing as part of a community 
        revitalization plan'' before the comma at the end of clause 
        (iii), and
          (2) by striking clauses (v), (vi), and (vii) and inserting 
        the following new clauses:
                          ``(v) tenant populations with special housing 
                        needs,
                          ``(vi) public housing waiting lists,
                          ``(vii) tenant populations of individuals 
                        with children, and
                          ``(viii) projects intended for eventual 
                        tenant ownership.''
  (b) Preference for Community Revitalization Projects Located in 
Qualified Census Tracts.--Clause (ii) of section 42(m)(1)(B) is amended 
by striking ``and'' at the end of subclause (I), by adding ``and'' at 
the end of subclause (II), and by inserting after subclause (II) the 
following new subclause:
                                  ``(III) projects which are located in 
                                qualified census tracts (as defined in 
                                subsection (d)(5)(C)) and the 
                                development of which contributes to a 
                                concerted community revitalization 
                                plan,''.

SEC. 1333. ADDITIONAL RESPONSIBILITIES OF HOUSING CREDIT AGENCIES.

  (a) Market Study; Public Disclosure of Rationale for Not Following 
Credit Allocation Priorities.--Subparagraph (A) of section 42(m)(1) 
(relating to responsibilities of housing credit agencies) is amended by 
striking ``and'' at the end of clause (i), by striking the period at 
the end of clause (ii) and inserting a comma, and by adding at the end 
the following new clauses:
                          ``(iii) a comprehensive market study of the 
                        housing needs of low-income individuals in the 
                        area to be served by the project is conducted 
                        before the credit allocation is made and at the 
                        developer's expense by a disinterested party 
                        who is approved by such agency, and
                          ``(iv) a written explanation is available to 
                        the general public for any allocation of a 
                        housing credit dollar amount which is not made 
                        in accordance with established priorities and 
                        selection criteria of the housing credit 
                        agency.''.
  (b) Site Visits.--Clause (iii) of section 42(m)(1)(B) (relating to 
qualified allocation plan) is amended by inserting before the period 
``and in monitoring for noncompliance with habitability standards 
through regular site visits''.

SEC. 1334. MODIFICATIONS TO RULES RELATING TO BASIS OF BUILDING WHICH 
                    IS ELIGIBLE FOR CREDIT.

  (a) HOME Assistance Not To Disqualify Building for Additional Credit 
Available to Buildings in High Cost Areas.--Clause (i) of section 
42(i)(2)(E) (relating to buildings receiving HOME assistance) is 
amended by striking the last sentence.
  (b) Adjusted Basis To Include Portion of Certain Buildings Used by 
Low-Income Individuals Who Are Not Tenants and by Project Employees.--
Paragraph (4) of section 42(d) (relating to special rules relating to 
determination of adjusted basis) is amended--
          (1) by striking ``subparagraph (B)'' in subparagraph (A) and 
        inserting ``subparagraphs (B) and (C)'',
          (2) by redesignating subparagraph (C) as subparagraph (D), 
        and
          (3) by inserting after subparagraph (B) the following new 
        subparagraph:
                  ``(C) Inclusion of basis of property used to provide 
                services for certain nontenants.--
                          ``(i) In general.--The adjusted basis of any 
                        building located in a qualified census tract 
                        (as defined in paragraph (5)(C)) shall be 
                        determined by taking into account the adjusted 
                        basis of property (of a character subject to 
                        the allowance for depreciation and not 
                        otherwise taken into account) used throughout 
                        the taxable year in providing any community 
                        service facility.
                          ``(ii) Limitation.--The increase in the 
                        adjusted basis of any building which is taken 
                        into account by reason of clause (i) shall not 
                        exceed 20 percent of the eligible basis of the 
                        qualified low-income housing project of which 
                        it is a part. For purposes of the preceding 
                        sentence, all community service facilities 
                        which are part of the same qualified low-income 
                        housing project shall be treated as 1 facility.
                          ``(iii) Community service facility.--For 
                        purposes of this subparagraph, the term 
                        `community service facility' means any facility 
                        designed to serve primarily individuals whose 
                        income is 60 percent or less of area median 
                        income (within the meaning of subsection 
                        (g)(1)(B)).''.

SEC. 1335. OTHER MODIFICATIONS.

  (a) Allocation of Credit Limit to Certain Buildings.--
          (1) The first sentence of section 42(h)(1)(E)(ii) is amended 
        by striking ``(as of'' the first place it appears and inserting 
        ``(as of the later of the date which is 6 months after the date 
        that the allocation was made or''.
          (2) The last sentence of section 42(h)(3)(C) is amended by 
        striking ``project which'' and inserting ``project which fails 
        to meet the 10 percent test under paragraph (1)(E)(ii) on a 
        date after the close of the calendar year in which the 
        allocation was made or which''.
  (b) Determination of Whether Buildings Are Located in High Cost 
Areas.--The first sentence of section 42(d)(5)(C)(ii)(I) is amended--
          (1) by inserting ``either'' before ``in which 50 percent'', 
        and
          (2) by inserting before the period `` or which has a poverty 
        rate of at least 25 percent''.

SEC. 1336. CARRYFORWARD RULES.

  (a) In General.--Clause (ii) of section 42(h)(3)(D) (relating to 
unused housing credit carryovers allocated among certain states) is 
amended by striking ``the excess'' and all that follows and inserting 
``the excess (if any) of--
                                  ``(I) the unused State housing credit 
                                ceiling for the year preceding such 
                                year, over
                                  ``(II) the aggregate housing credit 
                                dollar amount allocated for such 
                                year.''.
  (b) Conforming Amendment.--The second sentence of section 42(h)(3)(C) 
(relating to State housing credit ceiling) is amended by striking 
``clauses (i) and (iii)'' and inserting ``clauses (i) through (iv)''.

SEC. 1337. EFFECTIVE DATE.

  Except as otherwise provided in this subtitle, the amendments made by 
this subtitle shall apply to--
          (1) housing credit dollar amounts allocated after December 
        31, 2000, and
          (2) buildings placed in service after such date to the extent 
        paragraph (1) of section 42(h) of the Internal Revenue Code of 
        1986 does not apply to any building by reason of paragraph (4) 
        thereof, but only with respect to bonds issued after such date.

          Subtitle E--Entrepreneurial Equity Capital Formation

 PART I--TAX-FREE CONVERSIONS OF SPECIALIZED SMALL BUSINESS INVESTMENT 
                   COMPANIES INTO PASS-THRU ENTITIES

SEC. 1341. MODIFICATIONS TO PROVISIONS RELATING TO REGULATED INVESTMENT 
                    COMPANIES.

  (a) In General.--Section 851 (relating to definition of regulated 
investment company) is amended by adding at the end the following new 
subsection:
  ``(i) Special Rules for Specialized Small Business Investment 
Companies.--
          ``(1) In general.--For purposes of determining whether a 
        specialized small business investment company is a regulated 
        investment company for purposes of this subchapter--
                  ``(A) income derived from an investment as a limited 
                partner in a partnership shall be treated as qualifying 
                income under subsection (b)(2) if--
                          ``(i) the company does not participate in the 
                        active management of the normal business 
                        operations of the partnership, and
                          ``(ii) the company's investment in such 
                        partnership is an investment permitted for 
                        specialized small business investment companies 
                        under the Small Business Investment Act of 
                        1958, and
                  ``(B) the requirements of subsection (b)(3) shall be 
                treated as met if, at the close of each quarter of the 
                taxable year, at least 50 percent of the value of its 
                total assets is represented by--
                          ``(i) assets described in subsection 
                        (b)(3)(A)(i), and
                          ``(ii) other investments permitted to be made 
                        by a specialized small business investment 
                        company under the Small Business Investment Act 
                        of 1958.
          ``(2) Coordination of distribution requirements with sbic 
        requirements.--A specialized small business investment company 
        shall be treated as meeting the requirements of section 
        852(a)(1) if the deduction for dividends paid during the 
        taxable year (as defined in section 561, but without regard to 
        capital gain dividends) equals or exceeds the lesser of the 
        amount required under section 852(a)(1) or 100 percent of the 
        maximum amount that the company would be permitted to 
        distribute during such year under the Small Business Investment 
        Act of 1958.
          ``(3) Specialized small business investment company.--For 
        purposes of this subsection, the term `specialized small 
        business investment company' has the meaning given to such term 
        by section 1044(c)(3).
          ``(4) References to 1958 act.--For purposes of this 
        subsection, references to the Small Business Investment Act of 
        1958 shall be treated as references to such Act as in effect on 
        May 13, 1993.''
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of enactment of this Act.

SEC. 1342. TAX-FREE REORGANIZATION OF SPECIALIZED SMALL BUSINESS 
                    INVESTMENT COMPANY AS A PARTNERSHIP.

  (a) In General.--If, within 180 days after the date of the enactment 
of this Act, a corporation which is a specialized small business 
investment company transfers substantially all of its assets to a 
partnership (including its license to operate as a specialized small 
business investment company) solely in exchange for partnership 
interests in such partnership, no gain or loss shall be recognized to 
the corporation on such a transfer if--
          (1) immediately after such exchange, such corporation holds 
        partnership interests in such partnership having a value equal 
        to at least 80 percent of the total value of all partnership 
        interests in such partnership, and
          (2) before the 90th day after such exchange, such corporation 
        transfers all partnership interests held by the corporation in 
        such partnership, and all remaining assets of the corporation, 
        to its shareholders in the complete liquidation of such 
        corporation.
  (b) Nonrecognition of Gain or Loss to Corporation on Distribution of 
Partnership Interests.--In the case of any distribution of a 
partnership interest acquired by the liquidating corporation in an 
exchange to which subsection (a) applies--
          (1) no gain or loss shall be recognized to the liquidating 
        corporation by reason of such distribution, and
          (2) such distribution shall not be treated as a sale or 
        exchange for purposes of section 708(b)(1)(B) of the Internal 
        Revenue Code of 1986.
  (c) Gain Recognized by Shareholders on Receipt of Property Other Than 
Partnership Interests.--
          (1) In general.--No gain or loss shall be recognized to a 
        shareholder of a corporation on the transfer of such 
        shareholder's stock in such corporation to such corporation 
        solely in exchange for a partnership interest in the 
        partnership referred to in subsection (a)(1).
          (2) Receipt of property.--If paragraph (1) would apply to an 
        exchange but for the fact that there is received, in addition 
        to the partnership interests permitted to be received under 
        paragraph (1), other property or money, then--
                  (A) gain (if any) to such recipient shall be 
                recognized, but not in excess of--
                          (i) the amount of money received, plus
                          (ii) the fair market value of such other 
                        property received, and
                  (B) no loss to such recipient shall be recognized.
  (d) Basis.--The basis of property received in any exchange to which 
this section applies shall be determined in accordance with rules 
similar to the rules of section 358 of the Internal Revenue Code of 
1986.
  (e) Additional Requirements.--This section shall not apply to any 
specialized small business investment company unless--
          (1) such company elects to be subject to tax on its built-in 
        gains computed in a manner similar to that provided in section 
        1374 of such Code (without regard to any recognition period (as 
        defined in subsection (d)(7) thereof)), and
          (2) such company distributes all of its accumulated earnings 
        and profits (in distributions to which section 301 of such Code 
        applies) before its liquidation under this section.
If, after making an election under paragraph (1), a company ceases to 
be a specialized small business investment company, such company shall 
be treated as having disposed of all of its assets for purposes of 
applying paragraph (1).
  (f) Specialized Small Business Investment Company.--For purposes of 
this section, the term ``specialized small business investment 
company'' has the meaning given to such term by section 1044(c)(3) of 
such Code.

  PART II--ADDITIONAL INCENTIVES RELATED TO INVESTING IN SPECIALIZED 
                  SMALL BUSINESS INVESTMENT COMPANIES

SEC. 1346. EXPANSION OF NONRECOGNITION TREATMENT FOR SECURITIES GAIN 
                    ROLLED OVER INTO SPECIALIZED SMALL BUSINESS 
                    INVESTMENT COMPANIES.

  (a) Extension of Rollover Period.--Paragraph (1) of section 1044(a) 
(relating to nonrecognition of gain) is amended by striking ``60-day 
period'' and inserting ``180-day period''.
  (b) Increase of Maximum Exclusion.--
          (1) In general.--Paragraphs (1) and (2) of section 1044(b) 
        (relating to limitations) are amended to read as follows:
          ``(1) Limitation on individuals.--In the case of an 
        individual, the amount of gain which may be excluded under 
        subsection (a) for any taxable year shall not exceed--
                  ``(A) $750,000, reduced by
                  ``(B) the amount of gain excluded under subsection 
                (a) for all preceding taxable years.
          ``(2) Limitation on C corporations.--In the case of a C 
        corporation, the amount of gain which may be excluded under 
        subsection (a) for any taxable year shall not exceed--
                  ``(A) $2,000,000, reduced by
                  ``(B) the amount of gain excluded under subsection 
                (a) for all preceding taxable years.''
          (2) Conforming amendment.--Subparagraph (A) of section 
        1044(b)(3) (relating to special rules for married individuals) 
        is amended to read as follows:
                  ``(A) Separate returns.--In the case of a separate 
                return by a married individual, paragraph (1) shall be 
                applied by substituting `$375,000' for `$750,000'.''
  (c) Extension to Preferred Stock.--Paragraph (1) of section 1044(a) 
is amended by striking ``common''.
  (d) Effective Date.--The amendments made by this section shall apply 
to sales occurring after the date of the enactment of this Act.

SEC. 1347. MODIFICATIONS TO EXCLUSION FOR GAIN FROM QUALIFIED SMALL 
                    BUSINESS STOCK.

  (a) In General.--Section 1202 (relating to 50-percent exclusion for 
gain from certain small business stock) is amended by redesignating 
subsection (k) as subsection (l) and by inserting after subsection (j) 
the following new subsection:
  ``(k) Special Rules for Specialized Small Business Investment 
Companies.--
          ``(1) Increase in exclusion.--In the case of--
                  ``(A) the sale or exchange of stock in a specialized 
                small business investment company, and
                  ``(B) any amount treated under subsection (g) as gain 
                described in subsection (a) by reason of the sale or 
                exchange of stock in a specialized small business 
                investment company,
        subsection (a) shall be applied by substituting `60 percent' 
        for `50 percent'.
          ``(2) Waiver of active business requirement.--Notwithstanding 
        any provision of subsection (e), a corporation shall be treated 
        as meeting the active business requirements of such subsection 
        for any period during which such corporation qualifies as a 
        specialized small business investment company.
          ``(3) Specialized small business investment company.--For 
        purposes of this section, the term `specialized small business 
        investment company' means any eligible corporation (as defined 
        in subsection (e)(4)) which is licensed to operate under 
        section 301(d) of the Small Business Investment Act of 1958 (as 
        in effect on May 13, 1993).''
  (b) Conforming Amendment.--Section 1202(c)(2) is amended to read as 
follows:
          ``(2) Active business requirement, etc.--Stock in a 
        corporation shall not be treated as qualified small business 
        stock unless, during substantially all of the taxpayer's 
        holding period for such stock, such corporation meets the 
        active business requirements of subsection (e) and such 
        corporation is a C corporation.''
  (c) Effective Date.--The amendments made by this section shall apply 
to sales and exchanges occurring after the date of the enactment of 
this Act.

                      Subtitle F--Other Provisions

SEC. 1351. 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 1999.

SEC. 1352. TAX TREATMENT OF ALASKA NATIVE SETTLEMENT TRUSTS.

  (a) In General.--Subpart A of part I of subchapter J of chapter 1 
(relating to general rules for taxation of trusts and estates) is 
amended by adding at the end the following new section:

``SEC. 646. ELECTING ALASKA NATIVE SETTLEMENT TRUSTS.

  ``(a) In General.--Except as otherwise provided in this section, the 
provisions of this subchapter and section 1(e) shall apply to all 
Settlement Trusts.
  ``(b) Beneficiaries of Electing Trust Not Taxed on Contributions.--
          ``(1) In general.--In the case of a Settlement Trust for 
        which an election under paragraph (2) is in effect for any 
        taxable year, no amount shall be includible in the gross income 
        of a beneficiary of the Settlement Trust by reason of a 
        contribution to the Settlement Trust made during such taxable 
        year.
          ``(2) One-time election.--
                  ``(A) In general.--A Settlement Trust may elect to 
                have the provisions of this section apply to the trust 
                and its beneficiaries.
                  ``(B) Time and method of election.--An election under 
                subparagraph (A) shall be made--
                          ``(i) before the due date (including 
                        extensions) for filing the Settlement Trust's 
                        return of tax for the 1st taxable year of the 
                        Settlement Trust ending after December 31, 
                        1999, and
                          ``(ii) by attaching to such return of tax a 
                        statement specifically providing for such 
                        election.
                  ``(C) Period election in effect.--Except as provided 
                in paragraph (3), an election under subparagraph (A)--
                          ``(i) shall apply to the 1st taxable year 
                        described in subparagraph (B)(i) and all 
                        subsequent taxable years, and
                          ``(ii) may not be revoked once it is made.
  ``(c) Special Rules Where Transfer Restrictions Modified.--
          ``(1) Transfer of beneficial interests.--If, at any time, a 
        beneficial interest in a Settlement Trust may be disposed of to 
        a person in a manner which would not be permitted by section 
        7(h) of the Alaska Native Claims Settlement Act (43 U.S.C. 
        1606(h)) if the interest were Settlement Common Stock--
                  ``(A) no election may be made under subsection (b)(2) 
                with respect to such trust, and
                  ``(B) if such an election is in effect as of such 
                time, such election shall cease to apply for purposes 
                of subsection (b)(1) as of the 1st day of the taxable 
                year following the taxable year in which such 
                disposition is first permitted.
          ``(2) Stock in corporation.--If--
                  ``(A) the Settlement Common Stock in any Native 
                Corporation which transferred assets to a Settlement 
                Trust making an election under subsection (b)(2) may be 
                disposed of to a person in a manner not permitted by 
                section 7(h) of the Alaska Native Claims Settlement Act 
                (43 U.S.C. 1606(h)), and
                  ``(B) at any time after such disposition of stock is 
                first permitted, such corporation transfers assets to 
                such trust,
        subparagraph (B) of paragraph (1) shall be applied to such 
        trust on and after the date of the transfer in the same manner 
        as if the trust permitted dispositions of beneficial interests 
        in the trust in a manner not permitted by such section 7(h).
  ``(c) Tax Treatment of Distributions to Beneficiaries.--
          ``(1) In general.--In the case of a Settlement Trust for 
        which an election under subsection (b)(2) is in effect for any 
        taxable year, any distribution to a beneficiary shall be 
        included in gross income of the beneficiary as ordinary income 
        to the extent such distribution reduces the earnings and 
        profits of any Native Corporation making a contribution to such 
        Trust.
          ``(2) Earnings and profits.--The earnings and profits of any 
        Native Corporation making a contribution to a Settlement Trust 
        shall not be reduced on account thereof at the time of such 
        contribution, but such earnings and profits shall be reduced 
        (up to the amount of such contribution) as distributions are 
        thereafter made by the Settlement Trust which exceed the sum 
        of--
                  ``(A) such Trust's total undistributed net income for 
                all prior years during which an election under 
                subsection (b)(2) is in effect, and
                  ``(B) such Trust's distributable net income.
  ``(d) Definitions.--For purposes of this section--
          ``(1) Native corporation.--The term `Native Corporation' has 
        the meaning given such term by section 3(m) of the Alaska 
        Native Claims Settlement Act (43 U.S.C. 1602(m)).
          ``(2) Settlement trust.--The term `Settlement Trust' means a 
        trust which constitutes a Settlement Trust under section 39 of 
        the Alaska Native Claims Settlement Act (43 U.S.C. 1629e).''
  (b) Withholding on Distributions by Electing ANCSA Settlement 
Trusts.--Section 3402 is amended by adding at the end the following new 
subsection:
  ``(t) Tax Withholding on Distributions by Electing ANCSA Settlement 
Trusts.--
          ``(1) In general.--Any Settlement Trust (as defined in 
        section 646(d)) for which an election under section 646(b)(2) 
        is in effect (in this subsection referred to as an `electing 
        trust') and which makes a payment to any beneficiary which is 
        includable in gross income under section 646(c) shall deduct 
        and withhold from such payment a tax in an amount equal to such 
        payment's proportionate share of the annualized tax.
          ``(2) Exception.--The tax imposed by paragraph (1) shall not 
        apply to any payment to the extent that such payment, when 
        annualized, does not exceed an amount equal to the amount in 
        effect under section 6012(a)(1)(A)(i) for taxable years 
        beginning in the calendar year in which the payment is made.
          ``(3) Annualized tax.--For purposes of paragraph (1), the 
        term `annualized tax' means, with respect to any payment, the 
        amount of tax which would be imposed by section 1(c) 
        (determined without regard to any rate of tax in excess of 31 
        percent) on an amount of taxable income equal to the excess 
        of--
                  ``(A) the annualized amount of such payment, over
                  ``(B) the amount determined under paragraph (2).
          ``(4) Annualization.--For purposes of this subsection, 
        amounts shall be annualized in the manner prescribed by the 
        Secretary.
          ``(5) Alternate withholding procedures.--At the election of 
        an electing trust, the tax imposed by this subsection on any 
        payment made by such trust shall be determined in accordance 
        with such tables or computational procedures as may be 
        specified in regulations prescribed by the Secretary (in lieu 
        of in accordance with paragraphs (2) and (3)).
          ``(6) Coordination with other sections.--For purposes of this 
        chapter and so much of subtitle F as relates to this chapter, 
        payments which are subject to withholding under this subsection 
        shall be treated as if they were wages paid by an employer to 
        an employee.''
  (c) Reporting.--Section 6041 is amended by adding at the end the 
following new subsection:
  ``(f) Application to Alaska Native Settlement Trusts.--In the case of 
any distribution from a Settlement Trust (as defined in section 646(d)) 
to a beneficiary which is includable in gross income under section 
646(c), this section shall apply, except that--
          ``(1) this section shall apply to such distribution without 
        regard to the amount thereof,
          ``(2) the Settlement Trust shall include on any return or 
        statement required by this section information as to the 
        character of such distribution (if applicable) and the amount 
        of tax imposed by chapter 1 which has been deducted and 
        withheld from such distribution, and
          ``(3) the filing of any return or statement required by this 
        section shall satisfy any requirement to file any other form or 
        schedule under this title with respect to distributive share 
        information (including any form or schedule to be included with 
        the trust's tax return).''
  (d) Clerical Amendment.--The table of sections for subpart A of part 
I of subchapter J of chapter 1 is amended by adding at the end the 
following new item:

``Sec. 646. Electing Alaska Native Settlement Trusts.''

  (e) Effective Date.--The amendments made by this section shall apply 
to taxable years of Settlement Trusts ending after December 31, 1999, 
and to contributions to such trusts after such date.

SEC. 1353. INCREASE IN THRESHOLD FOR JOINT COMMITTEE REPORTS ON REFUNDS 
                    AND CREDITS.

  (a) General Rule.--Subsections (a) and (b) of section 6405 are each 
amended by striking ``$1,000,000'' and inserting ``$2,000,000''.
  (b) Effective Date.--The amendment made by subsection (a) shall take 
effect on the date of the enactment of this Act, except that such 
amendment shall not apply with respect to any refund or credit with 
respect to a report that has been made before such date of enactment 
under section 6405 of the Internal Revenue Code of 1986.

SEC. 1354. CLARIFICATION OF DEPRECIATION STUDY.

  Paragraph (1) of section 2022 of the Tax and Trade Relief Extension 
Act of 1998 (Public Law 105-277; 112 Stat. 2681-903) is amended by 
inserting after ``1986,'' the following: ``including such periods and 
methods applicable to section 1250 property used in connection with a 
franchise (within the meaning of section 1253) and owned by the 
franchisee,''.

                    Subtitle G--Tax Court Provisions

SEC. 1361. TAX COURT FILING FEE IN ALL CASES COMMENCED BY FILING 
                    PETITION.

  (a) In General.--Section 7451 (relating to fee for filing a Tax Court 
petition) is amended by striking all that follows ``petition'' and 
inserting a period.
  (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 1362. EXPANDED USE OF TAX COURT PRACTICE FEE.

  Subsection (b) of section 7475 (relating to use of fees) is amended 
by inserting before the period at the end ``and to provide services to 
pro se taxpayers''.

SEC. 1363. CONFIRMATION OF AUTHORITY OF TAX COURT TO APPLY DOCTRINE OF 
                    EQUITABLE RECOUPMENT.

  (a) Confirmation of Authority of Tax Court To Apply Doctrine of 
Equitable Recoupment.--Subsection (b) of section 6214 (relating to 
jurisdiction over other years and quarters) is amended by adding at the 
end the following new sentence: ``Notwithstanding the preceding 
sentence, the Tax Court may apply the doctrine of equitable recoupment 
to the same extent that it is available in civil tax cases before the 
district courts of the United States and the United States Court of 
Federal Claims.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to any action or proceeding in the Tax Court with respect to which a 
decision has not become final (as determined under section 7481 of the 
Internal Revenue Code of 1986) as of the date of the enactment of this 
Act.

 Subtitle H--Tax-Free Transfer of Bottled Distilled Spirits to Bonded 
                                Dealers

SEC. 1371. TAX-FREE TRANSFER OF BOTTLED DISTILLED SPIRITS FROM 
                    DISTILLED SPIRITS PLANT TO BONDED DEALER.

  (a) Domestic Bottled Distilled Spirits.--
          (1) In general.--The last sentence of section 5212 is amended 
        by inserting before the period ``and shall not apply to bottled 
        distilled spirits transferred from a distilled spirits plant 
        (other than a bonded dealer) to a bonded dealer if the 
        proprietor of such plant notifies (in such form and manner as 
        the Secretary prescribes by regulations) such bonded dealer of 
        the amount of tax determined on the distilled spirits so 
        transferred''.
          (2) Transfer of liability contingent on furnishing of certain 
        information.--Paragraph (2) of section 5005(c) is amended by 
        adding at the end the following new sentence: ``In the case of 
        a transfer of bottled distilled spirits from a distilled 
        spirits plant to a bonded dealer, the preceding provisions of 
        this subsection shall apply only to the extent of the amount 
        specified by the proprietor of such plant in accordance with 
        the last sentence of section 5212.''
  (b) Comparable Treatment for Imported Bottled Distilled Spirits.--
Subsection (a) of section 5232 is amended to read as follows:
  ``(a) Transfer to Distilled Spirits Plant Without Payment of Tax.--
          ``(1) In general.--Distilled spirits imported or brought into 
        the United States in bulk containers may, under such 
        regulations as the Secretary shall prescribe, be withdrawn from 
        customs custody and transferred in such bulk containers or by 
        pipeline to the bonded premises of a distilled spirits plant 
        without payment of the internal revenue tax imposed on such 
        distilled spirits by section 5001.
          ``(2) Imported bottled distilled spirits.--The restriction 
        under paragraph (1) to transfers in bulk or by pipeline shall 
        not apply to bottled distilled spirits transferred from customs 
        custody to a bonded dealer if the proprietor of the customs 
        bonded warehouse notifies (in such form and manner as the 
        Secretary prescribes by regulations) such bonded dealer of the 
        amount of tax determined on the distilled spirits so 
        transferred.
          ``(3) Transfer of liability.--The person operating the bonded 
        premises of the distilled spirits plant to which such spirits 
        are transferred shall become liable for the tax on distilled 
        spirits withdrawn from customs custody under this section upon 
        release of the spirits from customs custody, and the importer, 
        or the person bringing such distilled spirits into the United 
        States, shall thereupon be relieved of his liability for such 
        tax. In the case of a transfer of bottled distilled spirits 
        from a customs bonded warehouse to a bonded dealer, the pre-

        ceding sentence shall apply only to the extent of the amount 
        specified by the proprietor of such warehouse in accordance 
        with paragraph (2).''
  (c) Penalty for False or Erroneous Information to Bonded Dealers.--
          (1) In general.--Section 5684 is amended by redesignating 
        subsections (b) and (c) as subsections (c) and (d), 
        respectively, and inserting after subsection (a) the following 
        new subsection:
  ``(b) False or Erroneous Information to Bonded Dealers.--Any 
distilled spirits plant or importer which furnishes false or erroneous 
information to a bonded dealer relating to the amount of tax determined 
on a product, as required under sections 5212 and 5232, shall, in 
addition to any other penalty imposed by this title, be liable for a 
penalty equal to the greater of $1,000 or 5 times the amount of 
additional tax due on the product.''
          (2) Conforming amendment.--Subsection (c) of section 5684, as 
        redesignated by paragraph (1), is amended by striking 
        ``subsection (a)'' and inserting ``subsections (a) and (b)''.

SEC. 1372. ESTABLISHMENT OF DISTILLED SPIRITS PLANT.

  Section 5171 is amended--
          (1) by striking from subsection (a) ``or processor'' and 
        inserting ``processor, or bonded dealer'', and
          (2) by striking from subsection (b) ``or both.'' and 
        inserting ``as a bonded dealer, or as any combination 
        thereof.''

SEC. 1373. DISTILLED SPIRITS PLANTS.

  Section 5178(a) is amended by adding at the end the following new 
paragraph:
          ``(5) Bonded dealer operations.--Any person establishing a 
        distilled spirits plant to conduct operations as a bonded 
        dealer may, as described in the application for registration--
                  ``(A) store distilled spirits in any approved 
                container on the bonded premises of such plant, and
                  ``(B) under such regulations as the Secretary shall 
                prescribe, store taxpaid distilled spirits, beer and 
                wine and such other beverages and items (products) not 
                subject to tax or regulation under this title on such 
                bonded premises.''

SEC. 1374. BONDED DEALERS.

  (a) In General.--Subpart A of part I of subchapter A of chapter 51 
(relating to distilled spirits) is amended by adding at the end the 
following new section:

``SEC. 5011. ELECTION TO BE TREATED AS BONDED DEALER.

  ``(a) Election.--
          ``(1) In general.--Any wholesale dealer, or any control State 
        entity, may elect to be treated as a bonded dealer if such 
        wholesale dealer or entity sells bottled distilled spirits 
        exclusively to 1 or more of the following: wholesale dealers in 
        liquor, independent retail dealers, or other bonded dealers.
          ``(2) Election by certain entities not permitted.--
                  ``(A) Retail dealers.--Except in the case of a 
                control State entity, the election under paragraph (1) 
                may not be made by a retail dealer in liquor.
                  ``(B) Small dealers.--The election under paragraph 
                (1) may not be made by any person who is part of a 
                group treated as a single taxpayer under section 
                5061(e)(3) if the gross receipts of such group from the 
                sale of distilled spirits during the 12-month period 
                prior to making such election is less than $10,000,000.
          ``(3) Control state entities permitted to sell to related 
        retail dealers.--In the case of a control State entity, 
        paragraph (1) shall be applied by substituting `retail dealers' 
        for `independent retail dealers'.
  ``(b) Independent Retail Dealer.--For purposes of subsection (a), the 
term `independent retail dealer' means, with respect to a bonded 
dealer, any retail dealer if--
          ``(1) the bonded dealer does not have a greater than 10 
        percent ownership interest in, or control of, the retail 
        dealer,
          ``(2) the retail dealer does not have a greater than 10 
        percent ownership interest in, or control of, the bonded 
        dealer, and
          ``(3) no person has a greater than 10 percent ownership 
        interest in, or control of, both the bonded and retail dealer.
For purposes of this subsection, rules similar to the rules of section 
318 shall apply.
  ``(c) Inventory Owned at Time of Election.--Any bottled distilled 
spirits in the inventory of any person electing under this section to 
be treated as a bonded dealer shall not be subject to additional 
Federal excise tax on such spirits as a result of the election being in 
effect to the extent that the bonded dealer establishes that the 
Federal excise tax previously has been determined and paid at the time 
the election becomes effective.
  ``(d) Revocation of Election.--The election made under this section 
may be revoked by the bonded dealer at any time, but once revoked shall 
not be made again without the consent of the Secretary. When the 
election is revoked, the bonded dealer shall immediately withdraw the 
distilled spirits on determination of tax in accordance with a tax 
payment procedure established by the Secretary.
  ``(e) Approval of Application.--Any application under section 5171(c) 
submitted by a person electing to be treated as a bonded dealer shall 
be subject to the same conditions as an application for a basic permit 
under section 204(a)(2) of title 27 of the United States Code (the 
Federal Alcohol Administration Act) and shall be accorded notice and 
hearing as described in section 204(b) of such title 27.
  ``(f) Additional Tax.--
          ``(1) In general.--In addition to any other tax imposed by 
        this chapter, there is hereby imposed on each bonded dealer a 
        tax for each semimonthly period under section 5061(d) for which 
        an election under this section is in effect for such dealer.
          ``(2) Amount of tax.--The tax imposed by this subsection for 
        any semimonthly period shall be equal to 1.5 percent of the 
        liability for tax under sections 5001 and 7652 of such dealer 
        for such semimonthly period.
          ``(3) Payment of tax.--The tax imposed by this subsection 
        shall be paid with the return of tax for such semimonthly 
        period.
          ``(4) Taxpayers not paying on semimonthly basis.--If the 
        taxes referred to in paragraph (2) are not paid on the basis of 
        semimonthly periods, this subsection shall be applied by 
        substituting the time such taxes are required to be paid for 
        such periods.
          ``(5) Termination.--The tax imposed by this subsection shall 
        not apply to any semimonthly period ending after December 31, 
        2010.''
  (b) Conforming Amendments.--
          (1) Section 5002(a) is amended by adding the end the 
        following new paragraphs:
          ``(16) Bonded dealer.--The term `bonded dealer' means any 
        person who has elected under section 5011 to be treated as a 
        bonded dealer.
          ``(17) Control state entity.--The term `control State entity' 
        means a State or a political subdivision of a State in which 
        only the State or a political subdivision thereof is allowed 
        under applicable law to perform distilled spirit operations, or 
        any instrumentality of such a State or political subdivision.''
          (2) The table of sections of subpart A of part I of 
        subchapter A of chapter 51 and the table of contents of 
        subtitle E are each amended by adding at the appropriate 
        places:

                              ``Sec. 5011. Election to be treated as 
                                        bonded dealer.''

SEC. 1375. TIME FOR COLLECTING TAX ON DISTILLED SPIRITS.

  (a) In General.--Section 5061(d) is amended by adding at the end the 
following new paragraph:
          ``(6) Advanced payment of distilled spirits tax by bonded 
        dealers.--Notwithstanding the preceding provisions of this 
        subsection, in the case of any tax imposed by section 5001, 
        5011(f), or 7652 with respect to a bonded dealer who has an 
        election under section 5011 in effect on September 20 of any 
        year, any payment which would, but for this paragraph, be due 
        in October or November of that year, shall be made on such 
        September 20. No penalty or interest shall be imposed for the 
        period after such September 20 and before the due date for such 
        payment (determined without regard to this paragraph) to the 
        extent that the tax due exceeds the payment which would have 
        been due in such October and November had the election under 
        section 5011 been in effect.''
  (b) Payment by Electronic Fund Transfer.--Section 5061(e)(1) is 
amended by inserting ``and any bonded dealer,'' after 
``respectively,''.

SEC. 1376. EXEMPTION FROM OCCUPATIONAL TAX NOT APPLICABLE.

  Section 5113(a) is amended by adding at the end the following new 
sentence: ``The exemption under this subsection shall not apply to a 
proprietor of a distilled spirits plant whose premises are used for 
operations of a bonded dealer.''

SEC. 1377. TECHNICAL, CONFORMING, AND CLERICAL AMENDMENTS.

  (a) Technical and Conforming Amendments.--
          (1) Section 5003(3) is amended by striking ``certain''.
          (2) Subsection (a) of section 5214 is amended by inserting 
        ``(other than a bonded dealer)'' after ``distilled spirits 
        plant''.
          (3) Section 5362(b)(5) is amended by adding at the end the 
        following new sentence: ``This term shall not apply to premises 
        used for operations as a bonded dealer.''.
          (4) Section 5551(a) is amended by inserting ``bonded 
        dealer,'' after ``processor,'' each place it appears.
          (5) Section 5601(a) (2), (3), (4), (5), and (b) are amended 
        by inserting ``, bonded dealer'' before ``or processor'' each 
        place it appears.
          (6) Section 5602 is amended--
                  (A) by inserting ``, warehouseman, processor, or 
                bonded dealer'' after ``distiller'', and
                  (B) by inserting ``or possessed'' after 
                ``distilled''.
          (7) Sections 5180 and 5681 are repealed.
  (b) Clerical Amendments.--
          (1) The table of sections for subchapter B of chapter 51 is 
        amended by striking the item relating to section 5180.
          (2) The table of sections for part IV of subchapter J of 
        chapter 51 is amended by striking the item relating to section 
        5681.

SEC. 1378. COOPERATIVE AGREEMENTS.

  (a) Study.--The Secretary of the Treasury shall study and report to 
Congress concerning possible administrative efficiencies which could 
inure to the benefit of the Federal Government of cooperative 
agreements with States regarding the collection of distilled spirits 
excise taxes. Such study shall include, but not be limited to, possible 
benefits of the standardization of forms and collection procedures and 
shall be submitted 1 year after the date of the enactment of this Act.
  (b) Cooperative Agreement.--The Secretary of the Treasury is 
authorized to enter into such cooperative agreements with States which 
the Secretary deems will increase the efficient collection of distilled 
spirits excise taxes.

SEC. 1379. EFFECTIVE DATE.

  (a) In General.--Except as otherwise provided in this section, the 
amendments made by this subtitle shall take effect at the beginning of 
the first calendar quarter that begins after one hundred and twenty 
days following enactment.
  (b) Authority To Establish Distilled Spirits Plant.--
          (1) In general.--The amendments made by section 1372 of this 
        Act shall take effect on the date of enactment of this Act.
          (2) Deemed qualification in certain cases.--Each wholesale 
        dealer--
                  (A) who is required to file an application for 
                registration under section 5171(c) of the Internal 
                Revenue Code of 1986,
                  (B) whose operations are required to be covered by a 
                basic permit under the Federal Alcohol Administration 
                Act (27 U.S.C. 203 and 204) and who has received such a 
                basic permit as an importer, wholesaler, or both, and
                  (C) has obtained a bond required under this 
                subchapter,
        shall be treated as having such application approved as of the 
        first day of the first calendar quarter that begins at least 9 
        months after the application is filed until such time as the 
        Secretary or the Secretary's delegate takes final action on 
        such application.
          (3) Control state entities.--In the case of a control State 
        entity, paragraph (2) shall be applied without regard to 
        subparagraph (B) thereof.
  (c) Equitable Treatment of Bonded Dealers Using LIFO Inventory.--The 
Secretary of the Treasury or the Secretary's delegate shall provide 
such rules as may be necessary to assure that taxpayers using the last-
in first-out method of inventory valuation do not suffer a recapture of 
their LIFO reserve by reason of making the election under section 5011 
of such Code or by reason of operating a bonded wine cellar as 
permitted by section 5351 of such Code.

SEC. 1380. STUDY.

  Not later than June 1, 2002, the Secretary of the Treasury or the 
Secretary's delegate shall prepare and submit to the Congress a 
report--
          (1) on the extent to which (if any) there has been a decrease 
        in compliance with the provisions of chapter 51 of the Internal 
        Revenue Code of 1986 by reason of the amendments made by this 
        subtitle, and
          (2) on any particular compliance issues in applying the 
        credit allowable by section 5010 of such Code under the 
        amendments made by this subtitle.

              TITLE XIV--EXTENSIONS OF EXPIRING PROVISIONS

SEC. 1401. RESEARCH CREDIT.

  (a) Extension.--
          (1) In general.--Paragraph (1) of section 41(h) (relating to 
        termination) is amended--
                  (A) by striking ``June 30, 1999'' and inserting 
                ``June 30, 2004'', and
                  (B) by striking the material following subparagraph 
                (B).
          (2) Technical amendment.--Subparagraph (D) of section 
        45C(b)(1) is amended by striking ``June 30, 1999'' and 
        inserting ``June 30, 2004''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply to amounts paid or incurred after June 30, 1999.
  (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, 1999.

SEC. 1402. SUBPART F EXEMPTION FOR ACTIVE FINANCING INCOME.

  (a) In General.--Sections 953(e)(10) and 954(h)(9) are each amended--
          (1) by striking ``the first taxable year'' and inserting 
        ``taxable years'', and
          (2) by striking ``January 1, 2000'' and inserting ``January 
        1, 2005''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 1403. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR MARGINAL 
                    PRODUCTION.

  (a) In General.--Subparagraph (H) of section 613A(c)(6) is amended by 
striking ``January 1, 2000'' and inserting ``January 1, 2005''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 1999.

SEC. 1404. WORK OPPORTUNITY CREDIT AND WELFARE-TO-WORK CREDIT.

  (a) Temporary Extension.--Sections 51(c)(4)(B) and 51A(f) (relating 
to termination) are each amended by striking ``June 30, 1999'' and 
inserting ``December 31, 2001''.
  (b) Clarification of First Year of Employment.--Paragraph (2) of 
section 51(i) is amended by striking ``during which he was not a member 
of a targeted group''.
  (c) Electronic Filing of Certification.--Not later than July 1, 2001, 
the Secretary of the Treasury or the Secretary's delegate shall provide 
an electronic format by which employers may submit requests to 
designated local agencies (as defined in section 51(d)(11) of the 
Internal Revenue Code of 1986) for certifications that individuals are 
members of targeted groups for purposes of section 51 of such Code.
  (d) Effective Date.--The amendments made by this section shall apply 
to individuals who begin work for the employer after June 30, 1999.

                       TITLE XV--REVENUE OFFSETS

SEC. 1501. RETURNS RELATING TO CANCELLATIONS OF INDEBTEDNESS BY 
                    ORGANIZATIONS LENDING MONEY.

  (a) In General.--Paragraph (2) of section 6050P(c) (relating to 
definitions and special rules) is amended by striking ``and'' at the 
end of subparagraph (B), by striking the period at the end of 
subparagraph (C) and inserting ``, and'', and by inserting after 
subparagraph (C) the following new subparagraph:
                  ``(D) any organization a significant trade or 
                business of which is the lending of money.''
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to discharges of indebtedness after December 31, 1999.

SEC. 1502. EXTENSION OF INTERNAL REVENUE SERVICE USER FEES.

  (a) In General.--Chapter 77 (relating to miscellaneous provisions) is 
amended by adding at the end the following new section:

``SEC. 7527. INTERNAL REVENUE SERVICE USER FEES.

  ``(a) General Rule.--The Secretary shall establish a program 
requiring the payment of user fees for--
          ``(1) requests to the Internal Revenue Service for ruling 
        letters, opinion letters, and determination letters, and
          ``(2) other similar requests.
  ``(b) Program Criteria.--
          ``(1) In general.--The fees charged under the program 
        required by subsection (a)--
                  ``(A) shall vary according to categories (or 
                subcategories) established by the Secretary,
                  ``(B) shall be determined after taking into account 
                the average time for (and difficulty of) complying with 
                requests in each category (and subcategory), and
                  ``(C) shall be payable in advance.
          ``(2) Exemptions, etc.--The Secretary shall provide for such 
        exemptions (and reduced fees) under such program as the 
        Secretary determines to be appropriate.
          ``(3) Average fee requirement.--The average fee charged under 
        the program required by subsection (a) shall not be less than 
        the amount determined under the following table:

``Category                                                  Average Fee
    Employee plan ruling and opinion..............                $250 
    Exempt organization ruling....................                $350 
    Employee plan determination...................                $300 
    Exempt organization determination.............                $275 
    Chief counsel ruling..........................                $200.

  ``(c) Termination.--No fee shall be imposed under this section with 
respect to requests made after September 30, 2009.''
  (b) Conforming Amendments.--
          (1) The table of sections for chapter 77 is amended by adding 
        at the end the following new item:

                              ``Sec. 7527. Internal Revenue Service 
                                        user fees.''

          (2) Section 10511 of the Revenue Act of 1987 is repealed.
  (c) Effective Date.--The amendments made by this section shall apply 
to requests made after the date of the enactment of this Act.

SEC. 1503. LIMITATIONS ON WELFARE BENEFIT FUNDS OF 10 OR MORE EMPLOYER 
                    PLANS.

  (a) Benefits to Which Exception Applies.--Section 419A(f)(6)(A) 
(relating to exception for 10 or more employer plans) is amended to 
read as follows:
                  ``(A) In general.--This subpart shall not apply to a 
                welfare benefit fund which is part of a 10 or more 
                employer plan if the only benefits provided through the 
                fund are 1 or more of the following:
                          ``(i) Medical benefits.
                          ``(ii) Disability benefits.
                          ``(iii) Group term life insurance benefits 
                        which do not provide for any cash surrender 
                        value or other money that can be paid, 
                        assigned, borrowed, or pledged for collateral 
                        for a loan.
                The preceding sentence shall not apply to any plan 
                which maintains experience-rating arrangements with 
                respect to individual employers.''
  (b) Limitation on Use of Amounts for Other Purposes.--Section 4976(b) 
(defining disqualified benefit) is amended by adding at the end the 
following new paragraph:
          ``(5) Special rule for 10 or more employer plans exempted 
        from prefunding limits.--For purposes of paragraph (1)(C), if--
                  ``(A) subpart D of part I of subchapter D of chapter 
                1 does not apply by reason of section 419A(f)(6) to 
                contributions to provide 1 or more welfarebenefits 
through a welfare benefit fund under a 10 or more employer plan, and
                  ``(B) any portion of the welfare benefit fund 
                attributable to such contributions is used for a 
                purpose other than that for which the contributions 
                were made,
        then such portion shall be treated as reverting to the benefit 
        of the employers maintaining the fund.''
  (c) Effective Date.--The amendments made by this section shall apply 
to contributions paid or accrued after June 9, 1999, in taxable years 
ending after such date.

SEC. 1504. INCREASE IN ELECTIVE WITHHOLDING RATE FOR NONPERIODIC 
                    DISTRIBUTIONS FROM DEFERRED COMPENSATION PLANS.

  (a) In General.--Section 3405(b)(1) (relating to withholding) is 
amended by striking `10 percent' and inserting `15 percent'.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to distributions after December 31, 1999.

SEC. 1505. CONTROLLED ENTITIES INELIGIBLE FOR REIT STATUS.

  (a) In General.--Subsection (a) of section 856 (relating to 
definition of real estate investment trust) is amended by striking 
``and'' at the end of paragraph (6), by redesignating paragraph (7) as 
paragraph (8), and by inserting after paragraph (6) the following new 
paragraph:
          ``(7) which is not a controlled entity (as defined in 
        subsection (l)); and''.
  (b) Controlled Entity.--Section 856 is amended by adding at the end 
the following new subsection:
  ``(l) Controlled Entity.--
          ``(1) In general.--For purposes of subsection (a)(7), an 
        entity is a controlled entity if, at any time during the 
        taxable year, one person (other than a qualified entity)--
                  ``(A) in the case of a corporation, owns stock--
                          ``(i) possessing at least 50 percent of the 
                        total voting power of the stock of such 
                        corporation, or
                          ``(ii) having a value equal to at least 50 
                        percent of the total value of the stock of such 
                        corporation, or
                  ``(B) in the case of a trust, owns beneficial 
                interests in the trust which would meet the 
                requirements of subparagraph (A) if such interests were 
                stock.
          ``(2) Qualified entity.--For purposes of paragraph (1), the 
        term `qualified entity' means--
                  ``(A) any real estate investment trust, and
                  ``(B) any partnership in which one real estate 
                investment trust owns at least 50 percent of the 
                capital and profits interests in the partnership.
          ``(3) Attribution rules.--For purposes of this paragraphs (1) 
        and (2)--
                  ``(A) In general.--Rules similar to the rules of 
                subsections (d)(5) and (h)(3) shall apply.
                  ``(B) Stapled entities.--A group of entities which 
                are stapled entities (as defined in section 269B(c)(2)) 
                shall be treated as 1 person.
          ``(4) Exception for certain new reits.--
                  ``(A) In general.--The term `controlled entity' shall 
                not include an incubator REIT.
                  ``(B) Incubator reit.--A corporation shall be treated 
                as an incubator REIT for any taxable year during the 
                eligibility period if it meets all the following 
                requirements for such year:
                          ``(i) The corporation elects to be treated as 
                        an incubator REIT.
                          ``(ii) The corporation has only voting common 
                        stock outstanding.
                          ``(iii) Not more than 50 percent of the 
                        corporation's real estate assets consist of 
                        mortgages.
                          ``(iv) From not later than the beginning of 
                        the last half of the second taxable year, at 
                        least 10 percent of the corporation's capital 
                        is provided by lenders or equity investors who 
                        are unrelated to the corporation's largest 
                        shareholder.
                          ``(v) The directors of the corporation adopt 
                        a resolution setting forth an intent to engage 
                        in a going public transaction.
                No election may be made with respect to any REIT if an 
                election under this subsection was in effect for any 
                predecessor of such REIT.
                  ``(C) Eligibility period.--The eligibility period 
                (for which an incubator REIT election can be made) 
                begins with the REIT's second taxable year and ends at 
                the close of the REIT's third taxable year, but, 
                subject to the following rules, it may be extended for 
                an additional 2 taxable years if the REIT so elects:
                          ``(i) A REIT cannot elect to extend the 
                        eligibility period unless it agrees that, if it 
                        does not engage in a going public transaction 
                        by the end of the extended eligibility period, 
                        it shall pay Federal income taxes for the 2 
                        years of the extended eligibility period as if 
                        it had not made an incubator REIT election and 
                        had ceased to qualify as a REIT for those 2 
                        taxable years.
                          ``(ii) In the event the corporation ceases to 
                        be treated as a REIT by operation of clause 
                        (i), the corporation shall file any appropriate 
                        amended returns reflecting the change in status 
                        within 3 months of the close of the extended 
                        eligibility period. Interest would be payable 
                        but, unless there was a finding under 
                        subparagraph (D), no substantial underpayment 
                        penalties shall be imposed. The corporation 
                        shall, at the same time, also notify its 
                        shareholders and any other persons whose tax 
                        position is, or may reasonably be expected to 
                        be, affected by the change in status so they 
                        also may file any appropriate amended returns 
                        to conform their tax treatment consistent with 
                        the corporation's loss of REIT status. The 
                        Secretary shall provide appropriate regulations 
                        setting forth transferee liability and other 
                        provisions to ensure collection of tax and the 
                        proper administration of this provision.
                          ``(iii) Clause (i) and (ii) shall not apply 
                        if the corporation allows its incubator REIT 
                        status to lapse at the end of the initial 2-
                        year eligibility period without engaging in a 
                        going public transaction, provided the 
                        corporation satisfies the requirements of the 
                        closely-held test commencing with its fourth 
                        taxable year. In such a case, the corporation's 
                        directors may still be liable for the penalties 
                        described in subparagraph (D) during the 
                        eligibility period.
                  ``(D) Special penalties.--If the Secretary determines 
                that an incubator REIT election was filed for a 
                principal purpose other than as part of a reasonable 
                plan to undertake a going public transaction, an excise 
                tax of $20,000 would be imposed on each of the 
                corporation's directors for each taxable year for which 
                an election was in effect.
                  ``(E) Going public transaction.--For purposes of this 
                paragraph, a going public transaction means--
                          ``(i) a public offering of shares of the 
                        stock of the incubator REIT;
                          ``(ii) a transaction, or series of 
                        transactions, that results in the stock of the 
                        incubator REIT being regularly traded on an 
                        established securities market and that results 
                        in at least 50 percent of such stock being held 
                        by shareholders who are unrelated to persons 
                        who held such stock before it began to be so 
                        regularly traded; or
                          ``(iii) any transaction resulting in 
                        ownership of the REIT by 200 or more persons 
                        (excluding the largest single shareholder) who 
                        in the aggregate own at least 50 percent of the 
                        stock of the REIT.
                For the purposes of this subparagraph, the rules of 
                paragraph (3) shall apply in determining the ownership 
                of stock.
                  ``(F) Definitions.--The term `established securities 
                market' shall have the meaning set forth in the 
                regulations under section 897.''
  (c) Conforming Amendment.--Paragraph (2) of section 856(h) is amended 
by striking ``and (6)'' each place it appears and inserting ``, (6), 
and (7)''.
  (d) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to taxable years ending after July 12, 1999.
          (2) Exception for existing controlled entities.--The 
        amendments made by this section shall not apply to any entity 
        which is a controlled entity (as defined in section 856(l) of 
        the Internal Revenue Code of 1986, as added by this section) as 
        of July 12, 1999, which is a real estate investment trust for 
        the taxable year which includes such date, and which has 
        significant business assets or activities as of such date.

SEC. 1506. TREATMENT OF GAIN FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

  (a) In General.--Part IV of subchapter P of chapter 1 (relating to 
special rules for determining capital gains and losses) is amended by 
inserting after section 1259 the following new section:

``SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

  ``(a) In General.--If the taxpayer has gain from a constructive 
ownership transaction with respect to any financial asset and such gain 
would (without regard to this section) be treated as a long-term 
capital gain--
          ``(1) such gain shall be treated as ordinary income to the 
        extent that such gain exceeds the net underlying long-term 
        capital gain, and
          ``(2) to the extent such gain is treated as a long-term 
        capital gain after the application of paragraph (1), the 
        determination of the capital gain rate (or rates) applicable to 
        such gain under section 1(h) shall be determined on the basis 
        of the respective rate (or rates) that would have been 
        applicable to the net underlying long-term capital gain.
  ``(b) Interest Charge on Deferral of Gain Recognition.--
          ``(1) In general.--If any gain is treated as ordinary income 
        for any taxable year by reason of subsection (a)(1), the tax 
        imposed by this chapter for such taxable year shall be 
        increased by the amount of interest determined under paragraph 
        (2) with respect to each prior taxable year during any portion 
        of which the constructive ownership transaction was open. Any 
        amount payable under this paragraph shall be taken into account 
        in computing the amount of any deduction allowable to the 
        taxpayer for interest paid or accrued during such taxable year.
          ``(2) Amount of interest.--The amount of interest determined 
        under this paragraph with respect to a prior taxable year is 
        the amount of interest which would have been imposed under 
        section 6601 on the underpayment of tax for such year which 
        would have resulted if the gain (which is treated as ordinary 
        income by reason of subsection (a)(1)) had been included in 
        gross income in the taxable years in which it accrued 
        (determined by treating the income as accruing at a constant 
        rate equal to the applicable Federal rate as in effect on the 
        day the transaction closed). The period during which such 
        interest shall accrue shall end on the due date (without 
        extensions) for the return of tax imposed by this chapter for 
        the taxable year in which such transaction closed.
          ``(3) Applicable federal rate.--For purposes of paragraph 
        (2), the applicable Federal rate is the applicable Federal rate 
        determined under 1274(d) (compounded semiannually) which would 
        apply to a debt instrument with a term equal to the period the 
        transaction was open.
          ``(4) No credits against increase in tax.--Any increase in 
        tax under paragraph (1) shall not be treated as tax imposed by 
        this chapter for purposes of determining--
                  ``(A) the amount of any credit allowable under this 
                chapter, or
                  ``(B) the amount of the tax imposed by section 55.
  ``(c) Financial Asset.--For purposes of this section--
          ``(1) In general.--The term `financial asset' means--
                  ``(A) any equity interest in any pass-thru entity, 
                and
                  ``(B) to the extent provided in regulations--
                          ``(i) any debt instrument, and
                          ``(ii) any stock in a corporation which is 
                        not a pass-thru entity.
          ``(2) Pass-thru entity.--For purposes of paragraph (1), the 
        term `pass-thru entity' means--
                  ``(A) a regulated investment company,
                  ``(B) a real estate investment trust,
                  ``(C) an S corporation,
                  ``(D) a partnership,
                  ``(E) a trust,
                  ``(F) a common trust fund,
                  ``(G) a passive foreign investment company (as 
                defined in section 1297),
                  ``(H) a foreign personal holding company, and
                  ``(I) a foreign investment company (as defined in 
                section 1246(b)).
  ``(d) Constructive Ownership Transaction.--For purposes of this 
section--
          ``(1) In general.--The taxpayer shall be treated as having 
        entered into a constructive ownership transaction with respect 
        to any financial asset if the taxpayer--
                  ``(A) holds a long position under a notional 
                principal contract with respect to the financial asset,
                  ``(B) enters into a forward or futures contract to 
                acquire the financial asset,
                  ``(C) is the holder of a call option, and is the 
                grantor of a put option, with respect to the financial 
                asset and such options have substantially equal strike 
                prices and substantially contemporaneous maturity 
                dates, or
                  ``(D) to the extent provided in regulations 
                prescribed by the Secretary, enters into 1 or more 
                other transactions (or acquires 1 or more positions) 
                that have substantially the same effect as a 
                transaction described in any of the preceding 
                subparagraphs.
          ``(2) Exception for positions which are marked to market.--
        This section shall not apply to any constructive ownership 
        transaction if all of the positions which are part of such 
        transaction are marked to market under any provision of this 
        title or the regulations thereunder.
          ``(3) Long position under notional principal contract.--A 
        person shall be treated as holding a long position under a 
        notional principal contract with respect to any financial asset 
        if such person--
                  ``(A) has the right to be paid (or receive credit 
                for) all or substantially all of the investment yield 
                (including appreciation) on such financial asset for a 
                specified period, and
                  ``(B) is obligated to reimburse (or provide credit 
                for) all or substantially all of any decline in the 
                value of such financial asset.
          ``(4) Forward contract.--The term `forward contract' means 
        any contract to acquire in the future (or provide or receive 
        credit for the future value of) any financial asset.
  ``(e) Net Underlying Long-Term Capital Gain.--For purposes of this 
section, in the case of any constructive ownership transaction with 
respect to any financial asset, the term `net underlying long-term 
capital gain' means the aggregate net capital gain that the taxpayer 
would have had if--
          ``(1) the financial asset had been acquired for fair market 
        value on the date such transaction was opened and sold for fair 
        market value on the date such transaction was closed, and
          ``(2) only gains and losses that would have resulted from the 
        deemed ownership under paragraph (1) were taken into account.
The amount of the net underlying long-term capital gain with respect to 
any financial asset shall be treated as zero unless the amount thereof 
is established by clear and convincing evidence.
  ``(f) Special Rule Where Taxpayer Takes Delivery.--Except as provided 
in regulations prescribed by the Secretary, if a constructive ownership 
transaction is closed by reason of taking delivery, this section shall 
be applied as if the taxpayer had sold all the contracts, options, or 
other positions which are part of such transaction for fair market 
value on the closing date. The amount of gain recognized under the 
preceding sentence shall not exceed the amount of gain treated as 
ordinary income under subsection (a). Proper adjustments shall be made 
in the amount of any gain or loss subsequently realized for gain 
recognized and treated as ordinary income under this subsection.
  ``(g) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary or appropriate to carry out the purposes of this 
section, including regulations--
          ``(1) to permit taxpayers to mark to market constructive 
        ownership transactions in lieu of applying this section, and
          ``(2) to exclude certain forward contracts which do not 
        convey substantially all of the economic return with respect to 
        a financial asset.''
  (b) Clerical Amendment.--The table of sections for part IV of 
subchapter P of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 1260. Gains from constructive 
                                        ownership transactions.''.

  (c) Effective Date.--The amendments made by this section shall apply 
to transactions entered into after July 11, 1999.

SEC. 1507. TRANSFER OF EXCESS DEFINED BENEFIT PLAN ASSETS FOR RETIREE 
                    HEALTH BENEFITS.

  (a) Extension.--Paragraph (5) of section 420(b) (relating to 
expiration) is amended by striking ``in any taxable year beginning 
after December 31, 2000'' and inserting ``made after September 30, 
2009''.
  (b) Application of Minimum Cost Requirements.--
          (1) In general.--Paragraph (3) of section 420(c) is amended 
        to read as follows:
          ``(3) Minimum cost requirements.--
                  ``(A) In general.--The requirements of this paragraph 
                are met if each group health plan or arrangement under 
                which applicable health benefits are provided provides 
                that the applicable employer cost for each taxable year 
                during the cost maintenance period shall not be less 
                than the higher of the applicable employer costs for 
                each of the 2 taxable years immediately preceding the 
                taxable year of the qualified transfer.
                  ``(B) Applicable employer cost.--For purposes of this 
                paragraph, the term `applicable employer cost' means, 
                with respect to any taxable year, the amount determined 
                by dividing--
                          ``(i) the qualified current retiree health 
                        liabilities of the employer for such taxable 
                        year determined--
                                  ``(I) without regard to any reduction 
                                under subsection (e)(1)(B), and
                                  ``(II) in the case of a taxable year 
                                in which there was no qualified 
                                transfer, in the same manner as if 
                                there had been such a transfer at the 
                                end of the taxable year, by
                          ``(ii) the number of individuals to whom 
                        coverage for applicable health benefits was 
                        provided during such taxable year.
                  ``(C) Election to compute cost separately.--An 
                employer may elect to have this paragraph applied 
                separately with respect to individuals eligible for 
                benefits under title XVIII of the Social Security Act 
                at any time during the taxable year and with respect to 
                individuals not so eligible.
                  ``(D) Cost maintenance period.--For purposes of this 
                paragraph, the term `cost maintenance period' means the 
                period of 5 taxable years beginning with the taxable 
                year in which the qualified transfer occurs. If a 
                taxable year is in 2 or more overlapping cost 
                maintenance periods, this paragraph shall be applied by 
                taking into account the highest applicable employer 
                cost required to be provided under subparagraph (A) for 
                such taxable year.''
          (2) Conforming amendments.--
                  (A) Clause (iii) of section 420(b)(1)(C) is amended 
                by striking ``benefits'' and inserting ``cost''.
                  (B) Subparagraph (D) of section 420(e)(1) is amended 
                by striking ``and shall not be subject to the minimum 
                benefit requirements of subsection (c)(3)'' and 
                inserting ``or in calculating applicable employer cost 
                under subsection (c)(3)(B)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to qualified transfers occurring after the date of the enactment of 
this Act.

SEC. 1508. MODIFICATION OF INSTALLMENT METHOD AND REPEAL OF INSTALLMENT 
                    METHOD FOR ACCRUAL METHOD TAXPAYERS.

  (a) Repeal of Installment Method for Accrual Basis Taxpayers.--
          (1) In general.--Subsection (a) of section 453 (relating to 
        installment method) is amended to read as follows:
  ``(a) Use of Installment Method.--
          ``(1) In general.--Except as otherwise provided in this 
        section, income from an installment sale shall be taken into 
        account for purposes of this title under the installment 
        method.
          ``(2) Accrual method taxpayer.--The installment method shall 
        not apply to income from an installment sale if such income 
        would be reported under an accrual method of accounting without 
        regard to this section. The preceding sentence shall not apply 
        to a disposition described in subparagraph (A) or (B) of 
        subsection (l)(2).''
          (2) Conforming amendments.--Sections 453(d)(1), 453(i)(1), 
        and 453(k) are each amended by striking ``(a)'' each place it 
        appears and inserting ``(a)(1)''.
  (b) Modification of Pledge Rules.--Paragraph (4) of section 453A(d) 
(relating to pledges, etc., of installment obligations) is amended by 
adding at the end the following: ``A payment shall be treated as 
directly secured by an interest in an installment obligation to the 
extent an arrangement allows the taxpayer to satisfy all or a portion 
of the indebtedness with the installment obligation.''
  (c) Effective Date.--The amendments made by this section shall apply 
to sales or other dispositions occurring on or after the date of the 
enactment of this Act.

SEC. 1509. LIMITATION ON USE OF NONACCRUAL EXPERIENCE METHOD OF 
                    ACCOUNTING.

  (a) In General.--Section 448(d)(5) (relating to special rule for 
services) is amended--
          (1) by inserting ``in fields described in paragraph (2)(A)'' 
        after ``services by such person'', and
          (2) by inserting ``certain personal'' before ``services'' in 
        the heading.
  (b) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to taxable years ending after the date of the enactment 
        of this Act.
          (2) Change in method of accounting.--In the case of any 
        taxpayer required by the amendments made by this section to 
        change its method of accounting for its first taxable year 
        ending after the date of the enactment of this Act--
                  (A) such change shall be treated as initiated by the 
                taxpayer,
                  (B) such change shall be treated as made with the 
                consent of the Secretary of the Treasury, and
                  (C) the net amount of the adjustments required to be 
                taken into account by the taxpayer under section 481 of 
                the Internal Revenue Code of 1986 shall be taken into 
                account over a period (not greater than 4 taxable 
                years) beginning with such first taxable year.

SEC. 1510. EXCLUSION OF LIKE-KIND EXCHANGE PROPERTY FROM NONRECOGNITION 
                    TREATMENT ON THE SALE OF A PRINCIPAL RESIDENCE.

  (a) In General.--Subsection (d) of section 121 (relating to the 
exclusion of gain from the sale of a principal residence) is amended by 
adding at the end the following new paragraph:
          ``(9) Like-kind exchanges.--Subsection (a) shall not apply to 
        any sale or exchange of a residence if such residence was 
        acquired by the taxpayer during the 5-year period ending on the 
        date of such sale or exchange in an exchange in which any 
        amount of gain was not recognized under section 1031.''
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to any sale or exchange of a principal residence after the date of the 
enactment of this Act.

                    TITLE XVI--TECHNICAL CORRECTIONS

SEC. 1601. AMENDMENTS RELATED TO TAX AND TRADE RELIEF EXTENSION ACT OF 
                    1998.

  (a) Amendment Related to Section 1004(b) of the Act.--Subsection (d) 
of section 6104 is amended by adding at the end the following new 
paragraph:
          ``(6) Application to nonexempt charitable trusts and 
        nonexempt private foundations.--The organizations referred to 
        in paragraphs (1) and (2) of section 6033(d) shall comply with 
        the requirements of this subsection relating to annual returns 
        filed under section 6033 in the same manner as the 
        organizations referred to in paragraph (1).''
  (b) Amendments Related to Section 4003 of the Act.--
          (1) Subsection (b) of section 4003 of the Tax and Trade 
        Relief Extension Act of 1998 is amended by inserting 
        ``(7)(A)(i)(II),'' after ``(5)(A)(ii)(I),''.
          (2) Subparagraph (A) of section 9510(c)(1) is amended by 
        striking ``August 5, 1997'' and inserting ``October 21, 1998''.
  (c) Vaccine Tax and Trust Fund.--Sections 1503 and 1504 of the 
Vaccine Injury Compensation Program Modification Act (and the 
amendments made by such sections) are hereby repealed.
  (d) Effective Date.--The amendments made by this section shall take 
effect as if included in the provisions of the Tax and Trade Relief 
Extension Act of 1998 to which they relate.

SEC. 1602. AMENDMENTS RELATED TO INTERNAL REVENUE SERVICE RESTRUCTURING 
                    AND REFORM ACT OF 1998.

  (a) Amendment Related to 1103  of the Act.--Paragraph (6) of section 
6103(k) is amended--
          (1) by inserting ``and an officer or employee of the Office 
        of Treasury Inspector General for Tax Administration'' after 
        ``internal revenue officer or employee'', and
          (2) by striking ``internal revenue'' in the heading and 
        inserting ``certain''.
  (b) Amendment Related to Section 3509 of the Act.--Subparagraph (A) 
of section 6110(g)(5) is amended by inserting ``, any Chief Counsel 
advice,'' after ``technical advice memorandum''.
  (c) Effective Date.--The amendments made by this section shall take 
effect as if included in the provisions of the Internal Revenue Service 
Restructuring and Reform Act of 1998 to which they relate.

SEC. 1603. AMENDMENTS RELATED TO TAXPAYER RELIEF ACT OF 1997.

  (a) Amendment Related to Section 302 of the Act.--The last sentence 
of section 3405(e)(1)(B) is amended by inserting ``(other than a Roth 
IRA)'' after ``individual retirement plan''.
  (b) Amendments Related to Section  1072 of the Act.--
          (1) Clause (ii) of section 415(c)(3)(D) and subparagraph (B) 
        of section 403(b)(3) are each amended by striking ``section 125 
        or'' and inserting ``section 125, 132(f)(4), or''.
          (2) Paragraph (2) of section 414(s) is amended by striking 
        ``section 125, 402(e)(3)'' and inserting ``section 125, 
        132(f)(4), 402(e)(3)''.
  (c) Amendment Related to Section  1454 of the Act.--Subsection (a) of 
section 7436 is amended by inserting before the period at the end of 
the first sentence ``and the proper amount of employment tax under such 
determination''.
  (d) Effective Date.--The amendments made by this section shall take 
effect as if included in the provisions of the Taxpayer Relief of 1997 
to which they relate.

SEC. 1604. OTHER TECHNICAL CORRECTIONS.

  (a) Affiliated Corporations in Context of Worthless Securities.--
          (1) Subparagraph (A) of section 165(g)(3) is amended to read 
        as follows:
                  ``(A) the taxpayer owns directly stock in such 
                corporation meeting the requirements of section 
                1504(a)(2), and''.
          (2) Paragraph (3) of section 165(g) is amended by striking 
        the last sentence.
          (3) The amendments made by this subsection shall apply to 
        taxable years beginning after December 31, 1984.
  (b) Reference to Certain State Plans.--
          (1) Subparagraph (B) of section 51(d)(2) is amended--
                  (A) by striking ``plan approved'' and inserting 
                ``program funded'', and
                  (B) by striking ``(relating to assistance for needy 
                families with minor children)''.
          (2) The amendment made by paragraph (1) shall take effect as 
        if included in the amendments made by section 1201 of the Small 
        Business Job Protection Act of 1996.
  (c) Amount of IRA Contribution of Lesser Earning Spouse.--
          (1) Clause (ii) of section 219(c)(1)(B) is amended by 
        striking ``and'' at the end of subclause (I), by redesignating 
        subclause (II) as subclause (III), and by inserting after 
        subclause (I) the following new subclause:
                                  ``(II) the amount of any designated 
                                nondeductible contribution (as defined 
                                in section 408(o)) on behalf of such 
                                spouse for such taxable year, and''.
          (2) The amendment made by paragraph (1) shall take effect as 
        if included in section 1427 of the Small Business Job 
        Protection Act of 1996.
  (d) Modified Endowment Contracts.--
          (1) Paragraph (2) of section 7702A(a) is amended by inserting 
        ``or this paragraph'' before the period.
          (2) Clause (ii) of section 7702A(c)(3)(A) is amended by 
        striking ``under the contract'' and inserting ``under the old 
        contract''.
          (3) The amendments made by this subsection shall take effect 
        as if included in the amendments made by section 5012 of the 
        Technical and Miscellaneous Revenue Act of 1988.
  (e) Lump-Sum Distributions.--
          (1) Clause (ii) of section 401(k)(10)(B) is amended by adding 
        at the end the following new sentence: ``Such term includes a 
        distribution of an annuity contract from--
                                  ``(I) a trust which forms a part of a 
                                plan described in section 401(a) and 
                                which is exempt from tax under section 
                                501(a), or
                                  ``(II) an annuity plan described in 
                                section 403(a).''
          (2) The amendment made by paragraph (1) shall take effect as 
        if included in section 1401 of the Small Business Job 
        Protection Act of 1996.
  (f) Tentative Carryback Adjustments of Losses From Section 1256 
Contracts.--
          (1) Subsection (a) of section 6411 is amended by striking 
        ``section 1212(a)(1)'' and inserting ``subsection (a)(1) or (c) 
        of section 1212''.
          (2) The amendment made by paragraph (1) shall take effect as 
        if included in the amendments made by section 504 of the 
        Economic Recovery Tax Act of 1981.

SEC. 1605. CLERICAL CHANGES.

          (1) Subsection (f) of section 67 is amended by striking ``the 
        last sentence'' and inserting ``the second sentence''.
          (2) The heading for paragraph (5) of section 408(d) is 
        amended to read as follows:
          ``(5) Distributions of excess contributions after due date 
        for taxable year and certain excess rollover contributions.--
        ''.
          (3) The heading for subparagraph (B) of section 529(e)(3) is 
        amended by striking ``under guaranteed plans''.
          (4)(A) Subsection (e) of section 678 is amended by striking 
        ``an electing small business corporation'' and inserting ``an S 
        corporation''.
          (B) Clause (v) of section 6103(e)(1)(D) is amended to read as 
        follows:
                          ``(v) if the corporation was an S 
                        corporation, any person who was a shareholder 
                        during any part of the period covered by such 
                        return during which an election under section 
                        1362(a) was in effect, or''.
          (5) Subparagraph (B) of section 995(b)(3) is amended by 
        striking ``the Military Security Act of 1954 (22 U.S.C. 1934)'' 
        and inserting ``section 38 of the International Security 
        Assistance and Arms Export Control Act of 1976 (22 U.S.C. 
        2778)''.
          (6) Subparagraph (B) of section 4946(c)(3) is amended by 
        striking ``the lowest rate of compensation prescribed for GS-16 
        of the General Schedule under section 5332'' and inserting 
        ``the lowest rate of basic pay for the Senior Executive Service 
        under section 5382''.

  Amend the title so as to read:

      A bill to provide for reconciliation pursuant to sections 
105 and 211 of the concurrent resolution on the budget for 
fiscal year 2000.''.

                            I. INTRODUCTION


                         A. Purpose and Summary


                                Purpose

    The revenue reconciliation provisions included in the 
Committee bill (``Financial Freedom Act of 1999'') (the 
``bill'') provide: (1) 10-percent across-the-board reduction in 
individual income tax rates, marriage penalty tax relief, and 
repeal of the individual minimum tax (Title I); (2) reduced 
taxes on savings and investment income (Title II); (3) 
reduction in the corporate capital gains tax rate and repeal of 
the corporate minimum tax (Title III); (4) education savings 
incentives (Title IV); (5) health care tax relief (Title V); 
(6) phased-in repeal of estate, gift, and generation-skipping 
taxes (Title VI); (7) tax relief for distressed communities and 
industries (Title VII); (8) tax relief for small businesses 
(Title VIII); (9) international tax relief (Title IX); (10) 
modifications relating to tax-exempt organizations (Title X); 
(11) real estate tax relief (Title XI); (12) pension reforms 
(Title XII); (13) certain miscellaneous revenue provisions 
(Title XIII); (14) extension of tax provisions expiring in 1999 
(Title XIV); (15) certain revenue offsets (Title XV); and (16) 
technical corrections to recent tax legislation (Title XVI).
    The bill provides net tax reductions of $200 billion over 
fiscal years 1999-2004, and $864 billion over fiscal years 
1999-2009. This will provide needed tax relief for individuals, 
families, small businesses, distressed industries and others, 
and will give American taxpayers more freedom to improve their 
financial condition and to help the economy continue to invest 
and grow into the 21st century.

                          SUMMARY OF THE BILL

I. Broad-based tax relief provisions

            A. Reduction in individual income tax rates
    The bill reduces both the regular and the alternative 
minimum income tax rates by ten percent over a ten year period. 
The reductions occur in four proportional steps for taxable 
years beginning in 2001, 2005, 2008, and 2009. The tax rates 
are rounded up annually to the nearest one-tenth of a percent.
            B. Marriage penalty relief provisions
    Standard Deduction Tax Relief.--The bill provides for a 
phased-in increase of the standard deduction for married 
couples filing jointly, so that it will be twice the standard 
deduction for a single person. The phase-in occurs ratably for 
the taxable years 2001 through 2003. The standard deduction for 
married persons filing separately increases similarly to equal 
the standard deduction for single persons.
    Adjust Student Loan Interest Deduction Income Limits.--The 
bill increases the income levels at which married taxpayers 
filing jointly qualify for student loan interest deduction. In 
taxable years beginning after December 31, 1999, the student 
loan interest deduction for married taxpayers filing jointly is 
phased out ratably for modified adjusted gross incomes of 
$80,000 to $110,000, instead of the present-law phase-out range 
of $60,000 to $75,000 for joint returns.
    Increase Income Limit for Roth IRA Conversions.--The bill 
increases the adjusted gross income limit on Roth IRA 
conversions from $100,000 to $160,000 for married couples 
filing jointly. The provision is effective for taxable years 
beginning after December 31, 1999.
            C. Repeal individual alternative minimum tax
    The bill allows an individual to offset the entire regular 
tax liability, without regard to the minimum tax, for taxable 
years beginning after December 31, 1998. Further, the bill 
imposes only 80 percent of the full AMT liability for taxable 
years after December 31, 2002. That percentage is reduced by 20 
percentage points for each of the next three taxable years, and 
the tax is fully repealed for taxable years beginning after 
December 31, 2006. Finally, an individual taxpayer is allowed 
to use the AMT credit to offset 90 percent of his or her 
regular tax liability for taxable years beginning after 
December 31, 2006.

II. Savings and investment tax relief provisions

    Partial Exclusion for Interest and Dividends.--The bill 
excludes from income of individuals combined amounts of taxable 
interest and dividends (other than capital gain dividends from 
RICs and REITs, dividends from farmers' cooperative 
associations, and dividends received from an employee stock 
ownership plan). The maximum exclusion is $100 for taxable 
years beginning after December 31, 2000 ($200 for married 
couples filing jointly), and $200 for taxable years beginning 
after December 31, 2002 ($400 for married couples filing 
jointly).
    Reduce Individual Capital Gains Rates.--The bill reduces 
the 10- and 20-percent rates on the adjusted net capital gain 
to 7.5- and 15-percent, respectively. The 25-percent rate on 
unrecaptured section 1250 gain is reduced to 20 percent. These 
lower rates apply to both the regular tax and the alternative 
minimum tax. The bill repeals the special rates on gain from 
property held more than five years. The provision applies to 
taxable years ending after June 30, 1999, for property sold or 
exchanged after June 30, 1999.
    Apply Capital Gain Rates to Capital Gains Earned by 
Designated Settlement Funds.--Present law imposes a tax rate of 
39.6 percent on designated settlement funds. For taxable years 
beginning after December 31, 1999, the bill taxes the net 
capital gain of such funds in the same manner as in the case of 
an individual.
    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 or Certain Other Individuals Relocated Outside of 
the United States.--Present law contains a five year test 
period to determine whether the seller of a principal residence 
qualifies for exclusion of gain. The bill suspends the five 
year period for times of compelled service 50 miles away from 
home, or in government housing, by members of uniformed service 
or foreign service. The bill also suspends for up to five 
years, the five-year test period for an individual relocated 
for a period of more than 90 days outside of the United States 
by the individual's (or spouse's) employer. This provision does 
not apply to self-employed individuals. The provisions are 
effective for sales or exchanges of residences after the dates 
of enactment.
    Clarify the Tax Treatment of Income and Losses on 
Derivatives.--The bill adds three categories to the list of 
assets gain or loss on which is treated as ordinary under 
section 1221. The new categories are: commodities derivatives 
held by commodities derivatives dealers, hedging transactions, 
and supplies of a type regularly consumed by the taxpayer in 
the ordinary course of the taxpayer's trade or business. With 
respect to hedging transactions, the bill replaces the present-
law risk reduction standard with a risk management standard. 
The provision is effective for transactions entered into on or 
after the date of enactment.
    Treatment of Loss on Stock of Subsidiary.--For taxable 
years beginning after December 31, 1999, the bill excludes 
active lending or insurance income from the types of income 
that disqualify section 165(g)(3) ordinary loss treatment on 
the sale of worthless stock.

III. Business investment and job creation

    Alternative Tax for Corporate Capital Gains.--The bill 
creates an alternative maximum tax for the net capital gain of 
a corporation for taxable years beginning after December 31, 
1999. The alternative tax would be 34.1 percent for taxable 
years beginning in 2000, 33.9 percent in 2001, 32.7 percent in 
2002, 31.7 percent in 2003, 30.8 percent in 2004, 29.8 percent 
in 2005, 29.2 percent in 2006, 28.0 percent in 2007, 27.4 
percent in 2008, 26.2 percent in 2009, and 25 percent 
applicable for all taxable years after 2009.
    Repeal Corporate Alternative Minimum Tax.--For taxable 
years beginning after December 31, 2002, the limitation on the 
amount of AMT credits allowable to a corporation increases by 
20 percent of the corporation's tentative minimum tax. This 
percentage rises to 40-, 60-, and 80-percent, respectively, for 
2004, 2005, and 2006. The AMT credit cannot exceed an amount 
equal to the sum of the regular tax and minimum tax less the 
other nonrefundable credits. For taxable years beginning after 
December 31, 2006, the bill repeals the AMT, and a corporation 
would then be allowed to use the AMT credit to offset 90 
percent of its regular tax liability.
    Repeal of Limitation of Foreign Tax Credit under 
Alternative Minimum Tax.--The bill repeals the 90-percent 
limitation on the utilization of the AMT foreign tax credit for 
taxable years beginning after December 31, 2001.

IV. Education tax relief provisions

    Expand Education Savings Accounts.--The bill changes the 
name of education IRAs to ``Education Savings Accounts,'' and 
increases their annual contribution limit from $500 to $2,000 
per beneficiary. The bill expands the definition of qualified 
education expenses to include qualified elementary and 
secondary expenses, including certain homeschooling expenses. 
Further, the bill allows contributions to be made on behalf of 
special needs beneficiaries after they reach age 18. The bill 
also allows: (1) contributions for a taxable year to be made 
until April 15th of the following year, (2) coordination of 
distributions from education savings accounts with the HOPE and 
Lifetime Learning Credit, and (3) contributions by 
corporations. The provision generally is effective for taxable 
years beginning after December 31, 2000.
    Allow Tax-Free Distributions from State and Private 
Education Programs.--The bill expands the definition of 
``qualified state tuition program'' to include certain prepaid 
tuition programs established and maintained by one or more 
eligible educational institutions (which may be private 
institutions). The bill also allows a taxpayer to claim a HOPE 
credit or Lifetime Learning credit for a taxable year and to 
exclude from gross income amounts distributed (both the 
principal and the earnings portions) from a qualified tuition 
program on behalf of the same student as long as the 
distribution is not used for the same expenses for which a 
credit was claimed. The bill permits one tax-free rollover in 
each 1-year period for the benefit of the same beneficiary. The 
provision permitting the establishment of qualified tuition 
programs maintained by one or more private educational 
institutions is effective for taxable years beginning after 
December 31, 2000. The exclusion from gross income for certain 
distributions from qualified State tuition programs under 
section 529 is effective for distributions made in taxable 
years beginning after December 31, 2000, and is extended to 
private prepaid tuition programs in taxable years beginning 
after December 31, 2003. The remaining provisions modifying 
qualifying tuition plans generally are effective for 
distributions made after December 31, 2000.
    Eliminate Tax on Awards Under National Health Service Corps 
Scholarship Program, F. Edward Hebert Armed Forces Health 
Professions Scholarship and Financial Assistance Program, 
National Institutes of Health Undergraduate Scholarship Program 
and Certain State-sponsored Scholarship Programs.--The bill 
provides that amounts received by an individual under the NHSC 
Scholarship Program, the Armed Forces Scholarship Program, the 
NIH Scholarship Program, or any State-sponsored health 
scholarship program determined by the Secretary of the Treasury 
to have substantially similar objectives to these programs are 
eligible for tax-free treatment as qualified scholarships under 
section 117, without regard to any service obligation by the 
recipient. The bill is effective for education awards received 
under the NHSC Scholarship Program, the Armed Forces 
Scholarship Program, and the NIH Scholarship Program after 
December 31, 1993. The bill is effective for education awards 
received under any State-sponsored health scholarship program 
designated by the Secretary of the Treasury after December 31, 
1999.
    Liberalize Tax-Exempt Arbitrage Rebate Exceptions for 
Public School Construction Bonds.--The present-law 24-month 
expenditure exception to the arbitrage rebate requirement is 
liberalized for certain public school bonds. Under the bill, no 
rebate is required with respect to earnings on available 
construction proceeds of public school bonds if the proceeds 
are spent within 48 months after the bonds were issued and the 
certain intermediate spending levels are satisfied. The 
additional amount of governmental bonds for public schools that 
small governmental units may issue without being subject to the 
arbitrage rebate requirement is increased from $5 million to 
$10 million. The liberalized expenditure exception for public 
school construction bonds is effective for bonds issued after 
December 31, 1999. The increase in the small governmental unit 
arbitrage rebate exception is effective for calendar years 
beginning after December 31, 1999.
    Eliminate 60-month Limit on Student Loan Interest 
Deduction.--Present law allows student loan interest deductions 
only for the first 60 months of mandatory payments. The bill 
eliminates the 60 month limit and eliminates the requirement 
that a payment have been mandatory to qualify for the 
deduction. The provision is effective for interest paid after 
December 31, 1999.

V. Health care tax relief provisions

    Above-the-Line Deduction for Health Insurance Expenses.--
The bill allows an above-the-line deduction for a percentage of 
health insurance expenses. The amounts of the deduction are: 25 
percent in 2001, 40 percent in 2002, 50 percent in 2003 through 
2006, 75 percent in 2007, and 100 percent in 2008 and 
thereafter. The deduction is not available for any month in 
which the employee is covered by 50-percent employer 
subsidized, tax-free health insurance. The provision is 
effective for taxable years beginning after December 31, 2000.
    Provisions Relating to Long-Term Care Insurance.--The bill 
allows an above-the-line deduction for a percentage of 
qualified long-term care insurance expenses. The deductible 
percentage is the same as under the above-the-line deduction 
for health insurance expenses.
    Extend Availability of Medical Savings Accounts.--The bill: 
expands availability of Medical Savings Accounts (MSAs) to all 
employees covered under a high deductible health insurance plan 
of their employers, eliminates the cap on the number of 
taxpayers that can benefit annually from MSA contributions, 
decreases the lower dollar threshold of a high deductible 
health insurance plan, increases the amount of annual 
contributions that could be made to a MSA to 100-percent of the 
deductible, allows both employees and employers to make 
contributions to an MSA, and allows MSAs to be offered as part 
of a cafeteria plan.
    Additional Personal Exemption for Caretakers.--The bill 
provides taxpayers who maintain a household including one or 
more qualified persons with an additional personal exemption 
for each qualified person. A qualified person is a parent or 
ancestor of the taxpayer or the taxpayer's spouse. The 
provision is effective for taxable years beginning after 
December 31, 1999.
    Expand Human Clinical Trials Expenses Qualifying for the 
Orphan Drug Tax Credit.--Present law allows a 50-percent credit 
for human clinical testing expenses after a drug is certified 
as being a potential treatment for a rare disorder. The bill 
allows the credit for human testing expenses incurred after the 
taxpayer applies for orphan drug status. The provision is 
effective for taxable years beginning after December 31, 1999.
    Add Certain Vaccines Against Streptococcus Pneumoniae to 
the List of Taxable Vaccines.--The bill adds conjugate 
streptococcus pneumoniae vaccines to the list of taxable 
vaccines subject to the 75 cent tax to fund the Federal Vaccine 
Injury Compensation Trust Fund. The provision is effective for 
vaccines purchased the day after the Centers for Disease 
Control makes a final recommendation for routine administration 
of conjugate streptococcus vaccines to children. No floor 
stocks tax is to be collected for amounts held for sale on that 
date.
    Above-the-Line Deduction for Prescription Drug Insurance 
Coverage of Medicare Beneficiaries if Certain Medicare and Low-
Income Assistance Provisions in Effect.--The bill provides an 
above-the-line deduction for Medicare beneficiaries for 
prescription drug insurance. The deduction takes effect when 
(a) the Federal Government provides assistance for prescription 
drug coverage for low-income Medicare beneficiaries, (b) all 
policies supplemental to Medicare provide coverage for costs of 
prescription drugs, and (c) coverage for outpatient 
prescription drugs for Medicare beneficiaries is provided only 
through integrated comprehensive health plans which offer 
current Medicare covered services and minimum limitations on 
out-of-pocket spending and such comprehensive plans sponsored 
by the Health Care Financing Administration compete on the same 
basis as private plans. The provision is effective for taxable 
years beginning after the date of enactment.

VI. Death tax relief provisions

    Phase in Repeal of Estate, Gift, and Generation-Skipping 
Taxes.--The bill repeals the estate, gift, and generation-
skipping transfer (GST) taxes beginning in 2009, after which a 
carryover basis regime is to be phased in for large transfers 
of assets from large estates to individuals other than a 
decedent's surviving spouse. Beginning in 2001, the unified 
transfer tax credit is replaced with a comparable unified 
exemption amount, and the top estate and gift tax rates above 
50 percent and the 5-percent phase out surtax are repealed. 
Beginning in 2002 and through 2004, each of the rates of tax 
are reduced by 1 percentage point, and in 2005 and through 
2008, each of the rates of tax are reduced by 2 percentage 
points. The top estate, gift, and GST tax rates is to be no 
higher than the highest future individual income tax rate, and 
the lower estate and gift tax rates are not to be reduced below 
the lowest individual income tax rate.
    Modify Generation-Skipping Tax Rules.--The bill deems there 
to have been GST tax exemption allocated to transfers made 
during life that are ``indirect skips,'' which are transfers to 
GST trusts that are not direct skips. This provision applies to 
transfers subject to estate or gift tax made after December 31, 
1999, and to estate tax inclusion periods ending after December 
31, 1999. The bill also allows the retroactive allocation of 
GST exemption when there is an unnatural order of death. This 
rule applies to deaths of non-skip persons occurring after the 
date of enactment. The bill also allows a trust holding 
property with an inclusion ratio greater than zero to be 
severed at any time in a ``qualified severance.'' The severance 
provisions are effective for severances of trusts occurring 
after the date of enactment. In addition, the valuation rules 
are modified such that, for timely and automatic allocations of 
GST tax exemption, the value of the property for purposes of 
determining the inclusion ratio is its finally determined gift 
tax value or estate tax value depending on the circumstances of 
the transfer. The bill also authorizes and directs the Treasury 
Secretary to grant extensions of time to make the election to 
allocate GST tax exemption and to grant exceptions to the time 
requirement. Finally, the bill provides that substantial 
compliance with the statutory and regulatory requirements for 
allocating GST tax exemption suffice to establish that GST tax 
exemption was allocated to a particular transfer or trust.

VII. Distressed communities and industries provisions

    Renewal Community Provisions.--The bill authorizes the 
Secretary of HUD to designate up to 20 renewal communities that 
will receive tax benefits for a seven year period beginning 
January 1, 2001, and ending December 31, 2007. The tax benefits 
include: a zero percent capital gains tax rate on the sale of 
qualified community assets held for more than five years; 
family development accounts for qualified higher educational 
expenses, qualified first-time homebuyer costs, qualified 
business capitalization costs, and qualified medical expenses; 
commercial revitalization deductions for qualified 
revitalization buildings located in a renewal community; 
$35,000 in additional section 179 expensing; expensing of 
environmental remediation costs (for brownfields); and an 
extension of the work opportunity tax credit to qualified 
individuals who live in a renewal community.
    Provide that Federal Production Payments to Farmers are 
Taxable in the Year Received.--The bill modifies the 
constructive receipt rule for purposes of payments made by the 
Secretary of Agriculture pursuant to The Agriculture Market 
Transition Act. The existence of any option to accelerate any 
payment pursuant to the Act is disregarded and the payment is 
not included in gross income until received. The provision is 
effective on the date of enactment.
    Allow Net Operating Losses from Oil and Gas Properties to 
be Carried Back for up to Five Years.--The bill provides a 
special five year carryback period for certain eligible oil and 
gas losses. The carryforward period remains twenty years. The 
bill applies to net operating losses arising in taxable years 
beginning after December 31, 1998.
    Deduction for Delay Rental Payments.--The bill allows delay 
rental payments to be deducted currently. The provision applies 
to delay rental payments incurred in taxable years beginning 
after December 31, 2000.
    Election to Expense Geological and Geophysical 
Expenditures.--The bill allows geological and geophysical costs 
incurred in connection with oil and gas exploration in the 
United States to be deducted currently. The provision is 
effective for G&G costs incurred in taxable years beginning 
after December 31, 2000.
    Temporary Suspension of Limitation Based on 65 Percent of 
Taxable Income.--The bill suspends the limit on percentage 
depletion deductions to no more than 65 percent of the 
taxpayer's overall taxable income for taxable years beginning 
after December 31, 1998, and before January 1, 2005.
    Determination of Small Refiner Exception to Oil Depletion 
Deduction.--The bill changes the refiner limitation on claiming 
inde-

pendent producer status from a limit based on actual daily 
production to a limit based on average daily production for the 
taxable year: the average daily refinery run for the taxable 
year may not exceed 50,000 barrels. The provision is effective 
for taxable years beginning after December 31, 1999.
    Increase the Maximum Dollar Amount of Reforestation 
Expenditures Eligible for Amortization and Credit.--The bill 
increases the amount of reforestation expenditures eligible for 
7-year amortization and the reforestation credit from $10,000 
to $25,000 per taxable year (from $5,000 to $12,500 in the case 
of a separate return by a married individual). For taxable 
years beginning in 2000 through 2003, there is no limit on the 
amount eligible for 7-year amortization. The provision is 
effective for expenditures paid or incurred in taxable years 
beginning after December 31, 1998.
    Capital Gains Treatment Under Section 631(b) to Apply to 
Outright Sales by Landowners.--The bill provides that the 
requirement that a taxpayer retain an economic interest in 
timber in order to treat gains on sales prior to the time the 
timber is cut as capital gains does not apply in the case of a 
sale of timber by the owner of the land from which the timber 
is cut. The provision is effective for sales of timber after 
the date of enactment.
    Minimum Tax Relief for the Steel Industry.--The bill allows 
minimum tax credits to offset 90 percent of tentative minimum 
tax in the case of a steel company, in addition to any excess 
of regular tax over tentative minimum tax. The provision is 
effective for taxable years beginning after December 31, 1998.

VIII. Small business relief provisions

    Accelerate 100-Percent Self-Employed Health Insurance 
Deduction.--The bill increases the deduction for self-employed 
health insurance to 100-percent for taxable years beginning 
after December 31, 1999.
    Increase Section 179 Expensing.--The bill increases the 
maximum section 179 deduction from the present-law $19,000 per 
year, up to $30,000 per year for taxable years beginning after 
December 31, 1999.
    Repeal of Temporary Federal Unemployment Surtax.--The bill 
repeals the temporary Federal Unemployment Tax Act after 
December 31, 2004.
    Restore 80-Percent Meals Deduction.--For taxable years 
beginning after December 31, 2004, the bill increases the 
business meals deduction from the present-law 50-percent, by 
five percentage points per taxable year, up to an 80-percent 
deduction for taxable years beginning after December 31, 2009.

IX. International tax relief provisions

    Allocate Interest Expense on a Worldwide Basis.--The bill 
modifies the present-law interest expense allocation rules 
(which generally apply for purposes of computing the foreign 
tax credit limitations) by providing a one-time election under 
which the taxable income of domestic members of an affiliated 
group from foreign sources generally would be determined by 
allocating and apportioning interest expense of the worldwide 
affiliated group on a worldwide-group basis. The election 
provides taxpayers with the

option either to apply fungibility principles on a worldwide 
basis or to continue to apply present law. For purposes of the 
new elective rules based on worldwide fungibility, the 
worldwide affiliated group includes any foreign corporations in 
which more than 50 percent of the total vote or value is owned 
(directly or indirectly) by U.S. members of the affiliated 
group. A pro rata portion of such foreign corporation's 
interest expense and assets is treated as attributable to the 
affiliated group and taken into account for purposes of 
determining the allocation and apportionment of interest 
expense. In addition, regardless of whether a taxpayer elects 
to continue to be governed by the present-law allocation rules 
or to apply the new worldwide fungibility principle, the bill 
provides two annual elections that are exceptions to the 
general ``one-taxpayer'' rule: (1) the subsidiary group 
election under which U.S. members with debt that is not 
supported by other members of the affiliated group could elect 
to treat themselves and their subsidiaries as a separate group; 
and (2) a financial institution group election under which all 
members that are predominantly engaged in a financial services 
business could elect to be treated as a separate group. The 
provision is effective for taxable years beginning after 
December 31, 2001.
    Look-Through Rules to Apply to Dividends from Noncontrolled 
Section 902 Corporations.--For taxable years beginning after 
December 31, 2001, the bill applies the look-through approach 
to all dividends paid by a 10/50 company for foreign tax credit 
limitation purposes. The bill provides a transition rule under 
which pre-effective date foreign tax credits associated with a 
10/50 company separate limitation category can be carried 
forward into post-effective date years.
    Subpart F Treatment of Pipeline Transportation Income and 
Income from Transmission of High Voltage Electricity.--The bill 
exempts income derived from the transmission of high voltage 
electricity from the definition of foreign base company 
services income. Further, the bill provides that foreign base 
company oil related income does not include income from the 
pipeline transportation of oil or gas within a foreign country. 
The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2001, and taxable 
years of U.S. shareholders with or within which such taxable 
years of foreign corporations end.
    Recharacterization of Overall Domestic Loss.--The bill 
applies a resourcing rule to U.S.-source income where the 
taxpayer has suffered a reduction in the amount of its foreign 
tax credit limitation due to a prior overall domestic loss. The 
bill applies to losses incurred in taxable years beginning 
after December 31, 2004.
    Treatment of Military Property of Foreign Sales 
Corporations.--The bill repeals the special Foreign Sales 
Corporation (FSC) limitation relating to the export of military 
property, thus providing exports of military property through a 
FSC with the same treatment currently provided exports of non-
military property. The provision is effective for taxable years 
beginning after December 31, 2001.
    Modify Treatment of RIC Dividends Paid to Foreign 
Persons.--Under the bill, a regulated investment company (RIC) 
that earns certain interest income or short-term capital gains 
which are not subject to U.S. tax if earned by a foreign person 
directly may designate a dividend it pays as derived from such 
income. Under the provision, a foreign person who is a 
shareholder in the RIC generally treats such dividends as 
exempt from gross-basis U.S. tax, just as if the foreign person 
had realized the interest or short-term capital gains directly. 
In addition, the estate of a foreign decedent is exempt from 
U.S. estate tax on a transfer of stock in the RIC in the 
proportion that the assets held by the RIC are debt 
obligations, deposits, or other property that would generally 
be treated as situated outside the United States if held 
directly by the estate. The provision generally is effective 
for taxable years beginning after December 31, 2004.
    Repeal of Special Rules for Applying Foreign Tax Credit in 
Case of Foreign Oil and Gas Income.--The bill repeals the 
special rules of section 907, such that taxes attributable to 
foreign oil and gas extraction income are no longer subject to 
a special limitation, and the rules with respect to 
discriminatory taxes on foreign oil related income no longer 
apply. The provision is effective for taxable years beginning 
after December 31, 2004.
    Study of Proper Treatment of European Union under Subpart F 
Same Country Exceptions.--The bill directs the Secretary of the 
Treasury to conduct a study of the feasibility of treating all 
countries included in the European Union as one country for 
purposes of applying same country exceptions under subpart F. 
The bill requires the study to be completed no later than six 
months after the date of enactment.
    Provide Waiver from Denial of Foreign Tax Credits.--The 
bill provides that section 901(j) (relating to denial of 
foreign tax credits, etc.) no longer applies with respect to a 
foreign country if the President determines that the 
application of section 901(j) to such foreign country is not in 
the national interests of the United States. The provision is 
effective as of the date of enactment.
    Prohibit Disclosure of APAs and APA Background Files.--The 
bill provides that Advance Pricing Agreements (APAs) and 
related background information are confidential return 
information not subject to the public inspection requirements 
of section 6110. The bill also requires the Treasury Department 
to prepare an extensive annual report regarding APAs. The 
provision is effective on the date of enactment.
    Increase Dollar Limitation on Section 911 Exclusion.--The 
bill increases the maximum exclusion for foreign earned income 
in annual increments of $3,000 per year beginning in 2003, 
until the exclusion amount is $95,000. Beginning in 2008, the 
maximum exclusion amount of $95,000 is indexed for inflation.

X. Tax-exempt organization provisions

    Provide Tax Exemption for Organizations Created by a State 
to Provide Property and Casualty Insurance Coverage for 
Property for which Such Coverage is Otherwise Unavailable.--The 
bill provides tax-exempt status for associations created before 
January 1, 1999, by State law, and organized and operated 
exclusively to provide property and casualty insurance for 
property located within the State if coverage is limited or 
unavailable at reasonable rates, provided requirements are met. 
The provision is effective for taxable years beginning after 
December 31, 1999.
    Conform Provisions Relating to Arbitrage Treatment to 
Reflect Proposed State Constitutional Amendments.--The present 
law tax exemption for two State universities depends on 
relevant State law not changing terms in effect as of October 
9, 1969. The bill allows the exemption to continue in light of 
proposed amendments to the State Constitution. The bill applies 
to bonds issued after the effective date of the State 
constitutional amendments.
    Denial of Charitable Contribution Deduction for Transfers 
Associated with Split-Dollar Insurance Arrangements.--The bill 
restates present law to provide that no charitable contribution 
deduction is allowed for a transfer to or for the use of a 
charitable organization, if in connection with the transfer the 
organization directly or indirectly pays, or has previously 
paid, any premium on any personal benefit contract with respect 
to the transferor, or there is an understanding or expectation 
that any person will directly or indirectly pay any premium on 
any personal benefit contract with respect to the transferor. 
The bill also imposes on the charitable organization an excise 
tax in the amount of the premiums paid. The provision applies 
generally to transfers, or premiums paid, after February 8, 
1999.
    Authorize Secretary of Treasury to Grant Waivers from 
Section 4941 Prohibitions.--The bill requires that the 
Secretary of the Treasury establish an exemption procedure 
pursuant to which the Secretary could grant a conditional or 
unconditional exemption from the self-dealing prohibition of 
section 4941. The provision is effective for transactions 
occurring after the date of enactment.
    Extend Declaratory Judgment Procedures to Non-501(c)(3) 
Tax-exempt Organizations.--The bill extends declaratory 
judgment procedures similar to those currently available only 
to charities under section 7428 to other section 501(c) 
determinations. The provision is effective for pleadings with 
respect to determinations made after the date of enactment.
    Modify Section 512(b)(13).--The bill provides that certain 
payments made by a controlled entity to a tax-exempt 
organization count as unrelated business income only to the 
extent they exceed the amount of the payment that would have 
been made if the payment had been determined in accordance with 
the principles of section 482. The provision applies to 
payments received or accrued in taxable years beginning after 
December 31, 1999.

XI. Real estate relief provisions

    Proposals Relating to REITs.--Under the bill, a Real Estate 
Investment Trust (REIT) generally can not own more than ten 
percent of the total value of securities of a single issuer (to 
supplement the voting power limitation under present law), but 
does not apply for securities held directly or indirectly by 
such REIT on July 12, 1999. An exception to the limitations on 
ownership applies in the case of a wholly owned ``taxable REIT 
subsidiary'' that meets certain requirements. The bill also 
permits a REIT to own and operate a health care facility for at 
least two years, and treat it as permitted ``foreclosure'' 
property, if the facility is acquired by the termination or 
expiration of a lease of the property. The provisions generally 
are effective for taxable years beginning after December 31, 
2000.
    Modify At-Risk Rules for Publicly Traded Nonrecourse 
Debt.--The bill modifies the rules relating to qualified 
nonrecourse financing to provide that, in the case of an 
activity of holding real property, a taxpayer is considered at 
risk with respect to the taxpayer's share of certain financing 
that is not borrowed from a person that is regularly engaged in 
the business of lending money, and that is not secured by real 
property used in the activity, if the financing is qualified 
publicly traded debt. The financing may not be borrowed from a 
related person. The bill is effective for debt instruments 
issued after December 31, 1999.
    Qualified Lessee Construction Allowances Not Limited to 
Short-Term Leases for Certain Retailers.--The bill eliminates 
the section 110 requirement that a lease be for a term of 15 
years or less in the case of payment (or rent reduction) to a 
``qualified retail business.'' Payments by a lessor to such 
businesses for the purpose of constructing or improving long-
term real property are not included in the income of the lessee 
regardless of the term of the lease, provided the payments are 
used for such purpose. A qualified retail business is defined 
as a trade or business of selling tangible personal property to 
the general public. The bill applies to leases entered into 
after December 31, 1999. No inference is intended as to the 
treatment of amounts that are not affected by the bill.
    Exclusion From Gross Income For Certain Contributions to 
the Capital of Certain Retailers.--The bill establishes a safe 
harbor allowing certain inducements received by retailers in 
exchange for the retailer's agreement to operate a qualified 
retail business at particular location for a period of at least 
15 years to be treated as nontaxable contributions to capital. 
The provision is effective for contributions received after 
December 31, 1999.

XII. Pension reform provisions

            A. Expanding coverage
    Increase contribution and benefit limits.--Effective in 
2001, the bill: increases the $30,000 annual contribution limit 
for defined contribution plans to $40,000 (indexed in $1,000 
increments), increases the $130,000 annual benefit limit under 
a defined benefit plan to $160,000, lowers the early retirement 
age to 62 and the normal retirement age to 65 for purposes of 
applying the limit, and increases the limit on compensation 
that may be taken into account under a plan to $200,000 
(indexed in $5,000 increments). Beginning in 2001, the bill 
increases the dollar limit on annual elective deferrals under 
section 401(k) plans, section 403(b) annuities and salary 
reduction SEPs in $1,000 annual increments until the limits 
reach $15,000 in 2005, with indexing thereafter. Beginning in 
2001, the bill increases the maximum annual elective deferrals 
that can be made to a SIMPLE plan in $1,000 annual increments 
until the limit reaches $10,000 in 2004, with indexing 
thereafter. The bill increases the limit on deferrals under a 
section 457 plan to $11,000 in 2001, and increases in $1,000 
annual increments until the limit reaches $15,000 in 2005, with 
indexing thereafter.
    Plan loans for subchapter S shareholders, partners, and 
sole proprietors.--The bill generally eliminates the special 
present-law rules relating to plan loans made to an owner-
employee. Thus, the general statutory exemption applies to such 
transactions. Present law applies with respect to IRAs. The 
provision is effective with respect to transactions entered 
into after December 31, 2000.
    Modification of top-heavy rules.--The bill provides that a 
plan consisting of a cash-or-deferred arrangement that 
satisfies the design-based safe harbor for such plans and 
matching contributions that satisfy the safe harbor rule for 
such contributions is not a top-heavy plan. Matching provided 
can be taken into account in satisfying the minimum 
contribution requirements applicable to top-heavy plans. The 
bill simplifies the definition of key employee and the 
determination of top-heavy status. The provision is effective 
for years beginning after December 31, 2000.
    Elective deferrals not taken into account for purposes of 
deduction limits.--Under the bill, elective deferral 
contributions are not subject to the qualified plan deduction 
limits, and the application of a deduction limitation to any 
other employer contribution to qualified retirement plan does 
not take into account elective deferral contributions. The 
provision is effective for years beginning after December 31, 
2000.
    Reduce PBGC premiums for small and new plans.--Under the 
bill, for the first five plan years of a new single-employer 
plan of an employer with 100 or fewer employees, the flat-rate 
Pension Benefit Guaranty Corporation (PBGC) premium is $5 per 
plan participant. The bill provides that the variable PBGC 
premium is phased in for ``new defined benefit plans'' over a 
six-year period starting with the plan's first plan year. The 
bill also provides that, in the case of any plan (not just a 
new plan) of an employer with 25 or fewer employees, the 
variable-rate premium is no more than $5 multiplied by the 
number of plan participants. The provisions relating to new 
plans are effective for plans established after December 31, 
2000. The provision reducing the PBGC variable premium for 
small plans is effective for years beginning after December 31, 
2000.
    Repeal of coordination requirements for deferred 
compensation plans of State and local governments and tax-
exempt organizations.--For years beginning after December 31, 
2000, the bill repeals the rules coordinating the section 457 
dollar limit with contributions under other types of plans.
    Eliminate IRS user fees for determination letter requests 
regarding small employer plans.--Under the bill, an employer 
with no more than 100 employees is not required to pay a user 
fee for any determination letter with respect to the qualified 
status of a retirement plan that the employer maintains. The 
bill is effective for determination letter requests made after 
December 31, 2000.
    Definition of compensation for purposes of deduction 
limits.--For purposes of the qualified plan deduction limit the 
compensation otherwise paid or accrued during the employer's 
taxable year to the beneficiaries under the plan includes 
elective deferrals under a section 401(k) plan or a section 
403(b) annuity, and elective contributions under a section 457 
plan. The provision is effective for years beginning after 
December 31, 2000.
    Option to treat elective deferrals as after-tax 
contributions.--A section 401(k) plan or a section 403(b) 
annuity is permitted to have all or a portion of the 
participant's elective deferrals under the plan treated as 
designated plus contributions (i.e., elective deferrals that 
the participant designates as not excludable from the 
participant's gross income). The annual dollar limitation on a 
participant's designated plus contributions is the section 
402(g) annual limitation on elective deferrals, reduced by the 
participant's elective deferrals that the participant does not 
designate as designated plus contributions. Designated plus 
contributions are treated as any other elective deferral for 
purposes of nonforfeitability requirements, distribution 
restrictions, and nondiscrimination requirements. A qualified 
distribution from a participant's designated plus contributions 
account is not includible in the participant's gross income. A 
qualified distribution is a distribution made after the end of 
a specified nonexclusion period that is (1) made on or after 
the date on which the participant attains age 59\1/2\, (2) made 
to a beneficiary (or to the estate of the participant) on or 
after the death of the participant, or (3) attributable to the 
participant's being disabled. The nonexclusion period is the 5-
year-taxable period beginning with the earlier of (1) the first 
taxable year for which the participant made a designated plus 
contribution to any designated plus contribution account 
established for the participant under the plan, or (2) if the 
participant has made a rollover contribution to the designated 
plus contribution account that is the source of the 
distribution from a designated plus contribution account 
established for the participant under another plan, the first 
taxable year for which the participant made a designated plus 
contribution to the previously established account. A 
participant is permitted to roll over a distribution from a 
designated plus contributions account only to another 
designated plus contributions account or a Roth IRA of the 
participant. The provision is effective for taxable years 
beginning after December 31, 2000.
    Increase minimum benefit under defined benefit plans.--
Beginning in 2001, the minimum annual benefit permitted under a 
defined benefit plan increases in $10,000 annual increments 
until the minimum benefit amount reaches $40,000 in 2003. The 
$40,000 amount is not indexed. In addition, a participant is 
entitled to the minimum benefit even if the participant had 
participated in a defined contribution plan of the employer. 
The provision is effective for years beginning after December 
31, 2000.
            B. Enhancing fairness for women
    Additional salary reduction catch-up contributions.--The 
bill provides that the otherwise applicable dollar limit on 
elective deferrals under a section 401(k) plan, a section 
403(b) annuity, a SIMPLE, or deferrals under a section 457 plan 
increase for individuals who have attained at least age 50 
during the year. The otherwise applicable dollar limit would be 
increased by $1,000 in each year beginning in 2001 until the 
amount of the increase is $5,000 in 2005. Thereafter, the 
$5,000 limit is indexed for inflation in $500 increments. The 
provision is effective for taxable years beginning after 
December 31, 2000.
    Equitable treatment for contributions of employees to 
defined contribution plans.--The bill increases the 25 percent 
of compensation limitation on annual additions under a defined 
contribution plan to 100 percent of compensation. The bill 
conforms the limits on contributions to tax-sheltered annuities 
to the limits applicable to qualified plans. The bill increases 
the 33\1/3\ percent of compensation limitation on deferrals 
under a section 457 plan to 100 percent of compensation. The 
provision is effective for years beginning after December 31, 
2000.
    Faster vesting of employer matching contributions.--The 
bill applies faster vesting schedules to employer matching 
contributions. Under the bill, employer matching contributions 
have to vest at least as rapidly as under one of the following 
two alternative minimum vesting schedules. A plan satisfies the 
first schedule if a participant acquires a nonforfeitable right 
to 100 percent of employer matching contributions upon the 
completion of 3 years of service. A plan satisfies the second 
schedule if a participant has a nonforfeitable right to 20 
percent of employer matching contributions for each year of 
service beginning with the participant's second year of service 
and ending with 100 percent after 6 years of service. The 
provision is effective for years beginning after December 31, 
2000.
    Simplify and update the minimum distribution rules.--The 
bill applies the present-law rules applicable if the 
participant dies before distribution of minimum benefits has 
begun to all post-death distributions. The bill reduces the 
excise tax on failures to satisfy the minimum distribution 
rules to 10 percent of the amount that was required to be 
distributed but was not distributed. The Treasury is directed 
to update, simplify, and finalize the regulations relating to 
the minimum distribution rules. The bill repeals the special 
minimum distribution rules applicable to section 457 plans. The 
provision is effective for years beginning after December 31, 
2000.
    Clarification of tax treatment of division of section 457 
plan benefits upon divorce.--The bill applies the taxation 
rules for qualified plan distributions pursuant to a QDRO to 
distributions made pursuant to a domestic relations order from 
a section 457 plan. The provision is effective for transfers, 
distributions, and payments made after December 31, 2000.
            C. Increasing portability for participants
    Rollovers of retirement plan and IRA distributions.--The 
bill provides that eligible rollover distributions from 
qualified retirement plans, section 403(b) annuities, IRAs and 
governmental section 457 plans generally can be rolled over to 
any of such plans or arrangements. The direct rollover and 
withholding rules are extended to distributions from a section 
457 plan. The bill provides that employee after-tax 
contributions can be rolled over into another qualified plan or 
a traditional IRA. In the case of a rollover from a qualified 
plan to another qualified plan, the rollover can be 
accomplished only through a direct rollover. The bill provides 
that surviving spouses can roll over distributions to a 
qualified plan, section 403(b) annuity, or governmental section 
457 plan in which the spouse participates. The provision is 
effective for distributions made after December 31, 2000.
    Waiver of 60-day rule.--The bill provides that the 
Secretary may waive the 60-day rollover period if the failure 
to waive such requirement is against equity or good conscience, 
including cases of casualty, disaster, or other events beyond 
the reasonable control of the individual subject to such 
requirement. The provision applies to distributions made after 
December 31, 2000.
    Treatment of forms of distribution.--A defined contribution 
plan to which benefits are transferred is not treated as 
reducing a participant's or beneficiary's accrued benefit even 
though it does not provide all of the forms of distribution 
previously available under the transferor plan if (1) the plan 
receives from another defined contribution plan a direct 
transfer of the participant's or beneficiary's benefit accrued 
under the transferor plan, or the plan results from a merger or 
other transaction that has the effect of a direct transfer, (2) 
the terms of both the transferor plan and the transferee plan 
authorize the transfer, (3) the transfer occurs pursuant to a 
voluntary election by the participant or beneficiary that is 
made after the participant or beneficiary received a notice 
describing the consequences of making the election, (4) if the 
transferor plan provides for an annuity as the normal form of 
distribution in accordance with the joint and survivor annuity 
rules, the participant's spouse (if any) consents to the 
transfer, and (5) the transferee plan allows the participant or 
beneficiary to receive distribution of his or her benefit under 
the transferee plan in the form of a single sum distribution. 
In addition, except to the extent provided by the Secretary of 
the Treasury in regulations, a defined contribution plan is not 
treated as reducing a participant's accrued benefit if (1) a 
plan amendment eliminates a form of distribution, (2) a single 
sum distribution is available to the participant at the same 
time or times as the form of distribution eliminated by the 
amendment, and (3) the single sum distribution is based on the 
same or greater portion of the participant's accrued benefit as 
the eliminated form of distribution. The provision is effective 
for years beginning after December 31, 2000.
    Rationalization of restrictions on distributions.--The bill 
modifies the distribution restrictions applicable to section 
401(k) plans, section 403(b) annuities, and section 457 plans 
to provide that distribution may occur upon severance from 
employment rather than separation from service. The provision 
is effective for distributions made after December 31, 2000.
    Purchase of service credit under governmental pension 
plans.--Under the bill, a participant in a State or local 
governmental plan is not required to include in gross income a 
direct trustee-to-trustee transfer to the governmental plan 
from a section 403(b) plan or a section 457 plan if the 
transferred amount is used (1) to purchase permissive service 
credits under the plan, or (2) to repay contributions and 
earnings with respect to an amount previously refunded under a 
forfeiture of service credit under the plan (or another plan 
maintained by a State or local government employer within the 
same State). The provision is effective for transfers made 
after December 31, 2000.
    Employers may disregard rollovers for purposes of cash-out 
rules.--Under the bill, a plan is permitted to provide that the 
present value of a participant's nonforfeitable accrued benefit 
is determined without regard to the portion of such benefit 
that is attributable to rollover contributions, and any 
earnings allocable thereto, for purposes of the cash-out rules. 
The provision is effective for distributions made after 
December 31, 2000.
    Employers may disregard rollovers for purposes of cash-out 
rules.--A plan is permitted to provide that the present value 
of a participant's nonforfeitable accrued benefit is determined 
without regard to the portion of such benefit that is 
attributable to rollover contributions (and any earnings 
allocable thereto). The provision is effective for 
distributions after December 31, 2000.
            D. Strengthening pension security and enforcement
    Phase in repeal of 150 percent of current liability full 
funding limit; deduction for contributions to fund termination 
liability.--The bill gradually increases and then repeals the 
current liability full funding limit. The current liability 
full funding limit is 160 percent of current liability for plan 
years beginning in 2001, 165 percent for plan years beginning 
in 2002, and 170 percent for plan years beginning in 2003. The 
current liability full funding limit is repealed for plan years 
beginning in 2004 and thereafter. Under the bill, the special 
rule allowing a deduction for unfunded current liability 
generally is extended to all defined benefit pension plans 
covered by the PBGC. The provision is effective for years 
beginning after December 31, 2000.
    Extension of PBGC missing participants program.--The bill 
extends the PBGC missing participant program to multi-employer 
plans and defined contribution plans. The bill is effective for 
distributions from terminating plans that occur after the PBGC 
adopts final regulations implementing the provision.
    Excise tax relief for sound pension funding.--Under the 
bill, in determining the amount of nondeductible contributions, 
the employer can elect not to take into account contributions 
to a defined benefit pension plan in excess of the current 
liability full funding limit. The provision is effective for 
years beginning after December 31, 2000.
    Notice of significant reduction in plan benefit accruals.--
The bill requires the plan administrator of a defined benefit 
pension plan with more than 100 participants to provide a 
written notice concerning a plan amendment that provides for a 
significant reduction in the rate of future benefit accrual. 
The plan administrator is required to provide this notice to 
each affected participant, each affected alternate payee, and 
each employee organization representing affected participants. 
Except to the extent provided by Treasury regulations, the plan 
administrator is required to provide the notice within a 
reasonable time before the effective date of the plan 
amendment. The bill imposes on a plan administrator that fails 
to comply with the notice requirement an excise tax equal to 
$100 per day per omitted participant and alternate payee. The 
total excise tax imposed during a taxable year of the employer 
can not exceed $500,000. In the case of a failure that is due 
to reasonable cause and not to willful neglect, the Secretary 
of the Treasury is authorized to waive the excise tax to the 
extent that the payment of the tax is excessive relative to the 
failure involved. The bill is effective for plan amendments 
adopted on or after the date of enactment.

E. Reducing regulatory burdens

    Repeal of the multiple use test.--The bill repeals the 
multiple use test, effective for years beginning after December 
31, 2000.
    Modification of timing of plan valuations.--The bill allows 
an employer to elect to use the prior year's plan valuation in 
the case of a defined benefit plan with assets of at least 125 
percent of current liability. In any event, a plan valuation is 
required once every three years. The provision is effective for 
plan years beginning after December 31, 2000.
    Flexibility in nondiscrimination and line of business 
rules.--The Secretary of the Treasury is directed to modify, on 
or before December 31, 2000, the existing regulations issued 
under section 401(a)(4) and section 414(r) in order to expand 
(to the extent that the Secretary may determine to be 
appropriate) the ability of a plan to demonstrate compliance 
with the nondiscrimination and line of business requirements 
based upon the facts and circumstances surrounding the design 
and operation of the plan, even though the plan is unable to 
satisfy the mechanical tests currently used to determine 
compliance. The provision is effective on the date of 
enactment.
    Rules for substantial owner benefits in terminated plans.--
The bill increases the PBGC guarantee for certain substantial 
owners. The bill is effective for plan terminations with 
respect to which notices of intent to terminate are provided, 
or for which proceedings for termination are instituted by the 
PBGC after December 31, 2000.
    ESOP dividends may be reinvested without loss of dividend 
deduction.--In addition to the deductions permitted under 
present law for dividends paid with respect to employer 
securities that are held by an ESOP, an employer is entitled to 
deduct dividends that, at the election of plan participants or 
their beneficiaries, are paid to the plan and reinvested in 
qualifying employer securities. The provision is effective for 
taxable years beginning after December 31, 2000.
    Notice and consent period regarding distributions.--Under 
the bill, a qualified retirement plan is required to provide 
the applicable distribution notice no less than 30 days and no 
more than six months before the date distribution commences. 
The Secretary of the Treasury is directed to modify the 
applicable regulations to reflect the extension of the notice 
period to six months and to provide that the description of a 
participant's right, if any, to defer receipt of a distribution 
shall also describe the consequences of failing to defer such 
receipt. The provision is effective for years beginning after 
December 31, 2000.
    Repeal transition rule relating to certain highly 
compensated employees.--The bill repeals the special definition 
of highly compensated employee under the Tax Reform Act of 
1986. Thus, the present-law definition applies. The provision 
is effective for plan years beginning after December 31, 2000.
    Employees of tax-exempt entities.--The bill directs the 
Treasury Department to revise its regulations under section 
401(b) to provide that if certain requirements are satisfied, 
employees of a tax-exempt charitable organization who are 
eligible to make salary reduction contributions under a section 
403(b) annuity may be treated as excludable employees for 
purposes of testing a section 401(k) plan, or a section 401(m) 
plan that is provided under the same general arrangement as the 
section 401(k) plan of the employer. The revised regulations 
are to be effective for years beginning after December 31, 
1996.
    Treatment of employer-provided retirement advice.--The bill 
provides that qualified retirement planning services provided 
to an employee and his or her spouse or dependents are 
excludable from income and wages. The provision is effective 
with respect to taxable years beginning after December 31, 
2000.
    Provisions relating to plan amendments.--Any amendments to 
a plan or annuity contract required to be made by the bill are 
not required to be made before the last day of the first plan 
year beginning on or after January 1, 2003. In the case of a 
governmental plan, the date for amendments is extended to the 
first plan year beginning on or after January 1, 2004. The 
provision is effective on the date of enactment.
    Model plans for small businesses.--The Secretary of the 
Treasury is directed to issue, not later than December 31, 
2000, at least one model defined contribution plan document and 
at least one model defined benefit plan document that fit the 
needs of small businesses and that would be treated as meeting 
the requirements of section 401(a) with respect to the form of 
the plan. The provision is effective on the date of enactment.
    Reporting simplification.--The Secretary of the Treasury is 
directed to provide for the filing of a simplified annual 
return substantially similar to the Form 5500-EZ by a plan that 
meets certain requirements. The provision is effective on the 
date of enactment.
    Improvement to employer plans compliance resolution 
system.--The Secretary of the Treasury is directed to continue 
to update and improve EPCRS, giving special attention to (1) 
increasing the awareness and knowledge of small employers 
concerning the availability and use of EPCRS, (2) taking into 
account special concerns and circumstances that small employers 
face with respect to compliance and correction of compliance 
failures, (3) extending the duration of the self-correction 
period under APRSC for significant compliance failures, (4) 
expanding the availability to correct insignificant compliance 
failures under APRSC during audit, and (5) assuring that any 
tax, penalty, or sanction that is imposed by reason of a 
compliance failure is not excessive and bears a reasonable 
relationship to the nature, extent, and severity of the 
failure. The provision is effective on the date of enactment.

XIII. Miscellaneous provisions

    Expand the Exclusion from Income for Certain Foster Care 
Payments.--The bill makes two principal modifications to the 
exclusion. First, the bill expands the list of persons eligible 
to make qualified foster care payments. Therefore, the 
exclusion applies to qualified payments made pursuant to a 
foster care program of a State or local government which are 
paid by either: (1) a State or political subdivision of a 
State; or (2) a qualified foster care placement agency, whether 
taxable or tax-exempt. Second, the bill expands the list of 
persons eligible to place foster care individuals. 
Specifically, the bill allows placements by either: (1) a State 
or a political subdivision of a State; or (2) a qualified 
foster care placement agency. The bill allows State and local 
governments to employ both tax-exempt and taxable entities to 
administer their foster care programs more efficiently; 
however, it does not extend the exclusion to payments outside 
such foster care programs (e.g., payments to a foster care 
provider from friends or relatives of foster care individual in 
its care). The provision is effective for taxable years 
beginning after December 31, 1999.
    Provide Exclusion for Mileage Reimbursements by Charitable 
Organizations.--Under the bill, reimbursement for the costs of 
using an automobile in connection with providing donated 
services from an entity or organization described in section 
170(c) is excludable from the gross income of the volunteer, 
provided that (1) reimbursement does not exceed the rate 
prescribed for business use, and (2) applicable recordkeeping 
requirements are satisfied. The provision is effective for 
taxable years beginning after December 31, 1999.
    Expand Employer Reporting on Annual Wage and Tax 
Statements.--The bill requires the Form W-2 to include a 
statement of social security and medicare taxes paid by the 
employer on behalf of each employee. The bill is effective with 
respect to Form W-2s provided for calendar years beginning 
after December 31, 1999.
    Consistent Treatment of Survivor Benefits for Public Safety 
Officers Killed in the Line of Duty.--The bill extends the 
present-law treatment of survivor annuities with respect to 
public safety officers killed in the line of duty to payments 
received in taxable years beginning after December 31, 1999, 
with respect to individuals dying on or before December 31, 
1996.
    Distributions from Publicly Traded Partnerships Treated as 
Qualifying Income of Regulated Investment Companies.--The bill 
provides that permitted income of a RIC includesincome derived 
from an interest in a publicly traded partnership, effective for 
taxable years beginning after December 31, 2000.
    Equalize the Tax Treatment of ``Clean Fuel'' Vehicles and 
Oversized Vehicles--The bill provides that an electric truck or 
van with a gross vehicle weight rating greater than 13 tons or 
an electric bus which has seating capacity of at least 20 
adults is a qualified clean fuel vehicle for which the taxpayer 
may expense up to $50,000 of cost and that such vehicles are 
not eligible for the electric vehicle credit. The provision is 
effective for vehicles placed in service after December 31, 
1999.
    Nuclear Decommissioning.--The bill repeals the cost of 
service requirement for deductible contributions to nuclear 
decommissioning funds. Thus, taxpayers, including unregulated 
taxpayers, are allowed a deduction for amounts contributed to a 
qualified nuclear decommissioning fund. As under current law, 
however, the maximum contribution and deduction for a taxable 
year can not exceed the IRS ruling amount for that year. The 
bill also clarifies the Federal income tax treatment of the 
transfer of qualified nuclear decommissioning funds. No gain or 
loss is recognized to the transferor or the transferee as a 
result of the transfer of a qualified fund in connection with 
the transfer of the power plant with respect to which the fund 
was established. In such cases, the transferee is considered to 
``step into the shoes'' of the transferor with respect to the 
qualified nuclear decommissioning fund. The provision is 
effective for taxable years beginning after December 31, 1999.
    Permit Consolidation of Life Insurance and Nonlife 
Companies.--The bill repeals the two present-law 5-year 
limitation rules under the election to treat life insurance 
companies as a member of an affiliated group, and also the rule 
that a life insurance corporation is not an includible 
corporation unless the common parent makes an election to treat 
life insurance companies as includible corporations. The 
provision is effective for taxable years beginning after 
December 31, 2004.
    Consolidate Code Provisions Governing the Hazardous 
Substance Superfund and the Leaking Underground Storage Tank 
Trust Fund.--The Code provisions governing the Superfund and 
the LUST Trust Fund are consolidated into a single 
Environmental Remediation Trust Fund (the ``Trust Fund''). 
Amounts in the consolidated Trust Fund are available for 
expenditure, as provided in appropriations Acts, for the 
combined purposes of the two present-law Trust Funds, as of 
July 12, 1999. No future interest accrues on the unobligated 
balances of the Environmental Trust Fund. The provision is 
effective on October 1, 1999.
    Repeal Certain Excise Taxes on Rail Diesel Fuel and Inland 
Waterway Barge Fuels.--The 0.1-cent-per-gallon LUST tax on 
diesel fuel used in trains is repealed. In addition, the 4.3-
cents-per-gallon General Fund excise tax rates on diesel fuel 
used in trains and fuels used in barges operating on the 
designated inland waterways system is repealed. The repeal of 
the 0.1-cent-per-gallon LUST tax on diesel fuel used in trains 
is effective on October 1, 1999. The repeal of the 4.3-cents-
per-gallon excise taxes on train diesel and inland waterway 
barge fuels is effective after September 30, 2003. Repeal of 
these taxes is contingent upon inclusion in the legislation of 
a separate section of the bill that would consolidate the Code 
provisions governing the Hazardous Substance Superfund and the 
Leaking Underground Storage Tank Trust Fund into an 
Environmental Remediation Trust Fund.
    Repeal Excise Tax on Fishing Tackle Boxes.--The excise tax 
on fishing tackle boxes is repealed. The provision is effective 
beginning 30 days after the date of enactment.
    Clarification of Excise Tax Imposed on Arrow Components.--
The bill conforms the tax to current manufacturing design 
practice.
    Improvements in Low-Income Housing Credit.--The bill 
increases the credit cap and makes other changes. The provision 
generally is effective for calendar years beginning after 
December 31, 2000. The increase and indexing of the credit cap 
is effective for calendar years after December 31, 1999.
    Entrepreneurial Equity Capital Formation.--The bill 
increases the 50-percent exclusion for gain on the sale of 
qualifying SSBIC stock to 60 percent and makes certain 
modifications to the present-law rollover of gain on the 
proceeds from the sale of publicly traded securities when such 
proceeds are used to acquire qualifying SSBIC stock.
    Accelerate Scheduled Increase in State Volume Limits on 
Tax-Exempt Private Activity Bonds.--The bill increases the 
present-law annual State private activity bond volume limits to 
$75 per resident of each State or $225 million (if greater). 
The volume limit increases are effective for bonds issued after 
December 31, 1999.
    Tax Treatment of Alaska Native Settlement Trusts.--An 
Alaska Native Corporation may establish a Trust under section 
39 of the Alaska Native Claims Settlement Act and if the Trust 
makes an election for its first taxable year after the date of 
enactment, no amount is includible in the gross income of a 
beneficiary of such Trust by reason of a contribution to the 
Trust. The provision is effective for taxable years of 
Settlement Trusts, and contributions to such Trusts, after 
December 31, 1999.
    Increase Joint Committee on Taxation Refund Review 
Threshold to $2 Million.--The bill increases the threshold 
above which refunds must be submitted to the Joint Committee on 
Taxation for review from $1,000,000 to $2,000,000. The 
provision is effective on the date of enactment.
    Tax Court Proposals.--Section 7451 is amended to provide 
that the Tax Court is authorized to charge a filing fee of up 
to $60 in all cases commenced by the filing of a petition. The 
bill further provides that Tax Court fees imposed on 
practitioners also are available to provide services to pro se 
taxpayers. These provisions are effective on the date of 
enactment. Section 6214(b) is amended to provide that the Tax 
Court may apply the principle of equitable recoupment to the 
same extent that it may be applied in Federal civil tax cases 
by the district courts and Court of Federal Claims. This 
provision is effective for any action or proceeding in the Tax 
Court with respect to which a decision has not become final as 
of the date of enactment.

XIV. Extension of expiring provisions

    Extension of Research and Experimentation Credit and 
Increase in the Rates for the Alternative Incremental Research 
Credit.--The research tax credit is extended for five years--
i.e., generally, for the period July 1, 1999 through June 30, 
2004. In addition, the credit rate applicable under the 
alternative incremental credit is 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. Extension 
of the research credit is effective for qualified research 
expenditures paid or incurred during the period July 1, 1999, 
through June 30, 2004. The increase in the credit rate under 
the alternative incremental credit is effective for taxable 
years beginning after June 30, 1999.
    Extend Exceptions under Subpart F for Active Financing 
Income.--The bill extends for five years the present-law 
temporary exceptions from subpart F foreign personal holding 
company income, foreign base company services income, and 
insurance income for certain income that is derived in the 
active conduct of a banking, financing, or similar business, or 
in the conduct of an insurance business. The provision is 
effective for taxable years of a foreign corporation beginning 
after December 31, 1999, and before January 1, 2005, and for 
taxable years of U.S. shareholders with or within which such 
taxable years of such foreign corporation end.
    Extend Suspension of Income Limitation on Percentage 
Depletion From Marginal Oil and Gas Wells.--The bill extends 
the present-law rule suspending the 100-percent-of-net-income 
limitation with respect to oil and gas production from marginal 
wells to include taxable years beginning after December 31, 
1999, and before January 1, 2005. The provision is effective on 
the date of enactment.
    Extend the Work Opportunity Tax Credit.--The bill extends 
the WOTC for two years (through June 30, 2001). The bill also 
includes a direction to the Secretary of the Treasury to 
expedite procedures to allow taxpayers to satisfy their WOTC 
filing requirements (e.g., Form 8850) by electronic means. 
Generally, the provision is effective for wages paid to, or 
incurred with respect to, qualified individuals who begin work 
for the employer on or after July 1, 1999, and before July 1, 
2001.
    Extend the Welfare-To-Work Tax Credit.--The bill extends 
the welfare-to-work credit for two years, so that the credit is 
available for eligible individuals who begin work for an 
employer before July 1, 2001. The provision is effective for 
wages paid or incurred to a qualified individual who begins 
work for an employer on or after July 1, 1999, and before July 
1, 2001.

XV. Revenue offset provisions

    Expand Reporting of Cancellation of Indebtedness Income.--
The bill requires that information reporting on discharges of 
indebtedness also be done by any organization a significant 
trade or business of which is the lending of money, such as 
finance companies and credit card companies (whether or not 
affiliated with financial institutions). The bill is effective 
with respect to discharges of indebtedness after December 31, 
1999.
    Extension of IRS User Fees.--The bill extends the statutory 
authorization for these user fees through September 30, 2009. 
The bill also moves the statutory authorization for these fees 
into the Internal Revenue Code. The provision is effective on 
the date of enactment.
    Impose Limitation on Prefunding of Certain Employee 
Benefits.--Under the bill, the present-law exception to the 
deduction limit for 10-or-more employer plans is limited to 
plans that provide only medical benefits, disability benefits 
and group-term life insurance benefits which do not provide for 
any cash surrender value or other money that can be paid, 
assigned, borrowed or pledged for collateral for a loan. In 
addition, if any portion of a welfare benefit fund attributable 
to contributions that are deductible pursuant to the 10-or-more 
employer exception (and earnings thereon) is used for a purpose 
other than that for which the contributions were made 
(including cash payments to employees upon termination of the 
fund), such portion is treated as reverting to the benefit of 
the employers maintaining the fund and would be subject toan 
excise tax. The provision is effective with respect to contributions 
paid or accrued on or after June 9, 1999, in taxable years ending after 
such date.
    Increase Elective Withholding Rate for Nonperiodic 
Distributions from Deferred Compensation Plans.--Under the 
bill, the elective withholding rate for nonperiodic 
distributions from deferred compensation arrangements is 
increased from 10 percent to 15 percent. The provision is 
effective for distributions made after December 31, 1999.
    Modify Treatment of Closely-Held REITs.--The bill imposes 
as an additional requirement for REIT qualification that, 
except for the first taxable year for which an entity elects to 
be a REIT, no one person (e.g., no one corporation) can own 
stock of a REIT possessing 50 percent or more of the combined 
voting power of all classes of voting stock or 50 percent or 
more of the total value of shares of all classes of stock of 
the REIT. The provision is effective for entities electing REIT 
status for taxable years ending after July 12, 1999. Any entity 
that elects REIT status for a taxable year ending on or before 
July 12, 1999 and which has significant business assets or 
activities as of such date is not subject to the provision.
    Limit Conversion of Character of Income from Constructive 
Ownership Transactions.--The bill limits the amount of long-
term capital gain a taxpayer can recognize from certain 
derivative contracts transactions with respect to certain 
financial assets. The amount of long-term capital gain is 
limited to the amount of such gain the taxpayer would have had 
if the taxpayer held the financial asset directly during the 
term of the derivative contract. Any gain in excess of this 
amount is treated as ordinary income. An interest charge is 
imposed on the amount of gain that is treated as ordinary 
income. This provision applies to transactions entered into on 
or after July 12, 1999.
    Impose Limitation on Prefunding of Certain Employee 
Benefits.--The present-law provision permitting qualified 
transfers of excess defined benefit pension plan assets to 
provide retiree health benefits under a section 401(h) account 
is extended through September 30, 2009. In addition, the 
present-law minimum benefit requirement is replaced by the 
minimum cost requirement that applied to qualified transfers 
before December 9, 1994, to section 401(h) accounts. The bill 
generally is effective with respect to qualified transfers of 
excess defined benefit pension plan assets to section 401(h) 
accounts after December 31, 2000, and before October 1, 2009. 
The modification of the minimum benefit requirement is 
effective with respect to transfers after the date of 
enactment.
    Modify Installment Method and Prohibit its Use by Accrual 
Method Taxpayers.--The bill generally prohibits the use of the 
installment method of accounting for dispositions of property 
that otherwise would be reported for Federal income tax 
purposes using an accrual method of accounting. The bill does 
not change present law regarding the availability of the 
installment method for dispositions of property used or 
produced in the trade or business of farming. The bill also 
does not change present law regarding the availability of the 
installment method for dispositions of timeshares or 
residential lots if the taxpayer elects to pay interest under 
section 453(l). The bill does not change the ability of a cash 
method taxpayer to use the installment method. The bill does 
not change the ability of this individual to use the 
installment method in reporting the gain on the sale of the 
stock. The bill also modifies the pledge rule to provide that 
entering into any arrangement that gives the taxpayer the right 
to satisfy an obligation with an installment note is treated in 
the same manner as the direct pledge of the installment note. 
Under the bill, the taxpayer also is required to treat the 
proceeds of a loan as payment on the installment note to the 
extent the taxpayer had the right to ``put'' or repay the loan 
by transferring the installment note to the taxpayer's 
creditor. Other arrangements that have a similar effect would 
be treated in the same manner. The proposed modification of the 
pledge rule applies only to installment sales where the pledge 
rule of present law applies. Accordingly, the bill does not 
apply to installment method sales made by a dealer in 
timeshares and residential lots where the taxpayer elects to 
pay interest under section 453(l)(2)(B), to sales of property 
used or produced in the trade or business of farming, or to 
dispositions where the sales price does not exceed $150,000, 
since such sales are not subject to the pledge rule under 
present law. The provision prohibiting the use of the 
installment method of accounting for dispositions of property 
that would otherwise be reported for Federal income tax 
purposes using an accrual method of accounting is effective for 
installment sales entered into on or after the date of 
enactment. The provision modifying the pledge rules is 
effective for arrangements entered into on or after the date of 
enactment.
    Exclusion of Like-Kind Exchange Property from 
Nonrecognition Treatment on the Sale of a Principal 
Residence.--The bill denies the principal residence exclusion 
for gain on the sale or exchange of a principal residence if 
such principal residence was acquired in a like-kind exchange 
in which any gain was not recognized within the prior five 
years. The provision is effective for sales or exchanges of 
principal residences after the date of enactment.

XVI. Tax technical corrections

    The bill adopts technical corrections to recent tax 
legislation.

                 B. Background and Need for Legislation

    Under the Fiscal Year 2000 Budget Resolution (H. Con. Res. 
68), as updated to reflect the July 1, 1999 Congressional 
Budget Office revision in budget surplus projections, the 
Committee on Ways and Means was instructed to report revenue 
reconciliation provisions for a net $200 billion of tax 
reductions for fiscal years 1999-2004, and a net $864 billion 
of tax reductions for fiscal years 1999-2009.
    The revenue reconciliation provisions approved by the 
Committee reflect the need for tax relief for individuals, 
families, and small businesses, tax incentives for education 
savings, tax incentives for distressed communities and 
industries, health care tax incentives, international tax 
relief, real estate tax relief, pension reforms, certain 
miscellaneous provisions, extensions of certain expiring tax 
provisions, certain revenue offsets, and necessary tax 
technical corrections.

                         C. Legislative History


                            Committee action

    H.R. 2488 (the ``Financial Freedom Act of 1999'') was 
introduced by Chairman Archer on July 13, 1999. The Committee 
on Ways and Means marked up the bill on July 13 and 14, 1999, 
and approved the provisions, as amended, on July 14, 1999, by a 
roll call vote of 23 yeas and 13 nays, with a quorum present.

                           Committee hearings

    The following Committee and Subcommittee hearings related 
to provisions in the bill have been held during the 106th 
Congress.

Full Committee hearings

    Tax-related hearings were held by the full Committee as 
follows:
          Outlook for the state of the U.S. economy (January 
        20, 1999).
          President's fiscal year 2000 budget (February 4, 
        1999).
          Revenue provisions in President's fiscal year 2000 
        budget (March 10, 1999).
          Reducing the tax burden: Enhancing retirement and 
        health security (June 16, 1999).
          Reducing the tax burden: Providing tax relief to 
        strengthen the family and sustain a strong economy 
        (June 23, 1999).
          Impact of U.S. tax rules on international 
        competitiveness (June 30, 1999).

Subcommittee hearings

    The Oversight Subcommittee held tax-related hearings as 
follows:
          Incentives for domestic oil and gas production and 
        status of the industry (February 25, 1999).
          Tax treatment of structured settlements (March 18, 
        1999).
          Pension issues (March 23, 1999).
          Impact of complexity in the tax Code on individual 
        taxpayers and small businesses (May 25, 1999).
          Current U.S. international tax regime (June 22, 
        1999).
          Work opportunity tax credit (July 1, 1999).

                      II. EXPLANATION OF THE BILL


                    TITLE I. BROAD-BASED TAX RELIEF


              A. Reduction in Individual Income Tax Rates


         (sec. 101 of the bill and secs. 1 and 55 of the Code)


                              Present Law

Income tax rate structure

    To determine regular income tax liability, a taxpayer 
generally must apply the tax rate schedules (or the tax tables) 
to his or her taxable income. The rate schedules are broken 
into several ranges of income, known as income brackets, and 
the marginal tax rate increases as a taxpayer's income 
increases. The income bracket amounts are indexed for 
inflation. Separate rate schedules apply based on an 
individual's filing status. In order to limit multiple uses of 
a graduated rate schedule within a family, the net unearned 
income of a child under age 14 is taxed as if it were the 
parent's income. For 1999, the individual regular income tax 
rate schedules are shown below.

         TABLE 1.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 1999
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single individuals
$0-25,750.................................  15 percent of taxable
                                             income.
$25,750-$62,450...........................  $3,862.50, plus 28% of the
                                             amount over $25,750.
$62,450-$130,250..........................  $14,138.50 plus 31% of the
                                             amount over $62,450.
$130,250-$283,150.........................  $35,156.50 plus 36% of the
                                             amount over $130,250.
Over $283,150.............................  $90,200.50 plus 39.6% of the
                                             amount over $283,150.

                           Heads of households

$0-$34,550................................  15 percent of taxable
                                             income.
$34,550-$89,150...........................  $5,182.50 plus 28% of the
                                             amount over $34,550.
$89,150-$144,400..........................  $20,470.50 plus 31% of the
                                             amount over $89,150.
$144,400-$283,150.........................  $37,598 plus 36% of the
                                             amount over $144,400.
Over $283,150.............................  $87,548 plus 39.6% of the
                                             amount over $283,150.

                Married individuals filing joint returns

$0-$43,050................................  15 percent of taxable
                                             income.
$43,050-$104,050..........................  $6,457.50 plus 28% of the
                                             amount over $43,050.
$104,050-$158,550.........................  $23,537.50 plus 31% of the
                                             amount over $104,050.
$158,550-$283,150.........................  $40,432.50 plus 36% of the
                                             amount over $158,550.
Over $283,150.............................  $85,288.50 plus 39.6% of the
                                             amount over $283,150.
------------------------------------------------------------------------

Individual alternative minimum tax (``AMT'') rate structure

    Present law imposes the individual AMT on an individual to 
the extent the taxpayer's minimum tax liability exceeds his or 
her regular tax liability. The AMT is imposed upon individuals 
at rates of (1) 26 percent on the first $175,000 of alternative 
minimum taxable income (``AMTI'') in excess of a phased-out 
exemption amount and (2) 28 percent on the amount in excess of 
$175,000. AMTI is the taxpayer's taxable income increased by 
certain preference items and adjusted by determining the tax 
treatment of certain items in a manner that negates the 
deferral of income resulting from the regular tax treatment of 
those items. The exemption amounts are $45,000 in the case of 
married individuals filing a joint return and surviving 
spouses; $33,750 in the case of other unmarried individuals; 
and $22,500 in the case of married individuals filing a 
separate return. These exemption amounts are phased-out by an 
amount equal to 25 percent of the amount by which the 
individual's AMTI exceeds a threshold amount. The threshold 
amounts are $150,000 in the case of married individuals filing 
a joint return and surviving spouses; $112,500 in the case of 
other unmarried individuals; and $75,000 in the case of married 
individuals filing a separate return, estates, and trusts. The 
exemption amounts, the threshold phase-out amounts, and the 
$175,000 break-point amount are not indexed for inflation. The 
lower capital gains rates applicable to the regular tax also 
apply for purposes of the AMT.

                           Reasons for Change

    The Committee believes that the growing budget surplus 
belongs to the American people and that it should be returned 
to them. Also, the Committee believes that the American people 
deserve relief from the excessive and growing tax burden 
imposed by the tax system. It believes that these rate 
reductions will provide equitable across-the-board relief to 
all taxpayers.

                        Explanation of Provision

Individual regular tax rates

    The bill reduces the regular income tax rates by 10 percent 
over a 10-year period (2000-2009). Specifically, each rate is 
reduced by 2.5 percent for taxable years beginning in 2001-
2004, 5 percent in 2005-2007, 7.5 percent in 2008, and 10 
percent in 2009 and thereafter. The tax rates will be rounded 
up annually to the nearest one-tenth of a percent. The 
following table shows the regular tax rate structure under the 
bill.

                 Individual Regular Tax Rates 1999-2000

                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                                                   2009 and
            1999-2000                  2001-2004           2005-2007             2008             thereafter
----------------------------------------------------------------------------------------------------------------
15..............................               14.7                14.3                13.9                13.5
28..............................               27.3                26.6                25.9                25.2
31..............................               30.3                29.5                28.7                27.9
36..............................               35.1                34.2                33.3                32.4
39.6............................               38.7                37.7                36.7                35.7
----------------------------------------------------------------------------------------------------------------

    This rate reduction does not apply to the capital gains tax 
rates. However, a separate provision (described in Part Title 
II.B., below) will reduce individual capital gains rates.

Individual AMT

    The bill reduces the individual AMT tax rates by a total of 
2.5 percent for taxable years beginning in 2001-2004, 5 percent 
in 2005-2007, 7.5 percent in 2008, and 10 percent in 2009 and 
thereafter. The rates will be rounded up annually to the 
nearest one-tenth of a percent, like the regular income tax 
rates. The following table shows the AMT rate structure under 
the bill including the provision in Title II.C., below, to 
repeal the individual AMT.

                          Individual AMT Rates

                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                                                   2008 and
                      1999-2000                            2001-2004           2005-2007          thereafter
----------------------------------------------------------------------------------------------------------------
26..................................................               25.4                24.7                 0.0
28..................................................               27.3                26.6                 0.0
----------------------------------------------------------------------------------------------------------------

                             Effective Date

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

                 B. Marriage Penalty Relief Provisions


1. Standard deduction tax relief (sec. 111 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 a joint 
return. Other rate schedules apply to single persons and to 
single heads of households.
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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 as follows:

                                                          Basic standard
        Filing status                             deduction 2
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 
1.674 times the basic standard deduction for single returns. 
---------------------------------------------------------------------------
    \2\ Joint Committee on Taxation staff projections.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee is concerned about the inequity of the 
marriage penalty created by the present-law income tax. 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 2003 to 
approximately 24 million joint returns, including more than 6 
million returns filed by senior citizens.3 
Approximately 3 million returns which currently itemize their 
deductions will realize the simplification benefits of using 
the basic standard deduction.4
---------------------------------------------------------------------------
    \3\ Joint Committee on Taxation staff projections of the number of 
tax returns affected.
    \4\ Joint Committee on Taxation staff projections of the number of 
tax returns affected.
---------------------------------------------------------------------------

                        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 an unmarried individual in each taxable 
year. This increase is phased-in over three years beginning in 
2001 by increasing the standard deduction for a married couple 
filing a joint return to 1.778 times the standard deduction for 
an unmarried individual in 2001 and to 1.889 times such amount 
in 2002. Therefore, the provision is fully effective, (i.e., 
the basic standard deduction for a married couple will be twice 
the basic standard deduction for an unmarried individual) for 
taxable years beginning after December 31, 2002. Also, the 
basic standard deduction for a married taxpayer filing 
separately will be increased so that it will continue to equal 
one-half of the basic standard deduction for a married couple 
filing jointly. The basic standard deduction for a head of 
household will be unchanged.

                             Effective Date

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

2. Adjust student loan interest deduction income limits (sec. 112 of 
        the bill and sec. 221 of the Code)

                              Present Law

    Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, subject to a maximum annual deduction limit 
(sec. 221). The deduction is allowed only with respect to 
interest paid on a qualified education loan during the first 60 
months in which interest payments are required. Required 
payments of interest generally do not include nonmandatory 
payments, such as interest payments made during a period of 
loan forbearance. Months during which interest payments are not 
required because the qualified education loan is in deferral or 
forbearance do not count against the 60-month period. No 
deduction is allowed to an individual if that individual is 
claimed as a dependent on another taxpayer's return for the 
taxable year.
    A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for certain costs of 
attendance (including room and board) of a student (who may be 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer as of the time the indebtedness was incurred) who is 
enrolled in a degree program on at least a half-time basis at 
(1) an accredited post-secondary educational institution 
defined by reference to section 481 of the Higher Education Act 
of 1965, or (2) an institution conducting an internship or 
residency program leading to a degree or certificate from an 
institution of higher education, a hospital, or a health care 
facility conducting postgraduate training.
    The maximum allowable deduction per taxpayer return is 
$1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and 
thereafter.5 The deduction is phased out ratably for 
individual taxpayers with modified adjusted gross income of 
$40,000-$55,000 and $60,000-$75,000 for joint returns. The 
income ranges will be indexed for inflation after 2002.
---------------------------------------------------------------------------
    \5\ The maximum allowable deduction for 1998 was $1,000.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee is concerned about the inequity of the 
marriage penalty resulting from the phase-out provisions of the 
student loan interest deduction. The Committee believes that 
relief from the marriage penalty is appropriate for individuals 
with education loan obligations in order to assist in removing 
tax considerations from decisions regarding marriage.

                        Explanation of Provision

    The bill increases the beginning point of the income 
phaseout for the student loan interest deduction for taxpayers 
filing joint returns to twice the beginning point of the income 
phaseouts applicable to single taxpayers and doubles the 
phaseout range for joint filers. Thus, beginning in 2000, the 
deduction is phased out ratably for taxpayers filing joint 
returns with modified adjusted gross income of $80,000 to 
$110,000.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1999.

3. Increase income limit for Roth IRA conversions (sec. 113 of the bill 
        and sec. 408A of the Code)

                              Present Law

    Individuals with adjusted gross income below certain levels 
may make nondeductible contributions to a Roth IRA. The maximum 
annual contribution that an individual may make to a Roth IRA 
is the lesser of $2,000 or the individual's compensation for 
the year. This contribution limit is reduced to the extent an 
individual makes contributions to any other IRA for the same 
taxable year. With respect to married individuals, a 
contribution of up to $2,000 for each spouse may be made to a 
Roth IRA provided the combined compensation of the spouses is 
at least equal to the contributed amount. The maximum annual 
Roth IRA contribution is phased out for single individuals with 
AGI between $95,000 and $110,000, and for married individuals 
filing joint returns with AGI between $150,000 and $160,000.
    A taxpayer with AGI of $100,000 or less generally may 
convert a deductible or nondeductible IRA into a Roth IRA, 
unless the taxpayer is a married individual filing a separate 
return. The value of the IRA that is converted is includible in 
income as if the taxpayer made a withdrawal, except that the 
10-percent early withdrawal tax does not apply.

                           Reasons for Change

    The present-law income limits for conversions to Roth IRAs 
create a marriage penalty, because the same income limit 
applies to single filers and married couples filing a joint 
return. The Committee believes it appropriate to reduce this 
marriage penalty by increasing the income limit for married 
filers to the upper end of the Roth IRA contribution phase-out 
range for married couples filing joint returns.

                        Explanation of Provision

    The bill increases for married individuals filing joint 
return the present-law $100,000 AGI limitation on conversion of 
a deductible or nondeductible IRA into a Roth IRA. The 
increased AGI limitation matches the upper end of the Roth IRA 
contribution phase-out range for married individuals filing 
joint returns. Therefore, married individuals filing joint 
returns with AGI not exceeding $160,000 are permitted to 
convert a deductible or nondeductible IRA into a Roth IRA.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1999.

              C. Repeal Individual Alternative Minimum Tax


             (sec. 121 of the bill and sec. 55 of the Code)


                              Present Law

In general

    Present law imposes a minimum tax (``AMT'') on an 
individual to the extent the taxpayer's minimum tax liability 
exceeds his or her regular tax liability. The AMT is imposed on 
individuals at rates of (1) 26 percent on the first $175,000 of 
alternative minimum taxable income (``AMTI'') in excess of a 
phased-out exemption amount and (2) 28 percent on the remaining 
AMTI. The exemptions amounts are $45,000 in the case of married 
individuals filing a joint return and surviving spouses; 
$33,750 in the case of other unmarried individuals; and $22,500 
in the case of married individuals filing a separate return. 
These exemption amounts are phased-out by an amount equal to 25 
percent of the amount that the individual's AMTI exceeds a 
threshold amount. These threshold amounts are $150,000 in the 
case of married individuals filing a joint return and surviving 
spouses; $112,500 in the case of other unmarried individuals; 
and $75,000 in the case of married individuals filing a 
separate return, estates, and trusts. The exemption amounts, 
the threshold phase-out amounts, and the $175,000 break-point 
amount are not indexed for inflation. The lower capital gains 
rates applicable to the regular tax apply for purposes of the 
AMT.
    AMTI is the taxpayer's taxable income increased by certain 
preference items and adjusted by determining the tax treatment 
of certain items in a manner that negates the deferral of 
income resulting from the regular tax treatment of those items.

Preference items in computing AMTI

    The minimum tax preference items are:
    (1) The excess of the deduction for percentage depletion 
over the adjusted basis of the property at the end of the 
taxable year. This preference does not apply to percentage 
depletion allowed with respect to oil and gas properties.
    (2) The amount by which excess intangible drilling costs 
arising in the taxable year exceed 65 percent of the net income 
from oil, gas, and geothermal properties. This preference does 
not apply to an independent producer to the extent the 
preference would not reduce the producer's AMTI by more than 40 
percent.
    (3) Tax-exempt interest income on private activity bonds 
(other than qualified 501(c)(3) bonds) issued after August 7, 
1986.
    (4) Accelerated depreciation or amortization on certain 
property placed in service before January 1, 1987.
    (5) Forty-two percent of the amount excluded from income 
under section 1202 (relating to gains on the sale of certain 
small business stock).
    In addition, losses from any tax shelter, farm, or passive 
activities are denied.6
---------------------------------------------------------------------------
    \6\ Given the passage of section 469 by the Tax Reform Act of 1986 
(relating to the deductibility of losses from passive activities), 
these provisions are largely ``deadwood.''
---------------------------------------------------------------------------

Adjustments in computing AMTI

    The adjustments that individuals must make in computing 
AMTI are:
    (1) Depreciation on property placed in service after 1986 
and before January 1, 1999, must be computed by using the 
generally longer class lives prescribed by the alternative 
depreciation system of section 168(g) and either (a) the 
straight-line method in the case of property subject to the 
straight-line method under the regular tax or (b) the 150-
percent declining balance method in the case of other property. 
Depreciation on property placed in service after December 31, 
1998, is computed by using the regular tax recovery periods and 
the AMT methods described in the previous sentence.
    (2) Mining exploration and development costs must be 
capitalized and amortized over a 10-year period.
    (3) Taxable income from a long-term contract (other than a 
home construction contract) must be computed using the 
percentage of completion method of accounting.
    (4) The amortization deduction allowed for pollution 
control facilities placed in service before January 1, 1999 
(generally determined using 60-month amortization for a portion 
of the cost of the facility under the regular tax), must be 
calculated under the alternative depreciation system 
(generally, using longer class lives and the straight-line 
method). The amortization deduction allowed for pollution 
control facilities placed in service after December 31, 1998, 
is calculated using the regular tax recovery periods and the 
straight-line method.
    (5) Miscellaneous itemized deductions are not allowed.
    (6) Itemized deductions for State, local, and foreign real 
property taxes, State and local personal property taxes, and 
State, local, and foreign income, war profits, and excess 
profits taxes are not allowed.
    (7) Medical expenses are allowed only to the extent they 
exceed 10 percent of the taxpayer's adjusted gross income 
(AGI).
    (8) Standard deductions and personal exemptions are not 
allowed.
    (9) The amount allowable as a deduction for circulation 
expenditures must be capitalized and amortized over a 3-year 
period.
    (10) The amount allowable as a deduction for research and 
experimental expenditures must be capitalized and amortized 
over a 10-year period.7
---------------------------------------------------------------------------
    \7\ No adjustment is required if the taxpayer materially 
participates in the activity that relates to the research and 
experimental expenditures.
---------------------------------------------------------------------------
    (11) The regular tax rules relating to incentive stock 
options do not apply.

Other rules

    The combination of the taxpayer's net operating loss 
carryover and foreign tax credits cannot reduce the taxpayer's 
AMT liability by more than 90 percent of the amount determined 
without these items.
    The various nonrefundable credits allowed under the regular 
tax generally are allowed only to the extent that the 
individual's regular tax exceeds the tentative minimum tax. The 
earned income credit and the child credit of those taxpayers 
with three or more qualified children are refundable credits 
and may offset the taxpayer's tentative minimum tax. However, a 
taxpayer must reduce these refundable credits by the amount the 
taxpayer's tentative minimum tax exceeds his or her regular tax 
liability.8
---------------------------------------------------------------------------
    \8\ For 1998 only, the nonrefundable personal credits were not 
limited by the tentative minimum tax, and the refundable child credit 
was not reduced by the minimum tax.
---------------------------------------------------------------------------
    If an individual is subject to AMT in any year, the amount 
of tax exceeding the taxpayer's regular tax liability is 
allowed as a credit (the ``AMT credit'') in any subsequent 
taxable year to the extent the taxpayer's regular tax liability 
exceeds his or her tentative minimum tax in such subsequent 
year. For individuals, the AMT credit is allowed only to the 
extent the taxpayer's AMT liability is a result of adjustments 
that are timing in nature. Most individual AMT adjustments 
relate to itemized deductions and personal exemptions and are 
not timing in nature.

                           Reasons for Change

    The Committee is concerned that the individual AMT is a 
source of great complexity for an increasing number of 
individual taxpayers. Therefore the bill repeals the individual 
AMT.

                        Explanation of Provision

    The bill allows an individual to offset the entire regular 
tax liability (without regard to the minimum tax) by the 
personal nonrefundable credits. The bill also repeals the 
provision reducing the refundable child credit by the AMT.
    The bill phase-outs the individual AMT. For taxable years 
beginning in 2003, only 80 percent of the full AMT liability 
will be imposed. That percentage will be reduced to 70 percent 
in 2004, 60 percent in 2005, 50 percent in 2006 and 2007, and 
the AMT will be fully repealed for taxable years beginning 
after 2007.
    An individual will be allowed to use the AMT credit to 
offset 90 percent of its regular tax liability (determined 
after the application of the other nonrefundable credits).
    The repeal of the individual AMT will eliminate the 
present-law marriage penalty in the individual AMT.

                            Effective Dates

    The provisions relating to the personal credits are 
effective for taxable years beginning after December 31, 1998. 
The phase-out of the AMT will be effective for taxable years 
beginning after December 31, 2002. The repeal of the AMT and 
the provision relating to the use of AMT credits apply to 
taxable years beginning after December 31, 2007.

         TITLE II. SAVINGS AND INVESTMENT TAX RELIEF PROVISIONS


            A. Partial Exclusion for Interest and Dividends


          (sec. 201 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 gross 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 saving and 
will simplify the tax returns of a number of individuals. 
Approximately 65 million tax returns for 2003 will reflect tax 
savings as a result of this provision; out of that number, 
approximately 30 million tax returns will reflect a total 
exclusion from tax for all interest and dividends 
received.9
---------------------------------------------------------------------------
    \9\ Joint Committee on Taxation staff projections.
---------------------------------------------------------------------------

                        Explanation of Provision

    The bill gives individual taxpayers an exclusion from 
income of interest and dividends (other than capital gain 
dividends from RICs and REITs, dividends from farmers' 
cooperative associations, and dividends received from an 
employee stock ownership plan), received during a taxable 
year.10 The maximum exclusion from income is $100 of 
combined interest and dividends ($200 for married couples 
filing a joint return) for taxable years beginning after 
December 31, 2000. The maximum exclusion is $200 of combined 
interest and dividends ($400 for married couples filing a joint 
return) for taxable years beginning after December 31, 2002. 
The amount of the combined interest and dividends excluded 
under this proposal is in addition to the amount of any 
interest or dividend which is exempt from tax under any other 
provision (e.g., interest on certain State and local bonds 
which is exempt from tax under section 103 of the Code).
---------------------------------------------------------------------------
    \10\ 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 proposal is 
generally parallel to that provision. The exclusion for dividends was 
repealed by the Tax Reform Act of 1986.
---------------------------------------------------------------------------
    In determining eligibility for the earned income credit 
(``EIC''), any interest or dividends excluded from gross income 
under this provision are included in modified adjusted gross 
income for purposes of phase-out rules of the EIC and 
disqualified income for purposes of the EIC disqualified income 
test. Similarly, any interest or dividends excluded from gross 
income under this provision are included in modified adjusted 
gross income for purposes of the taxation of certain Social 
Security benefits.
    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 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 exclusion under section 135.
    In addition, the Committee encourages the IRS to simplify 
the process of completing tax forms to the greatest extent 
practicable, including, for example, considering raising the 
administratively-established dollar thresholds for completing 
Schedule B or for being able to use the Form 1040EZ.

                             Effective Date

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

                B. Reduce Individual Capital Gains Rates


         (sec. 202 of the bill and secs. 1 and 55 of the Code)


                              Present Law

    In general, gain or loss reflected in the value of an asset 
is not recognized for income tax purposes until a taxpayer 
disposes of the asset. On the sale or exchange of capital 
assets, any gain generally is included in income, and the net 
capital gain of an individual is taxed at maximum rates lower 
than the rates applicable to ordinary income. Net capital gain 
is the excess of the net long-term capital gain for the taxable 
year over the net short-term capital loss for the year. Gain or 
loss is treated as long-term if the asset is held for more than 
one year.
    A capital asset generally means any property except (1) 
inventory, stock in trade, or property held primarily for sale 
to customers in the ordinary course of the taxpayer's trade or 
business, (2) depreciable or real property used in the 
taxpayer's trade or business, (3) specified literary or 
artistic property, (4) business accounts or notes receivable, 
or (5) certain U.S. publications. In addition, the net gain 
from the disposition of certain property used in the taxpayer's 
trade or business is treated as long-term capital gain. Gain 
from the disposition of depreciable personal property is not 
treated as capital gain to the extent of all previous 
depreciation allowances. Gain from the disposition of 
depreciable real property is generally not treated as capital 
gain to the extent of the depreciation allowances in excess of 
the allowances that would have been available under the 
straight-line method of depreciation.
    The maximum rate of tax on the adjusted net capital gain of 
an individual is 20 percent. In addition, any adjusted net 
capital gain which otherwise would be taxed at the lowest 
individual rate (currently 15 percent) is taxed at a 10-percent 
rate. These rates apply for purposes of both the regular tax 
and the alternative minimum tax.
    The ``adjusted net capital gain'' of an individual is the 
net capital gain reduced (but not below zero) by the sum of the 
28-percent rate gain and the unrecaptured section 1250 gain. 
The net capital gain is reduced by the amount of gain which the 
individual treats as investment income for purposes of 
determining the investment interest limitation under section 
163(d).
    The term ``28-percent rate gain'' means the amount of net 
gain attributable to long-term capital gains and losses from 
the sale or exchange of collectibles (as defined in section 
408(m) without regard to paragraph (3) thereof) (``collectibles 
gain and loss''), an amount of gain equal to the amount of gain 
excluded from gross income under section 1202, relating to 
certain small business stock (``section 1202 
gain''),11 the net short-term capital loss for the 
taxable year, and any long-term capital loss carryover to the 
taxable year.
---------------------------------------------------------------------------
    \11\ This results in a maximum effective regular tax rate on 
qualified gain from small business stock of 14 percent.
---------------------------------------------------------------------------
    ``Unrecaptured section 1250 gain'' means any long-term 
capital gain from the sale or exchange of section 1250 property 
(i.e., depreciable real estate) held more than one year to the 
extent of the gain that would have been treated as ordinary 
income if section 1250 applied to all depreciation, rather than 
only to a portion of the depreciation, reduced by the net loss 
(if any) attributable to the items taken into account in 
computing 28-percent rate gain. The amount of unrecaptured 
section 1250 gain (before the reduction for the net loss) 
attributable to the disposition of property to which section 
1231 applies shall not exceed the net section 1231 gain for the 
year.
    The unrecaptured section 1250 gain is taxed at a maximum 
rate of 25 percent, and the 28-percent rate gain is taxed at a 
maximum rate of 28 percent.
    For taxable years beginning after December 31, 2000, any 
gain from the sale or exchange of property held more than five 
years which would otherwise be taxed at the 10-percent rate 
will instead be taxed at an 8-percent rate. Any gain from the 
sale or exchange of property held more than five years and the 
holding period for which begins after December 31, 2000, which 
would otherwise be taxed at a 20-percent rate will be taxed at 
an 18-percent rate. A taxpayer holding a capital asset or 
property used in the trade or business on January 1, 2001, may 
elect to treat the asset as having been sold in a taxable 
transaction on that date for an amount equal to its fair market 
value, and having been reacquired for an amount equal to such 
value.

                           Reasons for Change

    The Committee believes it is important that tax policy be 
conducive to economic growth. Economic growth cannot occur 
without savings, investment, and the willingness of individuals 
to take risks. The greater the pool of savings, the greater the 
monies available for business investment. It is through such 
investment that the United States' economy can increase output 
and productivity. It is through increases in productivity that 
workers earn higher real wages. Hence, a greater saving rate is 
necessary for all Americans to benefit from a higher standard 
of living.
    The Committee believes that, by reducing the effective tax 
rates on capital gains, American households will respond by 
increasing savings. The Committee believes it is important to 
encourage risk-taking and believes a reduction in the taxation 
of capital gains will have that effect. The Committee also 
believes that a reduction in the taxation of capital gains will 
improve the efficiency of the markets, because the taxation of 
capital gains upon realization encourages investors who have 
accrued past gains to keep their monies ``locked in'' to such 
investments even when better investment opportunities present 
themselves. A reduction in the taxation of capital gains should 
reduce this ``lock in'' effect.

                        Explanation of Provision

    The bill reduces the 10- and 20-percent rates on the 
adjusted net capital gain to 7.5 and 15 percent, respectively. 
The 25-percent rate on unrecaptured section 1250 gain is 
reduced to 20 percent. These lower rates apply to both the 
regular tax and the alternative minimum tax.12
---------------------------------------------------------------------------
    \12\ The provision does not change the regular tax rate for gain 
from collectibles and small business stock. The provision reduces the 
maximum effective AMT rate on small business stock to slightly below 15 
percent (depending on the amount of individual rate cut for the taxable 
year).
---------------------------------------------------------------------------
    The provision repeals the 8- and 18-percent rates on 
certain gain from property held more than 5 years.

                             Effective Date

    The provision applies to taxable years ending on or after 
July 1, 1999.
    For taxable years which include July 1, 1999, the lower 
rates apply to amounts properly taken into account for the 
portion of the year on or after that date. This generally has 
the effect of applying the lower rates to capital assets sold 
or exchanged (and installment payments received) on or after 
July 1, 1999. In the case of gain taken into account by a pass-
through entity, the date taken into account by the entity is 
the appropriate date for applying this rule.

   C. Apply Capital Gain Rates to Capital Gains Earned by Designated 
                            Settlement Funds


            (sec. 203 of the bill and sec. 468B of the Code)


                              Present Law

    Under present law, designated settlement funds are taxed at 
the highest rate of tax imposed on individuals, currently 39.6 
percent, on their entire taxable income (sec. 468B).

                           Reasons for Change

    The Committee believes that the net capital gain of a 
designated settlement fund should be taxed at the same rates as 
the net capital gain of an individual.

                        Explanation of Provision

    Under the bill, the net capital gain of a designated 
settlement fund will be taxed in the same manner as in the case 
of an individual, i.e., the lower rates applicable to net 
capital gain set forth in section 1(h), as amended by the bill, 
will apply.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1999.

 D. 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 or 
    Certain Other Individuals Relocated Outside of the United States


            (sec. 204 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) that is equal to the fraction of 
the two years that the ownership and use requirements are met. 
There are no special rules relating to: (1) members of the 
uniformed services or the Foreign Service of the United States 
or (2) individuals relocated outside 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 should not be deprived the exclusion 
because of service to their country. Further, the Committee 
believes that when an employee is relocated outside of the 
United States for an extended period of time that such 
individual and the individual's spouse should not be deprived 
of the exclusion if the absence from the principal residence 
does not exceed five years.

                        Explanation of Provision

    Under the bill, the five-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 uniformed 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 will 
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.
    The bill also suspends for up to five years, the five-year 
test period for an individual relocated for a period of more 
than 90 days outside of the United States by the individual's 
(or spouse's ) employer. This provision does not apply to self-
employed individuals.

                             Effective Date

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

    E. Clarify the Tax Treatment of Income and Losses on Derivatives


            (sec. 205 of the bill and sec. 1221 of the Code)


                              Present Law

    Capital gain treatment applies to gain on the sale or 
exchange of a capital asset. Capital assets include property 
other than (1) stock in trade or other types of assets 
includible in inventory, (2) property used in a trade or 
business that is real property or property subject to 
depreciation, (3) accounts or notes receivable acquired in the 
ordinary course of a trade or business, or (4) certain 
copyrights (or similar property) and U.S. government 
publications. Gain or loss on such assets generally is treated 
as ordinary, rather than capital, gain or loss. Certain other 
Code sections also treat gains or losses as ordinary. For 
example, the gains or losses of securities dealers or certain 
electing commodities dealers or electing traders in securities 
or commodities that are subject to ``mark-to-market'' 
accounting are treated as ordinary (sec. 475).
    Under case law in a number of Federal courts prior to 1988, 
business hedges generally were treated as giving rise to 
ordinary, rather than capital, income or loss. In 1988, the 
U.S. Supreme Court rejected this interpretation in Arkansas 
Best v. Commissioner which, relying on the statutory definition 
of a capital asset described above, held that a loss realized 
on a sale of stock was capital even though the stock was 
purchased for a business, rather than an investment, purpose. 
13
---------------------------------------------------------------------------
    \13\ 485 U.S. 212 (1988).
---------------------------------------------------------------------------
    Treasury regulations (which were finalized in 1994) require 
ordinary character treatment for most business hedges and 
provide timing rules requiring that gains or losses on hedging 
transactions be taken into account in a manner that matches the 
income or loss from the hedged item or items. The regulations 
apply to hedges that meet a standard of ``risk reduction'' with 
respect to ordinary property held (or to be held) or certain 
liabilities incurred (or to be incurred) by the taxpayer and 
that meet certain identification and other requirements (Treas. 
reg. sec. 1.1221-2).

                           Reasons for Change

    Derivative financial instruments entered into by securities 
dealers generally are required to be marked to market and the 
resulting gain or loss is automatically treated as ordinary 
income or loss under section 475. With respect to commodities 
derivative financial instruments entered into by a commodities 
derivatives dealer, on the other hand, the character of the 
gains and losses therefrom may be unclear (absent an election 
to be treated the same as a dealer in securities under section 
475). The Committee is concerned that this uncertainty (i.e., 
the potential for capital treatment of the commodities 
derivatives financial instruments) could inhibit commodities 
derivatives dealers from entering into transactions with 
respect to commodities derivative financial instruments that 
qualify as ``hedging transactions'' within the meaning of the 
Treasury regulations under section 1221. The Committee believes 
that commodities derivatives financial instruments are 
integrally related to the ordinary course of the trade or 
business of commodities derivatives dealers and, therefore, 
such assets should be treated as ordinary assets.
    The Committee further believes that ordinary character 
treatment is appropriate for business hedges with respect to 
ordinary property. The Committee believes that the approach 
taken in Treasury regulations with respect to the character of 
hedging transactions generally should be codified. The Treasury 
regulations model the definition of a hedging transaction after 
the present-law definition contained in section 1256, which 
generally requires that a hedging transaction ``reduces'' a 
taxpayer's risk. The Committee believes that a ``risk 
management'' standard better describes modern business hedging 
practices that appropriately should be accorded ordinary 
character treatment. In fact, Treasury regulations 
appropriately interpret risk reduction flexibly within the 
constraints of present law. For example, the regulations 
recognize that certain transactions that economically convert 
an interest rate or price from a fixed rate or price to a 
floating rate or price may qualify as hedging transactions. 
14 Similarly, the regulations provide hedging 
treatment for certain written call options, hedges of aggregate 
risk, dynamic hedges under which a taxpayer can more frequently 
manage or adjust its exposure to identified risk, partial 
hedges, ``recycled'' hedges (using a position entered into to 
hedge one asset or liability to hedge another asset or 
liability), and hedges of aggregate risk. 15 The 
Committee believes that (depending on the facts) treatment of 
such transactions as hedging transactions is appropriate and 
that it also is appropriate to modernize the definition of a 
hedging transaction by providing risk management as the 
standard.
---------------------------------------------------------------------------
    \14\ Treas. Reg. sec. 1. 1221-2(c)(1)(ii)(B).
    \15\ See Treas. Reg. sec. 1.1221-2(c).
---------------------------------------------------------------------------
    The Committee does not intend that speculative transactions 
or other transactions not entered into in the normal course of 
a taxpayer's trade or business should qualify for ordinary 
character treatment, and risk management should not be 
interpreted so broadly as to cover such transactions. In 
addition, to minimize whipsaw potential, the Committee believes 
that it is essential for hedging transactions to be properly 
identified by the taxpayer when the hedging transaction is 
entered into.
    Finally, because hedging status under present law is 
dependent upon the ordinary character of the property being 
hedged, an issue arises with respect to hedges of certain 
supplies, sales of which could give rise to capital gain, but 
which are generally consumed in the ordinary course of a 
taxpayer's trade or business and that would give rise to 
ordinary deductions. For purposes of defining a hedging 
transaction, Treasury regulations treat such supplies as 
ordinary property. 16 The Committee believes that it 
is appropriate to confirm this treatment by specifying that 
such supplies are ordinary assets.
---------------------------------------------------------------------------
    \16\ Treas. Reg. sec. 1.1221-2(c)(5)(ii).
---------------------------------------------------------------------------

                        Explanation of Provision

    The bill adds three categories to the list of assets the 
gain or loss on which is treated as ordinary (sec. 1221). The 
new categories are: (1) commodities derivative financial 
instruments entered into by derivatives dealers; (2) hedging 
transactions; and (3) supplies of a type regularly consumed by 
the taxpayer in the ordinary course of a taxpayer's trade or 
business.
    For this purpose, a commodities derivatives dealer is any 
person that regularly offers to enter into, assume, offset, 
assign or terminate positions in commodities derivative 
financial instruments with customers in the ordinary course of 
a trade or business. A commodities derivative financial 
instrument means a contract or financial instrument with 
respect to commodities, the value or settlement price of which 
is calculated by reference to any combination of a fixed rate, 
price, or amount, or a variable rate, price, or amount, which 
is based on current, objectively determinable financial or 
economic information. This includes swaps, caps, floors, 
options, futures contracts, forward contracts, and similar 
financial instruments with respect to commodities. It does not 
include shares of stock in a corporation; a beneficial interest 
in a partnership or trust; a note, bond, debenture, or other 
evidence of indebtedness; or a contract to which section 1256 
applies.
    In defining a hedging transaction, the provision generally 
codifies the approach taken by the Treasury regulations, but 
modifies the rules. The ``risk reduction'' standard of the 
regulations is broadened to ``risk management'' with respect to 
ordinary property held (or to be held) or certain liabilities 
incurred (or to be incurred). As under the Treasury 
regulations, the transaction must be identified as a hedge of 
specified property. It is intended that this be the exclusive 
means through which the gains or losses with respect to a 
hedging transaction are treated as ordinary. Authority is 
provided for Treasury regulations that would address improperly 
identified or non-identified hedging transactions. The Treasury 
Secretary is also given authority to apply these rules to 
related parties.

                             Effective Date

    The provision is effective for any instrument held, 
acquired or entered into, any transaction entered into, and 
supplies held or acquired on or after the date of enactment.

         F. Treatment of Loss on Worthless Stock of Subsidiary


         (sec. 206 of the bill and sec. 165(g)(3) of the Code)


                              Present Law

    Under present law, the loss on stock of a subsidiary 
corporation that becomes worthless is treated as an ordinary 
loss (rather than a capital loss), unless 10 percent or more of 
its gross receipts for all taxable years has been, with minor 
exceptions, from royalties, rents, dividends, interest, 
annuities, and gains from the sales or exchanges of stocks and 
securities (sec. 165(g)(3)).

                           Reasons for Change

    The Committee believes that the worthless stock of an 
insurance company or financial institution that is engaged in 
an active business should be treated the same as the worthless 
stock of other active businesses.

                        Explanation of Provision

    Under the bill, income from the conduct of an active trade 
or business of an insurance company or financial institution 
will not be included as gross receipts from the types of 
passive income listed above. Thus, a loss recognized with 
respect to the worthless stock of a subsidiary corporation 
which is an insurance company or financial institution could be 
treated as an ordinary loss, rather than as a capital loss.

                             Effective Date

    The provision applies to stock becoming worthless in 
taxable years beginning after December 31, 1999.

            TITLE III. BUSINESS INVESTMENT AND JOB CREATION


             A. Alternative Tax for Corporate Capital Gains


            (sec. 301 of the bill and sec. 1201 of the Code)


                              Present Law

    Under present law, the net capital gain of a corporation is 
taxed at the same rates as ordinary income, and subject to tax 
at graduated rates up to 35 percent.

                           Reasons for Change

    The Committee believes it is important that tax policy be 
conducive to economic growth. Economic growth cannot occur 
without savings, investment, and the willingness of business to 
take risks and exploit new economic opportunities. The greater 
the pool of savings, the greater the monies available for 
business investment in equipment and research. It is through 
such investment in equipment and new products and services that 
the United States economy can increase output and productivity. 
It is through increases in productivity that workers earn 
higher real wages. Hence, a greater saving rate is necessary 
for all Americans to benefit through a higher standard of 
living.
    The Committee observes that the net business saving rate 
has not increased significantly from its levels of a decade 
ago. The Committee believes that a lower rate of tax on 
corporate capital gains will encourage investment, saving, and 
risk-taking, create new jobs, and promote economic growth.

                        Explanation of Provision

    Under the bill, an alternative tax applies to the net 
capital gain of a corporation if that tax is lower than the 
corporation's regular tax. For taxable years beginning in 2000, 
the rate of the alternative tax is 34.1 percent. The 
alternative tax rate is reduced for each subsequent year, until 
a 25-percent rate is reached. The 25-percent rate applies to 
taxable years beginning after 2009.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 1999.

              B. Repeal Corporate Alternative Minimum Tax


           (sec. 302(a) of the bill and sec. 55 of the Code)


                              Present Law

In general

    Present law imposes a minimum tax on a corporation to the 
extent the corporation's minimum tax liability exceeds its 
regular tax liability. This alternative minimum tax (``AMT'') 
is imposed on corporations at the rate of 20 percent on the 
alternative minimum taxable income (``AMTI'') in excess of a 
$40,000 phased-out exemption amount. The exemption amount is 
phased-out by an amount equal to 25 percent of the amount that 
the corporation's AMTI exceeds $150,000.
    AMTI is the taxpayer's taxable income increased by certain 
preference items and adjusted by determining the tax treatment 
of certain items in a manner that negates the deferral of 
income resulting from the regular tax treatment of those items.
    A corporation with average gross receipts of less than $7.5 
million for the prior three taxable years is exempt from the 
corporate minimum tax. The $7.5 million threshold is reduced to 
$5 million for the corporation's first 3-taxable year period.

Preference items in computing AMTI

    The corporate minimum tax preference items are:
    (1) The excess of the deduction for percentage depletion 
over the adjusted basis of the property at the end of the 
taxable year. This preference does not apply to percentage 
depletion allowed with respect to oil and gas properties.
    (2) The amount by which excess intangible drilling costs 
arising in the taxable year exceed 65 percent of the net income 
from oil, gas, and geothermal properties. This preference does 
not apply to an independent producer to the extent the 
preference would not reduce the producer's AMTI by more than 40 
percent.
    (3) Tax-exempt interest income on private activity bonds 
(other than qualified 501(c)(3) bonds) issued after August 7, 
1986.
    (4) Accelerated depreciation or amortization on certain 
property placed in service before January 1, 1987.

Adjustments in computing AMTI

    The adjustments that corporations must make in computing 
AMTI are:
    (1) Depreciation on property placed in service after 1986 
and before January 1, 1999, must be computed by using the 
generally longer class lives prescribed by the alternative 
depreciation system of section 168(g) and either (a) the 
straight-line method in the case of property subject to the 
straight-line method under the regular tax or (b) the 150-
percent declining balance method in the case of other property. 
Depreciation on property placed in service after December 31, 
1998, is computed by using the regular tax recovery periods and 
the AMT methods described in the previous sentence.
    (2) Mining exploration and development costs must be 
capitalized and amortized over a 10-year period.
    (3) Taxable income from a long-term contract (other than a 
home construction contract) must be computed using the 
percentage of completion method of accounting.
    (4) The amortization deduction allowed for pollution 
control facilities placed in service before January 1, 1999 
(generally determined using 60-month amortization for a portion 
of the cost of the facility under the regular tax), must be 
calculated under the alternative depreciation system 
(generally, using longer class lives and the straight-line 
method). The amortization deduction allowed for pollution 
control facilities placed in service after December 31, 1998, 
is calculated using the regular tax recovery periods and the 
straight-line method.
    (5) The special rules applicable to Merchant Marine 
construction funds are not applicable.
    (6) The special deduction allowable under section 833(b) 
for Blue Cross and Blue Shield organizations is not allowed.
    (7) The adjusted current earnings adjustment, described 
below.

Adjusted current earning (``ACE'') adjustment

    The adjusted current earnings adjustment is the amount 
equal to 75 percent of the amount by which the adjusted current 
earnings (``ACE'') of a corporation exceeds its AMTI 
(determined without the ACE adjustment and the alternative tax 
net operating loss deduction. In determining ACE the following 
rules apply:
    (1) For property placed in service before 1994, 
depreciation generally is determined using the straight-line 
method and the class life determined under the alternative 
depreciation system.
    (2) Any amount that is excluded from gross income under the 
regular tax but is included for purposes of determining 
earnings and profits is included in determining ACE.
    (3) The inside build-up of a life insurance contract is 
included in ACE (and the related premiums are deductible).
    (4) Intangible drilling costs of integrated oil companies 
must be capitalized and amortized over a 60-month period.
    (5) The regular tax rules of section 173 (allowing 
circulation expenses to be amortized) and section 248 (allowing 
organizational expenses to be amortized) do not apply.
    (6) Inventory must be calculated using the FIFO, rather 
than LIFO, method.
    (7) The installment sales method generally may not be used.
    (8) No loss may be recognized on the exchange of any pool 
of debt obligations for another pool of debt obligations having 
substantially the same effective interest rates and maturities.
    (9) Depletion (other than for oil and gas) must be 
calculated using the cost, rather than the percentage, method.
    (10) In certain cases, the assets of a corporation that has 
undergone an ownership change must be stepped-down to their 
fair market values.

Other rules

    The combination of the taxpayer's net operating loss 
carryover and foreign tax credits cannot reduce the taxpayer's 
AMT liability by more than 90 percent of the amount determined 
without these items.
    The various nonrefundable business credits allowed under 
the regular tax generally are not allowed against the AMT.
    If a corporation is subject to AMT in any year, the amount 
of tax exceeding the taxpayer's regular tax liability is 
allowed as a credit (the ``AMT credit'') in any subsequent 
taxable year to the extent the taxpayer's regular tax liability 
exceeds its tentative minimum tax in such subsequent year.

                           Reasons for Change

    The Committee believes that the corporate AMT inhibits 
capital formation and business enterprise, and is 
administratively complex. Therefore, the bill repeals the 
corporate AMT.

                        Explanation of Provision

    For taxable years beginning in 2003, the limitation on the 
amount of AMT credits allowable to a corporation will be 
increased by 20 percent of the corporation's tentative minimum 
tax. This percentage is raised to 30 and 40 percent, 
respectively, for 2004 and 2005, and is raised to 50 percent 
for 2006 and 2007. The AMT credit may not exceed an amount 
equal to the sum of the regular tax and minimum tax less the 
other nonrefundable credits.
    For taxable years beginning after 2007, the provision 
repeals the corporate AMT. A corporation then will be allowed 
to use the AMT credit to offset 90 percent of its regular tax 
liability (determined after the application of other 
nonrefundable credits).

                             Effective Date

    The provision allowing the AMT credit to be offset a 
portion of the minimum tax applies to taxable years beginning 
after December 31, 2002.
    The provision repealing the AMT applies to taxable years 
beginning after December 31, 2007.

C. Repeal of Limitation of Foreign Tax Credit under Alternative Minimum 
                                  Tax


           (sec. 302(b) of the bill and sec. 59 of the Code)


                              Present Law

    Under present law, taxpayers are subject to an alternative 
minimum tax (``AMT''), which is payable, in addition to all 
other tax liabilities, to the extent that it exceeds the 
taxpayer's regular income tax liability. The tax is imposed at 
a flat rate of 20 percent, in the case of corporate taxpayers, 
on alternative minimum taxable income (``AMTI'') in excess of a 
phased-out exemption amount. The maximum rate for noncorporate 
taxpayers is 28 percent. AMTI is the taxpayer's taxable income 
increased for certain tax preferences and adjusted by 
determining the tax treatment of certain items in a manner 
which negates the exclusion or deferral of income resulting 
from the regular tax treatment of those items.
    Taxpayers are permitted to reduce their AMT liability by an 
AMT foreign tax credit. The AMT foreign tax credit for a 
taxable year is determined under principles similar to those 
used in computing the regular tax foreign tax credit, except 
that (1) the numerator of the AMT foreign tax credit limitation 
fraction is foreign source AMTI and (2) the denominator of that 
fraction is total AMTI.17 Taxpayers may elect to use 
as their AMT foreign tax credit limitation fraction the ratio 
of foreign source regular taxable income to total AMTI (sec. 
59(a)(4)).
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    \17\ Similar to the regular tax foreign tax credit, the AMT foreign 
tax credit is subject to the separate limitation categories set forth 
in section 904(d). Under the AMT foreign tax credit, however, the 
determination of whether any income is high taxed for purposes of the 
high-tax-kick-out rules (sec. 904(d)(2)) is made on the basis of the 
applicable AMT rate rather than the highest applicable rate of regular 
tax.
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    The AMT foreign tax credit for any taxable year generally 
may not offset a taxpayer's entire pre-credit AMT. Rather, the 
AMT foreign tax credit is limited to 90 percent of AMT computed 
without an AMT net operating loss deduction, an AMT energy 
preference deduction, or an AMT foreign tax credit. For 
example, assume that a corporation has $10 million of AMTI, has 
no AMT net operating loss or energy preference deductions, and 
is subject to the AMT. In the absence of the AMT foreign tax 
credit, the corporation's tax liability would be $2 million. 
Accordingly, the AMT foreign tax credit cannot be applied to 
reduce the taxpayer's tax liability below $200,000. Any unused 
AMT foreign tax credit may be carried back 2 years and carried 
forward 5 years for use against AMT in those years under the 
principles of the foreign tax credit carryback and carryforward 
rules set forth in section 904(c).

                           Reasons for Change

    The purpose of the foreign tax credit generally is to 
eliminate the possibility of double taxation (once by the 
foreign jurisdiction and again by the United States) on the 
foreign source income of a U.S. person. The Committee believes, 
however, that the 90-percent limitation on the AMT foreign tax 
credit has the effect of double taxing such income for AMT 
taxpayers and, thus, finds that the limitation is inconsistent 
with the purpose of providing a foreign tax credit.

                        Explanation of Provision

    The bill repeals the 90-percent limitation on the 
utilization of the AMT foreign tax credit.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

               TITLE IV. EDUCATION TAX RELIEF PROVISIONS


                  A. Expand Education Savings Accounts


       (sec. 401 of the bill and secs. 530 and 4973 of the Code)


                              Present Law

In general

    Section 530 provides tax-exempt status to education 
individual retirement accounts (``education IRAs''), meaning 
certain trusts (or custodial accounts) which are created or 
organized in the United States exclusively for the purpose of 
paying the qualified higher education expenses of a named 
beneficiary.18 Contributions to education IRAs may 
be made only in cash. Annual contributions to education IRAs 
may not exceed $500 per designated beneficiary (except in cases 
involving certain tax-free rollovers, as described below), and 
may not be made after the designated beneficiary reaches age 
18.19 Moreover, an excise tax is imposed if a 
contribution is made by any person to an education IRA 
established on behalf of a beneficiary during any taxable year 
in which any contributions are made by anyone to a qualified 
State tuition program (defined under sec. 529) on behalf of the 
same beneficiary.
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    \18\ Education IRAs generally are not subject to Federal income 
tax, but are subject to the unrelated business income tax (``UBIT'') 
imposed by section 511.
    \19\ An excise tax may be imposed under present law to the extent 
that excess contributions above the $500 annual limit are made to an 
education IRA.
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Phase-out of contribution limit

    The $500 annual contribution limit for education IRAs is 
phased out ratably for contributors with modified adjusted 
gross income (``AGI'') between $95,000 and $110,000 (between 
$150,000 and $160,000 for joint returns). Individuals with 
modified AGI above the phase-out range are not allowed to make 
contributions to an education IRA established on behalf of any 
individual.

Treatment of distributions

    Amounts distributed from an education IRA are excludable 
from gross income to the extent that the amounts distributed do 
not exceed qualified higher education expenses of the 
designated beneficiary incurred during the year the 
distribution is made (provided that a HOPE credit or Lifetime 
Learning credit is not claimed with respect to the beneficiary 
for the same taxable year). Distributions from an education IRA 
are generally deemed to consist of distributions of principal 
(which, under all circumstances, are excludable from gross 
income) and earnings (which may be excludable from gross 
income) by applying the ratio that the aggregate amount of 
contributions to the account for the beneficiary bears to the 
total balance of the account. If the qualified higher education 
expenses of the student for the year are at least equal to the 
total amount of the distribution (i.e., principal and earnings 
combined) from an education IRA, then the earnings in their 
entirety are excludable from gross income. If, on the other 
hand, the qualified higher education expenses of the student 
for the year are less than the total amount of the distribution 
(i.e., principal and earnings combined) from an education IRA, 
then the qualified higher education expenses are deemed to be 
paid from a pro-rata share of both the principal and earnings 
components of the distribution. Thus, in such a case, only a 
portion of the earnings are excludable (i.e., a portion of the 
earnings based on the ratio that the qualified higher education 
expenses bear to the total amount of the distribution) and the 
remaining portion of the earnings is includible in the 
distributee's gross income.
    To the extent that a distribution exceeds qualified higher 
education expenses of the designated beneficiary, an additional 
10-percent tax is imposed on the earnings portion of such 
excess distribution, unless such distribution is made on 
account of the death or disability of, or scholarship received 
by, the designated beneficiary. The additional 10-percent tax 
also does not apply to the distribution of any contribution to 
an education IRA made during the taxable year if such 
distribution is made on or before the date that a return is 
required to be filed (including extensions of time) by the 
beneficiary for the taxable year during which the contribution 
was made (or, if the beneficiary is not required to file such a 
return, April 15th of the year following the taxable year 
during which the contribution was made).
    Present law allows tax-free transfers or rollovers of 
account balances from one education IRA benefitting one 
beneficiary to another education IRA benefitting another 
beneficiary (as well as redesignations of the named 
beneficiary), provided that the new beneficiary is a member of 
the family of the old beneficiary. For this purpose, a ``member 
of the family'' means persons described in paragraphs (1) 
through (8) of section 152(a)--e.g., sons, daughters, brothers, 
sisters, nephews and nieces, certain in-laws--and any spouse of 
such persons or of the original beneficiary.
    Any balance remaining in an education IRA is deemed to be 
distributed within 30 days after the date that the named 
beneficiary reaches age 30 (or, if earlier, within 30 days of 
the date that the beneficiary dies).

Qualified higher education expenses

    The term ``qualified higher education expenses'' includes 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of the designated beneficiary at an 
eligible education institution, regardless of whether the 
beneficiary is enrolled at an eligible educational institution 
on a full-time, half-time, or less than half-time basis. 
Moreover, the term ``qualified higher education expenses'' 
includes certain room and board expenses for any period during 
which the beneficiary is at least a half-time student. 
Qualified higher education expenses include expenses with 
respect to undergraduate or graduate-level courses. In 
addition, qualified higher education expenses include amounts 
paid or incurred to purchase tuition credits (or to make 
contributions to an account) under a qualified State tuition 
program, as defined in section 529, for the benefit of the 
beneficiary of the education IRA.
    Qualified higher education expenses generally include only 
out-of-pocket expenses. Such qualified higher education 
expenses do not include expenses covered by educational 
assistance for the benefit of the beneficiary that is 
excludable from gross income. Thus, total qualified higher 
education expenses are reduced by scholarship or fellowship 
grants excludable from gross income under present- law section 
117, as well as any other tax-free educational benefits, such 
as employer-provided educational assistance that is excludable 
from the employee's gross income under section 127.\20\
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    \20\ No reduction of qualified higher education expenses is 
required, however, for a gift, bequest, devise, or inheritance.
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    Present law also provides that, if any qualified higher 
education expenses are taken into account in determining the 
amount of the exclusion for a distribution from an education 
IRA, then no deduction (e.g., for trade or business expenses 
deductible under sec. 162), or exclusion (e.g., for expenses 
paid with interest on education savings bonds excludable under 
sec. 135), or credit is allowed with respect to such expenses.

Eligible educational institution

    Eligible educational institutions are defined by reference 
to section 481 of the Higher Education Act of 1965. Such 
institutions generally are accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, a graduate-level or professional 
degree, or another recognized post-secondary credential. 
Certain proprietary institutions and post-secondary vocational 
institutions also are eligible institutions. The institution 
must be eligible to participate in Department of Education 
student aid programs.

                           Reasons for Change

    The Committee believes that the present-law rules and 
contribution limits governing education IRAs should be expanded 
to provide a greater incentive for families and other persons 
to save for educational purposes, including for expenses 
related to elementary and secondary school education. The 
Committee also believes that more flexible rules are needed for 
education IRAs (e.g., accounts established for the benefit of 
special needs students). The Committee further believes that 
the benefits of education IRAs should be coordinated with other 
education tax provisions so as to maximize the potential 
benefit of all the education tax incentives.

                        Explanation of Provision

Annual contribution limit

    The bill increases the annual education IRA contribution 
limit to $2,000. Thus, under the bill, aggregate contributions 
that can be made by all contributors to one (or more) education 
IRAs established on behalf of any particular beneficiary are 
limited to $2,000 for each year in years beginning after 2000.

Qualified expenses

    The bill expands the definition of qualified education 
expenses that may be paid with tax-free distributions from an 
education IRA for distributions made in taxable years beginning 
after December 31, 2000. Specifically, the definition of 
qualified education expenses is expanded to include ``qualified 
elementary and secondary education expenses,'' meaning (1) 
tuition, fees, academic tutoring,\21\ special needs services, 
books, supplies, and equipment (including computers and related 
software and services) incurred in connection with the 
enrollment or attendance of the designated beneficiary as an 
elementary or secondary student at a public, private, or 
religious school providing elementary or secondary education 
(kindergarten through grade 12), and (2) room and board, 
uniforms, transportation, and supplementary items and services 
(including extended-day programs) required or provided by such 
a school in connection with such enrollment or attendance of 
the designated beneficiary.\22\ ``Qualified elementary and 
secondary education expenses'' also include certain 
homeschooling education expenses if the requirements of any 
applicable State or local law are met with respect to such 
homeschooling.
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    \21\ For this purpose, the Committee intends that ``academic 
tutoring'' means additional, personalized instruction provided in 
coordination with the student's academic courses.
    \22\ The Committee intends that contributions made to education 
IRAs prior to December 31, 2000, (and earnings thereon) may be used for 
distributions for qualified elementary and secondary education expenses 
made after January 1, 2001. Thus, it is not necessary for trustees of 
education IRAs to keep separate accounts with respect to contributions 
made prior to January 1, 2001, and earnings thereon.
---------------------------------------------------------------------------
    Under the bill, the definition of ``qualified higher 
education expenses'' is modified to mean: (1) tuition and fees 
required for the enrollment or attendance of a designated 
beneficiary at an eligible education institution, and (2) an 
amount determined by the educational institution for purposes 
of Federal financial assistance programs as a reasonable 
allowance for books, supplies, and equipment.\23\ The bill also 
provides that ``qualified higher education expenses'' does not 
include expenses for education involving sports, games, or 
hobbies unless this education is part of the student's degree 
program or is taken to acquire or improve job skills of the 
individual. The bill does not change the definition of 
``qualified higher education expenses'' with respect to 
expenses for room and board.
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    \23\ ``Qualified higher education expenses'' for purposes of 
education IRAs are defined by reference to the definition of such 
expenses for purposes of qualified State tuition programs (sec. 
530(b)(2)(A)). Because the bill modifies the definition of ``qualified 
higher education expenses'' for purposes of qualified State tuition 
programs (sec. 529(e)(3)), the definition of ``qualified higher 
education expenses'' for education IRAs is also modified.
---------------------------------------------------------------------------

Special needs beneficiaries

    The bill also provides that, although contributions to an 
education IRA generally may not be made after the designated 
beneficiary reaches age 18, contributions may continue to be 
made to an education IRA in the case of a special needs 
beneficiary (as defined by Treasury Department regulations). In 
addition, under the bill, in the case of a special needs 
beneficiary, a deemed distribution of any balance in an 
education IRA will not occur when the beneficiary reaches age 
30.\24\
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    \24\ The Committee intends that the determination of whether a 
beneficiary has ``special needs'' will be made for each year that 
contributions are made to an education IRA after the beneficiary 
reaches age 18. However, if an individual meets the definition of a 
``special needs'' beneficiary when such individual reaches age 30, then 
such individual thereafter will be presumed to be a ``special needs'' 
beneficiary.
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Contributions by persons other than individuals

    The bill clarifies that corporations and other entities 
(including tax-exempt organizations) are permitted to make 
contributions to education IRAs, regardless of the income of 
the corporation or entity during the year of the 
contribution.\25\ As under present law, the eligibility of 
high-income individuals to make contributions to education IRAs 
is phased out ratably for individuals with modified AGI between 
$95,000 and $110,000 ($150,000 and $160,000 for joint returns).
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    \25\ The Committee intends that present-law rules governing the 
definition of gross income apply for purposes of determining whether a 
contribution by a corporation or another entity to an education IRA on 
behalf of a designated beneficiary is includible in the gross income of 
the beneficiary or another individual (e.g., includible in gross income 
as compensation to a parent employed by the contributing corporation).
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Contributions permitted until April 15

    Under the bill, individual contributors to education IRAs 
are deemed to have made a contribution 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), generally April 15.\26\ The bill 
also provides that the additional 10- percent tax does not 
apply to the distribution of any contribution to an education 
IRA made during the taxable year if such distribution is made 
on or before the first day of the sixth month of the taxable 
year (generally June 1) following the taxable year during which 
the contribution was or was deemed made.\27\
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    \26\ The Committee intends that trustees of education IRAs will 
require documentation from a contributor (whether an individual, 
corporation, or other entity) indicating the taxable year to which the 
contribution should be allocated.
    \27\ Thus, taxpayers will have approximately one and one-half 
months after the April 15 deadline for making contributions to an 
education IRA on account of the preceding year to determine whether an 
excess contribution was made to an education IRA and distribute (or 
reallocate to the current taxable year) the excess in order to avoid 
the additional 10-percent tax.
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Coordination with HOPE and Lifetime Learning credits

    For distributions made after December 31, 2000, the bill 
allows a taxpayer to claim a HOPE credit or Lifetime Learning 
credit for a taxable year and to exclude from gross income 
amounts distributed (both the principal and the earnings 
portions) from an education IRA on behalf of the same student 
as long as the distribution is not used for the same 
educational expenses for which a credit was claimed.\28\
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    \28\ In determining the amount of a distribution that can be 
excluded from income for a taxable year, a taxpayer's total higher 
education expenses will be reduced first by the amount of such expenses 
which were taken into account in determining the amount of any HOPE or 
Lifetime Learning credit allowed to the taxpayer (or other person) with 
respect to such expenses. After any reduction for expenses allocable to 
the credits, taxpayers may determine how to allocate their qualified 
education expenses among the various remaining education provisions for 
which they are eligible; however, under no circumstances, can the same 
expenses be allocated to more than one provision. For example, suppose 
that in 2002, a college freshman withdraws funds from both an education 
IRA and a qualified tuition program. If the student is otherwise 
eligible, he or she may claim a HOPE credit of $1,500 with respect to 
first $2,000 of tuition expense. To the extent that the student's 
remaining educational expenses constitute ``qualified higher education 
expenses'' and exceed the amounts distributed from both the education 
IRA and the qualified tuition program, the student may exclude from 
gross income the earnings portions (and, as always, the principal 
portions) of both distributions. Alternatively, if after allocating the 
first $2,000 of tuition expense to the HOPE credit, the student's 
remaining educational expenses do not exceed his or her total 
distributions from the education IRA and qualified tuition program, the 
student will not be able to exclude from gross income the entire 
earnings portions of both distributions. In addition, the student may 
be liable for a penalty imposed under the qualified tuition program or 
for additional tax imposed on the excess amounts distributed from the 
education IRA, or both. The student may allocate his or her educational 
expenses between the distributions as the student determines 
appropriate, but may not use the same expenses for both distributions, 
nor may he or she ``reuse'' the expenses taken into account for 
purposes of computing the HOPE credit claimed.
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Coordination with qualified tuition programs

    The bill repeals the excise tax on contributions made by 
any person to an education IRA on behalf of a beneficiary 
during any taxable year in which any contributions are made by 
anyone to a qualified State tuition program on behalf of the 
same beneficiary (sec. 4973(e)(1)(B)).

Change Name to ``Education Savings Accounts''

    The bill changes the name of education IRAs to ``Education 
Savings Accounts.''

                             Effective Date

    The provisions modifying education IRAs generally are 
effective for taxable years beginning after December 31, 2000. 
The provision modifying the definition of ``qualified higher 
education expenses'' applies to amounts paid for education 
furnished after December 31, 1999, the same date that this 
provision is effective for qualified state tuition plans 
described in section 529. The provision changing the name of 
education IRAs to Education Savings Accounts is effective on 
the date of enactment.

   B. Allow Tax-Free Distributions From State and Private Education 
                                Programs


            (sec. 402 of the bill and sec. 529 of the Code)


                              present law

    Section 529 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 (a ``savings account 
plan''). The term ``qualified higher education expenses'' 
generally has the same meaning as does the term for purposes of 
education IRAs (as described above) and, thus, includes 
expenses for tuition, fees, books, supplies, and equipment 
required for the enrollment or attendance at an eligible 
educational institution,29 as well as certain room 
and board expenses for any period during which the student is 
at least a half-time student.
---------------------------------------------------------------------------
    \29\ ``Eligible educational institutions'' are defined the same for 
purposes of education IRAs (described above) and qualified State 
tuition programs.
---------------------------------------------------------------------------
    No amount is 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) are 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) are included in the contributor's gross 
income to the extent such amounts exceed contributions made on 
behalf of the beneficiary.30
---------------------------------------------------------------------------
    \30\ Distributions from qualified State tuition programs are 
treated as representing a pro-rata share of the principal (i.e., 
contributions) and accumulated earnings in the account.
---------------------------------------------------------------------------
    A qualified State tuition program is required to provide 
that purchases or contributions only be made in 
cash.31 Contributors and beneficiaries are not 
allowed to directly or indirectly direct the investment of 
contributions to the program (or earnings thereon). The program 
is required to maintain a separate accounting for each 
designated beneficiary. A specified individual must be 
designated as the beneficiary at the commencement of 
participation in a qualified State tuition program (i.e., when 
contributions are first made to purchase an interest in such a 
program), unless interests in such a program are purchased by a 
State or local government or a tax-exempt charity described in 
section 501(c)(3) as part of a scholarship program operated by 
such government or charity under which beneficiaries to be 
named in the future will receive such interests as 
scholarships. A transfer of credits (or other amounts) from one 
account benefitting one designated beneficiary to another 
account benefitting a different beneficiary is considered a 
distribution (as is a change in the designated beneficiary of 
an interest in a qualified State tuition program), unless the 
beneficiaries are members of the same family. For this purpose, 
the term ``member of the family'' means persons described in 
paragraphs (1) through (8) of section 152(a)--e.g., sons, 
daughters, brothers, sisters, nephews and nieces, certain in-
laws--and any spouse of such persons or of the original 
beneficiary. Earnings on an account may be refunded to a 
contributor or beneficiary, but the State or instrumentality 
must impose a more than de minimis monetary penalty unless the 
refund is (1) used for qualified higher education expenses of 
the beneficiary, (2) made on account of the death or disability 
of the beneficiary, or (3) made on account of a scholarship 
received by the designated beneficiary to the extent the amount 
refunded does not exceed the amount of the scholarship used for 
higher education expenses.
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    \31\ Sections 529(c)(2), (c)(4), and (c)(5), and section 530(d)(3) 
provide special estate and gift tax rules for contributions made to, 
and distributions made from, qualified State tuition programs and 
education IRAs.
---------------------------------------------------------------------------
    To the extent that a distribution from a qualified State 
tuition program is used to pay for qualified tuition and 
related expenses (as defined in sec. 25A(f)(1)), the 
distributee (or another taxpayer claiming the distributee as a 
dependent) may claim the HOPE credit or Lifetime Learning 
credit under section 25A with respect to such tuition and 
related expenses (assuming that the other requirements for 
claiming the HOPE credit or Lifetime Learning credit are 
satisfied and the modified AGI phaseout for those credits does 
not apply).

                           reasons for change

    The Committee believes that distributions from qualified 
tuition programs should not be subject to Federal income tax to 
the extent that such distributions are used to pay for 
qualified higher education expenses of undergraduate or 
graduate students who are attending institutions of higher 
education or certain vocational schools. In addition, the 
Committee believes that the present-law rules governing 
qualified tuition programs should be expanded to permit private 
educational institutions to maintain certain prepaid tuition 
programs.

                        explanation of provision

Qualified tuition program

    The bill expands the definition of ``qualified tuition 
program'' to include certain prepaid tuition programs 
established and maintained by one or more eligible educational 
institutions (which may be private institutions) that satisfy 
the requirements under section 529 (other than the present-law 
State sponsorship rule). In the case of a qualified tuition 
program maintained by one or more private educational 
institutions, persons will be able to purchase tuition credits 
or certificates on behalf of a designated beneficiary, but will 
not be able to make contributions to savings account plans.

Exclusion from gross income

    Under the bill, an exclusion from gross income is provided 
for distributions made in taxable years beginning after 
December 31, 2000, from qualified State tuition programs to the 
extent that the distribution is used to pay for qualified 
higher education expenses. This exclusion from gross income is 
extended to distributions from qualified tuition programs 
established and maintained by an entity other than a State or 
agency or instrumentality thereof, for distributions made in 
taxable years after December 31, 2003.
    The bill also allows a taxpayer to claim a HOPE credit or 
Lifetime Learning credit for a taxable year and to exclude from 
gross income amounts distributed (both the principal and the 
earnings portions) from a qualified tuition program on behalf 
of the same student as long as the distribution is not used for 
the same expenses for which a credit was claimed. 32
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    \32\ In determining the amount of a distribution that can be 
excluded from income for a taxable year, a taxpayer's total higher 
education expenses will be reduced first by the amount of such expenses 
which were taken into account in determining the credit allowed to (and 
elected by) the taxpayer (or other person with respect to such 
expenses). After any reduction for expenses allocable to the credits, 
taxpayers may determine how to allocate their qualified education 
expenses among the various remaining education provisions (including 
education IRAs and qualified tuition programs) for which they are 
eligible; however, under no circumstances, can the same expenses be 
allocated to more than one provision. An example of how a taxpayer may 
claim a HOPE or Lifetime Learning credit and, in the same year, 
coordinate exclusions from gross income for distributions from a 
qualified tuition program and an education IRA is discussed above in 
connection with the modification of the rules governing education IRAs.
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Definition of qualified higher education expenses

    Under the bill, the definition of ``qualified higher 
education expenses'' is modified to mean: (1) tuition and fees 
required for the enrollment or attendance of a designated 
beneficiary at an eligible education institution, and (2) 
expenses for books, supplies, and equipment incurred in 
connection with such enrollment or attendance (but not in 
excess of the allowance for books and supplies determined by 
the educational institution for purposes of federal financial 
assistance programs). The bill also provides that ``qualified 
higher education expenses'' will not include expenses for 
education involving sports, games, or hobbies unless this 
education is part of the student's degree program or is taken 
to acquire or improve job skills of the individual. The bill 
does not change the definition of ``qualified higher education 
expenses'' with respect to expenses for room and board.

Rollovers for benefit of same beneficiary

    The bill provides that a transfer of credits (or other 
amounts) from one qualified tuition program for the benefit of 
a designated beneficiary to another qualified tuition program 
for the benefit of the same beneficiary will not be considered 
a distribution for a maximum of one such transfer in each 1-
year period.

Member of family

    The bill further provides that, for purposes of tax-free 
rollovers and changes of designated beneficiaries, a ``member 
of the family'' includes first cousins of such beneficiary.

                             effective date

    The provision permitting the establishment of qualified 
tuition programs maintained by one or more private educational 
institutions is effective for taxable years beginning after 
December 31, 2000. The exclusion from gross income for certain 
distributions from qualified State tuition programs under 
section 529 is effective for distributions made in taxable 
years beginning after December 31, 2000. In the case of a 
qualified tuition program established and maintained by an 
entity other than a State or agency or instrumentality thereof, 
the provision allowing an exclusion from gross income for 
certain distributions is effective for distributions made in 
taxable years beginning after December 31, 2003. The provision 
coordinating distributions from qualified tuition programs with 
the HOPE and Lifetime Learning credits is effective for 
distributions made after December 31, 2000. The provision 
modifying the definition of qualified higher education expenses 
is effective for amounts paid for education furnished after 
December 31, 1999. The provisions allowing rollovers for the 
same beneficiary and including first cousins as a member of the 
family are effective for taxable years beginning after December 
31, 2000.

    C. Eliminate Tax on Awards under National Health Service Corps 
 Scholarship Program, F. Edward Hebert Armed Forces Health Professions 
 Scholarship and Financial Assistance Program, National Institutes of 
 Health Undergraduate Scholarship Program, and Certain State-sponsored 
                          Scholarship Programs


            (sec. 403 of the bill and sec. 117 of the Code)


                              present law

    Section 117 excludes from gross income qualified 
scholarships received by an individual who is a candidate for a 
degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. In addition to the exclusion for qualified 
scholarships, section 117 provides an exclusion from gross 
income for qualified tuition reductions for certain education 
provided to employees (and their spouses and dependents) of 
certain educational organizations.
    Section 117(c) specifically provides that the exclusion for 
qualified scholarships and qualified tuition reductions does 
not apply to any amount received by a student that represents 
payment for teaching, research, or other services by the 
student required as a condition for receiving the scholarship 
or tuition reduction.
    The National Health Service Corps Scholarship Program (the 
``NHSC Scholarship Program''), the F. Edward Hebert Armed 
Forces Health Professions Scholarship and Financial Assistance 
Program (the ``Armed Forces Scholarship Program''), and the 
National Institutes of Health Undergraduate Scholarship Program 
(the ``NIH Scholarship Program'') provide education awards to 
participants on condition that the participants provide certain 
services. In the case of the NHSC Program, the recipient of the 
scholarship is obligated to provide medical services in a 
geographic area (or to an underserved population group or 
designated facility) identified by the Public Health Service as 
having a shortage of health-care professionals. In the case of 
the Armed Forces Scholarship Program, the recipient of the 
scholarship is obligated to serve a certain number of years in 
the military at an armed forces medical facility. The National 
Institutes of Health Undergraduate Scholarship Program (the 
``NIH Scholarship Program'') awards scholarships to students 
from disadvantaged backgrounds interested in pursuing a career 
in biomedical research. In exchange, the recipients must work 
for the National Institutes of Health after graduation. Several 
States also provide a limited number of scholarships to 
students in health professions who are obligated to work in 
underserved areas for a period of time after graduation. 
Because the recipients of scholarships in all of these programs 
are required to perform services in exchange for the education 
awards, the awards used to pay higher education expenses are 
taxable income to the recipient.

                           reasons for change

    To improve health care services in underserved areas, the 
Committee believes that it is appropriate to provide tax-free 
treatment for scholarships received by students under the NHSC 
Scholarship Program, Armed Forces Scholarship Program, NIH 
Scholarship Program, and State-sponsored programs with similar 
objectives.

                        explanation of provision

    The bill provides that amounts received by an individual 
under the NHSC Scholarship Program, the Armed Forces 
Scholarship Program, the NIH Scholarship Program, or any State-
sponsored health scholarship program determined by the 
Secretary of the Treasury to have substantially similar 
objectives to these programs are eligible for tax-free 
treatment as qualified scholarships under section 117, without 
regard to any service obligation by the recipient. As with 
other qualified scholarships under section 117, the tax-free 
treatment does not apply to amounts received by students for 
regular living expenses, including room and board.

                             effective date

    The provision is effective for education awards received 
under the NHSC Scholarship Program, the Armed Forces 
Scholarship Program, and the NIH Scholarship Program after 
December 31, 1993. The provision is effective for education 
awards received under any State-sponsored health scholarship 
program designated by the Secretary of the Treasury after 
December 31, 1999.

 D. Liberalize Tax-Exempt Bond Arbitrage Rebate Exceptions for Public 
                       School Construction Bonds


          (sec. 404-405 of the bill and sec. 148 of the Code)


                              Present Law

    Interest on debt incurred by States or local governments is 
excluded from income if the proceeds of the borrowing are used 
to carry out governmental functions of those entities or the 
debt is repaid with governmental funds (sec. 103). Like other 
activities carried out and paid for by States and local 
governments, the construction, renovation, and operation of 
public schools is an activity eligible for financing with the 
proceeds of tax-exempt bonds.
    The Federal income tax does not apply to the income of 
States and local governments that is derived from the exercise 
of an essential governmental function. To prevent these tax-
exempt entities from issuing more Federally subsidized tax-
exempt bonds than is necessary for the activity being financed 
or from issuing such bonds earlier than necessary, the Code 
includes arbitrage restrictions limiting the ability to profit 
from investment of tax-exempt bond proceeds. In general, 
arbitrage profits may be earned only during specified periods 
(e.g., defined ``temporary periods'') before funds are needed 
for the purpose of the borrowing or on specified types of 
investments (e.g., ``reasonably required reserve or replacement 
funds''). Subject to limited exceptions, profits that are 
earned during these periods or on such investments must be 
rebated to the Federal Government.
    The Code includes three exceptions applicable to education-
related bonds. First, issuers of all types of tax-exempt bonds 
are not required to rebate arbitrage profits if all of the 
proceeds of the bonds are spent for the purpose of the 
borrowing within six months after issuance. In the case of 
governmental bonds (including bonds to finance public schools) 
the six-month expenditure exception is treated as satisfied if 
at least 95 percent of the proceeds is spent within six months 
and the remaining five percent is spent within 12 months after 
the bonds are issued.
    Second, in the case of bonds to finance certain 
construction activities, including school construction and 
renovation, the six-month period is extended to 24 months for 
construction proceeds. Arbitrage profits earned on construction 
proceeds are not required to be rebated if all such proceeds 
(other than certain retainage amounts) are spent by the end of 
the 24-month period and prescribed intermediate spending 
percentages are satisfied.
    Third, governmental bonds issued by ``small'' governments 
are not subject to the rebate requirement. Small governments 
are defined as general purpose governmental units that issue no 
more than $5 million of tax-exempt governmental bonds in a 
calendar year. The $5 million limit is increased to $10 million 
if at least $5 million of the bonds are used to finance public 
schools.

                           Reasons for Change

    The policy underlying the arbitrage rebate exception for 
bonds of small governmental units is to reduce complexity for 
these entities because they may not have in-house financial 
staff to engage in the expenditure and investment tracking 
necessary for rebate compliance. The exception further is 
justified by the limited potential for arbitrage profits at 
small issuance levels and limitation of the provision to 
governmental bonds, which typically require voter approval 
before issuance. The Committee believes that a limited increase 
of $5 million per year for public school construction bonds 
will more accurately conform this present-law exception to 
current school construction costs.
    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

Liberalize construction bond expenditure rule for governmental bonds 
        for public schools

    The present-law 24-month expenditure exception to the 
arbitrage rebate requirement are liberalized for certain public 
school bonds. Under the bill, no rebate is required with 
respect to earnings on available construction proceeds of 
public school bonds if the proceeds are spent within 48 months 
after the bonds are issued and the following intermediate 
spending levels are satisfied:




12 months.................................  At least 10 percent
24 months.................................  At least 30 percent
36 months.................................  At least 60 percent
48 months.................................  100 percent (less present-
                                             law retainage amounts which
                                             must be spent within 60
                                             months of issuance)


Increase amount of bonds that may be issued by governments qualifying 
        for the ``small governmental unit'' arbitrage rebate exception

    The additional amount of governmental bonds for public 
schools that small governmental units may issue without being 
subject to the arbitrage rebate requirement is increased from 
$5 million to $10 million. Thus, these governmental units may 
issue up to $15 million of governmental bonds in a calendar 
year, provided that at least $10 million of the bonds are used 
to finance construction of public schools.

                             Effective Date

    The liberalized expenditure exception for public school 
construction bonds is effective for bonds issued after December 
31, 1999.
    The increase in the small governmental unit arbitrage 
rebate exception is effective for calendar years beginning 
after December 31, 1999.

     E. Eliminate 60-month Limit on Student Loan Interest Deduction


            (sec. 406 of the bill and sec. 221 of the Code)


                              Present Law

    Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, subject to a maximum annual deduction limit 
(sec. 221). The deduction is allowed only with respect to 
interest paid on a qualified education loan during the first 60 
months in which interest payments are required. Required 
payments of interest generally do not include nonmandatory 
payments, such as interest payments made during a period of 
loan forbearance. Months during which interest payments are not 
required because the qualified education loan is in deferral or 
forbearance do not count against the 60-month period. No 
deduction is allowed to an individual if that individual is 
claimed as a dependent on another taxpayer's return for the 
taxable year.
    A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for certain costs of 
attendance (including room and board) of a student (who may be 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer as of the time the indebtedness was incurred) who is 
enrolled in a degree program on at least a half-time basis at 
(1) an accredited post-secondary educational institution 
defined by reference to section 481 of the Higher Education Act 
of 1965, or (2) an institution conducting an internship or 
residency program leading to a degree or certificate from an 
institution of higher education, a hospital, or a health care 
facility conducting postgraduate training.
    The maximum allowable deduction per taxpayer return is 
$1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and 
thereafter. 33 The deduction is phased out ratably 
for individual taxpayers with modified adjusted gross income of 
$40,000-$55,000 and $60,000--$75,000 for joint returns. The 
income ranges will be indexed for inflation after 2002.
---------------------------------------------------------------------------
    \33\  The maximum allowable deduction for 1998 was $1,000.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee understands that many students incur 
considerable debt in the course of obtaining undergraduate and 
graduate education. The Committee believes that it is 
appropriate to expand the deduction for individuals who have 
paid interest on qualified education loans by repealing the 
limitation that the deduction is allowed only with respect to 
interest paid during the first 60 months in which interest 
payments are required. In addition, the repeal of the 60-month 
limitation lessens complexity and administrative burdens for 
taxpayers, lenders, loan servicing agencies, and the Internal 
Revenue Service.

                        Explanation of Provision

    The bill repeals both the limit on the number of months 
during which interest paid on a qualified education loan is 
deductible and the restriction that nonmandatory payments of 
interest are not deductible.

                             effective date

    The provision is effective for interest paid on qualified 
education loans after December 31, 1999.

               TITLE V. HEALTH CARE TAX RELIEF PROVISIONS


       A. Above-the-Line Deduction for Health Insurance Expenses


          (sec. 502 of the bill and new sec. 222 of the Code)


                              Present Law

    Under present law, the tax treatment of health insurance 
expenses depends on the individual's circumstances. Self-
employed individuals may deduct a portion of health insurance 
expenses for the individual and his or her spouse and 
dependents. The deductible percentage of health insurance 
expenses of a self-employed individual is 60 percent in 1999 
through 2001; 70 percent in 2002; and 100 percent in 2003 and 
thereafter. The deduction for health insurance expenses of 
self-employed individuals is not available for any month in 
which the taxpayer is eligible to participate in a subsidized 
health plan maintained by the employer of the taxpayer or the 
taxpayer's spouse. The deduction applies to qualified long-term 
care insurance premiums treated as medical expenses under the 
itemized deduction for medical expenses, described below.
    Employees can exclude from income 100 percent of employer-
provided health insurance.
    Individuals who itemize deductions may deduct their health 
insurance expenses only to the extent that the total medical 
expenses of the individual exceed 7.5 percent of adjusted gross 
income (sec. 213). Subject to certain dollar limitations, 
premiums for qualified long-term care insurance are treated as 
medical expenses for purposes of the itemized deduction for 
medical expenses (sec. 213). The amount of qualified long-term 
care insurance premiums that may be taken into account for 1999 
is as follows: $210 in the case of an individual 40 years old 
or less; $400 in the case of an individual who is more than 40 
but not more than 50; $800 in the case of an individual who is 
more than 50 but not more than 60; $2,120 in the case of an 
individual who is more than 60 but not more than 70; and $2,660 
in the case of an individual who is more than 70. These dollar 
limits are indexed for inflation.

                           Reasons for Change

    The Committee believes that the present-law inequities in 
tax treatment of health insurance expenses should be reduced. 
In addition, the Committee believes that individuals who are 
uninsured should be provided with a tax incentive to purchase 
health insurance for themselves and their families.

                        Explanation of Provision

    The provision provides an above-the-line deduction for a 
percentage of the amount paid during the year for insurance 
which constitutes medical care (as defined under sec. 213, 
other than long-term care insurance treated as medical care 
under sec. 213) for the taxpayer and his or her spouse and 
dependents.34 The deductible percentage is: 25 
percent in 2001; 40 percent in 2002; 50 percent in 2003 through 
2006; 75 percent in 2007; and 100 percent in 2008 and 
thereafter.
---------------------------------------------------------------------------
    \34\ The deduction only applies to health insurance that 
constitutes medical care; it does not apply to medical expenses. The 
deduction applies to self-insured arrangements (provided such 
arrangements constitute insurance, e.g., there is appropriate risk-
shifting) and coverage under employer plans treated as insurance under 
section 104. Another provision of the bill provides a similar deduction 
for qualified long-term care insurance expenses.
---------------------------------------------------------------------------
    The deduction is not available to an individual for any 
month in which the individual is covered under an employer-
sponsored health plan if at least 50 percent of the cost of the 
coverage is paid or incurred by the employer.35 For 
purposes of this rule, any amounts excludable from the gross 
income of the employee under the exclusion for employer-
provided health coverage is treated as paid or incurred by the 
employer; thus, for example, health insurance purchased by an 
employee through a cafeteria plan with salary reduction amounts 
is considered to be paid for by the employer.36 In 
determining whether the 50-percent threshold is met, all health 
plans of the employer in which the employee participates are 
treated as a single plan. If the employer pays for less than 50 
percent of the cost of all health plans in which the individual 
participates, the deduction is available only with respect to 
each plan with respect to which the employer subsidy is less 
than 50 percent. Cost is determined as under the health care 
continuation rules. The following examples illustrate the 
application of the 50-percent rule.
---------------------------------------------------------------------------
    \35\ This rule is applied separately with respect to qualified 
long-term care insurance.
    \36\ Excludable employer contributions to a health flexible 
spending arrangement or medical savings account (including salary 
reduction contributions) are also considered amounts paid by the 
employer for health insurance that constitutes medical care. Salary 
reduction contributions are not considered to be amounts paid by the 
employee.
---------------------------------------------------------------------------
    Example 1: Employee A participates in an employer-sponsored 
health plan. The annual cost for single coverage is $3,000, and 
the annual additional cost for coverage for A's spouse and 
dependents is $1,000. The employer pays 100 percent of the cost 
of individual coverage, but does not pay any additional amount 
for family coverage. A chooses family coverage. The total 
amount the employer pays for the insurance is $3,000, which is 
75 percent of the total cost of the coverage ($4,000). Thus, 
the deduction is not available.
    Example 2: Employee B participates in two employer-
sponsored health plans. One plan provides major medical 
coverage. The cost of this plan is $2,000 per year. The 
employer pays for half the cost of this plan ($1,000). The 
second plan provides only dental coverage. The cost of the 
dental plan is $300 per year, which is paid by the employee. 
The total cost of the health plans in which B participates is 
$2,300. The employer pays for less than 50 percent of this 
total cost. B may deduct the cost of the dental coverage; but 
not B's share of the premium for the major medical plan, 
because the employer pays for at least 50 percent of the cost 
of that plan.
    Example 3: Employee C participates in an employer-sponsored 
health plan. The cost of the plan is $4,000. Employee C pays 
$1,000 of the cost of the plan by salary reduction through a 
cafeteria plan. The $1,000 salary reduction contribution is an 
employer payment. Thus, the employer pays only one-fourth of 
the cost of the coverage. C may deduct the $3,000 C pays for 
the plan on an after-tax basis.
    The deduction is not available to individuals enrolled in 
Medicare, Medicaid, the Federal Employees Health Benefit 
Program (``FEHBP''),37 Champus, VA, Indian Health 
Service, or Children's Health Insurance programs. Thus, for 
example, the deduction is not available with respect to Medigap 
coverage, because such coverage is provided to individuals 
enrolled in Medicare.
---------------------------------------------------------------------------
    \37\ This rule does not prevent individuals covered by the FEHBP 
from deducting premiums for health care continuation coverage, provided 
the requirements for the deduction are otherwise met.
---------------------------------------------------------------------------
    The provision authorizes the Secretary to prescribe rules 
necessary to carry out the provision, including appropriate 
reporting requirements for employers.

                             Effective Date

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

           B. Provisions Relating to Long-term Care Insurance


(secs. 501 and 502 of the bill, new sec. 222 of the Code and secs. 106 
                          and 125 of the Code)


                              Present Law

Tax treatment of health insurance and long-term care insurance

    Under present law, the tax treatment of health insurance 
expenses depends on the individual's circumstances. Self-
employed individuals may deduct a portion of health insurance 
expenses for the individual and his or her spouse and 
dependents. The deductible percentage of health insurance 
expenses of a self-employed individual is 60 percent in 1999 
through 2001; 70 percent in 2002; and 100 percent in 2003 and 
thereafter. The deduction for health insurance expenses of 
self-employed individuals is not available for any month in 
which the taxpayer is eligible to participate in a subsidized 
health plan maintained by the employer of the taxpayer or the 
taxpayer's spouse. The deduction applies to qualified long-term 
care insurance premiums treated as medical expenses under the 
itemized deduction for medical expenses, described below.
    Employees can exclude from income 100 percent of employer-
provided health insurance or qualified long-term care 
insurance.
    Individuals who itemize deductions may deduct their health 
insurance expenses only to the extent that the total medical 
expenses of the individual exceed 7.5 percent of adjusted gross 
income (sec. 213). Subject to certain dollar limitations, 
premiums for qualified long-term care insurance are treated as 
medical expenses for purposes of the itemized deduction for 
medical expenses (sec. 213). The amount of qualified long-term 
care insurance premiums that may be taken into account for 1999 
is as follows: $210 in the case of an individual 40 years old 
or less; $400 in the case of an individual who is more than 40 
but not more than 50; $800 in the case of an individual who is 
more than 50 but not more than 60; $2,120 in the case of an 
individual who is more than 60 but not more than 70; and $2,660 
in the case of an individual who is more than 70. These dollar 
limits are indexed for inflation.

Cafeteria plans

    Under present law, compensation generally is includible in 
gross income when actually or constructively received. An 
amount is constructively received by an individual if it is 
made available to the individual or the individual has an 
election to receive such amount. Under one exception to the 
general principle of constructive receipt, amounts are not 
included in the gross income of a participant in a cafeteria 
plan described in section 125 of the Code solely because the 
participant may elect among cash and certain employer-provided 
qualified benefits under the plan. This constructive receipt 
exception is not available if the individual is permitted to 
revoke a benefit election during a period of coverage in the 
absence of a change in family status or certain other events.
    In general, qualified benefits are certain specified 
benefits that are excludable from an employee's gross income by 
reason of a specific provision of the Code. Thus, employer-
provided accident or health coverage, group-term life insurance 
coverage (whether or not subject to tax by reason of being in 
excess of the dollar limit on the exclusion for such 
insurance), and benefits under dependent care assistance 
programs may be provided through a cafeteria plan. The 
cafeteria plan exception from the principle of constructive 
receipt generally also applies for employment tax (FICA and 
FUTA) purposes.38
---------------------------------------------------------------------------
    \38\ Elective contributions under a qualified cash or deferred 
arrangement that is part of a cafeteria plan are subject to employment 
taxes.
---------------------------------------------------------------------------
    Long-term care insurance cannot be provided under a 
cafeteria plan.

Flexible spending arrangements

    A flexible spending arrangement (``FSA'') is a 
reimbursement account or other arrangement under which an 
employer pays or reimburses employees for medical expenses or 
certain other nontaxable employer-provided benefits, such as 
dependent care. An FSA may be part of a cafeteria plan and may 
be funded through salary reduction. FSAs may also be provided 
by an employer outside a cafeteria plan. FSAs are commonly 
used, for example, to reimburse employees for medical expenses 
not covered by insurance. Qualified long-term care services 
cannot be provided through an FSA.

                           Reasons for Change

    The Health Insurance Portability and Accountability Act of 
1996 (``HIPAA'') included provisions providing favorable tax 
treatment for qualified long-term care insurance. The Congress 
enacted those provisions in order to provide an incentive for 
individuals to take financial responsibility for their long-
term care needs. The Committee believes that further incentives 
are appropriate for individuals to purchase their own qualified 
long-term care insurance. The Committee also wishes to 
facilitate the purchase of qualified long-term care insurance 
through the workplace.

                        Explanation of Provision

Deduction for qualified long-term care insurance expenses

    The provision provides an above-the-line deduction for a 
percentage of the amount paid during the year for long-term 
care insurance which constitutes medical care (as defined under 
sec. 213) for the taxpayer and his or her spouse and 
dependents.39 The deductible percentage is: 25 
percent in 2001; 40 percent in 2002; 50 percent in 2003 through 
2006; 75 percent in 2007; and 100 percent in 2008 and 
thereafter.
---------------------------------------------------------------------------
    \39\ The deduction would only apply to insurance that constitutes 
medical care; it would not apply to long-term care insurance expenses. 
The deduction would apply to self-insured arrangements (provided such 
arrangements constitute insurance, e.g., there is appropriate risk-
shifting) and coverage under employer plans treated as insurance under 
section 104. Another provision of the bill provides a similar deduction 
for health insurance expenses.
---------------------------------------------------------------------------
    The deduction is not available to an individual for any 
month in which the individual is covered under an employer-
sponsored health plan if at least 50 percent of the cost of the 
coverage is paid or incurred by the employer.40 For 
purposes of this rule, any amounts excludable from the gross 
income of the employee with respect to qualified long-term care 
insurance are treated as paid or incurred by the employer. In 
determining whether the 50-percent threshold is met, all plans 
of the employer providing long-term care in which the employee 
participates are treated as a single plan. If the employer pays 
less than 50 percent of the cost of all long-term care plans in 
which the individual participates, the deduction is available 
only with respect to each plan with respect to which the 
employer pays for less than 50 percent of the cost. Cost is 
determined as under the health care continuation rules.
---------------------------------------------------------------------------
    \40\ This rule is applied separately with respect to health 
insurance.
---------------------------------------------------------------------------
    The provision authorizes the Secretary to prescribe rules 
necessary to carry out the provision, including appropriate 
reporting requirements for employers.
    The provision provides that qualified long-term care 
insurance is a qualified benefit under a cafeteria plan. The 
provision also provides that qualified long-term care services 
can be provided under an FSA.41
---------------------------------------------------------------------------
    \41\ Excludable employer contributions to a flexible spending 
arrangement or a cafeteria plan for qualified long-term care insurance 
or services are considered an amount paid by the employer for long-term 
care insurance.
---------------------------------------------------------------------------

                             Effective Date

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

           C. Extend Availability of Medical Savings Accounts


            (sec. 503 of the bill and sec. 220 of the Code)


                              Present Law

In general

    Within limits, contributions to a medical savings account 
(``MSA'') 42 are deductible in determining AGI if 
made by an eligible individual and are excludable from gross 
income and wages for employment tax purposes if made by the 
employer of an eligible individual. Earnings on amounts in an 
MSA are not currently taxable. Distributions from an MSA for 
medical expenses are not taxable. Distributions not used for 
medical expenses are taxable. In addition, distributions not 
used for medical expenses are subject to an additional 15-
percent tax unless the distribution is made after age 65, 
death, or disability.
---------------------------------------------------------------------------
    \42\ In general, an MSA is a trust or custodial account created 
exclusively for the benefit of the account holder and is subject to 
rules similar to those applicable to individual retirement 
arrangements. The trustee of an MSA can be a bank, insurance company, 
or other person who demonstrates to the satisfaction of the Secretary 
that the manner in which such person will administer the trust will be 
consistent with applicable requirements.
---------------------------------------------------------------------------

Eligible individuals

    MSAs are available to employees covered under an employer-
sponsored high deductible plan of a small employer and self-
employed individuals regardless of the size of the entity for 
which the individual performs services.43 An 
employer is a small employer if it employed, on average, no 
more than 50 employees on business days during either the 
preceding or the second preceding year.
---------------------------------------------------------------------------
    \43\ Self-employed individuals include more than 2-percent 
shareholders of S corporations who are treated as partners for purposes 
of fringe benefit rules pursuant to section 1372.
---------------------------------------------------------------------------
    In order for an employee of a small employer to be eligible 
to make MSA contributions (or to have employer contributions 
made on his or her behalf), the employee must be covered under 
an employer-sponsored high deductible health plan (see the 
definition below) and must not be covered under any other 
health plan (other than a plan that provides certain permitted 
coverage, described below). In the case of an employee, 
contributions can be made to an MSA either by the individual or 
by the individual's employer. However, an individual is not 
eligible to make contributions to an MSA for a year if any 
employer contributions are made to an MSA on behalf of the 
individual for the year. Similarly, if the individual's spouse 
is covered under the high deductible plan covering such 
individual and the spouse's employer makes a contribution to an 
MSA for the spouse, the individual may not make MSA 
contributions for the year.
    Similarly, in order to be eligible to make contributions to 
an MSA, a self-employed individual must be covered under a high 
deductible health plan and no other health plan (other than a 
plan that provides certain permitted coverage, described 
below). A self-employed individual is not an eligible 
individual (by reason of being self-employed) if the high 
deductible plan under which the individual is covered is 
established or maintained by an employer of the individual (or 
the individual's spouse).
    An individual with other coverage in addition to a high 
deductible plan is still eligible for an MSA if such other 
coverage is certain permitted insurance or is coverage (whether 
provided through insurance or otherwise) for accidents, 
disability, dental care, vision care, or long-term care. 
Permitted insurance is: (1) Medicare supplemental insurance; 
(2) insurance if substantially all of the coverage provided 
under such insurance relates to (a) liabilities incurred under 
worker's compensation law, (b) tort liabilities, (c) 
liabilities relating to ownership or use of property (e.g., 
auto insurance), or (d) such other similar liabilities as the 
Secretary may prescribe by regulations; (3) insurance for a 
specified disease or illness; and (4) insurance that provides a 
fixed payment for hospitalization.
    If a small employer with an MSA plan ceases to become a 
small employer (i.e., exceeds the 50-employee limit), then the 
employer (and its employees) can continue to establish and make 
contributions to MSAs (including contributions for new 
employees and employees that did not previously have an MSA) 
until the year following the first year in which the employer 
has more than 200 employees. After that, those employees who 
had an MSA (to which individual or employer contributions were 
made in any year) can continue to make contributions (or have 
contributions made on their behalf) even if the employer has 
more than 200 employees.

Tax treatment of and limits on contributions

    Individual contributions to an MSA are deductible (within 
limits) in determining adjusted gross income (i.e., ``above the 
line''). In addition, employer contributions are excludable 
from gross income and wages for employment tax purposes (within 
the same limits), except that this exclusion does not apply to 
contributions made through a cafeteria plan. No deduction is 
allowed to any individual for MSA contributions if such 
individual is a dependent on another taxpayer's tax return.
    In the case of a self-employed individual, the deduction 
cannot exceed the individual's earned income from the trade or 
business with respect to which the high deductible plan is 
established. In the case of an employee, the deduction cannot 
exceed the individual's compensation attributable to the 
employer sponsoring the high deductible plan in which the 
individual is enrolled.
    The maximum annual contribution that can be made to an MSA 
for a year is 65 percent of the deductible under the high 
deductible plan in the case of individual coverage and 75 
percent of the deductible in the case of family coverage.
    Contributions for a year can be made until the due date for 
the individual's tax return for the year (determined without 
regard to extensions).
    If an employer provides high deductible health plan 
coverage coupled with an MSA to employees and makes employer 
contributions to the MSAs during a calendar year, the employer 
must make available a comparable contribution on behalf of all 
employees with comparable coverage during the same coverage 
period in the calendar year. Contributions are considered 
comparable if they are either of the same dollar amount or the 
same percentage of the deductible under the high deductible 
plan. The comparability rule does not restrict contributions 
that can be made to an MSA by a self- employed individual.
    If employer contributions do not comply with the 
comparability rule during a calendar year, then the employer is 
subject to an excise tax equal to 35 percent of the aggregate 
amount contributed by the employer to MSAs of the employer for 
the year. In the case of a failure to comply with the 
comparability rule which is due to reasonable cause and not to 
willful neglect, the Secretary may waive part or all of the tax 
imposed to the extent that the payment of the tax is excessive 
relative to the failure involved.

Definition of high deductible plan

    A high deductible plan is a health plan with an annual 
deductible of at least $1,550 and no more than $2,300 in the 
case of individual coverage and at least $3,050 and no more 
than $4,600 in the case of family coverage. In addition, the 
maximum out-of-pocket expenses with respect to allowed costs 
(including the deductible) must be no more than $3,050 in the 
case of individual coverage and no more than $5,600 in the case 
of family coverage.44 A plan does not fail to 
qualify as a high deductible plan merely because it does not 
have a deductible for preventive care as required by State law. 
A plan does not qualify as a high deductible health plan if 
substantially all of the coverage under the plan is for 
permitted coverage (as described above). In the case of a self-
insured plan, the plan must in fact be insurance (e.g., there 
must be appropriate risk shifting) and not merely a 
reimbursement arrangement.
---------------------------------------------------------------------------
    \44\ These dollar amounts are for 1999. These amounts are indexed 
for inflation in $50 increments.
---------------------------------------------------------------------------

Tax treatment of MSAs

    Earnings on amounts in an MSA are not currently includible 
in income.

Taxation of distributions

    Distributions from an MSA for the medical expenses of the 
individual and his or her spouse or dependents generally are 
excludable from income.45 However, in any year for 
which a contribution is made to an MSA, withdrawals from an MSA 
maintained by that individual generally are excludable from 
income only if the individual for whom the expenses were 
incurred was covered under a high deductible plan for the month 
in which the expenses were incurred.46 This rule is 
designed to ensure that MSAs are in fact used in conjunction 
with a high deductible plan, and that they are not primarily 
used by other individuals who have health plans that are not 
high deductible plans.
---------------------------------------------------------------------------
    \45\ This exclusion does not apply to expenses that are reimbursed 
by insurance or otherwise.
    \46\ The exclusion still applies to expenses for continuation 
coverage or coverage while the individual is receiving unemployment 
compensation, even if for an individual who is not an eligible 
individual.
---------------------------------------------------------------------------
    For this purpose, medical expenses are defined as under the 
itemized deduction for medical expenses, except that medical 
expenses do not include expenses for insurance other than long-
term care insurance, premiums for health care continuation 
coverage, and premiums for health care coverage while an 
individual is receiving unemployment compensation under Federal 
or State law.
    Distributions that are not used for medical expenses are 
includible in income. Such distributions are also subject to an 
additional 15-percent tax unless made after age 65, death, or 
disability.

Cap on taxpayers utilizing MSAs

    The number of taxpayers benefiting annually from an MSA 
contribution is limited to a threshold level (generally 750,000 
taxpayers). If it is determined in a year that the threshold 
level has been exceeded (called a ``cut-off'' year) then, in 
general, for succeeding years during the 4-year pilot period 
1997-2000, only those individuals who (1) made an MSA 
contribution or had an employer MSA contribution for the year 
or a preceding year (i.e., are active MSA participants) or (2) 
are employed by a participating employer, is eligible for an 
MSA contribution. In determining whether the threshold for any 
year has been exceeded, MSAs of individuals who were not 
covered under a health insurance plan for the six month period 
ending on the date on which coverage under a high deductible 
plan commences would not be taken into account.47 
However, if the threshold level is exceeded in a year, 
previously uninsured individuals are subject to the same 
restriction on contributions in succeeding years as other 
individuals. That is, they would not be eligible for an MSA 
contribution for a year following a cut-off year unless they 
are an active MSA participant (i.e., had an MSA contribution 
for the year or a preceding year) or are employed by a 
participating employer.
---------------------------------------------------------------------------
    \47\ Permitted coverage, as described above, does not constitute 
coverage under a health insurance plan for this purpose.
---------------------------------------------------------------------------
    The number of MSAs established has not exceeded the 
threshold level.

End of MSA pilot program

    After December 31, 2000, no new contributions may be made 
to MSAs except by or on behalf of individuals who previously 
had MSA contributions and employees who are employed by a 
participating employer. An employer is a participating employer 
if (1) the employer madeany MSA contributions for any year to 
an MSA on behalf of employees or (2) at least 20 percent of the 
employees covered under a high deductible plan made MSA contributions 
of at least $100 in the year 2000.
    Self-employed individuals who made contributions to an MSA 
during the period 1997-2000 also may continue to make 
contributions after 2000.

                           Reasons for Change

    In enacting the MSA pilot program, the Congress wanted to 
provide additional health care options for individuals. The 
Congress believed that MSAs would give individuals more control 
over their health care dollars and provide an incentive for 
Americans to be more cost conscious purchasers of medical 
services by making available an alternative to low deductible 
health plans. MSA participation has been less than originally 
hoped for. The Committee believes that one of the reasons for 
the relatively low participation level is the restrictions 
imposed on MSAs. The Committee believes that these restrictions 
should be eliminated or modified in order to make MSAs more 
attractive.

                        Explanation of Provision

Eligible individuals and cap on MSAs

    The provision expands availability of MSAs to include all 
employees covered under a high deductible plan of an employer. 
Self-employed individuals continue to be eligible to contribute 
to an MSA.
    The provision also eliminates the cap on the number of 
taxpayers that can benefit annually from MSA contributions.

Definition of high deductible plan and limits on contributions

    The provision modifies the definition of a high deductible 
plan by decreasing the lower threshold for the annual 
deductible. Thus, under the provision, a high deductible plan 
means a plan with an annual deductible of at least $1,000 and 
not more than $2,300 (indexed) in the case of individual 
coverage and at least $2,000 and not more than $4,600 (indexed) 
in the case of family coverage. The limits on out-of-pocket 
expenses is the same as under present law.
    The provision increases the amount of deductible (or 
excludable) contributions to an MSA to 100 percent of the 
deductible under the high deductible plan. The provision also 
allows an individual to make deductible contributions to an MSA 
even if the individual's employer also made contributions. The 
provision provides that MSAs may be offered as part of a 
cafeteria plan. The total contributions to MSAs on behalf of an 
individual for a year may not exceed 100 percent of the 
deductible under the high deductible plan.

End of MSA pilot program

    The provision makes MSAs permanent.

                             Effective Date

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

            D. Additional Personal Exemption for Caretakers


            (sec. 504 of the bill and sec. 151 of the Code)


                              Present Law

    Generally, present law does not provide for an additional 
personal exemption based solely on the custodial care of 
parents or grandparents. However, taxpayers with dependent 
parents generally are able to claim a personal exemption for 
each of these dependents, if they satisfy five tests: (1) a 
member of household or relationship test; (2) a citizen test; 
(3) a joint return test; (4) a gross income test; and (5) a 
support test. The taxpayer is also required to list each 
dependent's tax identification number (the TIN'') on the tax 
return.
    The total amount of personal exemptions is subtracted 
(along with certain other items) from adjusted gross income 
(AGI) in arriving at taxable income. The amount of each 
personal exemption is $2,750 for 1999, and is adjusted annually 
for inflation. The total amount of the personal exemptions is 
phased out for taxpayers with AGI in excess of $126,600 for 
single taxpayers, $158,300 for heads of household, and $189,950 
for married couples filing joint returns. For 1999, the point 
at which a taxpayer's personal exemptions are completely 
phased-out is $249,100 for single taxpayers, $280,800 for heads 
of households, and $312,450 for married couples filing joint 
returns.

                           Reasons for Change

    Present law provides favorable tax treatment for long-term 
care insurance and services, but does not provide similar tax 
relief for in-home care. The Committee understands that in-
house care may be preferable in some cases, and that 
individuals who care for family members with special needs 
incur additional expenses. Thus, the Committee believes tax 
relief for in-home care is appropriate.

                        Explanation of Provision

    The bill provides taxpayers who maintain a household 
including one or more ``qualified persons'' with an additional 
personal exemption in computing income tax liability for each 
qualified person.
    To be a ``qualified person,'' an individual has to satisfy: 
(1) a relationship test, (2) a residency test, (3) a disability 
test, and (4) an identification test. The individual satisfies 
the relationship test if the individual was the father or 
mother of: (a) the taxpayer, (b) the taxpayer's spouse, or (c) 
a former spouse of the taxpayer. A stepfather, stepmother, and 
ancestors of the father or mother are treated as a father or 
mother for these purposes.
    An individual satisfies the residency test if the 
individual had the same principal place of abode as the 
taxpayer for the taxpayer's entire taxable year.
    An individual satisfies the disability test if the 
individual is certified before the due date of the return for 
the taxable year (without extensions) by a licensed physician 
as being unable for a period of at least 180 consecutive days 
to perform at least 2 activities of daily living (``ADLs'') 
without substantial assistance from another individual, due to 
a loss of functional capacity. As with the present-law rules 
relating to long-term care, ADLs are: (1) eating; (2) 
toileting; (3) transferring; (4) bathing; (5) dressing; and (6) 
continence. Substantial assistance includes hands-on assistance 
(that is, the physical assistance of another person without 
which the individual is unable to perform the ADL) and stand-by 
assistance (that is, the presence of another person within 
arm's reach of the individual that is necessary to prevent, by 
physical intervention, injury to the individual when performing 
the ADL).
    As an alternative to the 2-ADL test described above, an 
individual is considered to be disabled if he or she is 
certified by a licensed physician as (a) requiring substantial 
supervision for at least 6 months to be protected from threats 
to health and safety due to severe cognitive impairment and (b) 
being unable for at least 6 months to perform at least one or 
more ADLs or to engage in age appropriate activities as 
determined under regulations prescribed by the Secretary of the 
Treasury in consultation with the Secretary of Health and Human 
Services.
    An individual satisfies the identification test if the 
individual's name and taxpayer identification number (``TIN'') 
is included on the taxpayer's return for the taxable year.
    The bill provides that a taxpayer is treated as maintaining 
a household for any period only if over one-half of the cost of 
maintaining a household for such period is furnished by such 
taxpayer or, if such taxpayer is married, by such taxpayer and 
the taxpayer's spouse. The bill also provides that taxpayers 
who are married at the end of the taxable year must file a 
joint return to receive the credit unless they lived apart from 
their respective spouse for the last six months of the taxable 
year and the individual claiming the credit (1) maintained as 
his or her home a household for the qualified person for the 
entire taxable year and (2) furnished over one-half of the cost 
of maintaining that household in that taxable year. Finally, 
the bill provides that a taxpayer legally separated from the 
taxpayer's spouse under a decree of divorce or of separate 
maintenance will not be considered married for purposes of this 
provision.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1999.

E. Expand Human Clinical Trials Expenses Qualifying for the Orphan Drug 
                               Tax Credit


            (sec. 505 of the bill and sec. 45C of the Code)


                              Present Law

    Taxpayers may claim a 50-percent credit for expenses 
related to human clinical testing of drugs for the treatment of 
certain rare diseases and conditions, generally those that 
afflict less than 200,000 persons in the United States. 
Qualifying expenses are those paid or incurred by the taxpayer 
after the date on which the drug is designated as a potential 
treatment for a rare disease or disorder by the Food and Drug 
Administration (``FDA'') in accordance with the section 526 of 
the Federal Food, Drug, and Cosmetic Act.

                           Reasons for Change

    The Committee understands that approval for human clinical 
testing and designation as a potential treatment for a rare 
disease or disorder require separate reviews within the FDA. As 
a result, in some cases, a taxpayer may be permitted to begin 
human clinical testing prior to a drug being designated as a 
potential treatment for a rare disease or disorder. If the 
taxpayer delays human clinical testing in order to obtain the 
benefits of the orphan drug tax credit, which currently may be 
claimed only for expenses incurred after the drug is designated 
as a potential treatment for a rare disease or disorder, 
valuable time will have been lost and Congress's original 
intent in enacting the orphan drug tax credit will have been 
partially thwarted. Because taxpayers generally seek 
designation of a potential drug as a treatment for a rare 
disease or disorder at the time they seek approval to 
clinically test such drugs, the Committee believes it is 
appropriate to make such expenses related to human clinical 
testing that the taxpayer incurs prior to FDA designation 
eligible for the orphan drug tax credit to help speed cures to 
such insidious diseases.

                        Explanation of Provision

    The bill expands qualifying expenses to include those 
expenses related to human clinical testing incurred after the 
date on which the taxpayer files an application with the FDA 
for designation of the drug under section 526 of the Federal 
Food, Drug, and Cosmetic Act as a potential treatment for a 
rare disease or disorder. As under present law, the credit may 
only be claimed for such expenses related to drugs designated 
as a potential treatment for a rare disease or disorder by the 
FDA in accordance with section 526 of such Act.

                             Effective Date

    The provision would be effective for expenditures paid or 
incurred after December 31, 1999.

F. Add Certain Vaccines Against Streptococcus Pneumoniae to the List of 
                            Taxable Vaccines


            (sec. 506 of the bill and sec. 4132 of the Code)


                              Present Law

    A manufacturer's excise tax is imposed at the rate of 75 
cents per dose (sec. 4131) on the following vaccines 
recommended for routine administration to children: diphtheria, 
pertussis, tetanus, measles, mumps, rubella, polio, HIB 
(haemophilus influenza type B), hepatitis B, varicella (chicken 
pox), and rotavirus gastroenteritis. The tax applied to any 
vaccine that is a combination of vaccine components equals 75 
cents times the number of components in the combined vaccine.
    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. This program provides a substitute Federal, 
``no fault'' insurance system for the State-law tort and 
private liability insurance systems otherwise applicable to 
vaccine manufacturers and physicians. All persons immunized 
after September 30, 1988, with covered vaccines must pursue 
compensation under this Federal program before bringing civil 
tort actions under State law.

                           Reasons for Change

    Streptococcus pneumoniae (often referred to as 
pneumococcus) is a bacteria that can cause bacterial 
meningitis, a brain or spinal cord infection, bacteremia, a 
bloodstream infection, and otitis media (ear infection). The 
Committee understands that each year in the United States, 
pneumococcal disease accounts for an estimated 3,000 cases of 
bacterial meningitis, 50,000 cases of bacteremia, 500,000 cases 
of pneumonia, and 7 million cases of otitis media among all age 
groups. The Committee understands that, while there currently 
is a vaccine effective in preventing pneumococcal diseases in 
adults, that vaccine, a polysaccaride vaccine, does not induce 
an adequate immune response in young children and therefore 
does not protect children against these diseases. The Committee 
further understands that the Food and Drug Administration's 
(the ``FDA'') is expected to approve a new, sugar protein 
conjugate vaccine against the disease and the Centers for 
Disease Control is expected to recommend this conjugate vaccine 
for routine inoculation of children. The Committee believes 
American children will benefit from wide use of this new 
vaccine. The Committee believes that, by including the new 
vaccine with those presently covered by the Vaccine Trust Fund, 
greater application of the vaccine will be promoted. The 
Committee, therefore, believes it is appropriate to add the 
conjugate vaccine against streptococcus pneumoniae to the list 
of taxable vaccines.
    The Committee is aware that the Vaccine Trust Fund has a 
current cash-flow surplus in excess of $1.3 billion 
dollars.\48\ However, without more detailed information on the 
operation of the Vaccine Injury Compensation Program and likely 
future claims it is not possible to assess whether this current 
surplus is a prudent use of taxpayers' dollars. Therefore, the 
Committee finds it appropriate to direct the Comptroller 
General of the United States to report on the operation and 
management of expenditures from the Vaccine Trust Fund and to 
advise the Committee on the adequacy of the Vaccine Trust Fund 
to meet future claims under the Federal Vaccine Injury 
Compensation Program.
---------------------------------------------------------------------------
    \48\ Joint Committee on Taxation, Schedule of Present Federal 
Excise Taxes (as of January 1, 1999) (JCS-2-99), March 29, 1999, p. 48.
---------------------------------------------------------------------------

                        Explanation of Provision

    The bill adds any conjugate vaccine against streptococcus 
pneumoniae to the list of taxable vaccines.
    In addition, the bill directs the General Accounting Office 
(``GAO'') to report to the House Committee on Ways and Means 
and the Senate Committee on Finance on the operation and 
management of expenditures from the Vaccine Trust Fund and to 
advise the Committees on the adequacy of the Vaccine Trust Fund 
to meet future claims under the Federal Vaccine Injury 
Compensation Program.
    Within its report, to the greatest extent possible, the 
Committee would like to see a thorough statistical report of 
the number of claims submitted annually, the number of claims 
settled annually, and the value of settlements. The Committee 
would like to learn about the statistical distribution of 
settlements, including the mean and median values of 
settlements, and the extent to which the value of settlements 
varies with an injury attributed to an identifiable vaccine. 
The Committee also would like to learn about the settlement 
process, including a statistical distribution of the amount of 
time required from the initial filing of a claim to a final 
resolution.
    The Code provides that certain administrative expenses may 
be charged to the Vaccine Trust Fund. The Committee intends 
that the GAO report include an analysis of the overhead and 
administrative expenses charged to the Vaccine Trust Fund.
    The GAO is directed to report its findings to the House 
Committee on Ways and Means and the Senate Committee on Finance 
not later than December 31, 1999.

                             Effective Date

    The provision is effective for vaccine purchases beginning 
on the day after the date on which the Centers for Disease 
Control make final recommendation for routine administration of 
conjugated streptococcus pneumonia vaccines to children. No 
floor stocks tax is to be collected for amounts held for sale 
on that date. For sales on or before the date on which the 
Centers for Disease Control make final recommendation for 
routine administration of conjugate streptococcus pneumonia 
vaccines to children for which delivery is made after such 
date, the delivery date is deemed to be the sale date.

G. Above-the-line Deduction for Prescription Drug Insurance Coverage of 
       Medicare Beneficiaries If Certain Provisions Are in Effect


            (sec. 507 of the bill and sec. 213 of the Code)


                              Present Law

    Individuals who itemize deductions may deduct their health 
insurance expenses, including the cost of prescription drugs, 
to the extent that the total medical expenses of the individual 
exceed 7.5 percent of adjusted gross income (sec. 213).

                           Reasons for Change

    The Committee believes it appropriate to provide more 
favorable tax treatment for prescription drug insurance for 
Medicare beneficiaries when certain Medicare changes are 
enacted.

                        Explanation of Provision

    The provision provides an above-the-line deduction for 
Medicare beneficiaries for prescription drug insurance. The 
deduction will take effect when (a) the Federal Government 
provides assistance for prescription drug coverage for low-
income Medicare beneficiaries, (b) all policies supplemental to 
Medicare provide coverage for costs of prescription drugs, and 
(c) coverage for outpatient prescription drugs for Medicare 
beneficiaries is provided only through integrated comprehensive 
health plans which offer current Medicare covered services and 
maximum limitations on out-of-pocket spending and such 
comprehensive plans sponsored by the Health Care Financing 
Administration compete on the same basis as private plans.

                             Effective Date

    The provision is effective for taxable years beginning 
after the date of enactment.

                    VI. DEATH TAX RELIEF PROVISIONS


   A. Phase in Repeal of Estate, Gift, and Generation-Skipping Taxes


  (secs. 601-603, 611, and 621 of the bill and secs. 2001-2704 of the 
                                 Code)


                              Present Law

    A gift tax is imposed on lifetime transfers and an estate 
tax is imposed on transfers at death. The gift tax and the 
estate tax are unified so that a single graduated rate schedule 
applies to cumulative taxable transfers made by a taxpayer 
during his or her lifetime and at death. The unified estate and 
gift tax rates begin at 18 percent on the first $10,000 in 
cumulative taxable transfers and reach 55 percent on cumulative 
taxable transfers over $3 million. In addition, a 5-percent 
surtax is imposed on cumulative taxable transfers between $10 
million and the amount necessary to phase out the benefits of 
the graduated rates.
    A unified credit is available with respect to taxable 
transfers by gift and at death. The unified credit amount 
effectively exempts from tax a total of $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.
    A generation-skipping transfer (``GST'') tax generally is 
imposed on transfers, either directly or through a trust or 
similar arrangement, to a ``skip person'' (i.e., a beneficiary 
in a generation more than one generation below that of the 
transferor). Transfers subject to the GST tax include direct 
skips, taxable terminations, and taxable distributions. The GST 
tax is imposed at a flat rate of 55 percent (i.e., the top 
estate and gift tax rate) on cumulative generation-skipping 
transfers in excess of $1 million (indexed beginning in 1999).
    The basis of property acquired or passing from a decedent 
generally is its fair market value on the date of the 
decedent's death (or, if the alternative valuation date is 
elected, the earlier of six months after death or the date the 
property is sold or distributed by the estate). This step up 
(or step down) in basis eliminates the recognition of any 
income on the appreciation of the property that occurred prior 
to the decedent's death, and it has the effect of eliminating 
any tax benefit from any unrealized loss. The basis of property 
acquired by gift generally is the same as it was in the hands 
of the donor. However, if the donor's basis was greater than 
the fair market value of the property at the time of gift, 
then, for purposes of determining loss on the disposition of 
the property, the basis is its fair market value at the time of 
gift.

                           Reasons for Change

    The Committee finds that the estate, gift, and generation-
skipping taxes are unduly burdensome on all taxpayers, 
including decedents' estates, decedents' heirs, and businesses. 
The Committee further believes it is inappropriate to impose a 
tax by reason of the death of a taxpayer.

                        Explanation of Provision

    Beginning in 2009, the estate, gift, and GST taxes are 
repealed, after which a carryover basis regime takes effect for 
transfers of property at death. Transfers to surviving spouses 
at death will continue to receive a step up in basis. Assets 
from estates with a total value of $2 million or less also will 
receive a step up in basis; however, the carryover basis regime 
is phased in for estates valued in excess of $1.3 million and 
not over $2 million.
    Beginning in 2001, (1) the unified credit is replaced with 
a unified exemption, (2) the 5 percent surtax (which phases out 
the graduated rates) and the rates in excess of 50 percent are 
repealed, and (3) the estate, gift, and GST tax rates will be 
reduced each year until they are repealed in 2009.

Phaseout and repeal of estate, gift, and GST taxes

    Beginning in 2001, the top estate and gift tax rates above 
50 percent are repealed, as is the 5- percent surtax, which 
phases out the graduated rates. Beginning in 2002 and through 
2004, each of the rates of tax are reduced by 1 percentage 
point annually. Beginning in 2005 and through 2008, each of the 
rates of tax are reduced by 2 percentage points annually. The 
highest estate and gift tax rate in effect for a given year 
will be the GST tax rate for that year. The reduction in estate 
and gift tax rates is coordinated with the income tax rates 
such that the highest estate and gift tax rate (and, thus, the 
GST tax rate) is not reduced below the top individual tax rate 
under the broad-based income tax relief provision. The lower 
estate and gift tax rates will not be reduced below the lowest 
individual tax rate under the broad-based income tax relief 
provision. Beginning in 2002 and through 2008, the State death 
tax credit rates will be reduced in proportion to the reduction 
in the estate and gift tax rates.
    Beginning in 2009, the estate, gift, and GST taxes are 
repealed.

Replace unified credit with unified exemption

    Beginning in 2001, the unified credit is replaced with a 
unified exemption amount. The unified exemption amount is 
determined for the following calendar years: in 2001, $675,000; 
in 2002 and 2003, $700,000; in 2004, $850,000; in 2005, 
$950,000; and in 2006 and thereafter, $1,000,000. For decedents 
who are not residents and not citizens of the United States, 
the exemption is the greater of (1) $60,000 or (2) that portion 
of $175,000 which the value of that part of the decent's gross 
estate which at the time of his death is situated in the United 
States bears to the value of the decedent's entire gross estate 
wherever situated.

Carryover basis

    Beginning in 2009, after the estate, gift, and GST taxes 
have been repealed, a carryover basis regime will take effect. 
Recipients of property transferred during the transferor's life 
or at the decedent transferor's death will receive the 
transferor's basis in the property. However, if such basis is 
greater than the fair market value of the property at the time 
of the transfer from the estate, then, for purposes of 
determining loss on the disposition of the property, the basis 
is its fair market value at the time of transfer.
    Transfers to surviving spouses at death will continue to 
receive step up in basis. Assets from estates with a total 
value of $2 million or less also will receive a step up in 
basis; however, the step up in basis will be phased out for 
estates valued in excess of $1.3 million and not over $2 
million. For transfers from these estates, the amount of the 
step up from basis to fair market value of each appreciated 
asset will be reduced, proportionately, by the amount which 
bears the same ratio to such step up as the excess over $1.3 
million but not over $2 million bears to $700,000.

                             Effective Date

    The unified credit is replaced with a unified exemption, 
the 5-percent surtax is repealed, and the rates in excess of 50 
percent are repealed for estates of decedents dying and gifts 
and generation-skipping transfers made after December 31, 2000.
    The reduction of the estate and gift tax rates and of the 
State death tax credit occurs in 2002 through 2008.
    The estate, gift, and GST taxes will be repealed and the 
carryover basis regime takes effect for estates of decedents 
dying and gifts and generation-skipping transfers made after 
December 31, 2008.

                B. Modify Generation-Skipping Tax Rules


1. Deemed allocation of the generation-skipping transfer (``GST'') tax 
        exemption to lifetime transfers to trusts that are not direct 
        skips (sec. 631 of the bill and sec. 2632 of the Code)

                              Present Law

    A GST tax generally is imposed on transfers, either 
directly or through a trust or similar arrangement, to a ``skip 
person'' (i.e., a beneficiary in a generation more than one 
generation below that of the transferor). Transfers subject to 
the GST tax include direct skips, taxable terminations, and 
taxable distributions. An exemption of $1 million (indexed 
beginning in 1999) is provided for each person making 
generation-skipping transfers. The exemption may be allocated 
by a transferor (or his or her executor) to transferred 
property.
    A direct skip is any transfer subject to estate or gift tax 
of an interest in property to a skip person. A skip person may 
be a natural person or certain trusts. All persons assigned to 
the second or more remote generation below the transferor are 
skip persons (e.g., grandchildren and great-grandchildren). 
Trusts are skip persons if (1) all interests in the trust are 
held by skip persons, or (2) no person holds an interest in the 
trust and at no time after the transfer may a distribution 
(including distributions and terminations) be made to a non-
skip person.
    A taxable termination is a termination (by death, lapse of 
time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person. A taxable distribution is a 
distribution from a trust to a skip person (other than a 
taxable termination or direct skip).
    The tax rate on generation-skipping transfers is a flat 
rate of tax equal to the maximum estate and gift tax rate in 
effect at the time of the transfer (55 percent under present 
law) multiplied by the ``inclusion ratio.'' The inclusion ratio 
with respect to any property transferred in a generation-
skipping transfer indicates the amount of ``GST exemption'' 
allocated to a trust. The allocation of GST exemption reduces 
the 55-percent tax rate on a generation-skipping transfer.
    If an individual makes a direct skip during his or her 
lifetime, any unused GST exemption is automatically allocated 
to a direct skip to the extent necessary to make the inclusion 
ratio for such property equal to zero. An individual may elect 
out of the automatic allocation for lifetime direct skips.
    For lifetime transfers made to a trust that are not direct 
skips, the transferor must allocate GST exemption--the 
allocation is not automatic. If GST exemption is allocated on a 
timely-filed gift tax return, then the portion of the trust 
which is exempt from GST tax is based on the value of the 
property at the time of the transfer. If, however, the 
allocation is not made on a timely-filed gift tax return, then 
the portion of the trust which is exempt from GST tax is based 
on the value of the property at the time the allocation of GST 
exemption was made.
    Treas. Reg. 26.2632-1(d) further provides that any unused 
GST exemption, which has not been allocated to transfers made 
during an individual's life, is automatically allocated on the 
due date for filing the decedent's estate tax return. Unused 
GST exemption is allocated pro rata on the basis of the value 
of the property as finally determined for estate tax purposes, 
first to direct skips treated as occurring at the transferor's 
death. The balance, if any, of unused GST exemption is 
allocated pro rata, on the basis of the estate tax value of the 
nonexempt portion of the trust property (or in the case of 
trusts that are not included in the gross estate, on the basis 
of the date of death value of the trust) to trusts with respect 
to which a taxable termination may occur or from which a 
taxable distribution may be made.

                           Reasons for Change

    Under present law, GST tax exemption is automatically 
allocated to transfers that are direct skips; however, GST tax 
exemption is not automatically allocated to transfers to trusts 
that are not direct skips (``indirect skips''). The Committee 
recognizes that there are situations where a taxpayer would 
desire allocation of GST tax exemption, yet the taxpayer had 
missed allocating GST tax exemption to an indirect skip, e.g., 
because the taxpayer or the taxpayer's advisor inadvertently 
omitted making the election on a timely-filed gift tax return 
or the taxpayer submitted a defective election. Thus, the 
Committee believes that automatic allocation is appropriate for 
transfers to a trust from which GSTs are likely to occur.

                        Explanation of Provision

    Under the bill, GST tax exemption is automatically 
allocated to transfers made during life that are ``indirect 
skips.'' An indirect skip is any transfer of property (that is 
not a direct skip) subject to the gift tax that is made to a 
GST trust.
    A GST trust is defined as a trust that could have a 
generation-skipping transfer with respect to the transferor 
(e.g., a taxable termination or taxable distribution), unless:
    --the trust instrument provides that more than 25 percent 
of the trust corpus must be distributed to or may be withdrawn 
by 1 or more individuals who are non-skip persons (a) before 
the date that the individual attains age 46, (b) on or before 1 
or more dates specified in the trust instrument that will occur 
before the date that such individual attains age 46, or (c) 
upon the occurrence of an event that, in accordance with 
regulations prescribed by the Treasury Secretary, may 
reasonably be expected to occur before the date that such 
individual attains age 46;
    --the trust instrument provides that more than 25 percent 
of the trust corpus must be distributed to or may be withdrawn 
by 1 or more individuals who are non-skip persons and who are 
living on the date of death of another person identified in the 
instrument (by name or by class) who is more than 10 years 
older than such individuals;
    --the trust instrument provides that, if 1 or more 
individuals who are non-skip persons die on or before a date or 
event described in clause (1) or (2), more than 25 percent of 
the trust corpus either must be distributed to the estate or 
estates of 1 or more of such individuals or is subject to a 
general power of appointment exercisable by 1 or more of such 
individuals;
    --the trust is a trust any portion of which would be 
included in the gross estate of a non-skip person (other than 
the transferor) if such person died immediately after the 
transfer;
    --the trust is a charitable lead annuity trust or a 
charitable remainder annuity trust or a charitable unitrust; or
    --the trust is a trust with respect to which a deduction 
was allowed under section 2522 for the amount of an interest in 
the form of the right to receive annual payments of a fixed 
percentage of the net fair market value of the trust property 
(determined yearly) and which is required to pay principal to a 
non-skip person if such person is alive when the yearly 
payments for which the deduction was allowed terminate.
    If any individual makes an indirect skip during the 
individual's lifetime, then any unused portion of such 
individual's GST exemption is allocated to the property 
transferred to the extent necessary to produce the lowest 
possible inclusion ratio for such property.
    An individual may elect not to have the automatic 
allocation rules apply to an indirect skip, and such elections 
will be deemed timely if filed on a timely-filed gift tax 
return for the calendar year in which the transfer was made or 
deemed to have been made or on such later date or dates as may 
be prescribed by the Treasury Secretary. An individual may 
elect not to have the automatic allocation rules apply to any 
or all transfers made by such individual to a particular trust 
and may elect to treat any trust as a GST trust with respect to 
any or all transfers made by the individual to such trust, and 
such election may be made on a timely-filed gift tax return for 
the calendar year for which the election is to become 
effective.

                             Effective Date

    The provision applies to transfers subject to estate or 
gift tax made after December 31, 1999, and to estate tax 
inclusion periods ending after December 31, 1999.

2. Retroactive allocation of the GST tax exemption (sec. 631 of the 
        bill and sec. 2632 of the Code)

                              Present Law

    A taxable termination is a termination (by death, lapse of 
time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person. A taxable distribution is a 
distribution from a trust to a skip person (other than a 
taxable termination or direct skip). If a transferor allocates 
GST tax exemption to a trust prior to the taxable termination 
or taxable distribution, GST tax may be avoided.
    A transferor likely will not allocate GST tax exemption to 
a trust that the transferor expects will benefit only non-skip 
persons. However, if a taxable termination occurs because, for 
example, the transferor's child unexpectedly dies such that the 
trust terminates in favor of the transferor's grandchild, and 
GST tax exemption had not been allocated to the trust, then GST 
tax would be due even if the transferor had unused GST tax 
exemption.

                           Reasons for Change

    The Committee recognizes that when a transferor does not 
expect the second generation (e.g., the transferor's child) to 
die before the termination of a trust, the transferor likely 
will not allocate GST tax exemption to the transfer to the 
trust. If a transferor knew, however, that the transferor's 
child might predecease the transferor and that there could be a 
taxable termination as a result thereof, the transferor likely 
would have allocated GST tax exemption at the time of the 
transfer to the trust. The Committee believes it is appropriate 
to provide that when there is an unnatural order of death 
(e.g., when the second generation dies before the first 
generation transferor), the transferor may allocate GST tax 
exemption retroactively to the date of the respective transfer 
to trust.

                        Explanation of Provision

    Under the bill, GST tax exemption may be allocated 
retroactively when there is an unnatural order of death. If a 
lineal descendant of the transferor predeceases the transferor, 
then the transferor may allocate any unused GST exemption to 
any previous transfer or transfers to the trust on a 
chronological basis. The provision allows a transferor to 
retroactively allocate GST exemption to a trust where a 
beneficiary (a) is a non-skip person, (b) is a lineal 
descendant of the transferor's grandparent or a grandparent of 
the transferor's spouse, (c) is a generation younger than the 
generation of the transferor, and (d) dies before the 
transferor. Exemption is allocated under this rule 
retroactively, and the applicable fraction and inclusion ratio 
would be determined based on the value of the property on the 
date that the property was transferred to trust.

                             Effective Date

    The provision applies to deaths of non-skip persons 
occurring after the date of enactment.

3. Severing of trusts holding property having an inclusion ratio of 
        greater than zero (sec. 632 of the bill and sec. 2642 of the 
        Code)

                              Present Law

    A generation-skipping transfer tax (``GST tax'') generally 
is imposed on transfers, either directly or through a trust or 
similar arrangement, to a ``skip person'' (i.e., a beneficiary 
in ageneration more than one generation below that of the 
transferor). Transfers subject to the GST tax include direct skips, 
taxable terminations, and taxable distributions. An exemption of $1 
million (indexed beginning in 1999) is provided for each person making 
generation-skipping transfers. The exemption may be allocated by a 
transferor (or his or her executor) to transferred property.
    If the value of transferred property exceeds the amount of 
the GST exemption allocated to that property, then the GST tax 
generally is determined by multiplying a flat tax rate equal to 
the highest estate tax rate (which is currently 55 percent) by 
the ``inclusion ratio'' and the value of the taxable property 
at the time of the taxable event. The ``inclusion ratio'' is 
the number one minus the ``applicable fraction.'' The 
applicable fraction is a fraction calculated by dividing the 
amount of the GST exemption allocated to the property by the 
value of the property.
    Under Treas. Reg. 26.2654-1(b), a trust may be severed into 
two or more trusts (e.g., one with an inclusion ratio of zero 
and one with an inclusion ratio of one) only if (1) the trust 
is severed according to a direction in the governing instrument 
or (2) the trust is severed pursuant to the trustee's 
discretionary powers, but only if certain other conditions are 
satisfied (e.g., the severance occurs or a reformation 
proceeding begins before the estate tax return is due). Under 
current Treasury regulations, however, a trustee cannot 
establish inclusion ratios of zero and one by severing a trust 
that is subject to the GST tax after the trust has been 
created.

                           Reasons for Change

    If a trust has an inclusion ratio between zero and one, 
every distribution from the trust is subject to tax at a 
reduced rate. Complexity in this regard can be reduced if a GST 
trust is treated as two separate trusts for GST tax purposes--
one with an inclusion ratio of zero and one with an inclusion 
ratio of one. This result can be achieved by drafting complex 
documents in order to meet the specific requirements of 
severance. The Committee believes it is appropriate to make the 
rules regarding severance less burdensome and less complex.

                        Explanation of Provision

    Under the bill, a trust may be severed in a ``qualified 
severance.'' A qualified severance is defined as the division 
of a single trust and the creation of two or more trusts if (1) 
the single trust was divided on a fractional basis, and (2) the 
terms of the new trusts, in the aggregate, provide for the same 
succession of interests of beneficiaries as are provided in the 
original trust. If a trust has an inclusion ratio of greater 
than zero and less than one, a severance is a qualified 
severance only if the single trust is divided into two trusts, 
one of which receives a fractional share of the total value of 
all trust assets equal to the applicable fraction of the single 
trust immediately before the severance. In such case, the trust 
receiving such fractional share shall have an inclusion ratio 
of zero and the other trust shall have an inclusion ratio of 
one. Under the provision, a trustee may elect to sever a trust 
in a qualified severance at any time.

                             Effective Date

    The provision is effective for severances of trusts 
occurring after the date of enactment.

4. Modification of certain valuation rules (sec. 633 of the bill and 
        sec. 2642 of the Code)

                              Present Law

    Under present law, the inclusion ratio is determined using 
gift tax values for allocations of GST tax exemption made on 
timely filed gift tax returns. The inclusion ratio generally is 
determined using estate tax values for allocations of GST tax 
exemption made to transfers at death. Treas. Reg. 26.2642-5(b) 
provides that, with respect to taxable terminations and taxable 
distributions, the inclusion ratio becomes final on the later 
of the period of assessment with respect to the first transfer 
using the inclusion ratio or the period for assessing the 
estate tax with respect to the transferor's estate.

                           Reasons for Change

    The Committee believes it is appropriate to clarify the 
valuation rules relating to timely and automatic allocations of 
GST tax exemption.

                        Explanation of Provision

    Under the bill, in connection with timely and automatic 
allocations of GST tax exemption, the value of the property for 
purposes of determining the inclusion ratio shall be its 
finally determined gift tax value or estate tax value depending 
on the circumstances of the transfer. In the case of a GST tax 
exemption allocation deemed to be made at the conclusion of an 
estate tax inclusion period, the value for purposes of 
determining the inclusion ratio shall be its value at that 
time.

                             Effective Date

    The provision is effective as though included in the 
amendments made by section 1431 of the Tax Reform Act of 1986.

5. Relief from late elections (sec. 634 of the bill and sec. 2642 of 
        the Code)

                              Present Law

    Under present law, an election to allocate GST tax 
exemption to a specific transfer may be made at any time up to 
the time for filing the transferor's estate tax return. If an 
allocation is made on a gift tax return filed timely with 
respect to the transfer to trust, then the value on the date of 
transfer to the trust is used for determining GST tax exemption 
allocation. However, if the allocation relating to a specific 
transfer is not made on a timely-filed gift tax return, then 
the value on the date of allocation must be used. There is no 
statutory provision allowing relief for an inadvertent failure 
to make an election on a timely-filed gift tax return to 
allocate GST tax exemption.

                           Reasons for Change

    The Committee believes it is appropriate for the Treasury 
Secretary to grant extensions of time to make an election to 
allocate GST tax exemption and to grant exceptions to the 
statutory time requirement in appropriate circumstances, e.g., 
when the taxpayer intended to allocate GST tax exemption and 
the failure to timely allocate GST tax exemption was 
inadvertent.

                        Explanation of Provision

    Under the bill, the Treasury Secretary is authorized and 
directed to grant extensions of time to make the election to 
allocate GST tax exemption and to grant exceptions to the time 
requirement. If such relief is granted, then the value on the 
date of transfer to trust would be used for determining GST tax 
exemption allocation.
    In determining whether to grant relief for late elections, 
the Treasury Secretary is directed to consider all relevant 
circumstances, including evidence of intent contained in the 
trust instrument or instrument of transfer and such other 
factors as the Treasury Secretary deems relevant. For purposes 
of determining whether to grant relief, the time for making the 
allocation (or election) is treated as if not expressly 
prescribed by statute.

                             Effective Date

    The provision to provide relief from late elections applies 
to requests pending on, or filed after, the date of enactment.

6. Substantial compliance (sec. 634 of the bill and sec. 2642 of the 
        Code)

                              Present Law

    Under present law, there is no statutory rule which 
provides that substantial compliance with the statutory and 
regulatory requirements for allocating GST tax exemption will 
suffice to establish that GST tax exemption was allocated to a 
particular transfer or trust.

                           Reasons for Change

    The Committee recognizes that the rules and regulations 
regarding the allocation of GST tax exemption are complex. 
Thus, it is often difficult for taxpayers to comply with the 
technical requirements for making a proper election to allocate 
GST tax exemption. The Committee therefore believes it is 
appropriate to provide that GST tax exemption will be allocated 
when a taxpayer substantially complies with the rules and 
regulations for allocating GST tax exemption.

                        Explanation of Provision

    Under the bill, substantial compliance with the statutory 
and regulatory requirements for allocating GST tax exemption 
will suffice to establish that GST tax exemption was allocated 
to a particular transfer or a particular trust. If a taxpayer 
demonstrates substantial compliance, then so much of the 
transferor's unused GST tax exemption will be allocated to the 
extent it produces the lowest possible inclusion ratio. In 
determining whether there has been substantial compliance, all 
relevant circumstances will be considered, including evidence 
of intent contained in the trust instrument or instrument of 
transfer and such other factors as the Treasury Secretary deems 
appropriate.

                             Effective Date

    The substantial compliance provisions are effective on the 
date of enactment and apply to allocations made prior to such 
date for purposes of determining the tax consequences of 
generation-skipping transfers with respect to which the period 
of time for filing claims for refund has not 
expired.49
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    \49\ No inference is intended with respect to the application of a 
rule of substantial compliance prior to enactment of this provision.
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      TITLE VII. DISTRESSED COMMUNITIES AND INDUSTRIES PROVISIONS


                    A. Renewal Community Provisions


 (secs. 701-706 of the bill and secs. 51, 198, 4973, 4975, 6047, 6104, 
                6693, and new secs. 1400E-L of the Code)


                              Present Law

    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.50 Of 
the enterprise communities, 65 are located in urban areas and 
30 are located in rural areas (sec. 1391). Designated 
empowerment zones and enterprise communities were required to 
satisfy certain eligibility criteria, including specified 
poverty rates and population and geographic size limitations 
(sec. 1392).
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    \50\ 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).
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    The following tax incentives are available for certain 
businesses located in empowerment zones: (1) a 20-percent wage 
credit for the first $15,000 of wages paid to a zone resident 
who works in the zone; (2) an additional $20,000 of section 179 
expensing for ``qualified zone property'' placed in service by 
an ``enterprise zone business'' (accordingly, certain 
businesses operating in empowerment zones are allowed up to 
$39,000 of expensing for 1999); (3) special tax-exempt 
financing for certain zone facilities; and (4) the so-called 
``brownfields'' tax incentive, which allows taxpayers to 
expense (rather than capitalize) certain environmental 
remediation expenditures.51
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    \51\ 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.
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    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).
    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 under section 179, 
special tax-exempt financing, and ``brownfields'' incentive) as 
are available within the empowerment zones authorized by OBRA 
1993.52 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.53 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).
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    \52\ 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.
    \53\ 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 1997 Act also authorizes the Secretaries of HUD and 
Agriculture to designate an additional 20 empowerment zones (no 
more than 15 in urban areas and no more than five in rural 
areas).54 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.55 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.
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    \54\ The additional 20 empowerment zones were designated by the 
Secretaries of HUD and Agriculture on December 31, 1998.
    \55\ In lieu of the poverty criteria, outmigration may be taken 
into account in designating one rural empowerment zone.
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    Within the 20 additional empowerment zones, qualified 
``enterprise zone businesses'' are eligible to receive up to 
$20,000 of additional section 179 expensing 56 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). The 20 
additional empowerment zones generally will remain in effect 
for 10 years (i.e., from 1999 through 2008).57
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    \56\ 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.
    \57\ 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.
---------------------------------------------------------------------------

                           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 and increased 
savings incentives should help address both economic and social 
problems in such areas.

                        Explanation of Provision

    The provision authorizes the designation of 20 ``renewal 
communities'' within which special tax incentives would be 
available. The following is a description of the designation 
process and the tax incentives that would be available within 
the 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 four of the designated communities must 
be in rural areas (defined as areas which are (1) within local 
government jurisdictions with a population less than 50,000, 
(2) outside of a metropolitan statistical area, or (3) 
determined by HUD to be a rural area). The Secretary of HUD 
would be required to publish (within four months after 
enactment) regulations describing the selection process; all 
designations of renewal communities would have to be made 
within 24 months after such regulations are published. The 
designation of an area as a renewal community terminates after 
December 31, 2007.58
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    \58\ The designation would terminate earlier than December 31, 
2007, if (1) an earlier termination date is designated by the State or 
local government in their designation, or (2) the Secretary of HUD 
revokes the designation as of an earlier date.
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    Old empowerment zones and enterprise communities could seek 
additional designation as renewal communities.--The bill allows 
the previously designated empowerment zones and enterprise 
communities to apply for designation as renewal communities. 
Priority is given in the designation of the first ten renewal 
communities to nominated areas that are designated as 
empowerment zones or enterprise communities under present law 
and that otherwise meet the requirements 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 an empowerment zone 
or enterprise community remains 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 
would be available.
    Eligibility criteria.--To be designated as a renewal 
community, a nominated area must meet all of the following 
criteria: (1) each census tract has a poverty rate of at least 
20 percent; (2) in the case of an urban area, 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 ten 
renewal communities when priority would be given to existing 
empowerment zones and enterprise communities (as described 
above), those areas with the highest average ranking of 
eligibility factors (1), (2), and (3) above would be designated 
as renewal communities. The Secretary of HUD shall 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 Government 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 
provision merely requires that the boundary of a designated 
community be ``continuous'' and that the designated community 
have a minimumpopulation of 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, 
State and local governments are required to submit a written 
course of action that 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 that 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 necessary for and well-tailored to the 
protection of health and safety.

Tax incentives for renewal communities

    The following tax incentives generally would be available 
during the seven-year period beginning January 1, 2001, and 
ending December 31, 2007.
    100-percent capital gain exclusion.--The bill provides for 
a 100 percent capital gains exclusion for capital gain from the 
sale of any qualified community asset acquired after December 
31, 2000, and before January 1, 2008, and held for more than 
five years. A ``qualified community asset'' includes: (1) 
qualified community stock (meaning original-issue stock 
purchased for cash in a ``renewal community business''); (2) a 
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, 2000). A ``renewal community business'' is similar 
to the present-law definition of an enterprise zone business 
59 except that 80 percent of the gross income must 
be derived from the conduct of a qualified business within a 
renewal community. 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. The termination of an area's status 
as a renewal community does not affect whether property is a 
qualified community asset. Any gain attributable to the period 
before January 1, 2001, and after December 31, 2007, is not 
eligible for the 100-percent capital gains exclusion.
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    \59\ An ``enterprise zone business'' is defined as a corporation or 
partnership (or proprietorship) if for the taxable year: (1) the sole 
trade or business of the corporation or partnership is the active 
conduct of a qualified business within an empowerment zone or 
enterprise community; (2) at least 50 percent 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 
(sec. 1397B).
    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. In addition, the leasing 
of real property that is located within the empowerment zone or 
community to others is treated as a qualified business only if (1) the 
leased property is not residential property, and (2) at least 50 
percent of the gross rental income from the real property is from 
enterprise zone businesses. The rental of tangible personal property to 
others is not a qualified business unless 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 (sec. 
1397B(d)).
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    Family development accounts.--The bill allow individuals 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 was allowed to claim the earned income 
credit (EIC) during the preceding taxable year. A qualified 
individual may claim a deduction of up to $2,000 per year for 
amounts he or she contributes to his or her own FDA. Any other 
person may contribute amounts to one or more FDAs established 
for the benefit of a qualified individual and deduct up to 
$1,000 per qualified individual. Contributions to an FDA made 
on or before April 15th of the current taxable year could be 
treated as made during the preceding taxable year. The bill 
permits (but does not require) individuals to direct that the 
IRS directly deposit their EIC refunds into an FDA on behalf of 
such individual.
    The bill provides that up to five 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 two 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 
nodeduction 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.
    An FDA is exempt from taxation (other than the unrelated 
business income tax imposed by present-law section 511). A 
distribution from an FDA is not included in the gross income of 
the distributee if it is a ``qualified family development 
distribution.'' A qualified family development distribution is 
defined as a distribution from an FDA that is used exclusively 
to pay for (1) qualified higher educational expenses, (2) 
qualified first-time homebuyer expenses, (3) qualified business 
capitalization costs 60, 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.
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    \60\ As is the case for enterprise zone businesses, a qualified 
business capitalization cost would not include expenditures incurred 
for the capitalization of any trade or business described in section 
144(c)(6)(B) (e.g., a country club, hot tub facility, or liquor store).
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    Distributions from an FDA that are not qualified family 
development distributions are included in gross income and 
subject to either a 100-percent additional tax (in the case of 
a distribution attributable to a demonstration matching 
contribution) or a 10-percent additional tax (in the case of a 
distribution that is not attributable to a demonstration 
matching contribution). The 100-percent and 10-percent 
additional 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 additional tax) 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 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 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 deduction.--The bill allows each 
State to allocate an amount of ``commercial revitalization 
deductions'' with respect to qualified revitalization 
expenditures incurred in connection with a qualified 
revitalization building. The commercial revitalization 
deduction is equal to (a) 50 percent of qualified 
revitalization expenditures for the taxable year in which a 
qualified revitalization building is placed in service or, at 
the election of the taxpayer, (b) a ten-percent deduction for 
qualified revitalization expenditures per year for a 10-year 
period beginning with the year in which the building is placed 
in service. A ``qualified revitalization expenditure'' means 
the cost (up to $10 million) of constructing or substantially 
rehabilitating a building used for commercial purposes in a 
designated renewal community, including certain land 
acquisition costs. A commercial revitalization deduction would 
be in lieu of any depreciation deduction otherwise allowable on 
account of such expenditure.
    Each State would be allowed to allocate no more than $6 
million worth of commercial revitalization deductions to each 
renewal community located within the State for each calendar 
year after 2000 and before 2008. The appropriate State agency 
would make the allocations pursuant to a qualified allocation 
plan. The qualified allocation plan would (1) set forth the 
selection criteria to be used to determine priorities as 
appropriate to local conditions; (2) consider how the building 
project would contribute to the renewal community and its 
residents, and (3) provide a procedure that the agency would 
follow to monitor compliance.
    A qualified revitalization building must be located in a 
renewal community and placed in service after December 31, 
2000, and before January 1, 2008.
    Additional section 179 expensing.--A renewal community 
business is allowed an additional $35,000 of section 179 
expensing for qualified renewal property placed in service 
after December 31, 2000, and before January 1, 2008. 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). The section 179 expensing allowed to a taxpayer is 
phased out by the amount by which 50 percent of the cost of 
qualified renewal property placed in service during the year by 
the taxpayer exceeds $200,000. The term ``qualified renewal 
property'' is similar to the definition of ``qualified zone 
property'' under section 1397C.
    Expensing of environmental remediation costs 
(``brownfields'').--Under the bill, a renewal community is 
treated as a ``targeted area'' under section 198 which permits 
expensing of certain environmental remediation costs. Thus, 
taxpayers can elect to treat certain environmental remediation 
expenditures that otherwise would be capitalized 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 applies to expenditures incurred after December 
31, 2000, and before January 1, 2008.
    Extension of work opportunity tax credit (``WOTC'').--The 
provision makes two changes to the WOTC. Beginning in 2001, the 
provision expands the high-risk youth and qualified summer 
youth categories in the present-law WOTC to include qualified 
individuals who live in a renewal community.
    Second, in the event that the WOTC program were to expire, 
the bill permits employers engaged in a trade or business in a 
renewal community to claim a tax credit 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 tax credit equals 15 percent of the qualified 
first-year wages and 30 percent of the qualified second-year 
wages through December 31, 2007.61 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 period for which 
the WOTC is being calculated.
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    \61\ The Work Opportunity Tax Credit expired on July 1, 1999. A 
different section of the bill extends the Work Opportunity Tax Credit 
through December 31, 2001.
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    Targeted groups eligible for the tax credit include: (1) 
certain individuals certified by the designated local agency as 
being a member of a family receiving assistance under a IV-A 
program for any nine months during the 18-month period ending 
on the hiring date; (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.
    HUD 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 HUD 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

    Although renewal communities would be designated within 24 
months after publication of regulations by HUD, the tax 
benefits available in renewal communities are effective for the 
7-year period beginning January 1, 2001, and ending December 
31, 2007.

 B. Provide That Federal Production Payments to Farmers Are Taxable in 
                           the Year Received


                         (sec. 711 of the bill)


                              Present Law

    A taxpayer generally is required to include an item in 
income no later than the time of its actual or constructive 
receipt, unless such amount properly is accounted for in 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 
(the ``FAIR Act'') provides for production flexibility 
contracts between certain eligible owners and producers and the 
Secretary of Agriculture. These contracts generally cover crop 
years from 1996 through 2002. Annual payments are made under 
such contracts at specific times during the Federal 
government's fiscal year. Section 112(d)(2) of the FAIR Act 
provides that one-half of each annual payment is to be made on 
either December 15 or January 15 of the fiscal year, at the 
option of the recipient.62 The remaining one-half of 
the annual payment must be made no later than September 30 of 
the fiscal year. The Emergency Farm Financial Relief Act of 
1998 added section 112(d)(3) to the FAIR Act which 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. Thus, the one-half of the annual amount that would 
otherwise be required to be paid no later than September 30, 
1999 can be specified for payment in calendar year 1998.
---------------------------------------------------------------------------
    \62\  This rule applies to fiscal years after 1996. For fiscal year 
1996, this payment was to be made not later than 30 days after the 
production flexibility contract was entered into.
---------------------------------------------------------------------------
    These options potentially would have resulted in the 
constructive receipt (and thus inclusion in income) of the 
payments to which they relate at the time they could have been 
exercised, whether or not they were in fact exercised. However, 
section 2012 of the Tax and Trade Relief Extension Act of 1998 
provided that the time a production flexibility contract 
payment under the FAIR Act properly is includible in income is 
to be determined without regard to either option, effective for 
production flexibility contract payments made under the FAIR 
Act in taxable years ending after December 31, 1995.

                           Reasons for Change

    The Committee does not believe that farmers should be 
required to accelerate the recognition of income on production 
flexibility contract payments solely because Congress creates 
an option for the accelerated receipt of such payments.

                        Explanation of Provision

    Any option to accelerate the receipt of any payment under a 
production flexibility contract which is payable under the FAIR 
Act, as in effect on the date of enactment of the provision, is 
to be disregarded in determining the taxable year in which such 
payment is properly included in gross income. Options to 
accelerate payments that are enacted in the future are covered 
by this rule, providing the payment to which they relate is 
mandated by the FAIR Act as in effect on the date of enactment 
of this Act.
    The provision does not delay the inclusion of any amount in 
gross income beyond the taxable period in which the amount is 
received.

                             Effective Date

    The provision is effective on the date of enactment.

       C. Allow Net Operating Losses from Oil and Gas Properties


                To Be Carried Back for Up to Five Years


            (sec. 721 of the bill and sec. 172 of the Code)


                              Present Law

    A net operating loss (``NOL'') generally is the amount by 
which business deductions of a taxpayer exceed business gross 
income. In general, an NOL may be carried back two years and 
carried forward 20 years to offset taxable income in such 
years. 63 A carryback of an NOL results in the 
refund of Federal income tax for the carryback year. A 
carryforward of an NOL reduces Federal income tax for the 
carryforward year. Special NOL carryback rules apply to (1) 
casualty and theft losses of individual taxpayers, (2) 
Presidentially declared disasters for taxpayers engaged in a 
farming business or a small business, (3) real estate 
investment trusts, (4) specified liability losses, (5) excess 
interest losses, and (6) farm losses.
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    \63\  A taxpayer could elect to forgo the carryback of an NOL.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee notes that oil is, and will continue to be, 
vital to the American economy. The Committee observes that low 
oil prices have created substantial economic hardship in the 
oil industry and particularly in those communities where the 
majority of jobs are related to providing this vital commodity 
to the nation. Skilled workers and industry know-how will be 
critical to the exploration for and production of oil and gas 
in the future. The Committee, therefore, is concerned that the 
current economic hardship in the industry could lead to 
business failures and job losses. The Committee understands 
that many of these businesses are cash starved. The Committee 
also observes that, while current operations are unprofitable, 
many of these businesses have been taxpayers in the past. The 
Committee finds it appropriate to provide current net operating 
losses in the oil and gas industry to be carried back to 
earlier, more profitable, years, as this will improve the 
current cash position of many such businesses and help them 
weather this current economic storm.

                        Explanation of Provision

    The bill provides a special five-year carryback for certain 
eligible oil and gas losses. The carryforward period remains 20 
years. An ``eligible oil and gas loss'' is defined as the 
lesser of (1) the amount which would be the taxpayer's NOL for 
the taxable year if only income and deductions attributable to 
operating mineral interests in oil and gas wells were taken 
into account, or (2) the amount of such net operating loss for 
such taxable year. In calculating the amount of a taxpayer's 
NOL carrybacks, the portion of the NOL that is attributable to 
an eligible oil and gas loss is treated as a separate NOL and 
taken into account after the remaining portion of the NOL for 
the taxable year.

                             Effective Date

    The provision applies to NOLs arising in taxable years 
beginning after December 31, 1998.

                 D. Deduction for Delay Rental Payments


            (sec. 722 of the bill and sec. 263A of the Code)


                              Present Law

    Present law generally requires costs associated with 
inventory and property held for resale to be capitalized rather 
than currently deducted as they are incurred. (sec. 263). Oil 
and gas producers typically contract for mineral production in 
exchange for royalty payments. If mineral production is 
delayed, these contracts provide for ``delay rental payments'' 
as a condition of their extension. The Treasury Department has 
taken the position that the uniform capitalization rules of 
section 263A require delay rental payments to be capitalized.

                           Reasons for Change

    The Committee believes that, in essence, a delay rental 
payment is a substitute, both in the eyes of the payor and the 
payee, for a royalty payment that would have been made had the 
property been brought into production. The Committee notes that 
a royalty payment is deductible currently and, therefore, 
believes that delay rental payments also should be deductible 
currently.

                        Explanation of Provision

    The bill allows delay rental payments to be deducted 
currently.

                             Effective Date

    The provision applies to delay rental payments incurred in 
taxable years beginning after December 31, 2000.
    No inference is intended from the prospective effective 
date of this provision as to the proper treatment of pre-
effective date delay rental payments.

     E. Election To Expense Geological and Geophysical Expenditures


            (sec. 723 of the bill and sec. 263 of the Code)


                              Present Law

In general

    Under present law, current deductions are not allowed for 
any amount paid for new buildings or for permanent improvements 
or betterments made to increase the value of any property or 
estate (sec. 263(a)). Treasury Department regulations define 
capital amounts to include amounts paid or incurred (1) to add 
to the value, or substantially prolong the useful life, of 
property owned by the taxpayer or (2) to adapt property to a 
new or different use.64
---------------------------------------------------------------------------
    \64\ Treas. Reg. sec. 1.263(a)-(1)(b).
---------------------------------------------------------------------------
    The proper income tax treatment of geological and 
geophysical costs (``G&G costs'') associated with oil and gas 
production has been the subject of a number of court decisions 
and administrative rulings. G&G costs are incurred by the 
taxpayer for the purpose of obtaining and accumulating data 
that will serve as a basis for the acquisition and retention of 
oil or gas properties by taxpayers exploring for the minerals. 
Courts have ruled that such costs are capital in nature and are 
not deductible as ordinary and necessary business 
expenses.65 Accordingly, the costs attributable to 
such exploration are allocable to the cost of the property 
acquired or retained.66 The term ``property'' 
includes an economic interest in a tract or parcel of land 
notwithstanding that a mineral deposit has not been established 
or proven at the time the costs are incurred.
---------------------------------------------------------------------------
    \65\ See, e.g., Schermerhorn Oil Corporation, 46 B.T.A. 151 (1942).
    \66\ By contrast, section 617 of the Code permits a taxpayer to 
elect to deduct certain expenditures incurred for the purpose of 
ascertaining the existence, location, extent, or quality of any deposit 
of ore or other mineral (but not oil and gas). These deductions are 
subject to recapture if the mine with respect to which the expenditures 
were incurred reaches the producing stage.
---------------------------------------------------------------------------

Revenue Ruling 77-188

    In Revenue Ruling 77-188 67 (hereinafter 
referred to as the ``1977 ruling''), the Internal Revenue 
Service (``IRS'') provided guidance regarding the proper tax 
treatment of G&G costs. The ruling describes a typical 
geological and geophysical exploration program as containing 
the following elements:
---------------------------------------------------------------------------
    \67\ 1977-1 C.B. 76.
---------------------------------------------------------------------------
    --It is customary in the search for mineral producing 
properties for a taxpayer to conduct an exploration program in 
one or more identifiable project areas. Each project area 
encompasses a territory that the taxpayer determines can be 
explored advantageously in a single integrated operation. This 
determination is made after analyzing certain variables such as 
the size and topography of the project area to be explored, the 
existing information available with respect to the project area 
and nearby areas, and the quantity of equipment, the number of 
personnel, and the amount of money available to conduct a 
reasonable exploration program over the project area.
    --The taxpayer selects a specific project area from which 
geological and geophysical data are desired and conducts a 
reconnaissance-type survey utilizing various geological and 
geophysical exploration techniques that are designed to yield 
data that will afford a basis for identifying specific 
geological features with sufficient mineral potential to merit 
further exploration.
    --Each separable, noncontiguous portion of the original 
project area in which such a specific geological feature is 
identified is a separate ``area of interest.'' The original 
project area is subdivided into as many small projects as there 
are areas of interest located and identified within the 
original project area. If the circumstances permit a detailed 
exploratory survey to be conducted without an initial 
reconnaissance-type survey, the project area and the area of 
interest will be coextensive.
    --The taxpayer seeks to further define the geological 
features identified by the prior reconnaissance-type surveys by 
additional, more detailed, exploratory surveys conducted with 
respect to each area of interest. For this purpose, the 
taxpayer engages in more intensive geological and geophysical 
exploration employing methods that are designed to yield 
sufficiently accurate sub-surface data to afford a basis for a 
decision to acquire or retain properties within or adjacent to 
a particular area of interest or to abandon the entire area of 
interest as unworthy of development by mine or well.
    The 1977 ruling provides that if, on the basis of data 
obtained from the preliminary geological and geophysical 
exploration operations, only one area of interest is located 
and identified within the original project area, then the 
entire expenditure for those exploratory operations is to be 
allocated to that one area of interest and thus capitalized 
into the depletable basis of that area of interest. On the 
other hand, if two or more areas of interest are located and 
identified within the original project area, the entire 
expenditure for the exploratory operations is to be allocated 
equally among the various areas of interest.
    The 1977 ruling further provides that if, on the basis of 
data obtained from a detailed survey that does not relate 
exclusively to any particular property within a particular area 
of interest, an oil or gas property is acquired or retained 
within or adjacent to that area of interest, the entire G&G 
exploration expenditures, including those incurred prior to the 
identification of the particular area of interest but allocated 
thereto, are to be allocated to the property as a capital cost 
under section 263(a).
    If, however, from the data obtained by the exploratory 
operations no areas of interest are located and identified by 
the taxpayer within the original project area, then the 1977 
ruling states that the entire amount of the G&G costs related 
to the exploration is deductible as a loss under section 165 
for the taxable year in which that particular project area is 
abandoned as a potential source of mineral production.

                           Reasons for Change

    The Committee believes that substantial simplification for 
taxpayers and significant gains in taxpayer compliance and 
reductions in administrative cost can be obtained by 
establishing the simple rule that all geological and 
geophysical costs can be deducted currently, regardless of the 
taxpayer's determination of the suitability of the site or 
sites examined for future production.

                        Explanation of Provision

    The bill allows geological and geophysical costs incurred 
in connection with oil and gas exploration in the United States 
to be deducted currently.

                             Effective Date

    The provision is effective for G&G costs incurred in 
taxable years beginning after December 31, 2000.

 F. Temporary Suspension of Limitation Based on 65 Percent of Taxable 
                                 Income


            (sec. 724 of the bill and sec. 613 of the Code)


                              Present Law

In general

    Depletion, like depreciation, is a form of capital cost 
recovery. In both cases, the taxpayer is allowed a deduction in 
recognition of the fact that an asset--in the case of depletion 
for oil or gas interests, the mineral reserve itself--is being 
expended in order to produce income. Certain costs incurred 
prior to drilling an oil or gas property are recovered through 
the depletion deduction. These include costs of acquiring the 
lease or other interest in the property and geological and 
geophysical costs (in advance of actual drilling). Depletion is 
available to any person having an economic interest in a 
producing property.
    Two methods of depletion currently are allowable under the 
Code: (1) the cost depletion method, and (2) the percentage 
depletion method (secs. 611-613). Under the cost depletion 
method, the taxpayer deducts that portion of the adjusted basis 
of the depletable property which is equal to the ratio of units 
sold from that property during the taxable year to the number 
of units remaining as of the end of taxable year plus the 
number of units sold during the taxable year. Thus, the amount 
recovered under cost depletion may never exceed the taxpayer's 
basis in the property.
    Under the percentage depletion method, generally, 15 
percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable 
year (sec. 613A(c)). The amount deducted generally may not 
exceed 100 percent of the net income from that property in any 
year (the ``net-income limitation'') (sec. 
613(a)).68 Additionally, the percentage depletion 
deduction for all oil and gas properties may not exceed 65 
percent of the taxpayer's overall taxable income (determined 
before such deduction and adjusted for certain loss carrybacks 
and trust distributions) (sec. 613A(d)(1)).69 
Because percentage depletion, unlike cost depletion, is 
computed without regard to the taxpayer's basis in the 
depletable property, cumulative depletion deductions may be 
greater than the amount expended by the taxpayer to acquire or 
develop the property.
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    \68\ The Taxpayer Relief Act of 1997 suspended the 100-percent net-
income limitation for production from marginal wells for taxable years 
beginning after December, 31, 1997, and before January 1, 2000. This 
suspension is extended for an additional period, through December 31, 
2004, in another section of the bill.
    \69\ Amounts disallowed as a result of this rule may be carried 
forward and deducted in subsequent taxable years, subject to the 65-
percent taxable income limitation for those years. Amounts in excess of 
the 100-percent-of-income-from-the-property limit may not be carried 
forward. In neither case can unused amounts be carried back to reduce 
prior-years' tax liability.
---------------------------------------------------------------------------
    A taxpayer is required to determine the depletion deduction 
for each oil or gas property under both the percentage 
depletion method (if the taxpayer is entitled to use this 
method) and the cost depletion method. If the cost depletion 
deduction is larger, the taxpayer must utilize that method for 
the taxable year in question (sec. 613(a)).

Limitation of oil and gas percentage depletion to independent producers 
        and royalty owners

    Generally, only independent producers and royalty owners 
(as contrasted to integrated oil companies) are allowed to 
claim percentage depletion. Percentage depletion for eligible 
taxpayers is allowed only with respect to up to 1,000 barrels 
of average daily production of domestic crude oil or an 
equivalent amount of domestic natural gas (sec. 613A(c)). For 
producers of both oil and natural gas, this limitation applies 
on a combined basis.
    In addition to the independent producer and royalty owner 
exception, certain sales of natural gas under a fixed contract 
in effect on February 1, 1975, and certain natural gas from 
geopressured brine,70 are eligible for percentage 
depletion, at rates of 22 percent and 10 percent, respectively. 
These exceptions apply without regard to the 1,000-barrel-per-
day limitation and regardless of whether the producer is an 
independent producer or an integrated oil company.
---------------------------------------------------------------------------
    \70\ This exception is limited to wells the drilling of which began 
between September 30, 1978, and January 1, 1984.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee notes that oil is, and will continue to be, 
vital to the American economy. The Committee observes that low 
oil prices have created substantial economic hardship in the 
oil industry and particularly in those communities where the 
majority of jobs are related to providing this vital commodity 
to the nation. Skilled workers and industry know-how will be 
critical to the exploration for and production of oil and gas 
in the future. The Committee, therefore, is concerned that the 
current economic hardship in the industry could lead to 
business failures and job losses. The Committee understands 
that many of these businesses are cash starved. In light of 
this situation, the Committee finds it appropriate to suspend 
the 65-percent of taxable income limitation related to 
percentage depletion deductions.

                        Explanation of Provision

    The limit on percentage depletion deductions to no more 
than 65 percent of the taxpayer's overall taxable income is 
suspended for taxable years beginning after December 31, 1998, 
and before January 1, 2005.

                             Effective Date

    The provision is effective on the date of enactment.

 G. Determination of Small Refiner Exception to Oil Depletion Deduction


            (sec. 725 of the bill and sec. 613A of the Code)


                              Present Law

    Present law classifies oil and gas producers as independent 
producers or integrated companies. The Code provides numerous 
different, and typically more generous, tax rules for 
operations by independent producers. One such rule allows 
independent producers to claim percentage depletion deductions 
rather than deducting the costs of their asset, a producing 
well, based on actual production from the well (i.e., cost 
depletion).
    A producer is an independent producer only if its refining 
and retail operations are relatively small. For example, an 
independent producer may not have refining operations the runs 
from which exceed 50,000 barrels on any day in the taxable year 
during which independent producer status is claimed.

                           Reasons for Change

    The Committee observes that the present law limitation 
serves to define those oil and gas producers who are not 
integrated into the refining side of the oil business to a 
large degree. The Committee notes that the operation of a 
refinery, while highly technical is not so precise that a 
refinery can be efficiently run at a level up to but just below 
the present-law 50,000 barrel limitation on each an every day. 
The Committee believes that the goal of present law, to 
identify producers without significant refining capacity, can 
be achieved while permitting more flexibility to refinery 
operations.

                        Explanation of Provision

    The provision changes the refinery limitation on claiming 
independent producer status from a limit based on actual daily 
production to a limit based on average daily production for the 
taxable year: the average daily refinery run for the taxable 
year may not exceed 50,000 barrels. For this purpose, the 
taxpayer shall calculate average daily production by dividing 
total production for the taxable year by the total number of 
days in the taxable year.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1999.

  H. Increase the Maximum Dollar Amount of Reforestation Expenditures 
                  Eligible for Amortization and Credit


        (sec. 731 of the bill and secs. 48 and 194 of the Code)


                              Present Law

Amortization of reforestation costs (sec. 194)

    A taxpayer may elect to amortize up to $10,000 ($5,000 in 
the case of a separate return by a married individual) of 
qualifying reforestation expenditures incurred during the 
taxable year with respect to qualifying timber property. 
Amortization is taken over 84 months (7 years) and is subject 
to a mandatory half-year convention.71 In the case 
of an individual, the amortization deduction is allowed in 
determining adjusted gross income (an above-the-line deduction) 
rather than as an itemized deduction. The amount eligible for 
amortization has not been increased since the election was 
added to the Code in 1980.72
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    \71\ Under the half-year convention, all reforestation expenditures 
are considered to be incurred on the first day of the first month of 
the second half of the taxable year. Thus, an amortization deduction 
equal to 6/84 of the expenditures for the year is allowed in the first 
and eighth years and an amortization deduction equal to 1/7 (12/84) of 
such expenditures is allowed in the second through seventh years.
    \72\ Sec. 301(a) of the Multiemployer Pension Plan Amendments Act 
of 1980.
---------------------------------------------------------------------------
    Qualifying reforestation expenditures are the direct costs 
a taxpayer incurs in connection with the forestation or 
reforestation of a site by planting or seeding, and include 
costs for the preparation of the site, the cost of the seed or 
seedlings, and the cost of the labor and tools (including 
depreciation of long lived assets such as tractors and other 
machines) used in the reforestation activity. Qualifying 
reforestation expenditures do not include expenditures that 
would otherwise be deductible and do not include costs for 
which the taxpayer has been reimbursed under a governmental 
cost sharing program, unless the amount of the reimbursement is 
also included in the taxpayer's gross income.
    Qualifying timber property includes any woodlot or other 
site that is located in the United States that will contain 
trees in significant commercial quantities and that is held by 
the taxpayer for the planting, cultivating, caring for, and 
cutting of trees for sale or use in the commercial production 
of timber products. The regulations require that the site 
consist of at least one acre that is devoted to such 
activities.73 A taxpayer may hold qualifying timber 
property in fee or by lease. Where the property is held by one 
person for life with the remainder to another person, the life 
tenant is considered the owner of the property for this 
purpose.
---------------------------------------------------------------------------
    \73\ Treas. Reg. sec. 1.194-3(a).
---------------------------------------------------------------------------
    Reforestation amortization is subject to recapture as 
ordinary income on sale of qualifying timber property within 10 
years of the year in which the qualifying reforestation 
expenditures were incurred.74
---------------------------------------------------------------------------
    \74\ Sec. 1245(b)(7); Treas. Reg. sec. 1.194-1(c).
---------------------------------------------------------------------------

Reforestation tax credit (sec. 48(b))

    A tax credit is allowed equal to 10 percent of the 
reforestation expenditures incurred during the year that are 
properly elected to be amortized. An amount allowed as a credit 
is subject to recapture if the qualifying timber property to 
which the expenditure relates is disposed of within 5 years.

                           Reasons for Change

    The Committee believes that it is appropriate to increase 
the amount eligible for amortization and the credit to reflect 
the increased costs of reforestation. In light of the current 
financial difficulties in the timber industry, the Committee 
also believes that it is appropriate to temporarily allow 
amortization of reforestation expenditures without limit.

                        Explanation of Provision

    The provision increases the amount of reforestation 
expenditures eligible for 7-year amortization and the 
reforestation credit from $10,000 to $25,000 per taxable year 
(from $5,000 to $12,500 in the case of a separate return by a 
married individual).
    For taxable years beginning in 2000 through 2003, the 
provision removes the limitation on the amount eligible for 7-
year amortization.

                             Effective Date

    The provision is effective for expenditures paid or 
incurred in taxable years beginning after December 31, 1998. 
Expenditures paid or incurred prior to the effective date would 
continue to be recovered under the rules of present law. For 
taxable years beginning in 1999 and after 2003, the amount of 
reforestation expenditures eligible for 7-year amortization and 
for the credit is limited to $25,000. For taxable years 
beginning in 2000 through 2003, the amount of reforestation 
expenditures eligible for the credit is limited to $25,000 and 
no limit would apply to the amount eligible for 7-year 
amortization.

 I. Capital Gains Treatment Under Section 631(b) To Apply to Outright 
                          Sales by Landowners


            (sec. 732 of the bill and sec. 631 of the Code)


                              Present Law

    Gain on the cutting and sale of timber generally is 
eligible for capital gains treatment, provided the growing 
timber has been held for more than one year. If the taxpayer 
sells the timber at the time it is cut, the capital gain is 
measured as the difference between the sales price of the 
timber less cost of sales and any unrecovered costs of growing 
the timber.
    If the taxpayer sells the timber prior to its being cut, a 
special rule allows the taxpayer to treat the sale as a capital 
gain, provided the taxpayer retains an economic interest in the 
timber and holds the timber for more than one year prior to the 
date of disposal. The date of disposal is deemed to be the date 
the timber is cut, unless the taxpayer receives payment for the 
timber prior to the date it is cut and elects to treat the date 
of payment as the date of disposal.

                           Reasons for Change

    The Committee believes that, in the case of a landowner, 
gains from the sale of growing timber generally should be 
eligible for capital gains treatment without regard to whether 
the timber is cut at the time of sale. The Committee is 
concerned that present law requires landowners to engage in 
unnecessarily complex transactions in order to satisfy the 
present law requirement that the taxpayer retain an economic 
interest in the timber.

                        Explanation of Provision

    In the case of a sale of timber by the owner of the land 
from which the timber is cut, the requirement that a taxpayer 
retain an economic interest in the timber in order to treat 
gains on sales prior to the time the timber is cut as capital 
gains does not apply. Outright sales of timber by the landowner 
will qualify for capital gains treatment in the same manner as 
sales with a retained economic interest qualify under present 
law. The provision does not modify the rule that deems the date 
of cutting to be the date of disposition. Thus, unless the 
taxpayer receives payment prior to the date of cutting and 
elects to treat that date as the date of disposition, the date 
of sale will be the date of cutting whether or not an economic 
interest is retained.

                             Effective Date

    The provision is effective for sales of timber after the 
date of enactment. A sale will not be considered to occur after 
the date of enactment if the taxpayer conveys its interest in 
the timber on or before the date of enactment, even if the 
deemed date of disposition is after the date of enactment.

              J. Minimum Tax Relief for the Steel Industry


             (sec. 741 of the bill and sec. 53 of the Code)


                              present law

    A corporate taxpayer receives a minimum tax credit for any 
year in which it pays alternative minimum tax. The alternative 
minimum tax is the excess of tentative minimum tax over regular 
tax 75 and generally represents the additional tax a 
corporate taxpayer is required to pay in any year as a result 
of the alternative minimum tax system. The minimum tax credit 
may be used in future years to the extent regular tax exceeds 
tentative minimum tax. The minimum tax credit may not be used 
to reduce liability below tentative minimum tax. The credit may 
be carried forward indefinitely.
---------------------------------------------------------------------------
    \75\ For this purpose, tentative minimum tax is determined net of 
alternative minimum tax foreign tax credits and regular tax is 
determined net of regular tax foreign tax credits.
---------------------------------------------------------------------------
    For example, a corporate taxpayer has $1,000 of minimum tax 
credits available in a year in which its regular tax is $200 
and its tentative minimum tax is $100. The taxpayer may use 
$100 of its minimum tax credits (the excess of regular tax over 
tentative minimum tax) to reduce its current liability to $100. 
The taxpayer would then have $900 of minimum tax credits 
available in the following year.
    If instead the corporate taxpayer had regular tax of $100 
and tentative minimum tax of $200, it would not be allowed to 
use any of its minimum tax credits because there is no excess 
of regular tax over tentative minimum tax. The taxpayer would 
have a current liability of $200 ($100 of regular tax and $100 
of alternative minimum tax) and would generate an additional 
$100 of minimum tax credits, giving it minimum tax credits of 
$1100 available for the following year.

                           reasons for change

    The Committee notes that the business of manufacturing 
steel within the United States has been damaged by worldwide 
overcapacity and depressed prices for steel and steel products. 
The Committee is concerned that this has created substantial 
economic hardship in the steel industry and in those 
communities that rely on jobs related to the industry, and 
believes that this economic hardship threatens the well being 
of the current and retired employees of the companies 
comprising the steel industry.
    The Committee believes that the companies in the steel 
industry have been disadvantaged by their exposure to the 
alternative minimum tax, and that it is appropriate to 
accelerate the rate at which the alternative minimum tax they 
paid as a result of being a steel company is returned through 
the allowance of the minimum tax credit. The Committee intends 
that this accelerated return of previously paid alternative 
minimum tax be available to redress the disadvantages faced by 
the steel industry. The Committee does not intend for this 
provision to serve as an incentive to other companies to 
acquire steel companies for the purpose of accessing this tax 
treatment.

                        explanation of provision

    The provision allows minimum tax credits to offset 90 
percent of tentative minimum tax 76 in the case of a 
steel company, in addition to any excess of regular tax over 
tentative minimum tax. The benefit of the provision is limited 
to amounts that are attributable to the trade or business of 
manufacturing steel within the United States for sale to 
customers. The rules regarding the determination of minimum tax 
credits are not changed. The Secretary is authorized to issue 
regulations to insure that the benefit of the provision is 
limited to steel companies.
---------------------------------------------------------------------------
    \76\ Determined net of the alternative minimum tax foreign tax 
credit.
---------------------------------------------------------------------------
    For example, under the provision, a company that has 
exclusively engaged in the trade or business of manufacturing 
steel within the United States for sale to customers has $1,000 
of minimum tax credits available in a year in which its regular 
tax is $200 and its tentative minimum tax is $100. The taxpayer 
may use minimum tax credits of $100 (the excess of its regular 
tax over its tentative minimum tax) plus $90 (90 percent of its 
tentative minimum tax), for a total of $190, to reduce its 
current liability to $10. The taxpayer would then have $810 of 
minimum tax credits available in the following year.
    If instead the steel company had regular tax of $100 and 
tentative minimum tax of $200, it would be allowed to use $180 
(90 percent of its tentative minimum tax) of its minimum tax 
credits to reduce its current liability to $20. The net effect 
on its minimum tax credits would be a reduction of $80 
77, giving it minimum tax credits of $920 available 
for the following year.
---------------------------------------------------------------------------
    \77\ The determination of minimum tax credits available in the 
following year is a multiple step process, involving an increase in the 
stock of minimum tax credits by the amount that tentative minimum tax 
exceeds regular tax ($100), combined with a reduction by the amount 
used ($180), for a net reduction of $80.
---------------------------------------------------------------------------

                             effective date

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

            TITLE VIII. SMALL BUSINESS TAX RELIEF PROVISIONS


   A. Accelerate 100-Percent Self-Employed Health Insurance Deduction


           (sec. 801 of the bill and sec. 162(l) of the Code)


                              present law

    Under present law, the tax treatment of health insurance 
expenses depends on the individual's circumstances. Self-
employed individuals may deduct a portion of health insurance 
expenses for the individual and his or her spouse and 
dependents. The deductible percentage of health insurance 
expenses of a self-employed individual is 60 percent in 1999 
through 2001, 70 percent in 2002, and 100 percent in 2003 and 
thereafter. The deduction for health insurance expenses of 
self-employed individuals is not available for any month in 
which the taxpayer is eligible to participate in a subsidized 
health plan maintained by the employer of the taxpayer or the 
taxpayer's spouse.
    Employees can exclude from income 100 percent of employer-
provided health insurance.
    Individuals who itemize deductions may deduct their health 
insurance expenses only to the extent that the total medical 
expenses of the individual exceed 7.5 percent of adjusted gross 
income (sec. 213). Subject to certain dollar limitations, 
premiums for qualified long-term care insurance are treated as 
medical expenses for purposes of the itemized deduction for 
medical expenses (sec. 213). The amount of qualified long-term 
care insurance premiums that may be taken into account for 1999 
are as follows: $210 in the case of an individual 40 years old 
or less; $400 in the case of an individual who is over 40 but 
not more than 50; $800 in the case of an individual who is more 
than 50 but not more than 60; $2,120 in the case of an 
individual who is more than 60 but not more than 70; and $2,660 
in the case of an individual who is more than 70. These dollar 
limits are indexed for inflation.
    The self-employed health deduction also applies to 
qualified long-term care insurance premiums treated as medical 
care for purposes of the itemized deduction for medical 
expenses.

                           reasons for change

    The Committee believes it appropriate to eliminate the 
disparate treatment of employer-provided health care and health 
insurance expenses of self-employed individuals as soon as 
possible.

                        explanation of provision

    Beginning in 2000, the provision increases the deduction 
for health insurance expenses (and qualified long-term care 
insurance expenses) of self-employed individuals to 100 
percent.

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 1999.

                   B. Increase Section 179 Expensing


            (sec. 802 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 $19,000 (for taxable years beginning 
in 1999) 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 $19,000 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 $19,000 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 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 business. 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 order to 
increase the value of these benefits, the Committee bill 
increases the amount allowed to be expensed under section 179 
to $30,000.

                        explanation of provision

    The provision provides that the maximum dollar amount that 
may be deducted under section 179 is increased to $30,000 for 
taxable years beginning in 2000 and thereafter, without the 
present-law phase-in rule.

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 1999.

           C. Repeal of Temporary Federal Unemployment Surtax


            (sec. 803 of the bill and sec. 3301 of the Code)


                              Present Law

    The Federal Unemployment Tax Act (``FUTA'') imposes a 6.2-
percent gross tax rate on the first $7,000 paid annually by 
covered employers to each employee. Employers in States with 
programs approved by the Federal Government and with no 
delinquent Federal loans may credit 5.4-percentage points 
against the 6.2-percent tax rate, making the minimum, net 
Federal unemployment tax rate 0.8 percent. Since all States 
have approved programs, 0.8 percent is the Federal tax rate 
that generally applies. This Federal revenue finances 
administration of the unemployment system, half of the Federal-
State extended benefits program, and a Federal account for 
State loans. The States use the revenue turned back to them by 
the 5.4-percent credit to finance their regular State programs 
and half of the Federal-State extended benefits program.
    In 1976, Congress passed a temporary surtax of 0.2 percent 
of taxable wages to be added to the permanent FUTA tax rate. 
Thus, the current 0.8-percent FUTA tax rate has two components: 
a permanent tax rate of 0.6 percent, and a temporary surtax 
rate of 0.2 percent. The temporary surtax subsequently has been 
extended through 2007.

                           reasons for change

    Because current projections indicate that the overall 
funding levels in the unemployment trust funds can be 
maintained at adequate levels without the 0.2-percent surtax, 
the Committee believes that the surtax should be repealed. 
Also, the Committee believes that the repeal will reduce the 
tax burden on businesses subject to the surtax.

                        explanation of provision

    The bill repeals the temporary FUTA surtax after December 
31, 2004.

                             effective date

    The provision is effective for labor performed on or after 
January 1, 2005.

                 D. Restore 80-Percent Meals Deduction


           (sec. 804 of the bill and sec. 274(n) of the Code)


                              present law

    Ordinary and necessary business expenses, as well as 
expenses incurred for the production of income, are generally 
deductible, subject to a number of restrictions and 
limitations. Generally, the amount allowable as a deduction for 
business meal and entertainment expenses is limited to 50 
percent of the otherwise deductible amount. Exceptions to this 
50 percent rule are provided for food and beverages provided to 
crew members of certain vessels and offshore oil or gas 
platforms or drilling rigs, as well as to individuals subject 
to the hours of service limitations of the Department of 
Transportation.

                           reasons for change

    The Committee believes that these expenses generally serve 
legitimate business purposes, which is more appropriately 
reflected by increasing the deductible portion of business meal 
expenses from 50 percent to 80 percent.

                        explanation of provision

    The provision phases in an increase from 50 percent to 80 
percent in the deductible percentage of business meal (food and 
beverage) expenses.78 The increase in the deductible 
percentage is phased in according to the following schedule:
---------------------------------------------------------------------------
    \78\ The present-law 50 percent limitation continues to apply to 
entertainment expenses.

Taxable years beginning in--
                                                   Deductible percentage
2005..............................................................    55
2006..............................................................    60
2007..............................................................    65
2008..............................................................    70
2009..............................................................    75
2010 and thereafter...............................................    80

                             effective date

    The provision is effective for taxable years beginning 
after 1999.

             TITLE IX. INTERNATIONAL TAX RELIEF PROVISIONS


            A. Allocate Interest Expense on Worldwide Basis


            (sec. 901 of the bill and sec. 864 of the Code)


                              present law

In general

    In order to compute the foreign tax credit limitation, a 
taxpayer must determine the amount of taxable income from 
foreign sources. Thus, the taxpayer must allocate and apportion 
deductions between items of U.S.-source gross income, on the 
one hand, and items of foreign-source gross income, on the 
other. Generally, it is left to the Treasury to provide 
detailed rules for the allocation and apportionment of 
expenses.
    In the case of interest expense, regulations generally are 
based on the approach that money is fungible and that interest 
expense is properly attributable to all business activities and 
property of a taxpayer, regardless of any specific purpose for 
incurring an obligation on which interest is paid. (Exceptions 
to the fungibility concept are recognized or required, however, 
in particular cases, some of which are described below.) The 
Code provides that for interest allocation purposes all members 
of an affiliated group of corporations generally are to be 
treated as a single corporation (the so-called ``one-taxpayer 
rule''), and that allocation must be made on the basis of 
assets rather than gross income.

Affiliated group

            In general
    The term ``affiliated group'' in this context generally is 
defined by reference to the rules for determining whether 
corporations are eligible to file consolidated returns. 
However, some groups of corporations are eligible to file 
consolidated returns yet are not treated as affiliated for 
interest allocation purposes, and other groups of corporations 
are treated as affiliated for interest allocation purposes even 
though they are not eligible to file consolidated returns. 
Thus, under the one-taxpayer rule, the factors affecting the 
allocation of interest expense of one corporation may affect 
the sourcing of taxable income of another, related corporation 
even if the two corporations do not elect to file, or are 
ineligible to file, consolidated returns. (See, e.g., Treas. 
Reg. sec. 1.861-11T(g).)
            Definition of affiliated group--consolidated return rules
    For consolidation purposes, the term ``affiliated group'' 
means one or more chains of includible corporations connected 
through stock ownership with a common parent corporation which 
is an includible corporation, but only if the common parent 
owns directly at least 80 percent of the total voting power of 
all classes of stock and at least 80 percent of the total value 
of all outstanding stock of at least one other includible 
corporation. In addition, for each such other includible 
corporation (except the common parent), stock possessing at 
least 80 percent of the total voting power of all classes of 
its stock and at least 80 percent of the total value of all of 
its outstanding stock must be directly owned by one or more 
other includible corporations.
    Generally the term ``includible corporation'' means any 
domestic corporation except certain corporations exempt from 
tax under section 501 (for example, corporations organized and 
operated exclusively for charitable or educational purposes), 
certain life insurance companies, corporations electing 
application of the possession tax credit, regulated investment 
companies, real estate investment trusts, and domestic 
international sales corporations. A foreign corporation 
generally is not an includible corporation.
            Definition of affiliated group--special interest allocation 
                    rules
    Subject to exceptions, the consolidated return and interest 
allocation definitions of affiliation generally are consistent 
with each other. For example, both definitions exclude all 
foreign corporations from the affiliated group. Thus, while 
debt generally is considered fungible among the assets of a 
group of domestic affiliated corporations, the same rule does 
not apply as between the domestic and foreign members of a 
group with the same degree of common control as the domestic 
affiliated group. Moreover, Congress in 1986 expressly 
considered and rejected a rule that would have accomplished a 
result more consistent with worldwide fungibility by taking 
foreign members' indebtedness into account when allocating the 
interest expense of the domestic members (H. Rept. 99-841, II-
605 (1986)). In practice, the limit in the degree of 
fungibility recognized by present law can reduce the foreign 
tax credit limitations that otherwise would apply if the 
principle of fungibility were extended to foreign and domestic 
members of a commonly controlled group.
    The statutory definition of affiliation for purposes of 
group-wide allocation of interest expenses expressly provides 
for two exceptions from the definition of affiliation for 
consolidation purposes, one of which contracts the affiliated 
group and the other of which expands it.
            Banks, savings institutions and other financial affiliates
    Under the first-mentioned exception, the affiliated group 
for interest allocation purposes generally excludes what are 
referred to in the regulations as ``financial corporations'' 
(Treas. Reg. sec. 1.861-11T(d)(4)). These include any 
corporation, otherwise a member of the affiliated group for 
consolidation purposes, that is a financial institution 
(described in section 581 or section 591), the business of 
which is predominantly with persons other than related persons 
or their customers, and which is required by State or Federal 
law to be operated separately from any other entity which is 
not a financial institution (sec. 864(e)(5)(C)). The category 
of financial corporations also includes, to the extent provided 
in regulations, bank holding companies, subsidiaries of banks 
and bank holding companies, and savings institutions 
predominantly engaged in the active conduct of a banking, 
financing, or similar business (sec. 864(e)(5)(D)).
    A financial corporation is not treated as a member of the 
regular affiliated group for purposes of applying the one-
taxpayer rule to other nonfinancial members of that group. 
Instead, all such financial corporations that would be so 
affiliated are treated as a separate single corporation for 
interest allocation purposes.
            Section 936 corporations
    Under the second exception referred to above, the 
affiliated group for interest allocation purposes includes any 
corporation that has elected the application of the possession 
tax credit for the taxable year, if the corporation would be 
excluded solely for this reason from the affiliated group as 
defined for consolidation purposes (sec. 864(e)(5)(A)).

                           reasons for change

    The present-law rules with respect to the allocation and 
apportionment of interest expense, although largely left to 
Treasury regulations, are generally based on the principle that 
money is fungible and that interest expense is properly 
attributable to all business activities and property of the 
taxpayer, regardless of the specific purpose for which the debt 
is incurred. The present-law rules, however, disregard the 
interest expense of foreign affiliates. Accordingly, the 
interest expense incurred by the domestic members of an 
affiliated group is treated as funding all the activities and 
assets of such group, including the assets and activities of 
the group's foreign affiliates, notwithstanding that the 
foreign affiliate may have directly incurred debt itself to 
fund its own assets and activities.
    The Committee believes that ignoring the interest expense 
of foreign affiliates in the interest expense allocation and 
apportionment formula can result in a disproportionate amount 
of U.S. interest expense being allocated to foreign-source 
income, which in turn could result in an inappropriate 
reduction in the group's foreign tax credit limitation. To the 
extent that the interest expense allocation rules are intended 
to apply the principle of fungibility, the Committee believes 
that the rules should take into account the interest expense 
incurred by and assets owned by foreign affiliates. While 
foreign affiliates' borrowings are not related to the amount of 
the U.S. group's interest deduction, the Committee believes 
that those borrowings may nonetheless bear on the proper 
allocation of the U.S. group's interest expense for foreign tax 
credit purposes.
    In the domestic context, the Committee believes that 
corporations which satisfy the standards of affiliation for 
consolidated return purposes are sufficiently economically 
interrelated that treatment as a single corporation for 
interest expense allocation purposes provides an accurate 
measurement of their economic income, even if such corporations 
do not choose to consolidate. For purposes of expanding the 
group to include foreign corporations, however, the Committee 
believes that it is appropriate to apply the standards for 
treatment as a controlled foreign corporation (without regard 
to the constructive ownership rules). Because the controlled 
foreign corporation ownership requirements are significantly 
lower than the ownership requirements for consolidation, 
however, the Committee believes that inclusion of only a pro 
rata portion of the interest expense (and assets) of a foreign 
affiliate should be taken into account for purposes of applying 
the interest expense allocation rules, rather than inclusion of 
the foreign affiliate's entire interest expense.
    In addition, the Committee believes that in certain cases 
it is appropriate to permit the affiliated group to apply the 
interest expense allocation and apportionment rules separately 
with respect to certain subgroups of the affiliated group. For 
example, where a subsidiary corporation borrows solely on its 
own credit, its interest expense may support only its own 
assets and perhaps the assets of its lower-tier subsidiaries. 
The Committee believes that separate-group allocation is 
appropriate in circumstances in which the subsidiary 
corporation is using borrowed funds solely for its own purposes 
and not for purposes of other members of the group outside of 
the subsidiary group. When excessive funds are distributed 
outside of the subsidiary group to other members of the 
affiliated group, however, the rationale no longer applies. 
Similarly, if there is a guarantee of debt by a related party 
or the debt is otherwise supported by an affiliate outside of 
the subsidiary group, the Committee believes that the taxpayer 
should not be able to assert that the debt is the independent 
debt of the borrower for this purpose.
    Present law treats certain banks and bank holding companies 
as a separate subgroup of the affiliated group to which the 
interest expense allocation rules apply separately. This 
separation recognizes that financial institutions may have debt 
structures that are very different from the other members of an 
affiliated group. The Committee believes that the same 
rationale applies to any corporations predominantly engaged in 
banking, insurance, financing, and similar businesses and not 
merely those entities regulated as U.S. banks. The Committee 
therefore believes that affiliated groups should be permitted 
to apply the interest expense allocation rules separately with 
respect to a subgroup consisting of all corporations 
predominantly engaged in such financial services businesses.

                        Explanation of Provision

In general

    The bill modifies the present-law interest expense 
allocation rules (which generally apply for purposes of 
computing the foreign tax credit limitations) by providing a 
one-time election under which the taxable income of the 
domestic members of an affiliated group from sources outside 
the United States generally would be determined by allocating 
and apportioning interest expense of the domestic members of a 
worldwide affiliated group on a worldwide-group basis. The 
election provides taxpayers with the option either to apply 
fungibility principles on a worldwide basis or to continue to 
apply present law. For purposes of the new elective rules based 
on worldwide fungibility, the affiliated group is expanded to 
include any foreign corporations in which more than 50 percent 
of the total vote or value is owned (directly or indirectly) by 
domestic members of the affiliated group (through application 
of the controlled foreign corporation standards). A pro rata 
portion of such foreign corporation's interest expense and 
assets is treated as attributable to the affiliated group and 
taken into account for purposes of determining the allocation 
and apportionment of interest expense. In addition, regardless 
of whether a taxpayer elects to continue to be governed by the 
present-law allocation rules or to apply the new worldwide 
fungibility principle, the provision provides two annual 
elections that are exceptions to the general ``one-taxpayer'' 
rule: (1) a ``subsidiary group'' election under which domestic 
members with debt that is not supported by other members of the 
affiliated group can elect to treat themselves and their 
subsidiaries as a separate group; and (2) a ``financial 
institution group'' election under which all members that are 
predominantly engaged in a financial services business can 
elect to be treated as a separate group.

Worldwide affiliated group election

    Under the bill, the common parent of an affiliated group 
can make a one-time election to apply the present-law interest 
expense allocation and apportionment rules under section 864(e) 
by allocating and apportioning interest expense of the domestic 
members of the worldwide affiliated group on a worldwide-group 
basis. If an affiliated group makes this election, subject to 
certain modifications and exceptions discussed below, the 
taxable income of the domestic members of the worldwide 
affiliated group from sources outside the United States is 
determined by allocating and apportioning the interest expense 
of those domestic members to foreign-source income in an amount 
equal to the worldwide affiliated group's worldwide interest 
expense multiplied by a ratio of the foreign assets of the 
worldwide affiliated group over the total assets of the 
worldwide affiliated group.
    For purposes of the new elective rules based on worldwide 
fungibility, the worldwide affiliated group means all 
corporations in an affiliated group (as that term is defined 
under present law for interest expense allocation purposes) 
79 as well as any foreign corporations with respect 
to which domestic members of the affiliated group own stock 
meeting the ownership requirements for treatment as a 
controlled foreign corporation under section 957(a) (without 
regard to the constructive ownership rules of section 958(b)). 
Hence, if more than 50 percent of the total combined voting 
power or the total value of the stock of a foreign corporation 
is owned (directly or indirectly) by domestic members of the 
affiliated group that are U.S. shareholders (i.e., that own 10 
percent or more of the total combined voting power of the stock 
of such foreign corporation), then such foreign corporation is 
included in an electing worldwide affiliated group.
---------------------------------------------------------------------------
    \79\ The bill expands the present-law definition of an affiliated 
group for interest expense allocation purposes to include certain 
insurance companies that are generally excluded from an affiliated 
group under section 1504(b)(2) (without regard to whether such 
companies are covered by an election under section 1504(c)(2)). As is 
the case under present law, the affiliated group includes section 936 
corporations.
---------------------------------------------------------------------------
    With respect to foreign corporations included in a 
worldwide affiliated group, the bill provides that only a pro 
rata portion of such foreign corporation's interest expense and 
assets is treated as attributable to the worldwide affiliated 
group and taken into account for purposes of determining the 
allocation and apportionment of interest expense. The pro rata 
portion is determined by the ratio of the value of the stock of 
the foreign corporation owned by domestic members of the 
worldwide affiliated group (regardless of whether the foreign 
corporation qualifies as more than 50-percent owned because of 
either vote or value) to the total value of the stock of such 
foreign corporation. As a result, a situation could arise in 
which a foreign corporation is a member of a worldwide 
affiliated group because a domestic member (or members) of the 
affiliated group owns more than 50 percent of the combined 
voting power of the foreign corporation's stock but owns, for 
example, only 40 percent of the value of the foreign 
corporation's stock. In such a case only 40 percent of the 
foreign corporation's interest expense and assets would be 
taken into account in applying the interest expense allocation 
and apportionment rules on a worldwide basis.
    In short, the taxable income from sources outside the 
United States of electing domestic group members generally is 
determined by allocating and apportioning interest expense of 
the domestic members of the worldwide affiliated group as if 
all of the interest expense and assets of 80-percent or greater 
owned domestic corporations (i.e., corporations that are part 
of the affiliated group under present-law section 864(e)(5)(A) 
as modified to include insurance companies) and a pro rata 
portion of the interest expense and assets of greater than 50-
percent owned foreign subsidiaries were attributable to a 
single corporation.
    Although a pro rata portion of the interest expense of a 
foreign subsidiary is taken into account for purposes of 
allocating the interest expense of the domestic members of the 
electing worldwide affiliated group for foreign tax credit 
limitation purposes, the interest expense incurred by a foreign 
subsidiary is not deductible on a U.S. return. After 
calculating the interest expense allocation based on the 
worldwide affiliated group, the interest expense of the 
domestic members preliminarily allocable to foreign-source 
income is reduced (but not below zero) by the applicable pro 
rata portion of the interest expense incurred by a foreign 
member of the group to the extent that such interest would be 
allocated to foreign sources if the provision's principles were 
applied separately to the foreign members of the group.
    The general rules under present law continue to apply to 
the electing worldwide affiliated group as if it were an 
affiliated group as defined under present law for interest 
expense allocation purposes. Thus, among other things, the 
allocation and apportionment of interest expense continues to 
be made on the basis of assets (rather than gross income), 
modified in the case of foreign members to include a pro rata 
share of the foreign member's assets. In addition, as is the 
case under present law, certain basis adjustments are made with 
respect to the stock of nonaffiliated 10-percent owned 
corporations. To the extent that foreign members are included 
in the worldwide affiliated group, these basis adjustments are 
not applicable.
    The worldwide affiliated group election is to be made by 
the common parent of the affiliated group. It must be made for 
the first taxable year beginning after December 31, 2001 (the 
effective date), in which a worldwide affiliated group exists 
that includes at least one foreign corporation that meets the 
requirements for inclusion in a worldwide affiliated group. 
Once made, the election applies to the common parent and all 
other members of the worldwide affiliated group for the taxable 
year for which the election was made and all subsequent taxable 
years.

Annual elections

    Regardless of whether a taxpayer elects to continue to be 
governed by the present-law allocation rules or to apply the 
new worldwide fungibility principle, the bill provides two 
annual elections that are exceptions to the ``one-taxpayer'' 
rule described above: (1) the ``subsidiary group'' election, 
and (2) a ``financial institution group'' election.
            Subsidiary group election
    Under the subsidiary group election, at the annual election 
of the common parent of the affiliated group, certain interest 
expense attributable to qualified indebtedness incurred by a 
domestic member of the affiliated group (other than the common 
parent) is allocated and apportioned by treating the borrower 
and its direct and indirect subsidiaries as a separate group 
(in which the borrower would be treated as the common parent). 
The regime that was elected by the entire affiliated group 
(i.e., present law or the worldwide fungibility principles of 
the bill) applies to all the qualified indebtedness of the 
members of that separate electing subsidiary group. For this 
purpose, qualified indebtedness generally means any borrowing 
from unrelated parties that is not guaranteed or in any other 
way supported by any corporation within the same affiliated 
group (other than a member of the subsidiary group) of the 
borrower.
    If the common parent of the affiliated group makes the 
election with respect to a domestic member of an affiliated 
group, the subsidiary group election applies to all direct and 
indirect subsidiaries of that member. No member of an electing 
subsidiary group can be treated as a member of another electing 
subsidiary group. Therefore, a separate subsidiary group 
election could not be made with respect to lower-tier 
subsidiaries in an electing subsidiary group. It is intended 
that Treasury regulations similar to present-law regulations 
that apply with respect to a bank subgroup would provide that 
the subsidiary group's stock be ignored for purposes of 
applying the interest expense allocation and apportionment 
rules to the rest of the affiliated group. 80
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    \80\  See Temp. Treas. Reg. sec. 1.861-11T(d)(4).
---------------------------------------------------------------------------
    If the subsidiary group election is made, the bill also 
provides that an ``equalization'' rule applies under which 
interest expense (if any) incurred by domestic members of the 
affiliated group with respect to indebtedness that is not 
qualified indebtedness of an electing subsidiary group is 
allocated first to foreign-source income to the extent 
necessary to achieve (if possible) the allocation and 
apportionment of interest expense to foreign-source income that 
would have resulted had the subsidiary group election not been 
made. Under this rule, the interest expense of the domestic 
members of the affiliated group (other than subsidiary group 
interest expense) is allocated to foreign-source income to the 
extent such expense does not exceed the excess (if any) of (1) 
the total interest expense of the affiliated group (including 
that of the subsidiary group) that would have been allocated to 
foreign sources had no subsidiary group election been made over 
(2) the subsidiary group interest expense that is allocated to 
foreign sources through application of the subsidiary group 
election.
    In addition, the bill provides anti-abuse rules under which 
certain transfers from one member of a subsidiary group to a 
member of the affiliated group outside of the subsidiary group 
are treated as reducing the amount of qualified indebtedness. 
In this regard, if a member of an electing subsidiary group 
makes dividend or other distributions in a taxable year to a 
member of the affiliated group (other than a member of the 
electing subsidiary group) that exceed the greater of (1) its 
average annual dividend (expressed as a percentage of current 
earnings and profits) during the five preceding taxable years 
or (2) 25 percent of its average annual earnings and profits 
for such five preceding taxable years, or otherwise deals with 
any person in a manner not clearly reflecting income (as 
determined under principles similar to section 482), an amount 
of its qualified indebtedness equal to such excess is 
recharacterized as nonqualified indebtedness.
            Financial institution group election
    The bill provides a financial institution group election 
that expands and replaces the bank group rules of present law 
(sec. 864(e)(5)(B)-(D)). At the annual election of the common 
parent of the affiliated group, the interest expense allocation 
and apportionment rules that apply to the affiliated group as a 
whole (i.e., present law or the worldwide approach), can be 
applied separately to a subgroup of the affiliated group 
consisting of corporations that are predominantly engaged in a 
banking, insurance, financing, or similar business (as well as 
certain bank holding companies). For this purpose, a 
corporation is predominantly engaged in such a business if at 
least 80 percent of its gross income is ``financial services 
income'' as described in section 904(d)(2)(C)(ii) and the 
regulations thereunder. 81 The financial institution 
group rules, if elected, apply to all members of the affiliated 
group that are considered to be predominantly engaged in the 
active conduct of a banking, insurance, financing, or similar 
business, or otherwise considered to be a bank holding company. 
In addition, if a financial institution group election has been 
made, a member of the affiliated group that is part of the 
financial institution group could not also be a member of a 
separate subsidiary group at the same time. It is intended that 
Treasury regulations, similar to those that apply to the 
present-law bank group, would continue to apply to treat the 
financial institution group as a segregated group from the rest 
of the affiliated group. 82 Thus, the measurement of 
assets of the affiliated group would exclude the stock of 
members included in the financial institution group and, 
similarly, the financial institution group would not take into 
account the stock of any lower-tier corporation that is a 
member of the affiliated group but not a member of the 
financial institution group. In addition, the bill provides 
that anti-abuse rules similar to those that apply in connection 
with the subsidiary group election apply to the financial 
institution group.
---------------------------------------------------------------------------
    \81\  See Treas. Reg. sec. 1.904-4(e)(2).
    \82\  Temp. Treas. Reg. sec. 1.861-11T(d)(4).
---------------------------------------------------------------------------

                          Regulatory authority

    The bill grants the Treasury Secretary authority to 
prescribe rules to carry out the purposes of the provision, 
including rules (1) to address changes in members of an 
affiliated group (including acquisitions or other business 
combinations of affiliated groups in which one group has made 
an election to apply the worldwide approach and the other group 
applies present law); (2) to prevent assets and interest 
expense from being taken into account more than once; and (3) 
to provide for direct allocation of interest expense in 
circumstances where such allocation would be appropriate to 
carry out the purposes of the provision.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

B. Look-Through Rules to Apply To Dividends From Noncontrolled Section 
                            902 Corporations


            (sec. 902 of the bill and sec. 904 of the Code)


                              Present Law

    U.S. persons may credit foreign taxes against U.S. tax on 
foreign-source income. The amount of foreign tax credits that 
may be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S.-source income. Separate limitations are 
applied to specific categories of income.
    Special foreign tax credit limitations apply in the case of 
dividends received from a foreign corporation in which the 
taxpayer owns at least 10 percent of the stock by vote and 
which is not a controlled foreign corporation (a so-called 
``10/50 company''). 83 Dividends paid by a 10/50 
company in taxable years beginning before January 1, 2003, are 
subject to a separate foreign tax credit limitation for each 
10/50 company. Dividends paid by a 10/50 company that is not a 
passive foreign investment company in taxable years beginning 
after December 31, 2002, out of earnings and profits 
accumulated in taxable years beginning before January 1, 2003, 
are subject to a single foreign tax credit limitation for all 
10/50 companies (other than passive foreign investment 
companies). Dividends paid by a 10/50 company that is a passive 
foreign investment company out of earnings and profits 
accumulated in taxable years beginning before January 1, 2003, 
continue to be subject to a separate foreign tax credit 
limitation for each such 10/50 company. Dividends paid by a 10/
50 company in taxable years beginning after December 31, 2002, 
out of earnings and profits accumulated in taxable years after 
December 31, 2002, are treated as income in a foreign tax 
credit limitation category in proportion to the ratio of the 
earnings and profits attributable to income in such foreign tax 
credit limitation category to the total earnings and profits (a 
so-called ``look-through'' approach). For these purposes, 
distributions are treated as made from the most recently 
accumulated earnings and profits. Regulatory authority is 
granted to provide rules regarding the treatment of 
distributions out of earnings and profits for periods prior to 
the taxpayer's acquisition of such stock.
---------------------------------------------------------------------------
    \83\  A controlled foreign corporation in which the taxpayer owns 
at least 10 percent of the stock by vote is treated as a 10/50 company 
with respect to any distribution out of earnings and profits for 
periods when it was not a controlled foreign corporation.
---------------------------------------------------------------------------

                           Reasons for Change

    In the Taxpayer Relief Act of 1997, the Congress provided 
for a look-through regime to apply in characterizing dividends 
from 10/50 companies for foreign tax credit limitation 
purposes. The present-law rules that subject the dividends 
received from each 10/50 company to a separate foreign tax 
credit limitation impose a substantial record-keeping burden on 
companies and have the additional negative effect of 
discouraging minority-position joint ventures abroad. 
84
---------------------------------------------------------------------------
    \84\  Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in 1997 (JCS-23-97), December 17, 1997, p. 302.
---------------------------------------------------------------------------
    The Committee believes that the present-law rules for 
dividends from 10/50 companies will result in additional 
complexity and compliance burdens. For instance, dividends paid 
by a 10/50 company in taxable years beginning after December 
31, 2002, will be subject to the concurrent application of both 
the single-basket approach (for pre-2003 earnings and profits) 
and the look-through approach (for post-2002 earnings and 
profits).
    The Committee believes that joint ventures can be an 
efficient way for U.S. businesses to exploit their know-how and 
technology in foreign markets. To the extent that the present-
law limitation is discouraging such joint ventures or altering 
the structure of new ventures, the ability of U.S. businesses 
to succeed abroad could be diminished. The Committee believes 
that it is important to accelerate and simplify the look-
through approach enacted in 1997.

                        Explanation of Provision

    The bill simplifies the application of the foreign tax 
credit limitation by applying the look-through approach to all 
dividends paid by a 10/50 company, regardless of the year in 
which the earnings and profits out of which the dividend is 
paid were accumulated. The bill eliminates the single-basket 
limitation approach for dividends from such companies for 
foreign tax credit limitation purposes.
    The bill provides a transition rule under which pre-
effective date foreign tax credits associated with a 10/50 
company separate limitation category can be carried forward 
into post-effective date years. Under the bill, look-through 
principles similar to those applicable to post-effective date 
dividends from a 10/50 company apply to determine the 
appropriate foreign tax credit limitation category or 
categories with respect to the foreign tax credit carryforward.
    The bill also provides a default rule in cases in which 
taxpayers are unable to obtain the necessary information to 
apply the look-through rules with respect to dividends from a 
10/50 company (or in which the income is not treated as falling 
within one of certain enumerated limitation categories). In 
such cases, the bill treats the dividend (or a portion thereof) 
from such 10/50 company as a dividend that is not subject to 
the look-through rules.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

  C. Subpart F Treatment of Pipeline Transportation Income and Income 
             From Transmission of High Voltage Electricity


        (secs. 903 and 904 of the bill and sec. 954 of the Code)


                              Present Law

    Under the subpart F rules, U.S. 10-percent shareholders of 
a controlled foreign corporation (``CFC'') are subject to U.S. 
tax currently on their shares of certain income earned by the 
foreign corporation, whether or not such income is distributed 
to the shareholders (referred to as ``subpart F income''). 
Subpart F income includes foreign base company income, which in 
turn includes five categories of income: foreign personal 
holding company income, foreign base company sales income, 
foreign base company services income, foreign base company 
shipping income, and foreign base company oil related income 
(sec. 954(a)).
    Foreign base company services income includes income from 
services performed (1) for or on behalf of a related party and 
(2) outside the country of the CFC's incorporation (sec. 
954(e)). Treasury regulations provide that the services of the 
foreign corporation will be treated as performed for or on 
behalf of the related party if, for example, a party related to 
the foreign corporation furnishes substantial assistance to the 
foreign corporation in connection with the provision of 
services (Treas. Reg. sec. 1.954-4(b)(1)(iv)).
    Foreign base company oil related income is income derived 
outside the United States from the processing of minerals 
extracted from oil or gas wells into their primary products; 
the transportation, distribution, or sale of such minerals or 
primary products; the disposition of assets used by the 
taxpayer in a trade or business involving the foregoing; or the 
performance of any related services. However, foreign base 
company oil related income does not include income derived from 
a source within a foreign country in connection with: (1) oil 
or gas which was extracted from a well located in such foreign 
country or, (2), oil, gas, or a primary product of oil or gas 
which is sold by the CFC or a related person for use or 
consumption within such foreign country or is loaded in such 
country as fuel on a vessel or aircraft. An exclusion also is 
provided for income of a CFC that is a small producer (i.e., a 
corporation whose average daily oil and natural gas production, 
including production by related corporations, is less than 
1,000 barrels).

                           Reasons for Change

    The subpart F rules generally apply to provide current U.S. 
taxation of income that can be described as ``mobile,'' that 
is, income for which the taxpayer might easily be able to 
arrange that it be sourced to a low-tax foreign jurisdiction. 
The Committee understands that, until recently, many countries 
did not permit foreign corporations to own energy facilities 
such as oil and gas pipelines, electric generating stations, 
and high voltage electricity transmission lines. The Committee 
observes that with the advent of deregulation policies abroad, 
many U.S. corporations are actively considering the 
construction and operation of oil and gas pipelines and high 
voltage electricity transmission systems in foreign markets. 
The Committee understands that such projects involve 
substantial amounts of fixed capital investment, the income 
from which does not represent the type of ``mobile'' income to 
which the subpart F rules should apply.

                        Explanation of Provision

    The bill exempts income derived in connection with the 
performance of services which are directly related to the 
transmission of high voltage electricity from the definition of 
foreign base company services income. Thus, the income of a CFC 
that owns a high voltage transmission line for the purpose of 
providing electricity generated by a related party to a third 
party outside the CFC's country of incorporation does not 
constitute foreign base company services income. No inference 
is intended as to the treatment of such income under present 
law.
    The bill also provides an additional exception to the 
definition of foreign base company oil related income. Under 
the bill, foreign base company oil related income does not 
include income derived from a source within a foreign country 
in connection with the pipeline transportation of oil or gas 
within such foreign country. Thus, the exception applies 
whether or not the CFC that owns the pipeline also owns any 
interest in the oil or gas transported. In addition, the 
exception applies to income earned from the transportation of 
oil or gas by pipeline in a country in which the oil or gas was 
neither extracted nor consumed within such foreign country.

                             Effective Date

    The provision is effective for taxable years of CFCs 
beginning after December 31, 2001, and taxable years of U.S. 
shareholders with or within which such taxable years of CFCs 
end.

             D. Recharacterization of Overall Domestic Loss


            (sec. 905 of the bill and sec. 904 of the Code)


                              Present Law

    A premise of the foreign tax credit is that it should not 
reduce a taxpayer's U.S. tax on its U.S.-source income; rather, 
it should only reduce U.S. tax on foreign-source income. An 
overall foreign tax credit limitation prevents taxpayers from 
using foreign tax credits to offset U.S. tax on U.S.-source 
income. The overall limitation is calculated by prorating a 
taxpayer's pre-credit U.S. tax on its worldwide income between 
its U.S.-source and foreign-source taxable income. The ratio 
(not exceeding 100 percent) of the taxpayer's foreign-source 
taxable income to worldwide taxable income is multiplied by its 
pre-credit U.S. tax to establish the amount of U.S. tax 
allocable to the taxpayer's foreign-source income and, thus, 
the upper limit on the foreign tax credit for the year. If the 
taxpayer's foreign-source taxable income exceeds worldwide 
taxable income (because of a domestic source loss), then the 
full amount of pre-credit U.S. tax may be offset by the foreign 
tax credit.
    If a taxpayer's losses from foreign sources exceed its 
foreign-source income, the excess (``overall foreign loss'' or 
``OFL'') may offset U.S.-source income. Such an offset reduces 
the effective rate of U.S. tax on U.S.-source income. To 
eliminate a double benefit (that is, the reduction of U.S. tax 
previously noted and, later, full allowance of a foreign tax 
credit with respect to foreign-source income), an OFL recapture 
rule applies. Under this rule, a portion of foreign-source 
taxable income earned after an OFL year is recharacterized as 
U.S.-source taxable income for foreign tax credit purposes (and 
for purposes of the possessions tax credit) (sec. 904(f)(1)). 
Foreign-source taxable income up to the amount of the 
unrecaptured OFL may be so treated. In general, no more than 50 
percent of the foreign-source taxable income earned in any 
particular taxable year is recharacterized as U.S.-source 
taxable income, unless a taxpayer elects a higher 
percentage.\85\ The effect of the recapture is to reduce the 
foreign tax credit limitation in one or more years following an 
OFL year and, therefore, the amount of U.S. tax that can be 
offset by foreign tax credits in the later year or years.
---------------------------------------------------------------------------
    \85\ If a taxpayer with an OFL disposes of property that was used 
predominantly outside the United States in a trade or business, the 
taxpayer generally is deemed to have received and recognized foreign-
source taxable income as the result of a disposition in an amount at 
least equal to the lesser of the gain actually realized on the 
disposition or the remaining amount of the unrecaptured OFL. 
Furthermore, the annual 50-percent limit on the resourcing of foreign-
source income does not apply to that amount of foreign-source income 
realized by reason of the disposition.
---------------------------------------------------------------------------
    An overall U.S.-source loss reduces pre-credit U.S. tax on 
worldwide income to an amount less than the hypothetical tax 
that would apply to the taxpayer's foreign-source income if 
viewed in isolation. The existence of foreign-source taxable 
income in the year

of the U.S. loss reduces or eliminates any net operating loss 
carryover that the U.S. loss would otherwise have generated 
absent the foreign income. In addition, as the pre-credit U.S. 
tax on worldwide income is reduced, so is the foreign tax 
credit limitation. As a result, some foreign tax credits in the 
year of the U.S. loss must be credited, if at all, in a 
carryover year. Tax on domestic-source taxable income in a 
subsequent year may be offset by a net operating loss 
carryforward (if any), but not by a foreign tax credit 
carryforward. There is presently no mechanism for resourcing 
such subsequent U.S.-source income as foreign-source income.

                           Reasons for Change

    The Committee believes that it is appropriate to provide 
more parity between the treatment of U.S. and foreign losses 
for foreign tax credit limitation purposes. Accordingly, the 
Committee believes that rules similar to the resourcing rules 
that currently apply to OFLs should apply in the case of 
overall domestic losses.

                        Explanation of Provision

    The bill applies a resourcing rule to U.S.-source income 
where the taxpayer has suffered a reduction in the amount of 
its foreign tax credit limitation due to a prior overall 
domestic loss. Under the bill, in the case of a taxpayer that 
has incurred an overall domestic loss, the portion of the 
taxpayer's U.S.-source taxable income for each succeeding 
taxable year that is equal to the lesser of (1) the amount of 
the unrecharacterized overall domestic loss, or (2) 50 percent 
of the taxpayer's U.S.-source taxable income for such 
succeeding taxable year is recharacterized as foreign-source 
taxable income.
    The bill defines an overall domestic loss for this purpose 
as any domestic loss to the extent it offsets foreign-source 
taxable income for the current taxable year or for any 
preceding taxable year by reason of a loss carryback. For this 
purpose, a domestic loss means the amount by which the U.S.-
source gross income for the taxable year is exceeded by the sum 
of the deductions properly apportioned or allocated thereto, 
determined without regard to any loss carried back from a 
subsequent taxable year. Under the bill, an overall domestic 
loss does not include any loss for any taxable year unless the 
taxpayer elected the use of the foreign tax credit for such 
taxable year.
    Any U.S.-source income resourced under the bill is 
allocated among the various foreign tax credit separate 
limitation categories in the same proportion that those 
categories were reduced by the prior overall domestic loss.
    It is anticipated that situations could arise in which a 
taxpayer would generate an overall domestic loss in a year 
following a year in which it had an overall foreign loss, or 
vice versa. In such a case, it would be necessary for ordering 
and other coordination rules to be developed for purposes of 
computing the foreign tax credit limitation in subsequent 
taxable years. The bill grants the Treasury Secretary authority 
to prescribe such regulations as may be necessary to coordinate 
the operation of the OFL recapture rules with the operation of 
the overall domestic loss recharacterization rules that would 
be added by the bill.

                             Effective Date

    The provision applies to losses incurred in taxable years 
beginning after December 31, 2004.

    E. Treatment of Military Property of Foreign Sales Corporations


            (sec. 906 of the bill and sec. 923 of the Code)


                              Present Law

    A portion of the foreign trade income of an eligible 
foreign sales corporation (``FSC'') is exempt from federal 
income tax. Foreign trade income is defined as the gross income 
of a FSC that is attributable to foreign trading gross 
receipts. In general, the term ``foreign trading gross 
receipts'' means the gross receipts of a FSC from the sale or 
lease of export property, services related and subsidiary to 
the sale or lease of export property, engineering or 
architectural services for construction projects located 
outside the United States, and certain managerial services for 
an unrelated FSC or DISC.
    Section 923(a)(5) contains a special limitation relating to 
the export of military property. Under regulations prescribed 
by the Treasury Secretary, the portion of a FSC's foreign 
trading gross receipts from the disposition of, or services 
relating to, military property that may be treated as exempt 
foreign trade income is limited to 50 percent of the amount 
that would otherwise be so treated. For this purpose, the term 
``military property'' means any property that is an arm, 
ammunition, or implement of war designated in the munitions 
list published pursuant to federal law. 86 Under 
this provision, the export of military property through a FSC 
is accorded one-half the tax benefit that is accorded to 
exports of non-military property.
---------------------------------------------------------------------------
    \86\ Section 923(a)(5) defines ``military property'' by reference 
to section 995(b)(3)(B), which contains a technical error. Section 
995(b)(3)(B) references the Military Security Act of 1954. The proper 
reference should have been to the Mutual Security Act of 1954, which 
subsequently was superceded by the International Security Assistance 
and Arms Export Control Act of 1976. Current Treasury regulations 
provide the correct reference for purposes of defining ``military 
property.''
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee finds the present-law rule limiting the tax 
benefit available for the export of property through a FSC to 
one half of that otherwise available in the case of the export 
of military property to be an inappropriate limitation. The 
Committee believes that exporters of military property should 
be treated no differently under the FSC rules than exporters of 
other products.

                        Explanation of Provision

    The bill repeals the special FSC limitation relating to the 
export of military property, thus providing exports of military 
property through a FSC with the same treatment currently 
provided exports of non-military property.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

      F. Modify Treatment of RIC Dividends Paid to Foreign Persons


(sec. 907 of the bill and secs. 871, 881, 897, 1441, 1442, and 2105 of 
                               the Code)


                              Present Law

Regulated investment companies

    A regulated investment company (``RIC'') is a domestic 
corporation that, at all times during the taxable year, is 
registered under the Investment Company Act of 1940 as a 
management company or as a unit investment trust, or has 
elected to be treated as a business development company under 
that Act (sec. 851(a)).
    In addition, to qualify as a RIC, a corporation must elect 
such status and must satisfy certain tests (sec. 851(b)). These 
tests include a requirement that the corporation derive at 
least 90 percent of its gross income from dividends, interest, 
payments with respect to certain securities loans, and gains on 
the sale or other disposition of stock or securities or foreign 
currencies, or other income derived with respect to its 
business of investment in such stock, securities, or 
currencies.
    Generally, a RIC pays no income tax because it is permitted 
to deduct dividends paid to its shareholders in computing its 
taxable income. The amount of any distribution generally is not 
considered as a dividend for purposes of computing the 
dividends paid deduction unless the distribution is pro rata, 
with no preference to any share of stock as compared with other 
shares of the same class (sec. 562(c)). For distributions by 
RICs to shareholders who made initial investments of at least 
$10,000,000, however, the distribution is not treated as non-
pro rata or preferential solely by reason of an increase in the 
distribution due to reductions in administrative expenses of 
the company.
    A RIC generally may pass through to its shareholders the 
character of its long-term capital gains. It does this by 
designating a dividend it pays as a capital gain dividend to 
the extent that the RIC has net capital gain (i.e., net long-
term capital gain over net short-term capital loss). These 
capital gain dividends are treated as long-term capital gains 
by the shareholders. A RIC generally also can pass through to 
its shareholders the character of tax-exempt interest from 
State and municipal bonds, but only if, at the close of each 
quarter of its taxable year, at least 50 percent of the value 
of the total assets of the RIC consists of these obligations. 
In this case, the RIC generally may designate a dividend it 
pays as an exempt-interest dividend to the extent that the RIC 
has tax-exempt interest income. These exempt-interest dividends 
are treated as interest excludable from gross income by the 
shareholders.

U.S. source investment income of foreign persons

            In general
    The United States generally imposes a flat 30-percent tax, 
collected by withholding, on the gross amount of U.S.-source 
investment income payments, such as interest, dividends, rents, 
royalties, or similar types of income, to nonresident alien 
individuals and foreign corporations (``foreign persons'') 
(secs. 871(a), 881, 1441, and 1442). Under treaties, the United 
States may reduce or eliminate such taxes. Even taking into 
account U.S. treaties, however, the tax on a dividend generally 
is not entirely eliminated. Instead, U.S.-source portfolio 
investment dividends received by foreign persons generally are 
subject to U.S. withholding tax at a rate of at least 15 
percent.
            Interest
    Although payments of U.S.-source interest that is not 
effectively connected with a U.S. trade or business generally 
are subject to the 30-percent withholding tax, there are 
significant exceptions to that rule. For example, interest from 
certain deposits with banks and other financial institutions is 
exempt from tax (secs. 871(i)(2)(A) and 881(d)). Original issue 
discount on obligations maturing in 183 days or less from the 
date of original issue (without regard to the period held by 
the taxpayer) is also exempt from tax (sec. 871(g)). An 
additional exception is provided for certain interest paid on 
portfolio obligations (secs. 871(h) and 881(c)). ``Portfolio 
interest'' generally is defined as any U.S.-source interest 
(including original issue discount), not effectively connected 
with the conduct of a U.S. trade or business, (1) on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto (i.e., the obligation is ``foreign 
targeted''), and (2) that is not received by a 10-percent 
shareholder (secs. 871(h)(3) and 881(c)(3)). With respect to a 
registered obligation, a statement that the beneficial owner is 
not a U.S. person is required (secs. 871(h)(2), (5) and 
881(c)(2)). This exception is not available for any interest 
received either by a bank on a loan extended in the ordinary 
course of its business (except in the case of interest paid on 
an obligation of the United States), or by a controlled foreign 
corporation from a related person (sec. 881(c)(3)). Moreover, 
this exception is not available for certain contingent interest 
payments (secs. 871(h)(4) and 881(c)(4)). The payment of 
interest must not be to any person within a foreign country 
(and must not be a payment addressed to, or for the account of, 
persons within a foreign country) with respect to which the 
Treasury Secretary has determined that exchange of information 
is inadequate to prevent evasion of U.S. income tax by U.S. 
persons (secs. 871(h)(6), and 881(c)(6)).
            Capital gains
    Foreign persons generally are not subject to U.S. tax on 
gain realized on the disposition of stock or securities issued 
by a U.S. person (other than a ``U.S. real property holding 
corporation,'' as described below), unless the gain is 
effectively connected with the conduct of a trade or business 
in the United States. This exemption does not apply, however, 
to the extent that the foreign person is a nonresident alien 
individual present in the United States for a period or periods 
aggregating 183 days or more during the taxable year (sec. 
871(a)(2)). A RIC may elect not to withhold on a distribution 
to a foreign person representing a capital gain dividend. 
(Treas. Reg. sec. 1.1441-3(c)(2)(D)).
    Under the Foreign Investment in Real Property Tax Act of 
1980 (``FIRPTA''), as amended, gain or loss of a foreign person 
from the disposition of a U.S. real property interest is 
subject to net basis tax as if the taxpayer were engaged in a 
trade or business within the United States and the gain or loss 
were effectively connected with such trade or business (sec. 
897). Inaddition to an interest in real property located in the 
United States or the Virgin Islands, U.S. real property interests 
include (among other things) any interest in a domestic corporation 
unless the taxpayer establishes that the corporation was not, during a 
5-year period ending on the date of the disposition of the interest, a 
U.S. real property holding corporation (which is defined generally to 
mean a corporation the fair market value of whose U.S. real property 
interests equals or exceeds 50 percent of the sum of the fair market 
values of its real property interests and any other of its assets used 
or held for use in a trade or business).
    Under the FIRPTA provisions, a distribution by a real 
estate investment trust (``REIT'') to a foreign person is, to 
the extent attributable to gain from sales or exchanges by the 
REIT of U.S. real property interests, treated as gain 
recognized by the foreign person from the sale or exchange of a 
U.S. real property interest (sec. 897(h)). Under Treasury 
regulations, a REIT generally is required to withhold tax upon 
such a distribution to a foreign person, at a rate of 35 
percent times the maximum amount of that distribution that 
could be designated by the REIT as a capital gain dividend 
(Treas. Reg. sec. 1.1445-8(a)(2), (b)(1), and (c)(2)).
    In view of the nature of a REIT, an interest in a REIT may 
in some cases be considered to be a U.S. real property 
interest. An interest in a domestically-controlled REIT, 
however, is not considered a U.S. real property interest (sec. 
897(h)(2)). Nonetheless, the foreign ownership percentage of 
taxable appreciation in the value of a U.S. real property 
interest distributed by a domestically-controlled REIT is 
subject to tax in the hands of the REIT (sec. 897(h)(3)).

Estate taxation

    Decedents who were citizens or residents of the United 
States are generally subject to Federal estate tax on all 
property, wherever situated. Nonresidents who are not U.S. 
citizens, however, are subject to estate tax only on their 
property which is within the United States. Property within the 
United States generally includes debt obligations of U.S. 
persons, including the Federal government and State and local 
governments (sec. 2104(c)), but does not include either bank 
deposits or portfolio obligations, the interest on which would 
be exempt from U.S. income tax under section 871 (sec. 
2105(b)). Stock owned and held by a nonresident who is not a 
U.S. citizen is treated as property within the United States 
only if the stock was issued by a domestic corporation (sec. 
2104(a); Treas. Reg. sec. 20.2104-1(a)(5)).
    Treaties may reduce U.S. taxation on transfers by estates 
of nonresident decedents who are not U.S. citizens. Under 
recent treaties, for example, U.S. tax may generally be 
eliminated except insofar as the property transferred includes 
U.S. real property or business property of a U.S. permanent 
establishment.

                           Reasons for Change

    Under present law, a disparity is created between foreign 
persons who directly invest in certain interest bearing and 
other securities and a foreign person who invests in such 
securities indirectly through U.S. mutual funds. In general, 
certain amounts received by the direct foreign investor (or a 
foreign investor through a foreign fund) may be exempt from the 
U.S. gross-basis withholding tax, whereas distributions from a 
RIC generally are treated as dividends subject to the 
withholding tax, notwithstanding that the distributions may be 
attributable to amounts that could otherwise qualify for an 
exemption from withholding tax. The Committee believes that 
such disparate treatment should be eliminated.
    The Committee therefore believes that, to the extent that a 
RIC distributes to a foreign person a dividend attributable to 
amounts that would have been exempt from U.S. withholding tax 
had the foreign person received it directly (such as portfolio 
interest and capital gains, including short-term capital 
gains), such dividend should be exempt from the U.S. gross-
basis withholding tax. Similarly, the Committee believes that 
comparable treatment should be afforded for estate tax purposes 
to foreign persons who invest in certain assets through a RIC 
to the extent that such assets would not be subject to the 
estate tax if held directly.

                        Explanation of Provision

In general

    Under the provision, a RIC that earns certain interest 
income that would not be subject to U.S. tax if earned by a 
foreign person directly may, to the extent of such income, 
designate a dividend it pays as derived from such interest 
income. A foreign person who is a shareholder in the RIC 
generally would treat such a dividend as exempt from gross-
basis U.S. tax, just as if the foreign person had earned the 
interest directly. Similarly, a RIC that earns an excess of net 
short-term capital gains over net long-term capital losses, 
which excess would not be subject to U.S. tax if earned by a 
foreign person directly, generally may, to the extent of such 
excess, designate a dividend it pays as derived from such 
excess. A foreign person who is a shareholder in the RIC 
generally would treat such a dividend as exempt from gross-
basis U.S. tax, just as if the foreign person had realized the 
amount directly. The estate of a foreign decedent is exempt 
from U.S. estate tax on a transfer of stock in the RIC in the 
proportion that the assets held by the RIC are debt 
obligations, deposits, or other property that would generally 
be treated as situated outside the United States if held 
directly by the estate.

Interest-related dividends

    Under the provision, a RIC can, under certain 
circumstances, designate all or a portion of a dividend as an 
``interest-related dividend,'' by written notice mailed to its 
shareholders not later than 60 days after the close of its 
taxable year. An interest-related dividend received by a 
foreign person generally is exempt from U.S. gross-basis tax 
under sections 871(a), 881, 1441 and 1442.
    This exemption does not apply, however, to a dividend on 
shares of RIC stock in a case where the withholding agent does 
not receive a statement, similar to that required under the 
portfolio interest rules, that the beneficial owner of the 
shares is not a U.S. person. The exemption does not apply to a 
dividend paid to any person within a foreign country (or 
dividends addressed to, or for the account of, persons within 
such foreign country) with respect to which the Treasury 
Secretary has determined, under the portfolio interest rules, 
that exchange of information is inadequate to prevent evasion 
of U.S. income tax by U.S. persons.
    In addition, the exemption generally does not apply to 
dividends paid to a controlled foreign corporation to the 
extent that such dividends are attributable to income received 
by the RIC on a debt obligation of a person with respect to 
which the recipient of the dividend (i.e., the controlled 
foreign corporation) is a related person. Nor does the 
exemption generally apply to dividends to the extent such 
dividends are attributable to income (other than short-term 
original discount, bank deposit interest, and certain foreign-
source interest income) received by the RIC on indebtedness 
issued by the RIC-dividend recipient or by any corporation or 
partnership with respect to which the recipient of the RIC 
dividend is a 10-percent shareholder. In these two cases, 
however, the RIC remains exempt from its withholding obligation 
unless the RIC knows that the dividend recipient is such a 
controlled foreign corporation or 10-percent shareholder. To 
the extent that an interest-related dividend received by a 
controlled foreign corporation is attributable to interest 
income of the RIC that would be portfolio interest if received 
by a foreign corporation, the dividend is treated as portfolio 
interest for purposes of the de minimis rules, the high-tax 
exception, and the same country exceptions of subpart F (see 
sec. 881(c)(5)(A)).
    The aggregate amount designated as interest-related 
dividends for the RIC's taxable year (including dividends so 
designated that are paid after the close of the taxable year 
but treated as paid during that year as described in section 
855) generally is limited to the qualified net interest income 
of the RIC for the taxable year. The qualified net interest 
income of the RIC equals the excess of (1) the amount of 
qualified interest income of the RIC over (2) the amount of 
direct and indirect expenses of the RIC properly allocable to 
such interest income.
    Qualified interest income of the RIC is the sum of (1) its 
U.S.-source income with respect to (a) bank deposit interest; 
(b) short term original issue discount that is currently exempt 
from the gross-basis tax under section 871; (c) any interest 
(including amounts recognized as ordinary income in respect of 
original issue discount, market discount, or acquisition 
discount under the provisions of sections 1271-1288, and such 
other amounts as regulations may provide) on an obligation 
which is in registered form, unless it is earned on an 
obligation issued by a corporation or partnership in which the 
RIC is a 10-percent shareholder or is contingent interest not 
treated as portfolio interest under section 871(h)(4); and (d) 
any interest-related dividend from another RIC; and (2) its 
foreign-source interest income unless such interest is subject 
to a tax imposed by a foreign jurisdiction that is reduced or 
eliminated by a treaty with the United States.
    Where the amount designated as an interest-related dividend 
is greater than the qualified net interest income described 
above, then the portion of the distribution so designated which 
constitutes an interest-related dividend will be only that 
proportion of the amount so designated as the amount of the 
qualified net interest income bears to the amount so 
designated.

Short-term capital gain dividends

    Under the provision, a RIC can also, under certain 
circumstances, designate all or a portion of a dividend as a 
``short-term capital gain dividend,'' by written notice mailed 
to its shareholders not later than 60 days after the close of 
its taxable year. For purposes of the U.S. gross-basis tax, a 
short-term capital gain dividend received by a foreign person 
generally would be exempt from U.S. gross-basis tax under 
sections 871(a), 881, 1441 and 1442. This exemptiondoes not 
apply to the extent that the foreign person is a nonresident alien 
individual present in the United States for a period or periods 
aggregating 183 days or more during the taxable year. In this case, 
however, the RIC remains exempt from its withholding obligation unless 
the RIC knows that the dividend recipient has been present in the 
United States for such period.
    The aggregate amount qualified to be designated as short-
term capital gain dividends for the RIC's taxable year 
(including dividends so designated that are paid after the 
close of the taxable year but treated as paid during that year 
as described in section 855) is the excess of the RIC's net 
short-term capital gains over net long-term capital losses. The 
net short-term capital gains include short-term capital gain 
dividends from another RIC. As is provided under present law 
for purposes of computing the amount of a capital gain 
dividend, the amount is determined (except in the case where an 
election under section 4982(e)(4) applies) without regard to 
any net capital loss or net short-term capital loss 
attributable to transactions after October 31 of the year. 
Instead, that loss is treated as arising on the first day of 
the next taxable year. To the extent provided in regulations, 
this rule also would apply for purposes of computing the 
taxable income of the RIC.
    In computing the amount of short-term capital gain 
dividends for the year, no reduction is made for the amount of 
expenses of the RIC allocable to such net gains. In addition, 
where the amount designated as short-term capital gain 
dividends is greater than the amount of qualified short-term 
capital gain, then the portion of the distribution so 
designated which constitutes a short-term capital gain dividend 
will be only that proportion of the amount so designated as the 
amount of the excess bears to the amount so designated.
    As is true under present law for distributions from REITs, 
the bill provides that any distribution by a RIC to a foreign 
person shall, to the extent attributable to gain from the sale 
or exchange by the RIC of an asset that is considered a U.S. 
real property interest, be treated as gain recognized by the 
foreign person from the sale or exchange of a U.S. real 
property interest. The provision also extends the special rules 
applicable to domestically-controlled REITs to domestically-
controlled RICs.

Estate tax treatment

    Under the provision, a portion of the stock in a RIC held 
by the estate of a nonresident decedent who is not a U.S. 
citizen is treated as property without the United States. The 
portion so treated is based on the proportion of the assets 
held by the RIC at the end of the quarter immediately preceding 
the decedent's death (or such other time as the Secretary may 
designate in regulations) that are ``qualifying assets.'' 
Qualifying assets for this purpose are bank deposits of the 
type that are exempt from gross-basis income tax, portfolio 
debt obligations, certain original issue discount obligations, 
debt obligations of a domestic corporation that are treated as 
giving rise to foreign source income, and other property not 
within the United States.

                             Effective Date

    The provision generally applies to dividends with respect 
to taxable years of RICs beginning after December 31, 2004. 
With respect to the treatment of a RIC for estate tax purposes, 
the provision applies to estates of decedents dying after 
December 31, 2004. With respect to the treatment of RICs under 
section 897 (dealing with U.S. real property interests), the 
provision is effective on January 1, 2005.

 G. Repeal of Special Rules for Applying Foreign Tax Credit in Case of 
                       Foreign Oil and Gas Income


            (sec. 908 of the bill and sec. 907 of the Code)


                              Present Law

    U.S. persons are subject to U.S. income tax on their 
worldwide income. A credit against U.S. tax on foreign-source 
income is allowed for foreign taxes paid or accrued (or deemed 
paid) (secs. 901, 902).
    The amount of foreign tax credits that a taxpayer may claim 
in a year is subject to a limitation that prevents taxpayers 
from using foreign tax credits to offset U.S. tax on U.S.-
source income (sec. 904). The foreign tax credit limitation is 
calculated on an overall basis and separately for specific 
categories of income. The amount of creditable taxes paid or 
accrued (or deemed paid) in any taxable year that exceeds the 
respective foreign tax credit limitations is permitted to be 
carried back two years and carried forward five years (sec. 
904(c)).
    Special rules apply with respect to the foreign tax credit 
in the case of foreign oil and gas income (sec. 907). Under a 
special limitation, taxes on foreign oil and gas extraction 
income are creditable only to the extent that they do not 
exceed a specified amount (e.g., 35 percent of such income in 
the case of a corporation) (sec. 907(a)). For this purpose, 
foreign oil and gas extraction income is income derived from 
foreign sources from the extraction of minerals from oil or gas 
wells or the sale or exchange of assets used by the taxpayer in 
such extraction. A taxpayer must have excess limitation under 
the special rules applicable to foreign extraction taxes and 
excess limitation under the general foreign tax credit 
provisions in order to utilize excess foreign oil and gas 
extraction taxes in a carryback or carryforward year. A 
recapture rule applicable to foreign oil and gas extraction 
losses treats income that otherwise would be foreign oil and 
gas extraction income as foreign-source income that is not 
considered oil and gas extraction income; the taxes on such 
income retain their character as foreign oil and gas extraction 
taxes and continue to be subject to the special limitation 
imposed on such taxes.
    In the case of taxes paid or accrued to any foreign country 
with respect to foreign oil related income, discriminatory 
foreign taxes are not treated as creditable foreign taxes (sec. 
907(b)). Foreign taxes are discriminatory for this purpose to 
the extent that the Treasury Secretary determines that the 
foreign law imposing the tax is structured, or in facts 
operates, so that the amount of tax imposed with respect to 
foreign oil related income will be materially greater, over a 
reasonable period of time, than the amount imposed on non-oil 
related and non-extraction income. Foreign oil related income 
is income derived from foreign sources from the processing of 
minerals extracted from oil or gas wells into their primary 
products; the transportation, distribution, or sale of such 
minerals or primary products; the disposition of assets used by 
the taxpayer in one of the foregoing businesses; or the 
performance of any related service. To the extent that such 
taxes are treated as not creditable, the amount is treated as a 
deduction under foreign law (i.e., the amount is treated as a 
deductible business expense for purposes of computing an 
appropriate level of foreign income tax and for U.S. tax 
purposes).

                           Reasons for Change

    The purpose of the foreign tax credit is to eliminate 
double taxation of the same income by both the United States 
and a foreign jurisdiction. Certain safeguards apply to prevent 
taxpayers from using foreign tax credits to offset U.S. tax on 
U.S.-source income. In the case of foreign oil and gas income, 
however, in addition to safeguards of general application, 
special limitations apply. The Committee understands that these 
additional limitations involve substantial compliance burdens 
for U.S.-based companies. In addition, the interaction of these 
special limitations with the other foreign tax credit 
limitations of general application may result in double 
taxation of the same income. The Committee believes that it is 
appropriate to repeal these special limitation rules.

                        Explanation of Provision

    The bill repeals the special rules of section 907 for 
applying the foreign tax credit in the case of foreign oil and 
gas income. Thus, taxes attributable to foreign oil and gas 
extraction income are no longer subject to a special 
limitation, but rather are subject to the general limitation 
rules of section 904. Additionally, the special rules of 
section 907 with respect to discriminatory taxes on foreign oil 
related income no longer apply. It is intended that rules with 
respect to the creditability of foreign taxes and dual capacity 
taxpayers under section 901 and the regulations thereunder will 
continue to apply.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2004.

  H. Study of Proper Treatment of European Union Under Subpart F Same 
                           Country Exceptions


                         (sec. 909 of the bill)


                              Present Law

    In general, U.S. 10-percent shareholders of a controlled 
foreign corporation (``CFC'') are required to include in income 
for U.S. tax purposes currently certain income of the CFC 
(referred to as ``subpart F income''), without regard to 
whether the income is distributed to the shareholders (sec. 
951(a)(1)(A)). In effect, the Code treats the U.S. 10-percent 
shareholders of a CFC as having received a current distribution 
of their pro rata shares of the CFC's subpart F income. For 
this purpose, a U.S. 10-percent shareholder is a U.S. person 
that owns 10 percent or more of the corporation's stock 
(measured by vote) (sec. 951(b)). In general, a foreign 
corporation is a CFC if U.S. 10-percent shareholders own more 
than 50 percent of such corporation's stock (measured by vote 
or by value) (sec. 957).
    Subpart F income typically is passive income or income that 
is relatively movable from one taxing jurisdiction to another. 
Subpart F income consists of foreign base company income 
(defined in sec. 954), insurance income (defined in sec. 953), 
and certain income relating to international boycotts and other 
violations of public policy (defined in sec. 952(a)(3)-(5)). 
Subpart F income does not include income of the CFC that is 
effectively connected with the conduct of a trade or business 
within the United States (on which income the CFC is subject to 
current U.S. tax) (sec. 952(b)).
    Income of a CFC may be excepted from the subpart F 
provisions under various same country exceptions. For example, 
a major category of foreign base company income is foreign 
personal holding company income, which generally includes, 
among other things, certain dividends, interest, rents and 
royalties (sec. 954(c)). Same country exceptions from treatment 
as foreign personal holding company income generally are 
provided for dividends and interest received by the CFC from a 
related person that (1) is a corporation organized under the 
laws of the same foreign country in which the CFC is created or 
organized and (2) has a substantial part of its assets used in 
a trade or business located in such same foreign country. 
Similarly, same country exceptions from foreign personal 
holding income generally are provided for rents and royalties 
received by the CFC from a related corporation for the use of 
property within the country in which the CFC is created or 
organized (sec. 954(c)(3)).

                        Explanation of Provision

    The bill directs the Treasury Secretary to conduct a study 
of the feasibility of treating all countries included in the 
European Union as one country for purposes of applying same 
country exceptions under subpart F. The bill requires the 
results of the study to be reported to the House Committee on 
Ways and Means and the Senate Committee on Finance, along with 
any legislative recommendations, no later than 6 months after 
the date of enactment.

          I. Provide Waiver From Denial of Foreign Tax Credits


           (sec. 910 of the bill and sec. 901(j) of the Code)


                              Present Law

    In general, U.S. persons may credit foreign taxes against 
U.S. tax on foreign-source income. The amount of foreign tax 
credits that can be claimed in a year is subject to a 
limitation that prevents taxpayers from using foreign tax 
credits to offset U.S. tax on U.S.-source income. Separate 
limitations are applied to specific categories of income.
    Pursuant to special rules applicable to taxes paid to 
certain foreign countries, no foreign tax credit is allowed for 
income, war profits, or excess profits taxed paid, accrued, or 
deemed paid to a country which satisfies specified criteria, to 
the extent that the taxes are with respect to income 
attributable to a period during which such criteria were 
satisfied (sec. 901(j)). Section 901(j) applies with respect to 
any foreign country: (1) the government of which the United 
States does not recognize, unless such government is otherwise 
eligible to purchase defense articles or services under the 
Arms Export Control Act, (2) with respect to which the United 
States has severed diplomatic relations, (3) with respect to 
which the United States has not severed diplomatic relations 
but does not conduct such relations, or (4) which the Secretary 
of State has, pursuant to section 6(j) of the Export 
Administration Act of 1979, as amended, designated as a foreign 
country which repeatedly provides support for acts of 
international terrorisms (a ``section 901(j) foreign 
country''). The denial of credits applies to any foreign 
country during the period beginning on the later of January 1, 
1987, or six months after such country becomes a section 901(j) 
country, and ending on the date the Secretary of State 
certifies to the Secretary of the Treasury that such country is 
no longer a section 901(j) country.
    Taxes treated as noncreditable under section 901(j) 
generally are permitted to be deducted notwithstanding the fact 
that the taxpayer elects use of the foreign tax credit for the 
taxable year with respect to other taxes. In addition, income 
for which foreign tax credits are denied generally cannot be 
sheltered from U.S. tax by other creditable foreign taxes.
    Under the rules of subpart F, U.S. 10-percent shareholders 
of a controlled foreign corporation (``CFC'') are required to 
include in income currently certain types of income of the CFC, 
whether or not such income is actually distributed currently to 
the shareholders (referred to as ``subpart F income''). Subpart 
F income includes income derived from any foreign country 
during a period in which the taxes imposed by that country are 
denied eligibility for the foreign tax credit under section 
901(j) (sec. 952(a)(5)).

                           Reasons for Change

    The Committee has observed that the automatic denial of 
foreign tax credits under section 901(j) with respect to a 
foreign country may in certain cases conflict with other policy 
interests of the United States. The Committee believes that it 
is appropriate to provide a mechanism for the waiver of the 
denial of foreign tax credits in certain cases.

                        Explanation of Provision

    The bill provides that section 901(j) no longer applies 
with respect to a foreign country if the President determines 
that the application of section 901(j) to such foreign country 
is not in the national interests of the United States.

                             Effective Date

    The provision is effective as of the date of enactment.

        J. Prohibit Disclosure of APAs and APA Background Files


       (sec. 911 of the bill and secs. 6103 and 6110 of the Code)


                              Present Law

Section 6103

    Under section 6103, returns and return information are 
confidential and cannot be disclosed unless authorized by the 
Internal Revenue Code.
    The Code defines return information broadly. Return 
information includes:
    --a taxpayer's identity, the nature, source or amount of 
income, payments, receipts, deductions, exemptions, credits, 
assets, liabilities, net worth, tax liability, tax withheld, 
deficiencies, overassessments, or tax payments;
    --whether the taxpayer's return was, is being, or will be 
examined or subject to other investigation or processing; or
    --any other data, received by, recorded by, prepared by, 
furnished to, or collected by the Secretary with respect to a 
return or with respect to the determination of the existence, 
or possible existence, of liability (or the amount thereof) of 
any person under this title for any tax, penalty, interest, 
fine, forfeiture, or other imposition, or offense.87
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    \87\ Sec. 6103(b)(2)(A).
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Section 6110 and the Freedom of Information Act

    With certain exceptions, section 6110 makes the text of any 
written determination the IRS issues available for public 
inspection. A written determination is any ruling, 
determination letter, technical advice memorandum, or Chief 
Counsel advice. Once the IRS makes the written determination 
publicly available, the background file documents associated 
with such written determination are available for public 
inspection upon written request. The Code defines ``background 
file documents'' as any written material submitted in support 
of the request. Background file documents also include any 
communications between the IRS and persons outside the IRS 
concerning such written determination that occur before the IRS 
issues the determination.
    Before making them available for public inspection, section 
6110 requires the IRS to delete specific categories of 
sensitive information from the written determination and 
background file documents.88 It also provides 
judicial and administrative procedures to resolve disputes over 
the scope of the information the IRS will disclose. In 
addition, Congress has also wholly exempted certain matters 
from section 6110's public disclosure 
requirements.89 Any part of a written determination 
or background file that is not disclosed under section 6110 
constitutes ``return information.'' 90
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    \88\ Sec. 6110(c) provides for the deletion of identifying 
information, trade secrets, confidential commercial and financial 
information and other material.
    \89\ Sec. 6110(l).
    \90\ Sec. 6103(b)(2)(B) (``The term `return information' means . . 
. any part of any written determination or any background file document 
relating to such written determination (as such terms are defined in 
section 6110(b)) which is not open to public inspection under section 
6110'').
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    The Freedom of Information Act (FOIA) lists categories of 
information that a federal agency must make available for 
public inspection.91 It establishes a presumption 
that agency records are accessible to the public. The FOIA, 
however, also provides nine exemptions from public disclosure. 
One of those exemptions is for matters specifically exempted 
from disclosure by a statute other than the FOIA if the 
exempting statute meets certain requirements.92 
Section 6103 qualifies as an exempting statute under this FOIA 
provision. Thus, returns and return information that section 
6103 deems confidential are exempt from disclosure under the 
FOIA.
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    \91\ Unless published promptly and offered for sale, an agency must 
provide for public inspection and copying: (1) final opinions as well 
as orders made in the adjudication of cases; (2) statements of policy 
and interpretations not published in the Federal Register; (3) 
administrative staff manuals and instructions to staff that affect a 
member of the public; and (4) agency records which have been or the 
agency expects to be, the subject of repetitive FOIA requests. 5 U.S.C. 
sec. 552(a)(2). An agency must also publish in the Federal Register: 
the organizational structure of the agency and procedures for obtaining 
information under the FOIA; statements describing the functions of the 
agency and all formal and informal procedures; rules of procedure, 
descriptions of forms and statements describing all papers, reports and 
examinations; rules of general applicability and statements of general 
policy; and amendments, revisions and repeals of the foregoing. 5 
U.S.C. sec. 552(a)(1). All other agency records can be sought by FOIA 
request; however, some records may be exempt from disclosure.
    \92\ Exemption 3 of the FOIA provides that an agency is not 
required to disclose matters that are: (3) specifically exempted from 
disclosure by statute (other than section 552b of this title) provided 
that such statute (A) requires that the matters be withheld from the 
public in such a manner as to leave no discretion on the issue, or (B) 
establishes particular criteria for withholding or refers to particular 
types of matters to be withheld; . . . 5 U.S.C. Sec. 552(b)(3).
---------------------------------------------------------------------------
    Section 6110 is the exclusive means for the public to view 
IRS written determinations.93 If section 6110 covers 
the written determination, then the public cannot use the FOIA 
to obtain that determination.
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    \93\ Sec. 6110(m).
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Advance pricing agreements

    The Advanced Pricing Agreement (``APA'') program is an 
alternative dispute resolution program conducted by the IRS, 
which resolves international transfer pricing issues prior to 
the filing of the corporate tax return. Specifically, an APA is 
an advance agreement establishing an approved transfer pricing 
methodology entered into among the taxpayer, the IRS, and a 
foreign tax authority. The IRS and the foreign tax authority 
generally agree to accept the results of such approved 
methodology. Alternatively, an APA also may be negotiated 
between just the taxpayer and the IRS; such an APA establishes 
an approved transfer pricing methodology for U.S. tax purposes. 
The APA program focuses on identifying the appropriate transfer 
pricing methodology; it does not determine a taxpayer's tax 
liability. Taxpayers voluntarily participate in the program.
    To resolve the transfer pricing issues, the taxpayer 
submits detailed and confidential financial information, 
business plans and projections to the IRS for consideration. 
Resolution involves an extensive analysis of the taxpayer's 
functions and risks. Since its inception in 1991, the APA 
program has resolved more than 180 APAs, and approximately 195 
APA requests are pending.
    Currently pending in the U.S. District Court for the 
District of Columbia are three consolidated lawsuits asserting 
that APAs are subject to public disclosure under either section 
6110 or the FOIA.94 Prior to this litigation and 
since the inception of the APA program, the IRS held the 
position that APAs were confidential return information 
protected from disclosure by section 6103.95 On 
January 11, 1999, the IRS conceded that APAs are ``rulings'' 
and therefore are ``written determinations'' for purposes of 
section 6110.96 Although the court has not yet 
issued a ruling in the case, the IRS announced its plan to 
publicly release both existing and future APAs. The IRS then 
transmitted existing APAs to the respective taxpayers with 
proposed deletions. It has received comments from some of the 
affected taxpayers. Where appropriate, foreign tax authorities 
have also received copies of the relevant APAs for comment on 
the proposed deletions. No APAs have yet been released to the 
public.
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    \94\ BNA v. IRS, Nos. 96-376, 96-2820, and 96-1473 (D.D.C.). The 
Bureau of National Affairs, Inc. (BNA) publishes matters of interest 
for use by its subscribers. BNA contends that APAs are not return 
information as they are prospective in application. Thus at the time 
they are entered into they do not relate to ``the determination of the 
existence, or possible existence, of liability or amount thereof . . 
.''
    \95\ The IRS contended that information received or generated as 
part of the APA process pertains to a taxpayer's liability and 
therefore was return information as defined in sec. 6103(b)(2)(A). 
Thus, the information was subject to section 6103's restrictions on the 
dissemination of returns and return information. Rev. Proc. 91-22, sec. 
11, 1991-1 C.B. 526, 534 and Rev. Proc. 96-53, sec. 12, 1996-2 C.B. 
375, 386.
    \96\ IR 1999-05.
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    Some taxpayers assert that the IRS erred in adopting the 
position that APAs are subject to section 6110 public 
disclosure. Several have sought to participate as amici in the 
lawsuit to block the release of APAs. They are concerned that 
release under section 6110 could expose them to expensive 
litigation to defend the deletion of the confidential 
information from their APAs. They are also concerned that the 
section 6110 procedures are insufficient to protect the 
confidentiality of their trade secrets and other financial and 
commercial information.

                           Reasons for Change

    The APA program has been a successful mechanism for 
resolving transfer pricing issues, not only for future years, 
but, in some instances, for prior open years as well 
(rollbacks). It reduces protracted disputes and costly 
litigation between taxpayers and the government. The program 
involves not only taxpayers and the IRS, but also foreign 
taxing authorities.
    As part of the program, the taxpayer voluntarily provides 
substantial, sensitive information to the IRS. The proprietary 
information necessary to support a claim of comparability may 
be among a company's most closely guarded trade secrets. 
Similarly, information regarding production costs and customer 
pricing may also be extremely sensitive information.
    From the program's inception, the IRS has assured taxpayers 
and foreign governments that the information received or 
generated in the APA process would be protected as confidential 
return information. Such assurances were based on published IRS 
materials.
    The APA process is based on taxpayers' cooperation and 
voluntary disclosure to the IRS of sensitive information. The 
continued confidentiality of this information is vital to the 
APA program. Otherwise, the Committee believes that some 
taxpayers may refuse to participate in this successful program, 
causing a decline in its usefulness.
    Congress must balance the need for confidentiality with the 
general public's need for practical tax guidance. Some members 
of the public have expressed concern that the APA program has 
led to the development of a body of ``secret law,'' known only 
to a few members of the tax profession. In addition, some 
members of the public contend that taxpayers have received APAs 
permitting the use of transfer pricing methodologies not 
contemplated in the section 482 regulations. They also contend 
that APAs have provided interpretations of law not available to 
taxpayers that do not participate in the APA process. Such 
concerns could undermine the public's confidence in the IRS's 
ability to fairly enforce the transfer pricing rules. Thus, the 
provision requires the Department of the Treasury to prepare 
and publish an annual report regarding APAs, which will provide 
extensive information regarding the program, while clarifying 
that existing and future APAs and related background 
information continue to be confidential return information.

                        Explanation of Provision

    The provision amends section 6103 to provide that APAs and 
related background information are confidential return 
information under section 6103. Related background information 
is meant to include: the request for an APA, any material 
submitted in support of the request, and any communication 
(written or otherwise) prepared or received by the Secretary in 
connection with an APA, regardless of when such communication 
is prepared or received. Protection is not limited to 
agreements actually executed; it includes material received and 
generated in the APA process that does not result in an 
executed agreement.
    Further, APAs and related background information are not 
``written determinations'' as that term is defined in section 
6110. Therefore, the public inspection requirements of section 
6110 do not apply to APAs and related background information. A 
document's incorporation in a background file, however, is not 
intended to be grounds for not disclosing an otherwise 
disclosable document from a source other than a background 
file.
    The provision statutorily requires that the Treasury 
Department prepare and publish an annual report on the status 
of APAs. The annual report is to contain the following 
information:
    --Information about the structure, composition and, 
operation of the APA program office;
    --A copy of each current model APA;
    --Statistics regarding the amount of time to complete new 
and renewal APAs;
    --The number of APA applications filed during such year;
    --The number of APAs executed to date and for the year;
    --The number of APA renewals issued to date and for the 
year;
    --The number of pending APA requests;
    --The number of pending APA renewals;
    --The number of APAs executed and pending (including 
renewals and renewal requests) that are unilateral, bilateral 
and multilateral, respectively;
    --The number of APAs revoked or canceled, and the number of 
withdrawals from the APA program, to date and for the year;
    --The number of finalized new APAs and renewals by 
industry; 97 and
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    \97\ This information was previously released in IRS Publication 
3218, ``IRS Report on Application and Administration of I.R.C. Section 
482.''
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    General descriptions of:
    --The nature of the relationships between the related 
organizations, trades, or businesses covered by APAs;
    --The related organizations, trades, or businesses whose 
prices or results are tested to determine compliance with the 
transfer pricing methodology prescribed in the APA;
    --The covered transactions and the functions performed and 
risks assumed by the related organizations, trades or 
businesses involved;
    --Methodologies used to evaluate tested parties and 
transactions and the circumstances leading to the use of those 
methodologies;
    --Critical assumptions;
    --Sources of comparables;
    --Comparable selection criteria and the rationale used in 
determining such criteria;
    --The nature of adjustments to comparables and/or tested 
parties;
    --The nature of any range agreed to, including information 
such as whether no range was used and why, whether an inter-
quartile range was used, or whether there was a statistical 
narrowing of the comparables;
    --Adjustment mechanisms provided to rectify results that 
fall outside of the agreed upon APA range;
    --The various term lengths for APAs, including rollback 
years, and the number of APAs with each such term length;
    --The nature of documentation required; and
    --Approaches for sharing of currency or other risks.
    The first report is to cover the period January 1, 1991, 
through the calendar year including the date of enactment. The 
Treasury Department cannot include any information in the 
report which would have been deleted under section 6110(c) if 
the report were a written determination as defined in section 
6110. Additionally, the report cannot include any information 
which can be associated with or otherwise identify, directly or 
indirectly, a particular taxpayer. For purposes of section 
6103, the report requirement is treated as part of Title 26.
    The IRS user fee otherwise required to be paid for an APA 
is increased by $500. The Secretary has the authority to make 
appropriate reductions in such fee for small businesses.
    While the provision statutorily requires an annual report, 
it is not intended to discourage the Treasury Department from 
issuing other forms of guidance, such as regulations or revenue 
rulings, consistent with the confidentiality provisions of the 
Code.

                             Effective Date

    The provision is effective on the date of enactment; 
accordingly, no APAs or related background file documents can 
be released to the public after the date of enactment. It 
requires the Treasury Department to publish the first annual 
report no later than March 30, 2000.

         K. Increase Dollar Limitation on Section 911 Exclusion


            (sec. 912 of the bill and sec. 911 of the Code)


                              Present Law

    U.S. citizens generally are subject to U.S. income tax on 
their worldwide income. A U.S. citizen who earns income in a 
foreign country also may be taxed on such income by that 
foreign country. A credit against the U.S. income tax imposed 
on foreign-source income is allowed for foreign taxes paid on 
such income.
    U.S. citizens living abroad may be eligible to exclude from 
their income for U.S. tax purposes certain foreign earned 
income and foreign housing costs. In order to qualify for these 
exclusions, a U.S. citizen must be either (1) a bona fide 
resident of a foreign country or countries for an uninterrupted 
period that includes an entire taxable year, or (2) present in 
a foreign country or countries for 330 days out of any 12 
consecutive month period. In addition, the taxpayer must have 
his or her tax home in a foreign country.
    The exclusion for foreign earned income generally applies 
to income earned from sources outside the United States as 
compensation for personal services actually rendered by the 
taxpayer. The maximum exclusion for foreign earned income for 
taxable years before 1998 is $70,000. Beginning in 1998, the 
maximum exclusion is increased in increments of $2,000 per year 
until the exclusion amount is $80,000 (i.e., in the year 2002). 
The maximum exclusion is $74,000 for 1999. The exclusion is 
indexed for inflation beginning in 2008 (for inflation after 
2006).
    The exclusion for housing costs applies to reasonable 
expenses, other than deductible interest and taxes, paid or 
incurred by or on behalf of the taxpayer for housing for the 
taxpayer and his or her spouse and dependents in a foreign 
country. The exclusion amount for housing costs for a taxable 
year is equal to the excess of such housing costs for the 
taxable year over an amount computed pursuant to a specified 
formula.
    The combined earned income exclusion and housing cost 
exclusion may not exceed the taxpayer's total foreign earned 
income. The taxpayer's foreign tax credit is reduced by the 
amount of the credit that is attributable to excluded income.

                           Reasons for Change

    The Committee recognizes that for U.S. businesses to be 
effective competitors overseas it is necessary to dispatch U.S. 
citizens or residents to sites of foreign operations. Being 
stationed abroad typically imposes additional financial burdens 
on the employee and his or her family. These burdens may arise 
from maintaining two homes (one in the United States and one 
abroad), additional personal travel to maintain family ties, or 
the added expenses of living in a foreign location that has a 
high cost of living. Businesses often remunerate their 
employees for these additional burdens by paying higher wages. 
Because the increased remuneration is offset by larger burdens, 
the remuneration does not truly reflect an increase in economic 
well being. The Committee, therefore, believes that the 
exclusion of section 911 is a simple way to prevent taxpayers 
from facing an increased tax burden when there has been no 
increase in economic well being by accepting an overseas 
assignment.
    The Committee notes that in 1997 the Congress increased the 
then prevailing $70,000 exclusion, but the increase enacted was 
modest in light of the fact that the $70,000 exclusion had 
remained unchanged for the previous ten years, while the extra 
costs from working abroad had increased with worldwide 
inflation. The Committee, therefore, believes that it is 
appropriate to further increase the exclusion permitted under 
section 911. In addition, as a rough measure for the increased 
burden that may be expected to arise from future inflation, the 
Committee believes that it is appropriate to index the level of 
the increased section 911 exclusion amount to future changes in 
the domestic cost of living.

                        Explanation of Provision

    The bill increases the maximum exclusion for foreign earned 
income in annual increments of $3,000 per year beginning in 
2003, until the exclusion amount is $95,000 (i.e., in the year 
2007). Thus, for the years 2003 through 2007, the maximum 
exclusion gradually increases from $83,000 to $95,000. 
Beginning in 2008, the maximum exclusion amount of $95,000 is 
indexed for inflation.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1999.

              TITLE X. TAX-EXEMPT ORGANIZATION PROVISIONS


   A. Provide Tax Exemption for Organizations Created by a State To 
Provide Property and Casualty Insurance Coverage for Property for Which 
                 Such Coverage Is Otherwise Unavailable


        (sec. 1001 of the bill and sec. 501(c)(28) of the Code)


                              Present Law

    A life insurance company is subject to tax on its life 
insurance company taxable income, which is its life insurance 
income reduced by life insurance deductions (sec. 801). 
Similarly, a property and casualty insurance company is subject 
to tax on its taxable income, which is determined as the sum of 
its underwriting income and investment income (as well as gains 
and other income items) (sec. 831). Present law provides that 
the term ``corporation'' includes an insurance company (sec. 
7701(a)(3)).
    In general, the Internal Revenue Service (``IRS'') takes 
the position that organizations that provide insurance for 
their members or other individuals are not considered to be 
engaged in a tax-exempt activity. The IRS maintains that such 
insurance activity is either (1) a regular business of a kind 
ordinarily carried on for profit, or (2) an economy or 
convenience in the conduct of members' businesses because it 
relieves the members from obtaining insurance on an individual 
basis.
    Certain insurance risk pools have qualified for tax 
exemption under Code section 501(c)(6). In general, these 
organizations (1) assign any insurance policies and 
administrative functions to their member organizations 
(although they may reimburse their members for amounts paid and 
expenses); (2) serve an important common business interest of 
their members; and (3) must be membership organizations 
financed, at least in part, by membership dues.
    State insurance risk pools may also qualify for tax exempt 
status under section 501(c)(4) as a social welfare organization 
or under section 115 as serving an essential governmental 
function of a State. In seeking qualification under section 
501(c)(4), insurance organizations generally are constrained by 
the restrictions on the provision of ``commercial-type 
insurance'' contained in section 501(m). Section 115 generally 
provides that gross income does not include income derived from 
the exercise of any essential governmental function or accruing 
to a State or any political subdivision thereof.
    Certain specific provisions provide tax-exempt status to 
organizations meeting statutory requirements.

Health coverage for high-risk individuals

    Section 501(c)(26) provides tax-exempt status to any 
membership organization that is established by a State 
exclusively to provide coverage for medical care on a nonprofit 
basis to certain high-risk individuals, provided certain 
criteria are satisfied. The organization mayprovide coverage 
for medical care either by issuing insurance itself or by entering into 
an arrangement with a health maintenance organization (``HMO'').
    High-risk individuals eligible to receive medical care 
coverage from the organization must be residents of the State 
who, due to a pre-existing medical condition, are unable to 
obtain health coverage for such condition through insurance or 
an HMO, or are able to acquire such coverage only at a rate 
that is substantially higher than the rate charged for such 
coverage by the organization. The State must determine the 
composition of membership in the organization. For example, a 
State could mandate that all organizations that are subject to 
insurance regulation by the State must be members of the 
organization.
    The provision further requires the State or members of the 
organization to fund the liabilities of the organization to the 
extent that premiums charged to eligible individuals are 
insufficient to cover such liabilities. Finally, no part of the 
net earnings of the organization can inure to the benefit of 
any private shareholder or individual.

Workers' compensation reinsurance organizations

    Section 501(c)(27)(A) provides tax-exempt status to any 
membership organization that is established by a State before 
June 1, 1996, exclusively to reimburse its members for workers' 
compensation insurance losses, and that satisfies certain other 
conditions. A State must require that the membership of the 
organization consist of all persons who issue insurance 
covering workers' compensation losses in such State, and all 
persons and governmental entities who self-insure against such 
losses. In addition, the organization must operate as a 
nonprofit organization by returning surplus income to members 
or to workers' compensation policyholders on a periodic basis 
and by reducing initial premiums in anticipation of investment 
income.

State workmen's compensation act companies

    Section 501(c)(27)(B) provides tax-exempt status for any 
organization that is created by State law, and organized and 
operated exclusively to provide workmen's compensation 
insurance and related coverage that is incidental to workmen's 
compensation insurance, and that meets certain additional 
requirements. The workmen's compensation insurance must be 
required by State law, or be insurance with respect to which 
State law provides significant disincentives if it is not 
purchased by an employer (such as loss of exclusive remedy or 
forfeiture of affirmative defenses such as contributory 
negligence). The organization must provide workmen's 
compensation to any employer in the State (for employees in the 
State or temporarily assigned out-of-State) seeking such 
insurance and meeting other reasonable requirements. The State 
must either extend its full faith and credit to the initial 
debt of the organization or provide the initial operating 
capital of such organization. For this purpose, the initial 
operating capital can be provided by providing the proceeds of 
bonds issued by a State authority; the bonds may be repaid 
through exercise of the State's taxing authority, for example. 
For periods after the date of enactment, either the assets of 
the organization must revert to the State upon dissolution, or 
State law must not permit the dissolution of the organization 
absent an act of the State legislature. Should dissolution of 
the organization become permissible under applicable State law, 
then the requirement that the assets of the organization revert 
to the State upon dissolution applies. Finally, the majority of 
the board of directors (or comparable oversight body) of the 
organization must be appointed by an official of the executive 
branch of the State or by the State legislature, or by both.

                           Reasons for Change

    The Committee understands that certain types of insurance 
to support governmental programs to prepare for or mitigate the 
effects of natural catastrophic events (such as hurricanes) may 
be limited or unavailable at reasonable rates in the authorized 
insurance market in some States. The Committee believes it is 
appropriate to provide tax-exempt status to certain types of 
associations that provide property and casualty insurance for 
property located within a State if the State has determined 
that coverage in the authorized insurance market is in fact 
limited or unavailable at reasonable rates.

                        Explanation of Provision

    The provision provides tax-exempt status for any 
association created before January 1, 1999, by State law and 
organized and operated exclusively to provide property and 
casualty insurance coverage for property located within the 
State for which the State has determined that coverage in the 
authorized insurance market is limited or unavailable at 
reasonable rates, provided certain requirements are met.
    Under the provision, no part of the net earnings of the 
association may inure to the benefit of any private shareholder 
or individual. Except as provided in the case of dissolution, 
no part of the assets of the association may be used for, or 
diverted to, any purpose other than: (1) to satisfy, in whole 
or in part, the liability of the association for, or with 
respect to, claims made on policies written by the association; 
(2) to invest in investments authorized by applicable law; (3) 
to pay reasonable and necessary administration expenses in 
connection with the establishment and operation of the 
association and the processing of claims against the 
association (4) to make remittances pursuant to State law to be 
used by the State to provide for the payment of claims on 
policies written by the association, purchase reinsurance 
covering losses under such policies, or to support governmental 
programs to prepare for or mitigate the effects of natural 
catastrophic events. The provision requires that the State law 
governing the association permit the association to levy 
assessments on insurance companies authorized to sell property 
and casualty insurance in the State, or on property and 
casualty insurance policyholders with insurable interests in 
property located in the State to fund deficits of the 
association, including the creation of reserves. The provision 
requires that the plan of operation of the association be 
subject to approval by the chief executive officer or other 
official of the State, by the State legislature, or both. In 
addition, the provision requires that the assets of the 
association revert upon dissolution to the State, the State's 
designee, or an entity designated by the State law governing 
the association, or that State law not permit the dissolution 
of the association.
    The provision provides a special rule in the case of any 
entity or fund created before January 1, 1999, pursuant to 
State law and organized and operated exclusively to receive, 
hold, and invest remittances from an association exempt from 
tax under the provision, to make disbursements to pay claims on 
insurance contracts issued by the association, and to make 
disbursements to support governmental programs to prepare for 
or mitigate the effects of natural catastrophic events. The 
special rule provides that the entity or fund may elect to be 
disregarded as a separate entity and be treated as part of the 
association exempt from tax under the provision, from which it 
receives such remittances. The election is required to be made 
no later than 30 days following the date on which the 
association is determined to be exempt from tax under the 
provision, and would be effective as of the effective date of 
that determination.
    An organization described in the provision is treated as 
having unrelated business taxable income (``UBIT'') in the 
amount of its taxable income (computed as if the organization 
were not exempt from tax under the proposal), if at the end of 
the immediately preceding taxable year, the organization's net 
equity exceeded 15 percent of the total coverage in force under 
insurance contracts issued by the organization and outstanding 
at the end of that preceding year.
    Under the provision, no income or gain is recognized solely 
as a result of the change in status to that of an association 
exempt from tax under the provision.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1999. No inference is intended as to the tax 
status under present law of associations described in the 
provision.

   B. Conform Provisions Relating to Arbitrage Treatment To Reflect 
                Proposed State Constitutional Amendments


                        (sec. 1002 of the bill)


                              Present Law

    In general, present-law tax-exempt bond arbitrage 
restrictions provide that interest on a State or local 
government bond is not eligible for tax-exemption if the 
proceeds are invested, directly or indirectly, in materially 
higher yielding investments or if the debt service on the bond 
is secured by or paid from (directly or indirectly) such 
investments. An exception, enacted in 1984, provides that the 
pledge of income from investments in a Fund established under a 
provision of a State constitution adopted in 1876 as security 
for a limited amount of tax-exempt bonds will not cause 
interest on those bonds to be taxable. The terms of this 
exception are limited to State constitutional or statutory 
restrictions in effect as of October 9, 1969.
    The Fund consists of certain State lands that were set 
aside for the benefit of higher education, the income from 
mineral rights to these lands, and certain other earnings on 
Fund assets. The State constitution directs that monies held in 
the Fund are to be invested in interest-bearing obligations and 
other securities. The constitution does not permit the 
expenditure or mortgage of the Fund for any purpose. Income 
from the Fund is apportioned between two university systems 
operated by the State. Tax-exempt bonds issued by the two 
university systems are secured by and payable from the income 
of the Fund. These bonds are used to finance buildings and 
other permanent improvements for the universities.
    The General Assembly of the State has approved proposed 
constitutional amendments regarding the manner in which amounts 
in the Fund are paid for the benefit of the two university 
systems. These proposed amendments are to be voted on by the 
State's citizens in November 1999. If approved, the amendments 
will in substance eliminate the benefits of the 1984 exception 
from the tax-exempt bond arbitrage restrictions for future 
debt.

                           Reasons for Change

    The Committee understands that the proposed State 
constitutional amendments will have the effect of permitting 
the Fund to make annual distributions in a manner similar to 
standard university endowment funds, rather than the present 
practice which ties distributions to annual income performance 
which can create a quite variable pattern of distributions. The 
Committee does not believe that the Fund should lose the 
benefits of the 1984 exception from the tax-exempt bond 
arbitrage restrictions by adopting a sounder, more modern 
approach to the management of Fund distributions.

                        Explanation of Provision

    The 1984 exception is conformed to the proposed State 
constitutional amendments to permit its continued applicability 
to bonds of the two university systems. Limitations on the 
aggregate amount of bonds which may benefit from the exception 
are not modified.

                             Effective Date

    The provision applies to bonds issued after December 31, 
1999.

C. Denial of Charitable Contribution Deduction for Transfers Associated 
                With Split-Dollar Insurance Arrangements


      (sec. 1003 of the bill and new sec. 501(c)(28) of the Code)


                              Present Law

    Under present law, in computing taxable income, a taxpayer 
who itemizes deductions generally is allowed to deduct 
charitable contributions paid during the taxable year. The 
amount of the deduction allowable for a taxable year with 
respect to any charitable contribution depends on the type of 
property contributed, the type of organization to which the 
property is contributed, and the income of the taxpayer (secs. 
170(b) and 170(e)). A charitable contribution is defined to 
mean a contribution or gift to or for the use of a charitable 
organization or certain other entities (sec. 170(c)). The term 
``contribution or gift'' is not defined by statute, but 
generally is interpreted to mean a voluntary transfer of money 
or other property without receipt of adequate consideration and 
with donative intent. If a taxpayer receives or expects to 
receive a quid pro quo in exchange for a transfer to charity, 
the taxpayer may be able to deduct the excess of the amount 
transferred over the fair market value of any benefit received 
in return, provided the excess payment is made with the 
intention of making a gift.98
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    \98\ United States v. American Bar Endowment, 477 U.S. 105 (1986). 
Treas. Reg. sec. 1.170A-1(h).
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    In general, no charitable contribution deduction is allowed 
for a transfer to charity of less than the taxpayer's entire 
interest (i.e., a partial interest) in any property (sec. 
170(f)(3)). In addition, no deduction is allowed for any 
contribution of $250 or more unless the taxpayer obtains a 
contemporaneous written acknowledgment from the donee 
organization that includes a description and good faith 
estimate of the value of any goods or services provided by the 
donee organization to the taxpayer in consideration, whole or 
part, for the taxpayer's contribution (sec. 170(f)(8)).

                           Reasons for Change

    The Committee is concerned about an abusive scheme 
99 referred to as charitable split-dollar life 
insurance, and the provision is designed to stop the spread of 
this scheme. Under this scheme, taxpayers typically transfer 
money to a charity, which the charity then uses to pay premiums 
for cash value life insurance on the transferor or another 
person. The beneficiaries under the life insurance contract 
typically include members of the transferor's family (either 
directly or through a family trust or family partnership). 
Having passed the money through a charity, the transferor 
claims a charitable contribution deduction for money that is 
actually being used to benefit the transferor and his or her 
family. If the transferor or the transferor's family paid the 
premium directly, the payment would not be deductible. Although 
the charity eventually may get some of the benefit under the 
life insurance contract, it does not have unfettered use of the 
transferred funds.
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    \99\ ``A Popular Tax Shelter for `Angry Affluent' Prompts Ire of 
Others,'' Wall Street Journal, Jan. 22, 1999, p. A1; ``U.S. Treasury 
Officials Investigating Charitable Split-Dollar Insurance Plan,'' Wall 
Street Journal, Jan. 29, 1999, p. B5; ``Brilliant Deduction?,'' The 
Chronicle of Philanthropy, Aug. 13, 1998, p. 24; ``Charitable Reverse 
Split-Dollar: Bonanza or Booby Trap,'' Journal of Gift Planning, 2nd 
quarter 1998.
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    The Committee is concerned that this type of transaction 
represents an abuse of the charitable contribution deduction. 
The Committee is also concerned that the charity often gets 
relatively little benefit from this type of scheme, and serves 
merely as a conduit or accommodation party, which the Committee 
does not view as appropriate for an organization with tax-
exempt status. In substance, the charity receives a transfer of 
a partial interest in an insurance policy, for which no 
charitable contribution deduction is allowed. While there is no 
basis under present law for allowing a charitable contribution 
deduction in these circumstances, the Committee intends that 
the provision stop the marketing of these transactions 
immediately.
    Therefore, the provision clarifies present law by 
specifically denying a charitable contribution deduction for a 
transfer to a charity if the charity directly or indirectly 
pays or paid any premium on a life insurance, annuity or 
endowment contract in connection with the transfer, and any 
direct or indirect beneficiary under the contract is the 
transferor, any member of the transferor's family, or any other 
noncharitable person chosen by the transferor. In addition, the 
provision clarifies present law by specifically denying the 
deduction for a charitable contribution if, in connection with 
a transfer to the charity, there is an understanding or 
expectation that any person will directly or indirectly pay any 
premium on any such contract.
    The provision provides that certain persons are not treated 
as indirect beneficiaries, in certain cases in which a 
charitable organization purchases an annuity contract to fund 
an obligation to pay a charitable gift annuity. The provision 
also provides that a person is not treated as an indirect 
beneficiary solely by reason of being a noncharitable recipient 
of an annuity or unitrust amount paid by a charitable remainder 
trust that holds a life insurance, annuity or endowment 
contract. The rationale for these rules is that the amount of 
the charitable contribution deduction is limited under present 
law to the value of the charitable organization's interest. 
Congress has previously enacted rules designed to prevent a 
charitable contribution deduction for the value of any personal 
benefit to the donor in these circumstances, and the Committee 
expects that the personal benefit to the donor is appropriately 
valued.
    Further, the provision imposes an excise tax on the 
charity, equal to the amount of the premiums paid by the 
charity. Finally, the provision requires a charity to report 
annually to the Internal Revenue Service the amount of premiums 
subject to this excise tax and information about the 
beneficiaries under the contract.

                        Explanation of Provision

Deduction denial

    The provision 100 restates present law to 
provide that no charitable contribution deduction is allowed 
for purposes of Federal tax, for a transfer to or for the use 
of an organization described in section 170(c) of the Internal 
Revenue Code, if in connection with the transfer (1) the 
organization directly or indirectly pays, or has previously 
paid, any premium on any ``personal benefit contract'' with 
respect to the transferor, or (2) there is an understanding or 
expectation that any person will directly or indirectly pay any 
premium on any ``personal benefit contract'' with respect to 
the transferor. It is intended that an organization be 
considered as indirectly paying premiums if, for example, 
another person pays premiums on its behalf.
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    \100\ The provision is similar to H.R. 630, introduced by Mr. 
Archer for himself and for Mr. Rangel (106th Cong., 1st Sess.).
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    A personal benefit contract with respect to the transferor 
is any life insurance, annuity, or endowment contract, if any 
direct or indirect beneficiary under the contract is the 
transferor, any member of the transferor's family, or any other 
person (other than a section 170(c) organization) designated by 
the transferor. For example, such a beneficiary would include a 
trust having a direct or indirect beneficiary who is the 
transferor or any member of the transferor's family, and would 
include an entity that is controlled by the transferor or any 
member of the transferor's family. It is intended that a 
beneficiary under the contract include any beneficiary under 
any side agreement relating to the contract. If a transferor 
contributes a life insurance contract to a section 170(c) 
organization and designates one or more section 170(c) 
organizations as the sole beneficiaries under the contract, 
generally, it is not intended that the deduction denial rule 
under the provision apply. If, however, there is an outstanding 
loan under the contract upon the transfer of the contract, then 
the transferor is considered as a beneficiary. The fact that a 
contract also has other direct or indirect beneficiaries 
(persons who are not the transferor or a family member, or 
designated by the transferor) does not prevent it from being a 
personal benefit contract. The provision is not intended to 
affect situations in which an organization pays premiums under 
a legitimate fringe benefit plan for employees.
    It is intended that a person be considered as an indirect 
beneficiary under a contract if, for example, the person 
receives or will receive any economic benefit as a result of 
amounts paid under or with respect to the contract. For this 
purpose, as described below, an indirect beneficiary is not 
intended to include a person that benefits exclusively under a 
bona fide charitable gift annuity (within the meaning of sec. 
501(m)).
    In the case of a charitable gift annuity, if the charitable 
organization purchases an annuity contract issued by an 
insurance company to fund its obligation to pay the charitable 
gift annuity, a person receiving payments under the charitable 
gift annuity is not treated as an indirect beneficiary, 
provided certain requirements are met. The requirements are 
that (1) the charitable organization possess all of the 
incidents of ownership (within the meaning of Treas. Reg. sec. 
20.2042-1(c)) under the annuity contract purchased by the 
charitable organization; (2) the charitable organization be 
entitled to all the payments under the contract; and (3) the 
timing and amount of payments under the contract be 
substantially the same as the timing and amount of payments to 
each person under the organization's obligation under the 
charitable gift annuity (as in effect at the time of the 
transfer to the charitable organization).
    Under the provision, an individual's family consists of the 
individual's grandparents, the grandparents of the individual's 
spouse, the lineal descendants of such grandparents, and any 
spouse of such a lineal descendant.
    In the case of a charitable gift annuity obligation that is 
issued under the laws of a State that requires, in order for 
the charitable gift annuity to be exempt from insurance 
regulation by that State, that each beneficiary under the 
charitable gift annuity be named as a beneficiary under an 
annuity contract issued by an insurance company authorized to 
transact business in that State, then the foregoing 
requirements (1) and (2) are treated as if they are met, 
provided that certain additional requirements are met. The 
additional requirements are that the State law requirement was 
in effect on February 8, 1999, each beneficiary under the 
charitable gift annuity is a bona fide resident of the State at 
the time the charitable gift annuity was issued, the only 
persons entitled to payments under the annuity contract issued 
by the insurance company are persons entitled to payments under 
the charitable gift annuity when it was issued, and (as 
required by clause (iii) of subparagraph (D) of the provision) 
the timing and amount of payments under the annuity contract to 
each person are substantially the same as the timing and amount 
of payments to the person under the charitable organization's 
obligation under the charitable gift annuity (as in effect at 
the time of the transfer to the charitable organization).
    In the case of a charitable remainder annuity trust or 
charitable remainder unitrust (as defined in section 664(d)) 
that holds a life insurance, endowment or annuity contract 
issued by an insurance company, a person is not treated as an 
indirect beneficiary under the contract held by the trust, 
solely by reason of being a recipient of an annuity or unitrust 
amount paid by the trust, provided that the trust possesses all 
of the incidents of ownership under the contract and is 
entitled to all the payments under such contract. No inference 
is intended as to the applicability of other provisions of the 
Code with respect to the acquisition by the trust of a life 
insurance, endowment or annuity contract, or the 
appropriateness of such an investment by a charitable remainder 
trust.
    Nothing in the provision is intended to suggest that a life 
insurance, endowment, or annuity contract would be a personal 
benefit contract, solely because an individual who is a 
recipient of an annuity or unitrust amount paid by a charitable 
remainder annuity trust or charitable remainder unitrust uses 
such a payment to purchase a life insurance, endowment or 
annuity contract, and a beneficiary under the contract is the 
recipient, a member of his or her family, or another person he 
or she designates.

Excise tax

    The provision imposes on any organization described in 
section 170(c) of the Code an excise tax, equal to the amount 
of the premiums paid by the organization on any life insurance, 
annuity, or endowment contract, if the premiums are paid in 
connection with a transfer for which a deduction is not 
allowable under the deduction denial rule of the provision 
(without regard to when the transfer to the charitable 
organization was made). The excise tax does not apply if all of 
the direct and indirect beneficiaries under the contract 
(including any related side agreement) are organizations 
described in section 170(c). Under the provision, payments are 
treated as made by the organization, if they are made by any 
other person pursuant to an understanding or expectation of 
payment. The excise tax is to be applied taking into account 
rules ordinarily applicable to excise taxes in chapter 41 or 42 
of the Code (e.g., statute of limitation rules).

Reporting

    The provision requires that the charitable organization 
annually report the amount of premiums that is paid during the 
year and that is subject to the excise tax imposed under the 
provision, and the name and taxpayer identification number of 
each beneficiary under the life insurance, annuity or endowment 
contract to which the premiums relate, as well as other 
information required by the Secretary of the Treasury. For this 
purpose, it is intended that a beneficiary include any 
beneficiary under any side agreement to which the section 
170(c) organization is a party (or of which it is otherwise 
aware). Penalties applicable to returns required under Code 
section 6033 apply to returns under this reporting requirement. 
Returns required under this provision are to be furnished at 
such time and in such manner as the Secretary shall by forms or 
regulations require.

Regulations

    The provision provides for the promulgation of regulations 
necessary or appropriate to carry out the purposes of the 
provisions, including regulations to prevent the avoidance of 
the purposes of the provision. For example, it is intended that 
regulations prevent avoidance of the purposes of the provision 
by inappropriate or improper reliance on the limited exceptions 
provided for certain beneficiaries under bona fide charitable 
gift annuities and for certain noncharitable recipients of an 
annuity or unitrust amount paid by a charitable remainder 
trust.

                             effective date

    The deduction denial provision applies to transfers after 
February 8, 1999 (as provided in H.R. 630). The excise tax 
provision applies to premiums paid after the date of enactment. 
The reporting provision applies to premiums paid after February 
8, 1999 (determined as if the excise tax imposed under the 
provision applied to premiums paid after that date).
    No inference is intended that a charitable contribution 
deduction is allowed under present law with respect to a 
charitable split-dollar insurance arrangement. The provision 
does not change the rules with respect to fraud or criminal or 
civil penalties under present law; thus, actions constituting 
fraud or that are subject to penalties under present law would 
still constitute fraud or be subject to the penalties after 
enactment of the provision.

 D. Authorize Secretary of Treasury To Grant Waivers From Section 4941 
                              Prohibitions


           (sec. 1004 of the bill and sec. 4941 of the Code)


                              present law

    In order to prohibit transactions between tax-exempt 
private foundations and certain related persons, present law 
provides for the imposition of excise taxes when ``disqualified 
persons'' engage in acts of ``self-dealing'' with a private 
foundation (sec. 4941). Disqualified persons include foundation 
managers (directors, trustees, and officers of the foundation), 
substantial contributors to the foundation, certain family 
members of these persons, and certain entities related to these 
persons. Disqualified persons also include government officials 
at certain levels.
    Acts of self-dealing include any direct or indirect: (1) 
sale, exchange, or leasing of property between a private 
foundation and a disqualified person, (2) lending of money or 
extensions of credit between a private foundation and a 
disqualified person,101 (3) furnishing of goods, 
services, or facilities between a private foundation and a 
disqualified person,102 (4) payment of compensation 
(or payment or reimbursement of expenses) by a private 
foundation to a disqualified person,103 (5) transfer 
to, or use by or for the benefit of, a disqualified person of 
the income or assets of a private foundation, and (6) agreement 
by a private foundation to make any payment of money or other 
property to a government official. There is no exception from 
the prohibition on acts of self-dealing for inadvertent 
violations, and even transactions which arguably may benefit 
the private foundation may be subject to tax as an act of self-
dealing. Thus, for example, a disqualified person may not rent 
space to a private foundation at a rate that is below the 
market.
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    \101\ The lending of money to private foundation on an interest-
free basis where the loan proceeds are to be used exclusively for 
charitable purposes is not an act of self-dealing.
    \102\ A disqualified person may, however, furnish goods, services, 
or facilities to a private foundation at no charge. In addition, it is 
not an act of self-dealing for a private foundation to furnish goods, 
services, or facilities to a disqualified person on a basis no more 
favorable than available to the general public.
    \103\ Payment by a private foundation of compensation to a 
disqualified person (other than a government official) for personal 
services which are reasonable and necessary to carrying out the exempt 
purpose of the private foundation is not an act of self-dealing.
---------------------------------------------------------------------------
    Self-dealing excise taxes are imposed on a disqualified 
person who has engaged in a self-dealing transaction, and on 
any foundation manager who knowingly participates in the 
transaction.104 At the first level of tax, a 
disqualified person is subject to an initial tax at a rate of 5 
percent and a foundation manager at a rate of 2.5 percent (up 
to a maximum of $10,000) of the ``amount involved'' in the act 
of self-dealing. Where the self-dealing transaction involves 
the use of money (e.g., a loan) or other property, the ``amount 
involved'' generally is the greater of the amount of money and 
the fair market value of the other property given or the amount 
of money and the fair market value of the property 
received.105 Section 4941 also imposes a second 
level of taxes at higher rates where an act of self-dealing has 
occurred and the transaction is not corrected within a 
specified period of time. At the second level, a disqualified 
person is subject to a tax of 200 percent and a foundation 
manager is subject to a tax of 50 percent (up to a maximum of 
$10,000) of the amount involved.
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    \104\ Except in the case of a government official, the excise tax 
is imposed on a disqualified person even though the person had no 
knowledge at the time of the act that it constituted self-dealing. In 
the case of a government official, however, the tax may be imposed only 
if the official participated in an act of self-dealing knowing that it 
was such an act.
    \105\ For example, if a disqualified person leases office space 
from a private foundation, the amount involved is the greater of the 
amount of rent received by the foundation from the disqualified person 
or the fair rental value of the building for the period the building is 
used by the disqualified person.
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                           reasons for change

    The Committee believes that there may be certain 
transactions for which exemption from the self-dealing 
prohibition is appropriate and in the best interests of the 
private foundation, as long as such transactions are reviewed 
carefully pursuant to procedures established by the Secretary 
of the Treasury.

                        explanation of provision

    The bill requires the Secretary of the Treasury to 
establish an exemption procedure pursuant to which the 
Secretary can grant a conditional or unconditional exemption 
from the self-dealing prohibition of section 4941. The 
Secretary is permitted to grant an exemption for any 
disqualified person or transaction, or class of disqualified 
persons or transactions, if such exemption is: (1) 
administratively feasible, (2) in the interests of the private 
foundation, and (3) protective of the rights of the private 
foundation. The bill requires that, prior to granting such an 
exemption, the Secretary must: (1) require that adequate notice 
be given to interested persons, (2) publish notice in the 
Federal Register of the pendency of a request for an exemption, 
and (3) afford interested persons an opportunity to present 
their views.

                             effective date

    The provision is effective for transactions occurring after 
the date of enactment.

 E. Extend Declaratory Judgment Procedures to Non-501(c)(3) Tax-exempt 
                             Organizations


           (sec. 1005 of the bill and sec. 7428 of the Code)


                              present law

    In order for an organization to be granted tax exemption as 
a charitable entity described in section 501(c)(3), it 
generally must file an application for recognition of exemption 
with the IRS and receive a favorable determination of its 
status. Similarly, for most organizations, a charitable 
organization's eligibility to receive tax-deductible 
contributions is dependent upon its receipt of a favorable 
determination from the IRS. In general, a section 501(c)(3) 
organization can rely on a determination letter or ruling from 
the IRS regarding its tax-exempt status, unless there is a 
material change in its character, purposes, or methods of 
operation. In cases where an organization violates one or more 
of the requirements for tax exemption under section 501(c)(3), 
the IRS is authorized to revoke an organization's tax 
exemption, notwithstanding an earlier favorable determination.
    In situations where the IRS denies an organization's 
application for recognition of exemption under section 
501(c)(3) or fails to act on such application, or where the IRS 
informs a section 501(c)(3) organization that it is considering 
revoking or adversely modifying its tax-exempt status, present 
law authorizes the organization to seek a declaratory judgment 
regarding its tax status (sec. 7428). Section 7428 provides a 
remedy in the case of a dispute involving a determination by 
the IRS with respect to: (1) the initial qualification or 
continuing qualification of an organization as a charitable 
organization for tax exemption purposes or for charitable 
contribution deduction purposes; (2) the initial classification 
or continuing classification of an organization as a private 
foundation; (3) the initial classification or continuing 
classification of an organization as a private operating 
foundation; or (4) the failure of the IRS to make a 
determination with respect to (1), (2), or (3). A 
``determination'' in this context generally means a final 
decision by the IRS affecting the tax qualification of a 
charitable organization, although it also can include a 
proposed revocation of an organization's tax-exempt status or 
public charity classification. Section 7428 vests jurisdiction 
over controversies involving such a determination in the U.S. 
District Court for the District of Columbia, the U.S. Court of 
Federal Claims, and the U.S. Tax Court.
    Prior to utilizing the declaratory judgment procedure, an 
organization must have exhausted all administrative remedies 
available to it within the IRS. For the first 270 days after a 
request for a determination is made, an organization is deemed 
to not have exhausted its administrative remedies. Provided 
that no determination is made during the 270-day period, the 
organization may initiate an action for declaratory judgment 
after the period has elapsed. If, however, the IRS makes an 
adverse determination during the 270-day period, an 
organization may initiate a declaratory judgment immediately. 
The 270-day period does not begin with respect to applications 
for recognition of tax-exempt status until the date a 
substantially completed application is submitted.
    In contrast to the rules governing charities, it is a 
disputed issue as to whether non-charities (i.e., organizations 
not described in section 501(c)(3), including trade 
associations, social welfare organizations, social clubs, labor 
and agricultural organizations, and fraternal organizations) 
are required to file an application with the IRS to obtain a 
determination of their tax-exempt status. If an organization 
voluntarily files an application for recognition of exemption 
and receives a favorable determination from the IRS, the 
determination of tax-exempt status is usually effective as of 
the date of formation of the organization if its purposes and 
activities during the period prior to the date of the 
determination letter were consistent with the requirements for 
exemption. However, if the organization files an application 
for recognition of exemption and later receives an adverse 
determination from the IRS, the IRS may assert that the 
organization is subject to tax on some or all of its income for 
open taxable years. In addition, as with charitable 
organizations, the IRS may revoke or modify an earlier 
favorable determination regarding an organization's tax-exempt 
status.
    Under present law, a non-charity (i.e., an organization not 
described in section 501(c)(3)) may not seek a declaratory 
judgment with respect to an IRS determination regarding its 
tax-exempt status. The only remedies available to such an 
organization are to petition the U.S. Tax Court for relief 
following the issuance of a notice of deficiency or to pay any 
tax owed and sue for refund in federal district court or the 
U.S. Court of Federal Claims.

                           reasons for change

    The Committee believes that it is important to provide 
certainty for organizations that have sought a determination of 
their tax-exempt status and believes that it is necessary to 
provide a remedy for such organizations in cases where a 
determination by the Internal Revenue Service is delayed for a 
significant period of time.

                        explanation of provision

    The bill extends declaratory judgment procedures similar to 
those currently available only to charities under section 7428 
to other section 501(c) determinations. Jurisdiction over 
controversies involving such determinations is limited to the 
United States Tax Court. 106
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    \106\ This limitation currently applies to declaratory judgments 
relating to tax qualification for certain employee retirement plans 
(sec. 7476).
---------------------------------------------------------------------------

                             effective date

    The provision is effective for pleadings with respect to 
determinations made after the date of enactment.

                      F. Modify Section 512(b)(13)


       (sec. 1006 of the bill and section 512(b)(13) of the Code)


                              present law

    In general, interest, rents, royalties and annuities are 
excluded from the unrelated business income (``UBI'') of tax-
exempt organizations. However, section 512(b)(13) treats 
otherwise excluded rent, royalty, annuity, and interest income 
as UBI if such income is received from a taxable or tax-exempt 
subsidiary that is 50 percent controlled by the parent tax-
exempt organization. In the case of a stock subsidiary, 
``control'' means ownership by vote or value of more than 50 
percent of the stock. In the case of a partnership or other 
entity, control means ownership of more than 50 percent of the 
profits, capital or beneficial interests. In addition, present 
law applies the constructive ownership rules of section 318 for 
purposes of section 512(b)(13). Thus, a parent exempt 
organization is deemed to control any subsidiary in which it 
holds more than 50 percent of the voting power or value, 
directly (as in the case of a first-tier subsidiary) or 
indirectly (as in the case of a second-tier subsidiary).
    Under present law, interest, rent, annuity, or royalty 
payments made by a controlled entity to a tax-exempt 
organization are includable in the latter organization's UBI 
and are subject to the unrelated business income tax to the 
extent the payment reduces the net unrelated income (or 
increases any net unrelated loss) of the controlled entity.
    The Taxpayer Relief Act of 1997 (the ``1997 Act'') made 
several modifications, as described above, to the control 
requirement of section 512(b)(13). In order to provide 
transitional relief, the changes made by the 1997 Act do not 
apply to any payment received or accrued during the first two 
taxable years beginning on or after the date of enactment of 
the 1997 Act (August 5, 1997) if such payment is received or 
accrued pursuant to a binding written contract in effect on 
June 8, 1997, and at all times thereafter before such payment 
(but not pursuant to any contract provision that permits 
optional accelerated payments).

                           reasons for change

    The Committee believes that the present-law rule of section 
512(b)(13) produces results that are arbitrary in certain cases 
and that it is appropriate to use a fair market value standard 
to determine the pricing structure for rents, royalties, 
interest, and annuities paid by subsidiaries to their tax-
exempt parent organizations.

                        explanation of provision

    The bill provides that the general rule of section 
512(b)(13), which includes interest, rent, annuity, or royalty 
payments made by a controlled entity to a tax-exempt 
organization in the latter organization's UBI, applies only to 
the portion of payments received in a taxable year that exceed 
the amount of the specified payment which would have been paid 
if such payment had been determined under the principles of 
section 482. Thus, if a payment of rent by a controlled 
subsidiary to its tax-exempt parent organization exceeds fair 
market value, the excess amount of such payment over fair 
market value (as determined in accordance with section 482) is 
included in the parent organizations's UBI. In addition, the 
bill imposes a 20 percent penalty on the excess amount of any 
such payment.
    The bill provides relief for payments under contracts 
which, on the date of enactment of the proposal, are still 
subject to the binding contract transition rule of the 1997 
Act, but for which the transition rule would expire prior to 
the effective date of the proposal, by extending the transition 
rule until December 31, 1999.

                             effective date

    The provision providing an exception from the general rule 
of section 512(b)(13) for interest, rent, annuity, or royalty 
payments from controlled subsidiaries that do not exceed fair 
market value generally applies to payments received or accrued 
in taxable years beginning after December 31, 1999.

                TITLE XI. REAL ESTATE RELIEF PROVISIONS


                    A. Provisions Relating to REITs


(secs 1101-1106, 1111, 1121, 1131, 1141 and 1151 of the bill and secs. 
                     852, 856 and 857 of the Code)


                              Present Law

    Real estate investment trust (``REITs'') are treated, in 
substance, as pass-through entities under present law. Pass-
through status is achieved by allowing the REIT a deduction for 
dividends paid to its shareholders. REITs are restricted to 
investing in passive investments, primarily in real estate and 
securities. Specifically, a REIT is required to receive at 
least 95 percent of its income from real property rents and 
from securities. Amounts received as impermissible ``tenant 
services income'' are not treated as rents from real property. 
In general, such amounts are for services rendered to tenants 
that are not ``customarily furnished'' in connection with the 
rental of real property. Special rules permit amounts to be 
received from certain ``foreclosure property,'' treated as such 
for 3 years after the property is acquired by the REIT in 
foreclosure after a default (or imminent default) on a lease of 
such property or on indebtedness which such property secured.
    A REIT is not treated as providing services that produce 
impermissible tenant services income if such services are 
provided by an independent contractor from whom the REIT does 
not derive or receive any income. An independent contractor is 
defined as a person who does not own, directly or indirectly, 
more than 35 percent of the shares of the REIT. Also, no more 
than 35 percent of the total shares of stock of an independent 
contractor (or of the interests in assets or net profits, if 
not a corporation) can be owned directly or indirectly by 
persons owning 35 percent or more of the interests in the REIT.
    A REIT is limited in the amount that it can own in other 
corporations. Specifically, a REIT cannot own securities (other 
than Government securities and certain real estate assets) in 
an amount greater than 25 percent of the value of REIT assets. 
In addition, it cannot own securities of any one issuer 
representing more than 5 percent of the total value of REIT 
assets or more than 10 percent of the voting securities of any 
corporate issuer. Under an exception to this rule, a REIT can 
own 100 percent of the stock of a corporation, but in that case 
the income and assets of such corporation are treated as income 
and assets of the REIT. Securities for purposes of these rules 
are defined by reference to the Investment Company Act of 
1940.1
---------------------------------------------------------------------------
    \1\ 15 U.S.C. 80a-1 and following.
---------------------------------------------------------------------------
    A REIT is generally required to distribute 95 percent of 
its income before the end of its taxable year, as deductible 
dividends paid to shareholders. This rule is similar to a rule 
for regulated investment companies (``RICs'') that requires 
distribution of 90 percent of income. Both REITS and RICs can 
make certain ``deficiency dividends'' after the close of the 
taxable year, and have these treated as made before the end of 
the year. The regulations applicable to REITS state that a 
distribution will be treated as a ``deficiency dividend'' and 
thus as made before the end of the prior taxable year, only to 
the extent the earnings and profits for that year exceed the 
amount of distributions actually made during the taxable year.
    A REIT that has been or has combined with a C corporation 
will be disqualified if, as of the end of its taxable year, it 
has accumulated earnings and profits from a non-REIT year. A 
similar rule applies to regulated investment companies 
(``RICs''). In the case of a REIT, any distribution made in 
order to comply with this requirement is treated a being first 
from pre-REIT accumulated earnings and profits. RICs do not 
have a similar ordering rule.
    In the case of a RIC, under an elective provision entitled 
``procedures similar to deficiency dividend procedures'', any 
distribution made within a specified period after determination 
that the investment company did not qualify as a RIC for the 
taxable year will, ``for purposes of applying [the earnings and 
profits rule that forbids a RIC to have non-RIC earnings and 
profits] to subsequent taxable years'', be treated as applying 
to the RIC for the non-RIC year. The REIT rules do not specify 
any particular separate treatment of distributions made after 
the end of the taxable year for purposes of the earnings and 
profits rule. Treasury regulations under the REIT provisions 
state that ``distribution procedures similar to those . . . for 
regulated investment companies apply to non-REIT earnings and 
profits of a real estate investment trust.''

                           Reasons for Change

    The Committee believes that a 10-percent value, as well as 
a 10-percent vote test, is appropriate to test the permitted 
relationship of a REIT to the entities in which it invests. The 
committee is concerned that a REIT may invest in an entity in 
which it owns virtually all the value (e.g., through preferred 
stock) while owning a small amount of the vote. The remainder 
of the voting power might be held by persons related to the 
REIT such as its officers, directors, or employees. The REIT 
might effectively be the beneficiary of virtually all the 
earnings of the entity, through its preferred stock ownership. 
Also, the REIT might hold significant debt in the entity. If 
the entity is a corporation, this might significantly reduce 
the corporate tax that the corporation might pay. If the entity 
is a partnership engaged in activities that would generate 
nonqualified income for the REIT if done directly, the REIT 
might use a significant debt investment in the partnership to 
reduce the amount of nonqualified income it would report from 
the partnership while still receiving a significant income 
stream through the debt.
    The Committee believes, however, that certain types of 
activities that are related to the REIT's real estate 
investments should be permitted to be performed under the 
control of the REIT, through the establishment of a ``taxable 
REIT subsidiary''. One such type of activity is the provision 
of certain tenant services that might not be considered 
customary simply because they are relatively new or ``cutting-
edge'' services that the REIT wishes to have provided in order 
to retain the competitive value of its properties. The 
Committee believes it will be simplifying for the REIT to be 
able to use the taxable REIT subsidiary, so that any 
uncertainty whether a particular service will be considered 
``customary'' would not affect the REIT's qualification as a 
REIT. Another type of activity is the performance of real 
estate management and operation, generally for third parties. A 
REIT may have developed expertise in such activities with 
respect to its own properties. which expertise could 
efficiently be made available to third parties.
    The Committee believes it is desirable to obtain 
information regarding the extent of use of the new taxable REIT 
subsidiaries and the amount of corporate Federal income tax 
that such subsidiaries are paying.
    The Committee also believes that a number of other 
simplifying changes are desirable, including allowing limited 
operation of health care facilities after a lease terminates; 
simplifying the determination whether an entity is an 
independent contractor; and modifying and conforming certain 
RIC and REIT distribution rules.

                        Explanation of Provision

Taxable REIT subsidiaries

    Under the provision, a REIT generally may not own more than 
10 percent of the total value of securities of a single issuer, 
in addition to the present-law rule limiting the REIT's 
ownership to no more than 10 percent of the outstanding voting 
securities of a single issuer.
    For purposes of the new 10 percent value test, securities 
generally are defined to exclude safe harbor debt owned by a 
REIT (as defined for purposes of section 1361(c)(5)(B)(i) and 
(ii)) if the REIT (and any taxable REIT subsidiary of such 
REIT) owns no other securities of the issuer. In the case of a 
REIT that owns securities of a partnership, safe harbor debt is 
excluded from the definition of securities only if the REIT 
owns at least 20 percent or more of the profits interest in the 
partnership. The purpose of the partnership rule requiring a 
20-percent profits interest is to assure that if the 
partnership produces income that would be disqualified income 
to the REIT, the REIT will be treated as receiving a 
significant portion of that income directly, even though it may 
also derive qualified interest income through its safe harbor 
debt interest.
    An exception to the limitations on ownership of securities 
of a single issuer applies in the case of a ``taxable REIT 
subsidiary'' that meets certain requirements. For a subsidiary 
to qualify as a taxable REIT subsidiary, both the REIT and the 
subsidiary corporation must join in an election. In addition, 
any corporation (other than a REIT) of which a taxable REIT 
subsidiary owns, directly or indirectly, more than 35 percent 
of the vote or value is automatically treated as a taxable REIT 
subsidiary. Securities (as defined in the Investment Company 
Act of 1940) of taxable REIT subsidiaries (plus other assets 
that are not real estate assets, cash, cash items, or 
Government securities) may not exceed 25 percent of the total 
value of a REIT's assets.
    Under the provision, a taxable REIT subsidiary is able to 
engage in certain business activities that under present law 
could disqualify the REIT because, but for the provision, the 
taxable REIT subsidiary's activities and relationship with the 
REIT could prevent certain income from qualifying as rents from 
real property. Specifically, the subsidiary may provide 
services to tenants of REIT property (even if such services 
were not considered services customarily furnished in 
connection with the rental of real property), and manage or 
operate properties generally, without causing amounts received 
or accrued directly or indirectly by REIT for such activities 
to fail to be treated as rents from real property.
    However, the subsidiary may not directly or indirectly 
operate or manage a lodging or healthcare facility. 
Nevertheless, it could lease a qualified lodging facility 
(e.g., a hotel) from the REIT (provided no gambling revenues 
were derived by the hotel or on its premises); and the rents 
paid would be treated as rents from real property so long as 
the lodging facility was operated by an independent contractor 
for a fee. The subsidiary may bear all expenses of operating 
the facility and receive all the net revenues, minus the 
independent contractor's fee.
    For purposes of the rule that an independent contractor may 
operate a qualified lodging facility, an independent contractor 
qualifies so long as, at the time it enters into the management 
agreement with the taxable REIT subsidiary, it is actively 
engaged in the trade or business of operating qualified lodging 
facilities for any person who is not related to the REIT or the 
taxable REIT subsidiary. The REIT may receive income from such 
an independent contractor with respect to certain pre-existing 
leases.
    Also, the subsidiary generally may not provide to any 
person rights to any brand name under which hotels or 
healthcare facilities are operated. An exception applies to 
rights provided to an independent contractor to operate or 
manage a lodging facility, if the rights are held by the 
subsidiary as licensee or franchisee, and the lodging facility 
is owned by the subsidiary or leased to it by the REIT.
    Interest paid by a taxable REIT subsidiary to the related 
REIT is subject to the earnings stripping rules of section 
163(j). Thus, the taxable REIT subsidiary may not deduct 
interest in any year that would exceed 50 percent of the 
subsidiary's adjusted gross income.
    If any amount of interest, rent, or other deductions of the 
taxable REIT subsidiary for amounts paid to the REIT is 
determined to be other than at arm's length (``redetermined'' 
items), an excise tax of 100 percent is imposed on the portion 
that was excessive. ``Safe harbors'' are provided for certain 
rental payments where the amounts are de minimis, there is 
specified evidence that charges to unrelated parties are 
substantially comparable, certain charges for services from the 
taxable REIT subsidiary are separately stated, or the 
subsidiary's gross income from the service is not less than 150 
percent of the subsidiary's direct cost in furnishing the 
service.
    In determining whether rents are arm's length rents, the 
fact that such rents do not meet the requirements of the 
specified safe harbors is not taken into account. In addition, 
rent received by a REIT does not fail to qualify as rents from 
real property by reason of the fact that all or any portion of 
such rent is redetermined for purposes of the excise tax.
    The Commissioner of Internal Revenue is to conduct a study 
to determine how many taxable REIT subsidiaries are in 
existence and the aggregate amount of taxes paid by such 
subsidiaries. The Commissioner is required to submit a report 
to the Congress describing the results of the study.

Health care REITS

    The provison permits a REIT to own and operate a health 
care facility for two years, and treat it as permitted 
``foreclosure'' property, if the facility is acquired by the 
termination or expiration of a lease of the property. 
Extensions of the 2-year period may be granted.

Conformity with regulated investment company rules

    The provision conforms the REIT distribution requirements 
to the rules for regulated investment companies. Specifically, 
a REIT is required to distribute only 90 percent, rather than 
95 percent, of its income.

Definition of independent contractor

    If any class of stock of the REIT or of the person being 
tested as an independent contractor is regularly traded on an 
established securities market, only persons who directly or 
indirectly own 5 percent or more of such class of stock are 
counted as owning such stock for purposes of determining 
whether the 35 percent ownership limitations have been exceeded 
(but all of the outstanding stock is included in the 
denominator for purposes of this computation) .

Modification of earnings and profits rules for RICs and REITS

    The provision modifies the present-law rule allowing a RIC 
to make a distribution after a determination that it had failed 
RIC status, and thus meet the requirement of no non-RIC 
earnings and profits in subsequent years. Under the provision, 
when the reason for the determination is that the RIC had non-
RIC earnings and profits in the initial year, RIC qualification 
is permitted in the initial year to which such determination 
applied, in addition to subsequent years.
    The provision modifies the present-law RIC earnings and 
profits rules to provide an ordering rule similar to the REIT 
rule, treating a distribution to meet the requirements of no 
non-RIC earnings and profits as coming first from the earliest 
earnings and profits accumulated in any year for which the RIC 
was not qualified as a RIC.
    The rule regarding ordering of REIT distributions to cure a 
failure to distribute non-REIT earnings and profits is included 
as part of the REIT deficiency dividend procedure, thereby 
providing that all REIT distributions (including those made 
after the end of a taxable year under a deficiency dividend 
procedure) will be deemed to come from accumulated earnings and 
profits first if made for the purpose of curing such failure.

                             Effective Date

    The provision is generally effective for taxable years 
beginning after December 31, 2000. The provision with respect 
to modification of earnings and profits rules is effective for 
distributions after December 31, 2000.
    In the case of the provisions relating to permitted 
ownership of securities of an issuer, special transition rules 
apply. The new rules forbidding a REIT to own more than 10 
percent of the value of securities of a single issuer do not 
apply to a REIT with respect to securities held directly or 
indirectly by such REIT on July 12, 1999, or acquired pursuant 
to the terms of a written binding contract in effect on that 
date and at all times thereafter until the acquisition. Also, 
securities received in a tax-free exchange or reorganization, 
with respect to or in exchange for such grandfathered 
securities are grandfathered. This transition rule ceases to 
apply to securities of a corporation as of the first day after 
July 12, 1999 on which such corporation engages in a 
substantial new line of business, or acquires any substantial 
asset, other than pursuant to a binding contract in effect on 
such date and at all times thereafter, or in a reorganization 
or transaction in which gain or loss is not recognized by 
reason of section 1031 or 1033 of the Code. If a corporation 
makes an election to become a taxable REIT subsidiary, 
effective before January 1, 2004 and at a time when the REIT's 
ownership is grandfathered under these rules, the election is 
treated as a reorganization under section 368(a)(1)(A) of the 
Code.

      B. Modify At-Risk Rules for Publicly Traded Nonrecourse Debt


         (sec. 1161 of the bill and sec. 465(b)(6) of the Code)


                              Present Law

    Present law provides an at-risk limitation on losses from 
business and income-producing activities, applicable to 
individuals and certain closely held corporations (sec. 465). 
Under the at-risk rules, a taxpayer generally is not considered 
at risk with respect to borrowed amounts if the taxpayer is not 
personally liable for repayment of the debt (e.g., nonrecourse 
loans), and in certain other circumstances.
    In the case of the activity of holding real property, 
however, an exception is provided for qualified nonrecourse 
financing that is secured by real property used in the activity 
(sec. 465(b)(6)). The qualified nonrecourse financing rules 
require, among other things, that the financing be borrowed by 
the taxpayer from a qualified person or from certain 
governmental entities. For this purpose, a qualified person is 
one that is actively and regularly engaged in the business of 
lending money (and that is not a related person with respect to 
the taxpayer, is not a person from whom the taxpayer acquired 
the property or a related person, and is not a person that 
receives a fee with respect to the taxpayer's investment or a 
related person (sec. 49(a)(1)(D)(iv)). A related person is one 
with certain types of relationships to the taxpayer defined by 
statute (sec. 465(b)(3)(C)). The qualified nonrecourse 
financing rules also require that the financing be secured by 
real property used in the activity (sec. 465(b)(6)(A)).

                           Reasons for Change

    The Committee understands that the rule requiring that the 
financing be borrowed from a person that is actively and 
regularly engaged in the business of lending money hinders the 
use of publicly traded debt in real estate financing to which 
the at-risk rules apply, because absent restrictions on sale of 
the debt, the holders of publicly traded debt could be persons 
other than those who are actively and regularly engaged in the 
business of lending money (even though such persons are not 
related persons). In addition, the Committee understands that 
publicly traded debt may often be debt that is not mortgage 
debt and is not otherwise secured by real property used in the 
real estate activity. Nevertheless, the Committee is aware that 
seller financing and related-party financing can give rise to 
deduction shifting and overvaluation problems that the at-risk 
rules are designed to address. Thus, the Committee bill 
provides that qualified nonrecourse financing in the case of 
the activity of holding real property can include certain 
publicly traded debt that is not borrowed from a person who is 
actively and regularly engaged in the business of lending 
money, and that is not secured by property used in the real 
estate activity, so long as the present-law prohibitions 
against seller financing and related party financing continue 
to apply. In addition, to address concerns about shifting 
deductions among taxpayers through the use of relatively risky 
debt with a relatively high yield, which may tend to resemble

an equity investment, the yield on the publicly traded debt 
under the provision is limited in the same manner as the yield 
under high-yield debt obligations under present law.

                        Explanation of Provision

    The provision modifies the rules relating to qualified 
nonrecourse financing to provide that, in the case of an 
activity of holding real property, a taxpayer is considered at 
risk with respect to the taxpayer's share of certain financing 
that is not borrowed from a person that is regularly engaged in 
the business of lending money, and that is not secured by real 
property used in the activity, if the financing is qualified 
publicly traded debt.
    The financing may not be borrowed from a person that is a 
related person with respect to the taxpayer, that is a person 
from whom the taxpayer acquired the property or a related 
person, or that is a person that receives a fee with respect to 
the taxpayer's investment or a related person.
    Qualified publicly traded debt generally means any debt 
instrument that is readily tradable on an established 
securities market. However, qualified publicly traded debt does 
not include any debt instrument, the yield to maturity on which 
equals or exceeds the applicable Federal rate of interest for 
the calendar month in which it is issued, plus 5 percentage 
points. The applicable Federal rate is the rate determined 
under section 1274(d) with respect to the term of the debt 
instrument. Under the provision, it is intended that ``readily 
tradable on an established securities market'' have the same 
meaning as under section 453(f)(5).

                             Effective Date

    The provision is effective for debt instruments issued 
after December 31, 1999.

 C. Qualified Lessee Construction Allowances Not Limited to Short-term 
                      Leases for Certain Retailers


            (sec. 1171 of the bill and sec. 110 of the Code)


                              Present Law

    Section 110 provides that the gross income of a lessee does 
not include amounts received in cash (or treated as a rent 
reduction) from a lessor under a short-term lease of retail 
space for the purpose of the lessee's construction or 
improvement of qualified long-term real property for use in the 
lessee's trade or business at the retail space subject to the 
short-term lease. The exclusion only applies to the extent the 
allowance does not exceed the amount expended by the lessee on 
the construction or improvement of qualified long-term real 
property. For this purpose, ``qualified long-term real 
property'' means nonresidential real property that is part of, 
or otherwise present at, retail space used by the lessee and 
that reverts to the lessor at the termination of the lease. A 
``short-term lease'' means a lease or other agreement for the 
occupancy or use of retail space for a term of 15 years or less 
(as determined pursuant to sec. 168(i)(3)). ``Retail space'' 
means real property leased, occupied, or otherwise used by the 
lessee in its trade or business of selling tangible personal 
property or services to the general public.
    The lessor must treat the amounts expended on the 
construction allowance as nonresidential real property owned by 
the lessor. The Secretary is granted the authority to require 
reporting to ensure that both the lessor and lessee treat such 
amounts as nonresidential real property owned by the 
lessor.2
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    \2\ Section 110 provides for regulations to be issued establishing 
the time and manner information must be provided the Secretary 
concerning amounts received (or treated as a rent reduction), amounts 
expended on qualified long-term real property, and such other 
information as the Secretary deems necessary to carry out the 
provision. These regulations have not yet been issued.
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                           Reasons for Change

    The Committee is concerned that the present law limitation 
of section 110 to situations involving a short-term lease does 
not adequately reflect transactions between developers and 
retailers. The Committee believes that section 110 should be 
available in a transaction between a developer and a retailer 
without regard to the term of the lease.

                        Explanation of Provision

    The provision eliminates the section 110 requirement that 
the lease be for a term of 15 years or less in the case of 
payment (or rent reduction) to a ``qualified retail business.'' 
Payments by a lessor to such businesses for the purpose of 
constructing or improving long-term real property would not be 
included in the income of the lessee regardless of the term of 
the lease, provided the payments are used for such purpose.
    For this purpose, a qualified retail business would be 
defined as a trade or business of selling tangible personal 
property to the general public. A trade or business will not 
fail to be considered a qualified retail business by reason of 
sales of services to the general public if such sales are 
incidental to the sale of tangible personal property (such as 
tailoring services provided incidental to the sale of a suit or 
dress) or are de minimis in amount. For this purpose, services 
would be considered de minimis in amount if they represent 10% 
or less of the gross receipts of the business at the retail 
space subject to the lease.
    The provision does not eliminate the short-term lease 
requirement in all situations that are otherwise eligible for 
section 110 under present law. Section 110 presently applies 
(assuming the other standards are met) if the retail space of 
the lessee will be used in the trade or business of selling 
tangible personal property or services to the public. If the 
lessee will earn more than 10% of the gross receipts of the 
space from the sale of services (other than from services that 
are incidental to the sale of tangible personal property), 
section 110 will continue to be available only if the lease is 
for a term of 15 years or less.

                             Effective Date

    The provision applies to leases entered into after December 
31, 1999. No inference is intended as to the treatment of 
amounts that are not affected by the provision.

D. Exclusion From Gross Income for Certain Contributions to the Capital 
                          of Certain Retailers


            (sec. 1172 of the bill and sec. 118 of the Code)


                              Present Law

    Section 118 provides that gross income does not include any 
contribution to the capital of a corporation. The test for 
determining whether a particular payment is a contribution to 
capital is the intent or motive of the transferor. The 
contribution (1) must become a part of the recipient's capital 
structure; (2) may not be compensation for a ``specific, 
quantifiable service''; (3) must be bargained for; (4) must 
result in a benefit to the recipient; and (5) ordinarily will 
contribute to the production of additional income. United 
States v. Chicago, Burlington & Quincy R.R., 412 U.S. 401, 411, 
93 S. Ct. 2169, 2175, 37 L. Ed. 2d 30 (1973).
    Two appellate courts have applied section 118(a) to 
inducements paid by developers to retailers in exchange for the 
agreement of the retailers to ``anchor'' future shopping 
centers. Federated Department Stores v. Commissioner 51 TC 500 
( 1968), aff'd 426 F. 2d 417 (6th Cir., 1970), May Department 
Stores Co. v. Commissioner, 33 TCM 1128 (1974), aff'd 519 F. 2d 
1154 (8th Cir., 1975). In both cases, the courts held that the 
benefits anticipated by the developer were speculative and 
intangible, and thus could not be considered in payment for any 
particular service.
    The recipient taxpayer is allowed no basis in any property 
it receives as a contribution to capital, or an property it 
acquires within 12 months with the proceeds of a contribution 
to capital (sec. 362).

                           Reasons for Change

    The Committee agrees with the courts that inducements paid 
by developers to retailers in exchange for the agreement of the 
retailers to anchor future shopping centers may constitute 
nontaxable contributions to capital. The Committee believes 
that it is appropriate that a safeharbor be created to cover 
common situations that are expected to qualify as nontaxable 
contributions to capital under present law without requiring 
the taxpayer to prove the intent of the other party to the 
transaction. The Committee believes that the benefits of the 
safeharbor should be limited to amounts that would typically be 
treated as nontaxable contributions to capital under present 
law and that the safeharbor should not apply to any amount that 
may be falsely classified as a contribution in an attempt to 
abuse the provision.

                        Explanation of Provision

    The provision establishes a safe harbor allowing certain 
inducements received by retailers to be treated as nontaxable 
contributions to capital. In order to qualify for the safe 
harbor, the inducement must be in exchange for the retailer's 
agreement to operate a qualified retail business at particular 
location for a period of at least 15 years. The retailer must, 
immediately after the receipt of the contribution, own the land 
and structures to be used by the taxpayer in carrying on the 
qualified retail business at the agreed location and must 
satisfy an expenditure rule.
    The safe harbor does not apply if the contributor owns a 
beneficial interest in property located on the premises of the 
qualified retail business, other than de minimis amounts of 
property associated with the operation of adjacent property. 
For example, a developer may be the owner of the pipes and 
related equipment making up the water system of a shopping 
mall. Ownership of such property on premises owned by the 
retailer is expected to be considered de minimis and would not 
prevent the application of the safeharbor. On the other hand, 
ownership of more than a de minimis amount of assets or the 
ownership of assets disqualifies the inducement from safeharbor 
treatment. For example, if a developer owns and leases to a 
retailer the retailer's point of sale equipment, any inducement 
paid by the developer to the retailer will not qualify under 
the safeharbor as a nontaxable contribution to 
capital.3 The rule applies to property owned by the 
developer on the premises of the retailer. The premises of the 
retailer is the area in which the retailer holds out personal 
property for sale to the general public. The premises of the 
retailer do not include adjacent space, such as a parking 
facility under the store which is owned and operated by the 
developer whose use is not limited to customers of the 
taxpayer. The rule also does not prevent the developer paying 
the inducement from owning a beneficial interest in the 
retailers, or joining in a joint venture with the retailer 
unless the joint venture involves ownership of property on the 
premises of the retailer that would prevent the use of the 
safeharbor if owned directly by the developer.
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    \3\ Ownership of property on the premises of the retailer by the 
developer does not automatically prevent an inducement from qualifying 
as a nontaxable contribution to capital under section 118(a), provided 
the taxpayer can establish the facts required for that provision to 
apply.
---------------------------------------------------------------------------
    The expenditure rule requires that, prior to the end of the 
second taxable year after the year in the contribution was 
received, the retailer spend an amount equal to the amount of 
the contribution for the acquisition of land or structure, or 
for the acquisition or construction of other property to be 
used in the qualified retail business at the agreed location. 
Accurate records would be required to be kept that establish 
the satisfaction of the expenditure rule. It is not intended 
that the retailer be required to trace specific expenditures to 
the inducement.
    A qualified retail business is defined as a trade or 
business of selling tangible personal property to the general 
public. A trade or business will not fail to be considered a 
qualified retail business by reason of sales of services to the 
general public if such sales are incidental to the sale of 
tangible personal property (such as tailoring services provided 
incidental to the sale of a suit or dress) or are de minimis in 
amount. For this purpose, services are considered de minimis in 
amount if they represent 10 percent or less of the gross 
receipts of the business at the retail space subject to the 
lease.
    Anti-abuse rules are provided to prevent the use of the 
safeharbor for amounts that are not intended by the parties as 
contributions to capital. The Secretary is authorized to 
allocate income and deductions, or to reduce the amount of any 
contribution to capital under the safeharbor, in cases in which 
it is established that above market rates have been paid from 
the retailer to the devel-

oper in another transaction. A rate is not expected to be 
considered to be above market if it is the same on a square 
footage basis as the rate charged other retailers at the same 
location. For example, a developer charges all retailers in the 
mall a common area maintenance charge. If this charge is equal 
to a standard rate times the square footage of each store in 
the mall, it will not be considered to be an above market rate 
with respect to any single retailer.
    The Secretary is also authorized to allocate income and 
deductions, or reduce the amount of any contribution to 
capital, to the extent necessary to prevent the abuse of the 
purposes of this section where the transaction takes place 
between related parties. It is expected that this authority 
will be used to prevent the conversion of nondepreciable or 
longer lived property into costs that may be recovered over a 
shorter period of time. For example, if a retailer who owns a 
piece of land contributes that land to a joint venture and then 
accept the land from the joint venture as an inducement to 
operate a retail facility for 20 years an anchor for a new 
mall, it is expected that the Secretary will use its authority 
to reduce the amount of any contribution to capital in a 
transaction between related parties to prevent the application 
of the safeharbor. However, it is not intended that the 
authority to will be used simply because the retailer and a 
related party engage in transactions that are concluded on an 
arm's-length basis and do not result in the conversion of 
nondepreciable or longer lived assets into costs that may be 
recovered over a shorter period of time.
    The provision does not limit the application of section 
118(a) of present law. No inference is intended as to whether 
any payment constitutes a nontaxable contribution to capital 
under section 118(a) whether or not such payment qualifies for 
the safeharbor provided by this provision.

                             Effective Date

    The provision is effective for contributions received after 
December 31, 1999.

                  TITLE XII. PENSION REFORM PROVISIONS


                         A. Expanding Coverage


1. Increase contribution and benefit limits (sec. 1201 of the bill and 
        secs. 401(a)(17), 402(g), 408(p), 415 and 457 of the Code)

                              Present Law

In general

    Under present law, limits apply to contributions and 
benefits under qualified plans (sec. 415), the amount of 
compensation that may be taken into account under a plan for 
determining benefits (sec. 401(a)(17)), the maximum amount of 
elective deferrals that an individual may make to a salary 
reduction plan or tax sheltered annuity (sec. 402(g)), and 
deferrals under an eligible deferred compensation plan of a 
tax-exempt organization or a State or local government (sec. 
457).

Limitations on contributions and benefits

    Under present law, the limits on contributions and benefits 
under qualified plans are based on the type of plan. Under a 
defined contribution plan, the qualification rules limit the 
annual additions to the plan with respect to each plan 
participant to the lesser of (1) 25 percent of compensation or 
(2) $30,000 (for 1999). Annual additions are the sum of 
employer contributions, employee contributions, and forfeitures 
with respect to an individual under all defined contribution 
plans of the same employer. The $30,000 limit is indexed for 
cost-of-living adjustments in $5,000 increments.
    Under a defined benefit plan, the maximum annual benefit 
payable at retirement is generally the lesser of (1) 100 
percent of average compensation, or (2) $130,000 (for 1999). 
The dollar limit is adjusted for cost-of-living increases in 
$5,000 increments.
    Under present law, in general, the dollar limit on annual 
benefits is reduced if benefits under the plan begin before the 
social security retirement age (currently, age 65) and 
increased if benefits begin after social security retirement 
age.4
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    \4\ An overall limit applies if a participant participates in a 
defined contribution plan and a defined benefit plan maintained by the 
same employer (sec. 415(e)). This limit is repealed for years beginning 
after December 31, 1999.
---------------------------------------------------------------------------

Compensation limitation

    Under present law, the annual compensation of each 
participant that may be taken into account for purposes of 
determining contributions and benefits under a plan, applying 
the deduction rules, and for nondiscrimination testing purposes 
is limited to $160,000 (for 1999). The compensation limit is 
indexed for cost-of-living adjustments in $10,000 increments.

Elective deferral limitations

    Under present law, under certain salary reduction 
arrangements, an employee may elect to have the employer make 
payments as contributions to a plan on behalf of the employee, 
or to the employee directly in cash. Contributions made at the 
election of the employee are called elective deferrals.
    The maximum annual amount of elective deferrals that an 
individual may make to a qualified cash or deferred arrangement 
(a ``section 401(k) plan''), a tax-sheltered annuity (``section 
403(b) annuity'') or a salary reduction simplified employee 
pension plan (``SEP'') is $10,000 (for 1999). The maximum 
annual amount of elective deferrals that an individual may make 
to a SIMPLE plan is $6,000. These limits are indexed for 
inflation in $500 increments.

Section 457 plans

    The maximum annual deferral under a deferred compensation 
plan of a State or local government or a tax-exempt 
organization (a ``section 457 plan'') is the lesser of (1) 
$8,000 (for 1999) or (2) 33\1/3\ percent of compensation. The 
$8,000 dollar limit is increased for inflation in $500 
increments. Under a special catch-up rule, the section 457 plan 
may provide that, for one or more of the participant's last 3 
years before retirement, the otherwise applicable limit is 
increased to the lesser of (1) $15,000 or (2) the sum of the 
otherwise applicable limit for the year plus the amount by 
which the limit applicable in preceding years of participation 
exceeded the deferrals for that year.

                           Reasons for Change

    The tax benefits provided under qualified plans are a 
departure from the normally applicable income tax rules. The 
special tax benefits for qualified plans are generally 
justified on the ground that they serve an important social 
policy objective, i.e., the provision of retirement benefits to 
a broad group of employees. The limits on contributions and 
benefits, elective deferrals, and compensation that may be 
taken into account under a qualified plan all serve to limit 
the tax benefits associated with such plans. The level at which 
to place such limits involves a balancing of different policy 
objectives and a judgment as to what limits are most likely to 
best further policy goals.
    One of the factors that may influence the decision of an 
employer, particularly a small employer, to adopt a plan is the 
extent to which the owners of the business, the decision-
makers, or other highly compensated employees will benefit 
under the plan. The Committee believes that increasing the 
dollar limits on qualified plan contributions and benefits will 
encourage employers to establish qualified plans for their 
employees.
    The Committee understands that, in recent years, section 
401(k) plans have become increasingly more prevalent. The 
Committee believes it is important to increase the amount 
ofemployee elective deferrals allowed under such plans, and other plans 
that allow deferrals, to better enable plan participants to save for 
their retirement.

                        Explanation of Provision

Limits on contributions and benefits

    The provision increases the $30,000 annual addition limit 
for defined contribution plans to $40,000. This amount is 
indexed in $1,000 increments.5
---------------------------------------------------------------------------
    \5\ The 25 percent of compensation limitation is increased to 100 
percent of compensation under another provision of the bill.
---------------------------------------------------------------------------
    The provision increases the $130,000 annual benefit limit 
under a defined benefit plan to $160,000. The dollar limit is 
reduced for benefit commencement before age 62 and increased 
for benefit commencement after age 65.

Compensation limitation

    The provision increases the limit on compensation that may 
be taken into account under a plan to $200,000. This amount is 
indexed in $5,000 increments.

Elective deferral limitations

    Beginning in 2001, the provision increases the dollar limit 
on annual elective deferrals under section 401(k) plans, 
section 403(b) annuities and salary reduction SEPs in $1,000 
annual increments until the limits reach $15,000 in 2005. 
Beginning in 2001, the provision increases the maximum annual 
elective deferrals that may be made to a SIMPLE plan in $1,000 
annual increments until the limit reaches $10,000 in 2004. The 
$15,000 and $10,000 limits are indexed in $500 increments, as 
under present law.

Section 457 plans

    The provision increases the dollar limit on deferrals under 
a section 457 plan to conform to the elective deferral 
limitation. Thus, the limit is $11,000 in 2001, and is 
increased in $1,000 annual increments until the limit reaches 
$15,000 in 2005. The limit is indexed thereafter in $500 
increments. The limit is twice the otherwise applicable dollar 
limit in the three years prior to retirement.6
---------------------------------------------------------------------------
    \6\ Another provision of the bill increases the 33\1/3\ percentage 
of compensation limit to 100 percent.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2000, with a delayed effective date for plans 
maintained pursuant to a collective bargaining agreement.

2. Plan loans for subchapter S shareholders, partners, and sole 
        proprietors (sec. 1202 of the bill and sec. 4975 of the Code)

                              Present Law

    The Internal Revenue Code prohibits certain transactions 
(``prohibited transactions'') between a qualified plan and a 
disqualified person in order to prevent persons with a close 
relationship to the qualified plan from using that relationship 
to the detriment of plan participants and 
beneficiaries.7 Certain types of transactions are 
exempted from the prohibited transaction rules, including loans 
from the plan to plan participants, if certain requirements are 
satisfied. In addition, the Department of Labor can grant an 
administrative exemption from the prohibited transaction rules 
if she finds the exemption is administratively feasible, in the 
interest of the plan and plan participants and beneficiaries, 
and protective of the rights of participants and beneficiaries 
of the plan. Pursuant to this exemption process, the Secretary 
of Labor grants exemptions both with respect to specific 
transactions and classes of transactions.
---------------------------------------------------------------------------
    \7\ Title I of the Employee Retirement Income Security Act of 1974, 
as amended (``ERISA''), also contains prohibited transaction rules. The 
Code and ERISA provisions are substantially similar, although not 
identical.
---------------------------------------------------------------------------
    The statutory exemptions to the prohibited transaction 
rules do not apply to certain transactions in which the plan 
makes a loan to an owner-employee.8 Loans to 
participants other than owner-employees are permitted if loans 
are available to all participants on a reasonably equivalent 
basis, are not made available to highly compensated employees 
in an amount greater than made available to other employees, 
are made in accordance with specific provisions in the plan, 
bear a reasonable rate of interest, and are adequately secured. 
In addition, the Code places limits on the amount of loans and 
repayment terms.
---------------------------------------------------------------------------
    \8\ Certain transactions involving a plan and Subchapter S 
shareholders are permitted.
---------------------------------------------------------------------------
    For purposes of the prohibited transaction rules, an owner-
employee means (1) a sole proprietor, (2) a partner who owns 
more than 10 percent of either the capital interest or the 
profits interest in the partnership, (3) an employee or officer 
of a Subchapter S corporation who owns more than 5 percent of 
the outstanding stock of the corporation, and (4) the owner of 
an individual retirement arrangement (``IRA''). The term owner-
employee also includes certain family members of an owner-
employee and certain corporations owned by an owner-employee.
    Under the Internal Revenue Code, a two-tier excise tax is 
imposed on disqualified persons who engage in a prohibited 
transaction. The first level tax is equal to 15 percent of the 
amount involved in the transaction. The second level tax is 
imposed if the prohibited transaction is not corrected within a 
certain period, and is equal to 100 percent of the amount 
involved.

                           Reasons for Change

    The Committee believes that the present-law prohibited 
transaction rules regarding loans unfairly discriminate against 
the owners of unincorporated businesses and subchapter S 
corporations. For example, under present law, the sole 
shareholder of a C corporation may take advantage of the 
statutory exemption to the prohibited transaction rules for 
loans, but an individual who does business as a sole proprietor 
may not.

                        Explanation of Provision

    The provision generally eliminates the special present-law 
rules relating to plan loans made to an owner-employee. Thus, 
the general statutory exemption applies to such transactions. 
Present law continues to apply with respect to IRAs.

                             Effective Date

    The provision is effective with respect to loans made after 
December 31, 2000.

3. Modification of top-heavy rules (sec. 1203 of the bill and sec. 416 
        of the Code)

                              Present Law

In general

    Under present law, additional qualification requirements 
apply to plans that primarily benefit an employer's key 
employees (``top-heavy plans''). These additional requirements 
provide (1) more rapid vesting for plan participants who are 
non-key employers and (2) minimum nonintegrated employer 
contributions or benefits for plan participants who are non-key 
employees.

Definition of top-heavy plan

    In general, a top-heavy plan is a plan under which more 
than 60 percent of the contributions or benefits are provided 
to key employees. More precisely, a defined benefit plan is a 
top-heavy plan if more than 60 percent of the cumulative 
accrued benefits under the plan are for key employees. A 
defined contribution plan is top heavy if the sum of the 
account balances of key employees is more than 60 percent of 
the total account balances under the plan. For each plan year, 
the determination of top-heavy status generally is made as of 
the last day of the preceding plan year (``the determination 
date'').
    For purposes of determining whether a plan is a top-heavy 
plan, benefits derived both from employer and employee 
contributions, including employee elective contributions, are 
taken into account. In addition, the accrued benefit of a 
participant in a defined benefit plan and the account balance 
of a participant in a defined contribution plan includes any 
amount distributed within the 5-year period ending on the 
determination date.
    An individual's accrued benefit or account balance is not 
taken into account in determining whether a plan is top-heavy 
if the individual has not performed services for the employer 
during the 5-year period ending on the determination date.
    In some cases, two or more plans of a single employer must 
be aggregated for purposes of determining whether the group of 
plans is top-heavy. The following plans must be aggregated: (1) 
plans which cover a key employee (including collectively 
bargained plans); and (2) any plan upon which a plan covering a 
key employee depends for purposes of satisfying the Code's 
nondiscrimination rules. The employer may be required to 
include terminated plans in the required aggregation group. In 
some circumstances, an employer may elect to aggregate plans 
for purposes of determining whether they are top heavy.
    SIMPLE plans are not subject to the top-heavy rules.

Definition of key employee

    A key employee is an employee who, during the plan year 
that ends on the determination date or any of the 4 preceding 
plan years, is (1) an officer earning over one-half of the 
defined benefit plan dollar limitation of section 415 ($65,000 
for 1999), (2) a 5-percent owner of the employer, (3) a 1-
percent owner of the employer earning over $150,000, or (4) one 
of the 10 employees earning more than the defined contribution 
plan dollar limit ($30,000 for 1999) with the largest ownership 
interests in the employer.

Minimum benefit for non-key employees

    A minimum benefit generally must be provided to all non-key 
employees in a top-heavy plan. In general, a top-heavy defined 
benefit plan must provide a minimum benefit equal to the lesser 
of (1) 2 percent of compensation multiplied by the employee's 
years of service, or (2) 20 percent of compensation. A top-
heavy defined contribution plan must provide a minimum annual 
contribution equal to the lesser of (1) 3 percent of 
compensation, or (2) the percentage of compensation at which 
contributions were made for key employees (including employee 
elective contributions made by key employees and employer 
matching contributions).
    For purposes of the minimum benefit rules, only benefits 
derived from employer contributions (other than amounts 
employees have elected to defer) to the plan are taken into 
account, and an employee's social security benefits are 
disregarded (i.e., the minimum benefit is nonintegrated). 
Employer matching contributions may be used to satisfy the 
minimum contribution requirement; however, in such a case the 
contributions are not treated as matching contributions for 
purposes of applying the special nondiscrimination requirements 
applicable to employee elective contributions and matching 
contributions under sections 401 (k) and (m). Thus, such 
contributions would have to meet the general nondiscrimination 
test of section 401(a)(4).9
---------------------------------------------------------------------------
    \9\ Tres. Reg. sec. 1.416-1 Q&A M-19.
---------------------------------------------------------------------------

Top-heavy vesting

    Benefits under a top-heavy plan must vest at least as 
rapidly as under one of the following schedules: (1) 3-year 
cliff vesting, which provides for 100 percent vesting after 3 
years of service; and (2) 2-6 year graduated vesting, which 
provides for 20 percent vesting after 2 years of service, and 
20 percent more each year thereafter so that a participant is 
fully vested after 6 years of service.10
---------------------------------------------------------------------------
    \10\ Benefits under a plan that is not top heavy must vest at least 
as rapidly as under one of the following schedules: (1) 5-year cliff 
vesting; and (2) 3-7 year graded vesting, which provides for 20 percent 
vesting after 3 years and 20 percent more each year thereafter so that 
a participant is fully vested after 7 years of service.
---------------------------------------------------------------------------

Qualified cash or deferred arrangements

    Under a qualified cash or deferred arrangement (a ``section 
401(k) plan''), an employee may elect to have the employer make 
payments as contributions to a qualified plan on behalf of the 
employee, or to the employee directly in cash. Contributions 
made at the election of the employee are called elective 
deferrals. A special nondiscrimination test applies to elective 
deferrals under cash or deferred arrangements, which compares 
the elective deferrals of highly compensated employees with 
elective deferrals of nonhighly compensated employees. (This 
test is called the actual deferral percentage test or the 
``ADP'' test.) Employer matching contributions under qualified 
defined contribution plans are also subject to a similar 
nondiscrimination test. (This test is called the actual 
contribution percentage test or the ``ACP'' test.)
    Under a design-based safe harbor, a cash or deferred 
arrangement is deemed to satisfy the ADP test if the plan 
satisfies one of two contribution requirements and satisfies a 
notice requirement. A plan satisfies the contribution 
requirement under the safe harbor rule for qualified cash or 
deferred arrangements if the employer either (1) satisfies a 
matching contribution requirement or (2) makes a nonelective 
contribution to a defined contribution plan of at least 3 
percent of an employee's compensation on behalf of each 
nonhighly compensated employee who is eligible to participate 
in the arrangement without regard to the permitted disparity 
rules (sec. 401(l)). A plan satisfies the matching contribution 
requirement if, under the arrangement: (1) the employer makes a 
matching contribution on behalf of each nonhighly compensated 
employee that is equal to (a) 100 percent of the employee's 
elective deferrals up to 3 percent of compensation and (b) 50 
percent of the employee's elective deferrals from 3 to 5 
percent of compensation; and (2), the rate of match with 
respect to any elective contribution for highly compensated 
employees is not greater than the rate of match for nonhighly 
compensated employees. Matching contributions that satisfy the 
design-based safe harbor for cash or deferred arrangements are 
deemed to satisfy the ACP test. Certain additional matching 
contributions are also deemed to satisfy the ACP test.

                           Reasons for Change

    The top-heavy rules primarily affect the plans of small 
employers. While the top-heavy rules were intended to provide 
additional minimum benefits to rank-and-file employees, the 
Committee is concerned that in some cases the top-heavy rules 
may act as a deterrent to the establishment of a plan by a 
small employer. The Committee believes that simplification of 
the top-heavy rules will help alleviate the additional 
administrative burdens the rules place on small employers. The 
Committee also believes that, in applying the top-heavy minimum 
benefit rules, the employer should receive credit for all 
contributions the employer makes, including matching 
contributions.
    The Committee understands that some employers may have been 
discouraged from adopting a safe harbor section 401(k) plan due 
to concerns about the top-heavy rules. The Committee believes 
that facilitating the adoption of such plans will broaden 
coverage. Thus, the Committee believes it appropriate to 
provide that such plans are not subject to the top-heavy rules.

                        Explanation of Provision

Definition of top-heavy plan

    The provision provides that a plan consisting of a cash-or-
deferred arrangement that satisfies the design-based safe 
harbor for such plans and matching contributions that satisfy 
the safe harbor rule for such contributions is not a top-heavy 
plan. Matching or nonelective contributions provided under such 
a plan may be taken into account in satisfying the minimum 
contribution requirements applicable to top-heavy 
plans.11
---------------------------------------------------------------------------
    \11\ This provision is not intended to preclude the use of 
nonelective contributions that are used to satisfy the safe harbor 
rules from being used to satisfy other qualified retirement plan 
nondiscrimination rules, including those involving cross-testing.
---------------------------------------------------------------------------
    In determining whether a plan is top-heavy, the provision 
provides that distributions during the year ending on the date 
the top-heavy determination is being made are taken into 
account. The present-law 5-year rule applies with respect to 
in-service distributions. Similarly, the provision provides 
that an individual's accrued benefit or account balance is not 
taken into account if the individual has not performed services 
for the employer during the 1-year period ending on the date 
the top-heavy determination is being made.

Definition of key employee

    The provision (1) provides that an employee is not 
considered a key employee by reason of officer status unless 
the employee earns more than $150,000 in compensation for the 
year, and (2) repeals the top-10 owner key employee category.
    The provision repeals the 4-year lookback rule for 
determining key employee status and provides that an employee 
is a key employee only if he or she is a key employee during 
the current plan year.

Minimum benefit for non-key employees

    Under the provision, matching contributions are taken into 
account in determining whether the minimum benefit requirement 
has been satisfied. 12
---------------------------------------------------------------------------
    \12\ Thus, this provision overrides the provision in Treasury 
regulations that, if matching contributions are used to satisfy the 
minimum benefit requirement, then they are not treated as matching 
contributions for purposes of the section 401(m) nondiscrimination 
rules.
---------------------------------------------------------------------------
    The provision provides that, in determining the minimum 
benefit required under a defined benefit plan, a year of 
service does not include any year in which no employee benefits 
under the plan (as determined under sec. 410).

                             Effective Date

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

4. Elective deferrals not taken into account for purposes of deduction 
        limits (sec. 1204 of the bill and sec. 404 of the Code)

                              Present Law

    Employer contributions to one or more qualified retirement 
plans are deductible subject to certain limits. In general, the 
deduction limit depends on the kind of plan.
    In the case of a defined benefit pension plan or a money 
purchase pension plan, the employer generally may deduct the 
amount necessary to satisfy the minimum funding cost of the 
plan for the year. If a defined benefit pension plan has more 
than 100 participants, the maximum amount deductible is at 
least equal to the plan's unfunded current liabilities.
    In the case of a profit-sharing or stock bonus plan, the 
employer generally may deduct an amount equal to 15 percent of 
compensation of the employees covered by the plan for the year.
    If an employer sponsors both a defined benefit pension plan 
and a defined contribution plan that covers some of the same 
employees (or a money purchase pension plan and another kind of 
defined contribution plan), the total deduction for all plans 
for a plan year generally is limited to the greater of (1) 25 
percent of compensation or (2) the contribution necessary to 
meet the minimum funding requirements of the defined benefit 
pension plan for the year (or the amount of the plan's unfunded 
current liabilities, in the case of a plan with more than 100 
participants).
    For purposes of the deduction limits, employee elective 
deferral contributions to a section 401(k) plan are treated as 
employer contributions and, thus, are subject to the generally 
applicable deduction limits.
    Subject to certain exceptions, nondeductible contributions 
are subject to a 10-percent excise tax.

                           Reasons for Change

    Subjecting elective deferrals to the normally applicable 
deduction limits may cause employers to restrict the amount of 
elective contributions an employee may make or to restrict 
employer contributions to the plan, thereby reducing 
participants' ultimate retirement benefits and their ability to 
save adequately for retirement. The Committee believes that the 
amount of elective deferrals otherwise allowable should not be 
further limited through application of the deduction rules.

                        Explanation of Provision

    Under the provision, elective deferral contributions are 
not subject to the deduction limits, and the application of a 
deduction limitation to any other employer contribution to a 
qualified retirement plan does not take into account elective 
deferral contributions.

                             Effective Date

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

5. Reduced PBGC premiums for small and new plans (secs. 1205 and 1206 
        of the bill and sec. 4006 of ERISA)

                              Present Law

    Under present law, the Pension Benefit Guaranty Corporation 
(``PBGC'') provides insurance protection for participants and 
beneficiaries under certain defined benefit pension plans by 
guaranteeing certain basic benefits under the plan in the event 
the plan is terminated with insufficient assets to pay benefits 
promised under the plan. The guaranteed benefits are funded in 
part by premium payments from employers who sponsor defined 
benefit plans. The amount of the required annual PBGC premium 
for a single-employer plan is generally a flat rate premium of 
$19 per participant and an additional variable rate premium 
based on a charge of $9 per $1,000 of unfunded vested benefits. 
Unfunded vested benefits under a plan generally means (1) the 
unfunded current liability for vested benefits under the plan, 
over (2) the value of the plan's assets, reduced by any credit 
balance in the funding standard account. No variable rate 
premium is imposed for a year if contributions to the plan were 
at least equal to the full funding limit.
    The PBGC guarantee is phased in ratably in the case of 
plans that have been in effect for less than 5 years, and with 
respect to benefit increases from a plan amendment that was in 
effect for less than 5 years before termination of the plan.

                           Reasons for Change

    The Committee believes that reducing the PBGC premiums for 
new and small plans will help encourage the establishment of 
defined benefit pension plans.

                        Explanation of Provision

Reduced flat-rate premiums for new plans of small employers

    Under the provision, for the first five plan years of a new 
single-employer plan of a small employer, the flat-rate PBGC 
premium is $5 per plan participant.
    A small employer is a contributing sponsor that, on the 
first day of the plan year, has 100 or fewer employees. For 
this purpose, all employees of the members of the controlled 
group of the contrib-

uting sponsor are taken into account. In the case of a plan to 
which more than one unrelated contributing sponsor contributes, 
employees of all contributing sponsors (and their controlled 
group members) are taken into account in determining whether 
the plan is a plan of a small employer.
    A new plan means a defined benefit plan maintained by a 
contributing sponsor if, during the 36-month period ending on 
the date of adoption of the plan, such contributing sponsor (or 
controlled group member or a predecessor of either) has not 
established or maintained a plan subject to PBGC coverage with 
respect to which benefits were accrued for substantially the 
same employees as are in the new plan.

Reduced variable PBGC premium for new and small employer plans

    The provision provides that the variable premium is phased 
in for new defined benefit plans over a six-year period 
starting with the plan's first plan year. The amount of the 
variable premium is a percentage of the variable premium 
otherwise due, as follows: 0 percent of the otherwise 
applicable variable premium in the first plan year; 20 percent 
in the second plan year; 40 percent in the third plan year; 60 
percent in the fourth plan year; 80 percent in the fifth plan 
year; and 100 percent in the sixth plan year (and thereafter).
    A new defined benefit plan is defined as under the flat-
rate premium provision relating to new small employer plans.
    The provision also provides that, in the case of any plan 
(not just a new plan) of an employer with 25 or fewer 
employees, the variable-rate premium is no more than $5 
multiplied by the number of plan participants in the plan at 
the close of the preceding year.

                             Effective Date

    The provisions relating to new plans are effective for 
plans established after December 31, 2000. The provision 
reducing the PBGC variable premium for small plans is effective 
for years beginning after December 31, 2000.

6. Repeal of coordination requirements for deferred compensation plans 
        of State and local governments and tax-exempt organizations 
        (sec. 1207 of the bill and sec. 457 of the Code)

                              Present Law

    Compensation deferred under an eligible deferred 
compensation plan of a tax-exempt or State and local government 
employer (a ``section 457 plan'') is not includible in gross 
income until paid or made available. In general, the maximum 
permitted annual deferral under such a plan is the lesser of 
(1) $8,000 (in 1999) or (2) 33\1/3\ percent of compensation. 
The $8,000 limit is increased for inflation in $500 increments. 
Under a special catch-up rule, a section 457 plan may provide 
that, for one or more of the participant's last 3 years before 
retirement, the otherwise applicable limit is increased to the 
lesser of (1) $15,000 or (2) the sum of the otherwise 
applicable limit for the year plus the amount by which the 
limit applicable in preceding years of participation exceeded 
the deferrals for that year.
    The $8,000 limit (as modified under the catch-up rule), 
applies to all deferrals under all section 457 plans in which 
the individual participates. In addition, in applying the 
$8,000 limit, contributions under a tax-sheltered annuity 
(``section 403(b) annuity''), elective deferrals under a 
qualified cash or deferred arrangement (``section 401(k) 
plan''), salary reduction contributions under a simplified 
employee pension plan (``SEP''), and contributions under a 
SIMPLE plan are taken into account. Further, the amount 
deferred under a section 457 plan is taken into account in 
applying a special catch-up rule for section 403(b) annuities.

                           Reasons for Change

    The Committee believes that individuals participating in a 
section 457 plan should also be able to fully participate in a 
section 403(b) annuity or section 401(k) plan of the employer. 
Eliminating the coordination rule may also encourage the 
establishment of section 403(b) or 401(k) plans by tax-exempt 
and governmental employers (as permitted under present law).

                        Explanation of Provision

    The provision repeals the rules coordinating the section 
457 dollar limit with contributions under other types of 
plans.13
---------------------------------------------------------------------------
    \13\ The limits on deferrals under a section 457 plan are modified 
under other provisions of the bill.
---------------------------------------------------------------------------

                             Effective Date

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

7. Eliminate IRS user fees for determination letter requests regarding 
        small employer plans (sec. 1208 of the bill and sec. 7527 of 
        the Code)

                              Present Law

    An employer that maintains a retirement plan for the 
benefit of its employees may request from the Internal Revenue 
Service (``IRS'') a determination as to whether the form of the 
plan satisfies the requirements applicable to tax-qualified 
plans (sec. 401(a)). In order to obtain from the IRS a 
determination letter on the qualified status of the plan, the 
employer must pay a user fee. The user fee may range from $125 
to $1,250, depending upon the scope of the request and the type 
and format of the plan.14
---------------------------------------------------------------------------
    \14\ User fees are statutorily authorized; however, the IRS sets 
the dollar amount of the fee applicable to any particular type of 
request.
---------------------------------------------------------------------------

                           Reasons for Change

    One of the factors affecting the decision of a small 
employer to adopt a plan is the level of administrative costs 
associated with the plan. The Committee believes that reducing 
administrative costs, such as IRS user fees, will help further 
the establishment of qualified plans by small employers.

                        Explanation of Provision

    A small employer (100 or fewer employees) is not required 
to pay a user fee for any determination letter with respect to 
the qualified status of a retirement plan that the employer 
maintains. The provision applies only to requests by employers 
for determination letters concerning the qualified retirement 
plans they maintain. Therefore, a sponsor of a prototype plan 
is required to pay a user fee for a request for a notification 
letter, opinion letter, or similar ruling. A small employer 
that adopts a prototype plan, however, is not required to pay a 
user fee for a determination letter request with respect to the 
employer's plan.

                             Effective Date

    The provision is effective for determination letter 
requests made after December 31, 2000.

8. Definition of compensation for purposes of deduction limits (sec. 
        1209 of the bill and sec. 404 of the Code)

                              Present Law

    Employer contributions to one or more qualified retirement 
plans are deductible subject to certain limits. In general, the 
deduction limit depends on the kind of plan. Subject to certain 
exceptions, nondeductible contributions are subject to a 10-
percent excise tax.
    In the case of a defined benefit pension plan or a money 
purchase pension plan, the employer generally may deduct the 
amount necessary to satisfy the minimum funding cost of the 
plan for the year. If a defined benefit pension plan has more 
than 100 participants, the maximum amount deductible is at 
least equal to the plan's unfunded current liabilities.
    In some cases, the amount of deductible contributions is 
limited by compensation. In the case of a profit-sharing or 
stock bonus plan, the employer generally may deduct an amount 
equal to 15 percent of compensation of the employees covered by 
the plan for the year.
    If an employer sponsors both a defined benefit pension plan 
and a defined contribution plan that covers some of the same 
employees (or a money purchase pension plan and another kind of 
defined contribution plan), the total deduction for all plans 
for a plan year generally is limited to the greater of (1) 25 
percent of compensation or (2) the contribution necessary to 
meet the minimum funding requirements of the defined benefit 
pension plan for the year (or the amount of the plan's unfunded 
current liabilities, in the case of a plan with more than 100 
participants).
    In the case of an employee stock ownership plan (``ESOP''), 
principal payments on a loan used to acquire qualifying 
employer securities are deductible up to 25 percent of 
compensation.
    For purposes of the deduction limits, employee elective 
deferral contributions to a qualified cash or deferred 
arrangement (``section 401(k) plan'') are treated as employer 
contributions and, thus, are subject to the generally 
applicable deduction limits.15
---------------------------------------------------------------------------
    \15\ Another provision in the bill provides that elective deferrals 
are not subject to the deduction limits.
---------------------------------------------------------------------------
    For purposes of the deduction limits, compensation means 
the compensation otherwise paid or accrued during the taxable 
year to the beneficiaries under the plan, and the beneficiaries 
under a profit-sharing or stock bonus plan are the employees 
who benefit under the plan with respect to the employer's 
contribution.16 An employee who is eligible to make 
elective deferrals under a section 401(k) plan is treated as 
benefitting under the arrangement even if the employee elects 
not to defer.17
---------------------------------------------------------------------------
    \16\ Rev. Rul. 65-295, 1965-2 C.B. 148.
    \17\ Treas. Reg. sec. 1.410(b)-3.
---------------------------------------------------------------------------
    For purposes of the deduction rules, compensation generally 
includes only taxable compensation, and thus does not include 
salary reduction amounts, such as elective deferrals under a 
section 401(k) plan or a tax-sheltered annuity (``section 
403(b) annuity''), electivecontributions under a deferred 
compensation plan of a tax-exempt organization or a State or local 
government (``section 457 plan''), and salary reduction contributions 
under a section 125 cafeteria plan. For purposes of the contribution 
limits under section 415, compensation does include such salary 
reduction amounts.

                           Reasons for Change

    The Committee believes that compensation unreduced by 
employee elective contributions is a more appropriate measure 
of compensation for plan purposes, including deduction limits, 
than the present-law rule. Applying the same definition for 
deduction purposes as is generally used for other qualified 
plan purposes will also simplify application of the qualified 
plan rules.

                        Explanation of Provision

    Under the provision, the definition of compensation for 
purposes of the deduction rules includes salary reduction 
amounts treated as compensation under section 415.18
---------------------------------------------------------------------------
    \18\ A technical correction in the bill expands the salary 
reduction amounts treated as compensation under section 415 to include 
amounts used to purchase qualified transportation benefits (under sec. 
132(f)).
---------------------------------------------------------------------------

                             Effective Date

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

9. Option to treat elective deferrals as after-tax contributions (sec. 
        1210 of the bill and new sec. 402A of the Code)

                              Present Law

    A qualified cash or deferred arrangement (``section 401(k) 
plan'') or a tax-sheltered annuity (``section 403(b) annuity'') 
may permit a participant to elect to have the employer make 
payments as contributions to the plan or to the participant 
directly in cash. Contributions made to the plan at the 
election of a participant are elective deferrals. Elective 
deferrals must be nonforfeitable and are subject to an annual 
dollar limitation (sec. 402(g)) and distribution restrictions. 
In addition, elective deferrals under a section 401(k) plan are 
subject to special nondiscrimination rules. Elective deferrals 
(and earnings attributable thereto) are not includable in a 
participant's gross income until distributed from the plan.
    Individuals with adjusted gross income below certain levels 
generally may make nondeductible contributions to a Roth IRA 
and may convert a deductible or nondeductible IRA into a Roth 
IRA. Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includable in income, nor 
subject to the additional 10-percent tax on early withdrawals. 
A qualified distribution is a distribution that (1) is made 
after the 5-taxable year period beginning with the first 
taxable year for which the individual made a contribution to a 
Roth IRA, and (2) is made after attainment of age 59\1/2\, is 
made on account of death or disability, or is a qualified 
special purpose distribution (i.e., for first-time homebuyer 
expenses of up to $10,000). A distribution from a Roth IRA that 
is not a qualified distribution is includable in income to the 
extent attributable to earnings, and is subject to the 10-
percent tax on early withdrawals (unless an exception 
applies).19
---------------------------------------------------------------------------
    \19\ Early distributions of converted amounts may also accelerate 
income inclusion of converted amounts that are taxable under the 4-year 
rule applicable to 1998 conversions.
---------------------------------------------------------------------------

                           Reasons for Change

    The recently-enacted Roth IRA provisions have provided 
individuals with another form of tax-favored retirement 
savings. For a variety of reasons, some individuals may prefer 
to save through a Roth IRA rather than a traditional deductible 
IRA. The Committee believes that similar savings choices should 
be available to participants in section 401(k) plans and tax-
sheltered annuities.

                        Explanation of Provision

    A section 401(k) plan or a section 403(b) annuity is 
permitted to include a ``qualified plus contribution program'' 
that permits a participant to elect to have all or a portion of 
the participant's elective deferrals under the plan treated as 
designated plus contributions. Designated plus contributions 
are elective deferrals that the participant designates as not 
excludable from the participant's gross income.
    The annual dollar limitation on a participant's designated 
plus contributions is the section 402(g) annual limitation on 
elective deferrals, reduced by the participant's elective 
deferrals that the participant does not designate as designated 
plus contributions. Designated plus contributions are treated 
as any other elective deferral for purposes of 
nonforfeitability requirements and distribution restrictions. 
Under a section 401(k) plan, designated plus contributions also 
are treated as any other elective deferral for purposes of the 
special nondiscrimination requirements.
    The plan is required to establish a separate account, and 
maintain separate recordkeeping, for a participant's designated 
plus contributions (and earnings allocable thereto). A 
qualified distribution from a participant's designated plus 
contributions account is not includable in the participant's 
gross income. A qualified distribution is a distribution that 
is made after the end of a specified nonexclusion period and 
that is (1) made on or after the date on which the participant 
attains age 59\1/2\, (2) made to a beneficiary (or to the 
estate of the participant) on or after the death of the 
participant, or (3) attributable to the participant's being 
disabled.20 The nonexclusion period is the 5-year-
taxable period beginning with the earlier of (1) the first 
taxable year for which the participant made a designated plus 
contribution to any designated plus contribution account 
established for the participant under the plan, or (2) if the 
participant has made a rollover contribution to the designated 
plus contribution account that is the source of the 
distribution from a designated plus contribution account 
established for the participant under another plan, the first 
taxable year for which the participant made a designated plus 
contribution to the previously established account.
---------------------------------------------------------------------------
    \20\ A qualified special purpose distribution, as defined under the 
rules relating to Roth IRAs, does not qualify as a tax-free 
distribution from a designated plus contributions account.
---------------------------------------------------------------------------
    A distribution from a designated plus contributions account 
that is a corrective distribution of an elective deferral (and 
income allocable thereto) that exceeds the section 402(g) 
annual limit on elective deferrals is not a qualified 
distribution.
    A participant is permitted to roll over a distribution from 
a designated plus contributions account only to another 
designated plus contributions account or a Roth IRA of the 
participant.
    The Secretary of the Treasury is directed to require the 
plan administrator of each section 401(k) plan or section 
403(b) annuity that permits participants to make designated 
plus contributions to make such returns and reports regarding 
designated plus contributions to the Secretary, plan 
participants and beneficiaries, and other persons that the 
Secretary may designate.

                             Effective Date

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

10. Increase minimum benefit under defined benefit plans (sec. 1211 of 
        the bill and sec. 415 of the Code)

                              Present Law

    Under a defined benefit plan, the maximum annual benefit 
payable at retirement is generally the lesser of (1) 100 
percent of the participant's compensation, or (2) $130,000 (for 
1999).21 Payment of a minimum annual benefit is 
permitted even if the benefit exceeds the normally applicable 
benefit limitations. Thus, the limits on benefits are deemed to 
be satisfied if the aggregate annual retirement benefit of a 
participant under all defined benefit pension plans of the 
employer does not exceed $10,000 and the participant has not 
participated in a defined contribution plan of the employer. 
The $10,000 limit is reduced for participants with less than 10 
years of service with the employer.
---------------------------------------------------------------------------
    \21\ Another provision of the bill increases the dollar limit on 
the annual benefit under a defined benefit plan.
---------------------------------------------------------------------------

                           Reasons for Change

    The present-law minimum benefit amount has not been 
increased since its enactment. The Committee believes that 
increasing the minimum benefit amount is appropriate because 
doing so will increase benefits for certain workers, 
particularly lower-paid, longer service employees.

                        Explanation of Provision

    Under the provision, beginning in 2001, the minimum annual 
benefit permitted under a defined benefit plan is increased in 
$10,000 annual increments until the minimum benefit amount 
reaches $40,000 in 2003. The $40,000 amount is not indexed. In 
addition, a participant is entitled to the minimum benefit even 
if the participant had participated in a defined contribution 
plan of the employer.

                             Effective Date

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

                    B. Enhancing Fairness for Women


1. Additional salary reduction catch-up contributions (sec. 1221 of the 
        bill and secs. 402(g), 408(p), and 457 of the Code)

                              Present Law

Elective deferral limitations

    Under present law, under certain salary reduction 
arrangements, an employee may elect to have the employer make 
payments as contributions to a plan on behalf of the employee, 
or to the employee directly in cash. Contributions made at the 
election of the employee are called elective deferrals.
    The maximum annual amount of elective deferrals that an 
individual may make to a qualified cash or deferred arrangement 
(a ``401(k) plan''), a tax-sheltered annuity (``section 403(b) 
annuity'') or a salary reduction simplified employee pension 
plan (``SEP'') is $10,000 (for 1999). The maximum annual amount 
of elective deferrals that an individual may make to a SIMPLE 
plan is $6,000. These limits are indexed for inflation in $500 
increments.

Section 457 plans

    The maximum annual deferral under a deferred compensation 
plan of a State or local government or a tax-exempt 
organization (a ``section 457 plan'') is the lesser of (1) 
$8,000 (for 1999) or (2) 33\1/3\ percent of compensation. The 
$8,000 limit is increased for inflation in $500 increments. 
Under a special catch-up rule, the section 457 plan may provide 
that, for one or more of the participant's last 3 years before 
retirement, the otherwise applicable limit is increased to the 
lesser of (1) $15,000 or (2) the sum of the otherwise 
applicable limit for the year plus the amount by which the 
limit applicable in preceding years of participation exceeded 
the deferrals for that year.

                           Reasons for Change

    Although the Committee believes that individuals should be 
saving for retirement throughout their working lives, as a 
practical matter, many individuals simply do not focus on the 
amount of retirement savings they need until they near 
retirement. In addition, many individuals may have difficulty 
saving more in earlier years, e.g., because an employee leaves 
the workplace to care for a family. Some individuals may have a 
greater ability to save as they near retirement.
    The Committee believes that the pension laws should assist 
individuals who are nearing retirement to save more for their 
retirement.

                        Explanation of Provision

    The provision provides that the otherwise applicable dollar 
limit on elective deferrals under a section 401(k) plan, 
section 403(b) annuity, or SIMPLE, or deferrals under a section 
457 plan are increased for individuals who have attained age 50 
by the end of the year.22 The otherwise applicable 
dollar limit is increased by $1,000 in each year beginning in 
2001 until the amount of the increase is $5,000 in 2005. 
Thereafter, the $5,000 limit is indexed for inflation in $500 
increments. In the case of section 457 plans, this catch-up 
rule does not apply during the participant's last 3 years 
before retirement (in those years, the regularly applicable 
dollar limit is doubled).
---------------------------------------------------------------------------
    \22\ Another provision in the bill increases the dollar limit on 
elective deferrals under such arrangements.
---------------------------------------------------------------------------

                             Effective Date

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

2. Equitable treatment for contributions of employees to defined 
        contribution plans (sec. 1222 of the bill and secs. 403(b), 
        415, and 457 of the Code)

                              Present Law

    Present law imposes limits on the contributions that may be 
made to tax-favored retirement plans.

Defined contribution plans

    In the case of a tax-qualified defined contribution plan, 
the limit on annual additions that can be made to the plan on 
behalf of an employee is the lesser of $30,000 (for 1999) or 25 
percent of the employee's compensation (sec. 415(c)). Annual 
additions include employer contributions, including 
contributions made at the election of the employee (i.e., 
employee elective deferrals), after-tax employee contributions, 
and any forfeitures allocated to the employee. For this 
purpose, compensation means taxable compensation of the 
employee, plus elective deferrals, and similar salary reduction 
contributions.

Tax-sheltered annuities

    In the case of a tax-sheltered annuity (a ``section 403(b) 
annuity''), the annual contribution generally cannot exceed the 
lesser of the exclusion allowance or the section 415(c) defined 
contribution limit. The exclusion allowance for a year is equal 
to 20 percent of the employee's includible compensation, 
multiplied by the employee's years of service, minus excludable 
contributions for prior years under qualified plans, tax-
sheltered annuities or section 457 plans of the employer.
    In addition to this general rule, employees of nonprofit 
educational institutions, hospitals, home health service 
agencies, health and welfare service agencies, and churches may 
elect application of one of several special rules that increase 
the amount of the otherwise permitted contributions. The 
election of a special rule is irrevocable; an employee may not 
elect to have more than one special rule apply.
    Under one special rule, in the year the employee separates 
from service, the employee may elect to contribute up to the 
exclusion allowance, without regard to the 25 percent of 
compensation limit under section 415. Under this rule, the 
exclusion allowance is determined by taking into account no 
more than 10 years of service.
    Under a second special rule, the employee may contribute up 
to the lesser of: (1) the exclusion allowance; (2) 25 percent 
of the participant's includible compensation; or (3) $15,000.
    Under a third special rule, the employee may elect to 
contribute up to the section 415(c) limit, without regard to 
the exclusion allowance. If this option is elected, then 
contributions to other plans of the employer are also taken 
into account in applying the limit.
    For purposes of determining the contribution limits 
applicable to section 403(b) annuities, includible compensation 
means the amount of compensation received from the employer for 
the most recent period which may be counted as a year of 
service under the exclusion allowance. In addition, includible 
compensation includes elective deferrals and similar salary 
reduction amounts.

Section 457 plans

    Compensation deferred under an eligible deferred 
compensation plan of a tax-exempt or State and local 
governmental employer (a ``section 457 plan'') is not 
includible in gross income until paid or made available. In 
general, the maximum permitted annual deferral under such a 
plan is the lesser of (1) $8,000 (in 1999) or (2) 33\1/3\ 
percent of compensation. The $8,000 limit is increased for 
inflation in $500 increments.

                           Reasons for Change

    The present-law rules that limit contributions to defined 
contribution plans by a percentage of compensation reduce the 
amount that lower- and middle-income workers can save for 
retirement. The present-law limits may not allow such workers 
to accumulate adequate retirement benefits, particularly if a 
defined contribution plan is the only type of retirement plan 
maintained by the employer.
    Conforming the contribution limits for tax-sheltered 
annuities to the limits applicable to retirement plans will 
simplify the administration of the pension laws, and provide 
more equitable treatment for participants in similar types of 
plans.

                        Explanation of Provision

Increase in defined contribution plan limit

    The provision increases the 25 percent of compensation 
limitation on annual additions under a defined contribution 
plan to 100 percent.23
---------------------------------------------------------------------------
    \23\ Another provision of the bill increases the defined 
contribution plan dollar limit.
---------------------------------------------------------------------------

Conforming limits on tax-sheltered annuities

    The provision repeals the exclusion allowance applicable to 
contributions to tax-sheltered annuities. Thus, such annuities 
are subject to the limits applicable to tax-qualified plans.

Section 457 plans

    The provision increases the 33\1/3\ percent of compensation 
limitation on deferrals under a section 457 plan to 100 percent 
of compensation.

                             Effective Date

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

3. Faster vesting of employer matching contributions (sec. 1223 of the 
        bill and sec. 411 of the Code)

                              Present Law

    Under present law, a plan is not a qualified plan unless a 
participant's employer-provided benefit vests at least as 
rapidly as under one of two alternative minimum vesting 
schedules. A plan satisfies the first schedule if a participant 
acquires a nonforfeitable right to 100 percent of the 
participant's accrued benefit derived from employer 
contributions upon the completion of 5 years of service. A plan 
satisfies the second schedule if a participant has a 
nonforfeitable right to at least 20 percent of the 
participant's accrued benefit derived from employer 
contributions after 3 years of service, 40 percent after 4 
years of service, 60 percent after 5 years of service, 80 
percent after 6 years of service, and 100 percent after 7 years 
of service.24
---------------------------------------------------------------------------
    \24\ The minimum vesting requirements are also contained in Title I 
of the Employee Retirement Income Security Act of 1974, as amended 
(``ERISA'').
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee understands that many employees, particularly 
lower- and middle-income employees, do not take full advantage 
of the retirement savings opportunities provided by their 
employer's section 401(k) plan. The Committee believes that 
providing faster vesting for matching contributions will make 
section 401(k) plans more attractive for employees, 
particularly lower- and middle-income employees, and will 
encourage employees to save more for their own retirement. In 
addition, faster vesting for matching contributions will enable 
short-service employees to accumulate greater retirement 
savings.

                        Explanation of Provision

    The provision applies faster vesting schedules to employer 
matching contributions. Under the provision, employer matching 
contributions have to vest at least as rapidly as under one of 
the following two alternative minimum vesting schedules. A plan 
satisfies the first schedule if a participant acquires a 
nonforfeitable right to 100 percent of employer matching 
contributions upon the completion of 3 years of service. A plan 
satisfies the second schedule if a participant has a 
nonforfeitable right to 20 percent of employer matching 
contributions for each year of service beginning with the 
participant's second year of service and ending with 100 
percent after 6 years of service.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2000, with a delayed effective date for plans 
maintained pursuant to a collective bargaining agreement. The 
provision does not apply to any employee until the employee has 
an hour of service after the effective date. In applying the 
new vesting schedule, service before the effective date is 
taken into account.

4. Simplify and update the minimum distribution rules (secs. 1224 and 
        1239 of the bill and secs. 401(a)(9) and 457 of the Code)

                              Present Law

In general

    Minimum distribution rules apply to all types of tax-
favored retirement vehicles, including qualified plans, 
individual retirement arrangements (``IRAs''), tax-sheltered 
annuities (``section 403(b) annuities''), and eligible deferred 
compensation plans of tax-exempt and State and local government 
employers (``section 457 plans''). In general, under these 
rules, distribution of minimum benefits must begin no later 
than the required beginning date. Minimum distribution rules 
also apply to benefits payable with respect to a plan 
participant who has died. Failure to comply with the minimum 
distribution rules results in an excise tax imposed on the 
individual plan participant equal to 50 percent of the required 
minimum distribution not distributed for the year. The excise 
tax can be waived if the individual establishes to the 
satisfaction of the Secretary that the shortfall in the amount 
distributed was due to reasonable error and reasonable steps 
are being taken to remedy the shortfall.

Distributions prior to the death of the individual

    In the case of distributions prior to the death of the plan 
participant, the minimum distribution rules are satisfied if 
either (1) the participant's entire interest in the plan is 
distributed by the required beginning date, or (2) the 
participant's interest in the plan is to be distributed (in 
accordance with regulations), beginning not later than the 
required beginning date, over a permissible period. The 
permissible periods are (1) the life of the participant, (2) 
the lives of the participant and a designated beneficiary, (3) 
the life expectancy of the participant, or (4) the joint life 
and last survivor expectancy of the participant and a 
designated beneficiary. In calculating minimum required 
distributions, life expectancies of the participant and the 
participant's spouse may be recomputed annually.
    In the case of qualified plans, tax-sheltered annuities, 
and section 457 plans, the required beginning date is the April 
1 of the calendar year following the later of (1) the calendar 
year in which the employee attains age 70\1/2\ or (2) the 
calendar year in which the employee retires. However, in the 
case of a 5-percent owner of the employer, distributions are 
required to begin no later than the April 1 of the calendar 
year following the year in which the 5-percent owner attains 
age 70\1/2\. If commencement of benefits is delayed beyond age 
70\1/2\ from a defined benefit plan, then the accrued benefit 
of the employee must be actuarially increased to take into 
account the period after age 70\1/2\ in which the employee was 
not receiving benefits under the plan.25 In the case 
of distributions from an IRA other than a Roth IRA, the 
required beginning date is the April 1 following the calendar 
year in which the IRA owner attains age 70\1/2\. The pre-death 
minimum distribution rules do not apply to Roth IRAs.
---------------------------------------------------------------------------
    \25\ State and local government plans and church plans are not 
required to actuarially increase benefits that begin after age 70\1/2\.
---------------------------------------------------------------------------
    In general, under proposed regulations, in order to satisfy 
the minimum distribution rules, annuity payments under a 
defined benefit plan must be paid in period payments made at 
intervals not longer than one year over a permissible period, 
and must be nonincreasing, or increase only as a result of the 
following: (1) cost-of-living adjustments; (2) cash refunds of 
employee contributions; (3) benefit increases under the plan; 
or (4) an adjustment due to death of the employee's 
beneficiary. In the case of a defined contribution plan, the 
minimum required distribution is determined by dividing the 
employee's benefit by the applicable life expectancy.

Distributions after the death of the plan participant

    The minimum distribution rules also apply to distributions 
to beneficiaries of deceased participants. In general, if the 
participant dies after minimum distributions have begun, the 
remaining interest must be distributed at least as rapidly as 
under the minimum distribution method being used as of the date 
of death. If the participant dies before minimum distributions 
have begun, then the entire remaining interest must generally 
be distributed within 5 years of the participant's death. The 
5-year rule does not apply if distributions begin within 1 year 
of the participant's death and are payable over the life of a 
designated beneficiary or over the life expectancy of a 
designated beneficiary. A surviving spouse beneficiary is not 
required to begin distribution until the date the deceased 
participant would have attained age 70\1/2\.

Special rules for section 457 plans

    Eligible deferred compensation plans of State and local and 
tax-exempt employers (``section 457 plans'') are subject to the 
minimum distribution rules described above. Such plans are also 
subject to additional minimum distribution requirements (sec. 
457(d)(2)(b)).

                           Reasons for Change

    The Committee believes that the minimum distribution rules 
are among the most complex of the rules relating to tax-favored 
arrangements. While a plan or IRA trustee may assist the 
individual in complying with the minimum distribution rules, 
ultimately the responsibility for compliance falls on the 
individual. Many of the complexities of the present-law rules 
are contained in Treasury regulations, which have not yet been 
finalized. The Committee believes that the present-law rules 
impose undue burdens on individuals and plan administrators.
    The sanction for failure to comply with the minimum 
distribution rules is severe. The Committee believes this 
sanction is inappropriate, particularly given the complexity of 
the rules, and the likelihood of inadvertent mistakes.

                        Explanation of Provision

Modification of post-death distribution rules

    The provision applies the present-law rules applicable if 
the participant dies before distribution of minimum benefits 
has begun to all post-death distributions. Thus, in general, if 
the employee dies before his or her entire interest has been 
distributed, distribution of the remaining interest must be 
made within 5 years of the date of death, or begin within one 
year of the date of death and paid over the life or life 
expectancy of a designated beneficiary. In the case of a 
surviving spouse, distributions are not required to begin until 
the surviving spouse attains age 70\1/2\. Minimum distributions 
that have already begun may be recalculated under the new rule.

Reduction in excise tax

    The provision reduces the excise tax on failures to satisfy 
the minimum distribution rules to 10 percent of the amount that 
was required to be distributed but was not distributed.

Treasury regulations

    The Treasury is directed to update, simplify and finalize 
the regulations relating to the minimum distribution rules. The 
Treasury is directed to reflect in the regulations current life 
expectancies and to revise the required distribution methods so 
that, under reasonable assumptions, the amount of the required 
distribution does not decrease over time. The regulations are 
to permit recalculation of distributions for future years to 
reflect the change in the regulations, and to permit the 
election of a new designated beneficiary and method of 
calculating life expectancy. The regulations are to be 
effective for years beginning after December 31, 2000.

Section 457 plans

    The provision repeals the special minimum distribution 
rules applicable to section 457 plans. Thus, such plans are 
subject to the same minimum distribution rules applicable to 
other types of tax-favored arrangements.

                             Effective Date

    In general, the provision is effective for years beginning 
after December 31, 2000.

5. Clarification of tax treatment of division of section 457 plan 
        benefits upon divorce (sec. 1225 of the bill and secs. 414(p) 
        and 457 of the Code)

                              Present Law

    Under present law, benefits provided under a qualified 
retirement plan for a participant may not be assigned or 
alienated to creditors of the participant, except in very 
limited circumstances. One exception to the prohibition on 
assignment or alienation rule is a qualified domestic relations 
order (``QDRO''). A QDRO is a domestic relations order that 
creates or recognizes a right of an alternate payee to any plan 
benefit payable with respect to a participant, and that meets 
certain procedural requirements.
    Under present law, a distribution from a governmental plan 
or a church plan is treated as made pursuant to a QDRO if it is 
made pursuant to a domestic relations order that creates or 
recognizes a right of an alternate payee to any plan benefit 
payable with respect to a participant. Such distributions are 
not required to meet the procedural requirements that apply 
with respect to distributions from qualified plans.
    Under present law, amounts distributed from a qualified 
plan generally are taxable to the participant in the year of 
distribution. However, if amounts are distributed to the spouse 
(or former spouse) of the participant by reason of a QDRO, the 
benefits are taxable to the spouse (or former spouse). Amounts 
distributed pursuant to a QDRO to an alternate payee other than 
the spouse (or former spouse) are taxable to the plan 
participant.
    Section 457 of the Internal Revenue Code provides rules for 
deferral of compensation by an individual participating in an 
eligible deferred compensation plan (``section 457 plan'') of a 
tax-exempt or State and local government employer. The QDRO 
rules do not apply to section 457 plans.

                           Reasons for Change

    The Committee believes that the rules regarding qualified 
domestic relations orders should apply to all types of 
employer-sponsored retirement plans.

                        Explanation of Provision

    The provision applies the taxation rules for qualified plan 
distributions pursuant to a QDRO to distributions made pursuant 
to a domestic relations order from a section 457 plan. In 
addition, a section 457 plan is not treated as violating the 
restrictions on distributions from such plans due to payments 
to an alternate payee under a QDRO. The special rule applicable 
to governmental plans and church plans applies for purposes of 
determining whether a distribution is pursuant to a QDRO.

                             Effective Date

    The provision is effective for transfers, distributions and 
payments made after December 31, 2000.

               C. Increasing Portability for Participants


1. Rollovers of retirement plan and IRA distributions (secs. 1231-1233 
        and 1239 of the bill and secs. 401, 402, 403(b), 408, 457, and 
        3405 of the Code)

                              Present Law

In general

    Present law permits the rollover of funds from a tax-
favored retirement plan to another tax-favored retirement plan. 
The rules that apply depend on the type of plan involved. 
Similarly, the rules regarding the tax treatment of amounts 
that are not rolled over depend on the type of plan involved.

Distributions from qualified plans

    Under present law, an ``eligible rollover distribution'' 
from a tax-qualified employer-sponsored retirement plan may be 
rolled over tax free to a traditional individual retirement 
arrangement (``IRA'') 26 or another qualified 
plan.27 An ``eligible rollover distribution'' means 
any distribution to an employee of all or any portion of the 
balance to the credit of the employee in a qualified plan, 
except the term does not include (1) any distribution which is 
one of a series of substantially equal periodic payments made 
(a) for the life (or life expectancy) of the employee or the 
joint lives (or joint life expectancies) of the employee and 
the employee's designated beneficiary, or (b) for a specified 
period of 10 years or more, (2) any distribution to the extent 
such distribution is required under the minimum distribution 
rules, and (3) certain hardship distributions. The maximum 
amount that can be rolled over is the amount of the 
distribution includible in income, i.e., after-tax employee 
contributions cannot be rolled over. Qualified plans are not 
required to accept rollovers.
---------------------------------------------------------------------------
    \26\ A ``traditional'' IRA refers to IRAs other than Roth IRAs or 
SIMPLE IRAs. All references to IRAs refers only to traditional IRAs.
    \27\ An eligible rollover distribution may either be rolled over by 
the distributee within 60 days of the date of the distribution or, as 
described below, directly rolled over by the distributing plan.
---------------------------------------------------------------------------

Distributions from tax-sheltered annuities

    Eligible rollover distributions from a tax-sheltered 
annuity (``section 403(b) annuity'') may be rolled over into an 
IRA or another section 403(b) annuity. Distributions from a 
section 403(b) annuity cannot be rolled over into a tax-
qualified plan. Section 403(b) annuities are not required to 
accept rollovers.

IRA distributions

    Distributions from a traditional IRA, other than minimum 
required distributions, can be rolled over into another IRA. In 
general, distributions from an IRA cannot be rolled over into a 
qualified plan or section 403(b) annuity. An exception to this 
rule applies in the case of so-called ``conduit IRAs.'' Under 
the conduit IRA rule, amounts can be rolled from a qualified 
plan into an IRA and then subsequently rolled back to another 
qualified plan if the amounts in the IRA are attributable 
solely to rollovers from a qualified plan. Similarly, an amount 
may be rolled over from a section 403(b) annuity to an IRA and 
subsequently rolled back into a section 403(b) annuity if the 
amounts in the IRA are attributable solely to rollovers from a 
section 403(b) annuity.

Distributions from section 457 plans

    A ``section 457 plan'' is an eligible deferred compensation 
plan of a State or local government or tax-exempt employer that 
meets certain requirements. In some cases, different rules 
apply under section 457 to governmental plans and plans of tax-
exempt employers. For example, governmental section 457 plans 
are like qualified plans in that plan assets are required to be 
held in a trust for the exclusive benefit of plan participants 
and beneficiaries. In contrast, benefits under a section 457 
plan of a tax-exempt employer are unfunded, like nonqualified 
deferred compensation plans of private employers.
    Section 457 benefits can be transferred to another section 
457 plan. Distributions from a section 457 plan cannot be 
rolled over to another section 457 plan, a qualified plan, a 
section 403(b) annuity, or an IRA.

Rollovers by surviving spouses

    A surviving spouse that receives an eligible rollover 
distribution may roll over the distribution into an IRA, but 
not a qualified plan or section 403(b) annuity.

Direct rollovers and withholding requirements

    Qualified plans and section 403(b) annuities are required 
to provide that a plan participant has the right to elect that 
an eligible rollover distribution be directly rolled over to 
another eligible retirement plan. If the plan participant does 
not elect the direct rollover option, then withholding is 
required on the distribution at a 20-percent rate.

Notice of eligible rollover distribution

    The plan administrator of a qualified plan or a section 
403(b) annuity is required to provide a written explanation of 
rollover rules to individuals who receive a distribution 
eligible for rollover. In general, the notice is to be provided 
within a reasonable period of time before making the 
distribution and is to include an explanation of (1) the 
provisions under which the individual may have the distribution 
directly rolled over to another eligible retirement plan, (2) 
the provision that requires withholding if the distribution is 
not directly rolled over, (3) the provision under which the 
distribution may be rolled over within 60 days of receipt, and 
(4) if applicable, certain other rules that may apply to the 
distribution. The Treasury Department has provided more 
specific guidance regarding timing and content of the notice.

Taxation of distributions

    As is the case with the rollover rules, different rules 
regarding taxation of benefits apply to different types of tax-
favored arrangements. In general, distributions from a 
qualified plan, section 403(b) annuity, or IRA are includible 
in income in the year received. In certain cases, distributions 
from qualified plans are eligible for capital gains treatment 
and averaging. These rules do not apply to distributions from 
another type of plan. Distributions from a qualified plan, IRA, 
and section 403(b) annuity generally are subject to an 
additional 10-percent early withdrawal tax if made before age 
59\1/2\. There are a number of exceptions to the early 
withdrawal tax. Some of the exceptions apply to all three types 
of plans, and others apply only to certain types of plans. For 
example, the 10-percent early withdrawal tax does not apply to 
IRA distributions for educational expenses, but does apply to 
similar distributions from qualified plans and section 403(b) 
annuities. Benefits under a section 457 plan are generally 
includible in income when paid or made available. The 10-
percent early withdrawal tax does not apply to section 457 
plans.

                           Reasons for Change

    Present law encourages individuals who receive 
distributions from qualified plans and similar arrangements to 
save those distributions for retirement by facilitating tax-
free rollovers to an IRA or another qualified plan. The 
Committee believes that expanding the rollover options for 
individuals in employer-sponsored retirement plans and owners 
of IRAs will provide further incentives for individuals to 
continue to accumulate funds for retirement. The Committee 
believes it appropriate to extend the same rollover rules to 
governmental section 457 plans; like qualified plans, such 
plans are required to hold plan assets in trust for employees.

                        Explanation of Provision

In general

    The provision provides that eligible rollover distributions 
from qualified retirement plans, section 403(b) annuities, and 
governmental section 457 plans generally could be rolled over 
to any of such plans or arrangements.\28\ Similarly, 
distributions from an IRA generally may be rolled over into a 
qualified plan, section 403(b) annuity, or governmental section 
457 plan. The direct rollover and withholding rules are 
extended to distributions from a governmental section 457 plan, 
and such plans are required to provide the written notification 
regarding eligible rollover distributions. The rollover notice 
(with respect to all plans) is required to include a 
description of the provisions under which distributions from 
the plan to which the distribution is rolled over may be 
subject to restrictions and tax consequences different than 
those applicable to distributions from the distributing plan. 
Qualified plans, section 403(b) annuities, and section 457 
plans are not required to accept rollovers.
---------------------------------------------------------------------------
    \28\ Hardship distributions from governmental section 457 plans 
would be considered eligible rollover distributions.
---------------------------------------------------------------------------
    Some special rules apply in certain cases. A distribution 
from a qualified plan is not eligible for capital gains or 
averaging treatment if there was a rollover to the plan that 
would not have been permitted under present law. Thus, in order 
to preserve capital gains and averaging treatment for a 
qualified plan distribution that is rolled over, the rollover 
has to be made to a ``conduit IRA'' as under present law, and 
then rolled back into a qualified plan. Amounts distributed 
from a section 457 plan are subject to the early withdrawal tax 
to the extent the distribution consists of amounts attributable 
to rollovers from another type of plan. Section 457 plans are 
required to separately account for such amounts.
    The provision also provides that benefits in governmental 
section 457 plans are includible in income when paid.

Rollover of after-tax contributions

    The provision provides that employee after-tax 
contributions may be rolled over into another qualified plan or 
a traditional IRA. In the case of a rollover from a qualified 
plan to another qualified plan, the rollover may be 
accomplished only through a direct rollover. In addition, a 
qualified plan may not accept rollovers of after-tax 
contributions unless the plan provides separate accounting for 
such contributions (and earnings thereon). After-tax 
contributions (including nondeductible contributions to an IRA) 
may not be rolled over from an IRA into a qualified plan, tax-
sheltered annuity, or section 457 plan.
    In the case of a distribution from a traditional IRA that 
is rolled over into an eligible rollover plan that is not an 
IRA, the distribution is attributed first to amounts other than 
after-tax contributions.

Expansion of spousal rollovers

    The provision provides that surviving spouses may roll over 
distributions to a qualified plan, section 403(b) annuity, or 
governmental section 457 plan in which the spouse participates.

Treasury regulations

    The Secretary is directed to prescribe rules necessary to 
carry out the provisions. Such rules may include, for example, 
reporting requirements and mechanisms to address mistakes 
relating to rollovers. It is anticipated that the IRS will 
develop forms to assist individuals who roll over after-tax 
contributions to an IRA in keeping track of such contributions. 
Such forms could, for example, expand Form 8606--Nondeductible 
IRAs, to include information regarding after-tax contributions.

                             Effective Date

    The provision is effective for distributions made after 
December 31, 2000.

2. Waiver of 60-day rule (sec. 1234 of the bill and secs. 402 and 408 
        of the Code)

                              Present Law

    Under present law, amounts received from an IRA or 
qualified plan may be rolled over tax free if the rollover is 
made within 60 days of the date of the distribution. The 
Secretary does not have the authority to waive the 60-day 
requirement.

                           Reasons for Change

    The inability of the Secretary to waive the 60-day rollover 
period can result in adverse tax consequences for individuals. 
The Committee believes such harsh results are inappropriate and 
that providing for waivers of the rule will help facilitate 
rollovers.

                        Explanation of Provision

    The provision provides that the Secretary may waive the 60-
day rollover period if the failure to waive such requirement 
would be against equity or good conscience, including cases of 
casualty, disaster, or other events beyond the reasonable 
control of the individual subject to such requirement.

                             Effective Date

    The provision applies to distributions made after December 
31, 2000.

3. Treatment of forms of distribution (sec. 1235 of the bill and sec. 
        411(d)(6) of the Code)

                              Present Law

    An amendment of a qualified retirement plan may not 
decrease the accrued benefit of a plan participant. An 
amendment is treated as reducing an accrued benefit if, with 
respect to benefits accrued before the amendment is adopted, 
the amendment has the effect of either (1) eliminating or 
reducing an early retirement benefit or a retirement-type 
subsidy, or (2) except as provided by Treasury regulations, 
eliminating an optional form of benefit (sec. 411(d)(6)).\29\
---------------------------------------------------------------------------
    \29\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
    The prohibition against the elimination of an optional form 
of benefit applies to plan mergers, spinoffs, transfers, and 
transactions amending or having the effect of amending a plan 
or plans to transfer plan benefits. For example, if Plan A, a 
profit-sharing plan that provides for distribution of benefits 
in annual installments over ten or twenty years, is merged with 
Plan B, a profit-sharing plan that provides for distribution of 
benefits in annual installments over life expectancy at the 
time of retirement, the merged plan must preserve the ten- or 
twenty-year installment option with respect to benefits accrued 
under Plan A as of the date of the merger and the installments 
over life expectancy with respect to benefits accrued under 
Plan B as of the date of the merger. Similarly, for example, if 
a participant's benefit under a defined contribution plan is 
transferred to another defined contribution plan maintained by 
the same or a different employer, the optional forms of benefit 
available with respect to the participant's accrued benefit 
under the transferor plan must be preserved.\30\
---------------------------------------------------------------------------
    \30\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(a)(3)(i).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee understands that the application of the 
prohibition against the elimination of any optional form of 
benefit to plan mergers and transfers with respect to defined 
contribution plans frequently results in complexity and 
confusion, especially in the context of business acquisitions 
and similar transactions. In addition, the Committee 
understands that a defined contribution plan participant who is 
entitled to receive a single sum distribution generally may 
roll over such a distribution to an IRA and control the manner 
of distribution from the IRA.

                        Explanation of Provision

    A defined contribution plan to which benefits are 
transferred is not treated as reducing a participant's or 
beneficiary's accrued benefit even though it does not provide 
all of the forms of distribution previously available under the 
transferor plan if (1) the plan receives from another defined 
contribution plan a direct transfer of the participant's or 
beneficiary's benefit accrued under the transferor plan, or the 
plan results from a merger or other transaction that has the 
effect of a direct transfer (including consolidations of 
benefits attributable to different employers within a multiple 
employer plan), (2) the terms of both the transferor plan and 
the transferee plan authorize the transfer, (3) the transfer 
occurs pursuant to a voluntary election by the participant or 
beneficiary that is made after the participant or beneficiary 
received a notice describing the consequences of making the 
election, (4) if the transferor plan provides for an annuity as 
the normal form of distribution in accordance with the joint 
and survivor annuity rules (sec. 417), the participant's spouse 
(if any) consents to the transfer in a manner similar to the 
consent required by section 417, and (5) the transferee plan 
allows the participant or beneficiary to receive distribution 
of his or her benefit under the transferee plan in the form of 
a single sum distribution.
    In addition, except to the extent provided by the Secretary 
of the Treasury in regulations, a defined contribution plan is 
not treated as reducing a participant's accrued benefit if (1) 
a plan amendment eliminates a form of distribution previously 
available under the plan, (2) a single sum distribution is 
available to the participant at the same time or times as the 
form of distribution eliminated by the amendment, and (3) the 
single sum distribution is based on the same or greater portion 
of the participant's accrued benefit as the form of 
distribution eliminated by the amendment.
    The Secretary is directed to issue, not later than December 
31, 2001, final regulations under section 411(d)(6) 
implementing the provision.
    Furthermore, the provision authorizes the Secretary of the 
Treasury to provide by regulations that the prohibitions 
against eliminating or reducing an early retirement benefit, a 
retirement-type subsidy, or an optional form of benefit not 
apply to plan amendments that do not adversely affect the 
rights of participants in a material manner but that do 
eliminate or reduce early retirement benefits, retirement-type 
subsidies, and optional forms of benefit that create 
significant burdens and complexities for a plan and its 
participants.
    It is intended that the factors to be considered in 
determining whether an amendment has a materially adverse 
effect on a participant would include (1) all of the 
participant's early retirement benefits, retirement-type 
subsidies, and optional forms of benefits that are reduced or 
eliminated by the amendment, (2) the extent to which early 
retirement benefits, retirement-type subsidies, and optional 
forms of benefit in effect with respect to a participant after 
the amendment effective date provide rights that are comparable 
to the rights that are reduced or eliminated by the plan 
amendment, (3) the number of years before the participant 
attains normal retirement age under the plan (or early 
retirement age, as applicable), (4) the size of the 
participant's benefit that is affected by the plan amendment, 
in relation to the amount of the participant's compensation, 
and (5) the number of years before the plan amendment is 
effective.

                             Effective Date

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

4. Rationalization of restrictions on distributions (sec. 1236 of the 
        bill and secs. 401(k), 403(b), and 457 of the Code)

                              Present Law

    Elective deferrals under a qualified cash or deferred 
arrangement (``section 401(k) plan''), tax-sheltered annuity 
(``section 403(b) annuity''), or an eligible deferred 
compensation plan of a tax-exempt organization or State or 
local government (``section 457 plan''), may not be 
distributable prior to the occurrence of one or more specified 
events. These permissible distributable events include 
``separation from service.''
    A separation from service occurs only upon a participant's 
death, retirement, resignation or discharge, and not when the 
employee continues on the same job for a different employer as 
a result of the liquidation, merger, consolidation or other 
similar corporate transaction. A severance from employment 
occurs when a participant ceases to be employed by the employer 
that maintains the plan. Under a so-called ``same desk rule,'' 
a participant's severance from employment does not necessarily 
result in a separation from service.31
---------------------------------------------------------------------------
    \31\ Rev. Rul. 79-336, 1979-2 C.B. 187.
---------------------------------------------------------------------------
    In addition to separation from service and other events, a 
section 401(k) plan that is maintained by a corporation may 
permit distributions to certain employees who experience a 
severance from employment with the corporation that maintains 
the plan but does not experience a separation from service 
because the employee continues on the same job for a different 
employer as a result of a corporate transaction. If the 
corporation disposes of substantially all of the assets used by 
the corporation in a trade or business, a distributable event 
occurs with respect to the accounts of the employees who 
continue employment with the corporation that acquires the 
assets. If the corporation disposes of its interest in a 
subsidiary, a distributable event occurs with respect to the 
accounts of the employees who continue employment with the 
subsidiary.

                           Reasons for Change

    The Committee believes that application of the ``same 
desk'' rule is inappropriate because it hinders portability of 
retirement benefits, creates confusion for employees, and 
results in significant administrative burdens for employers 
that engage in business acquisition transactions.

                        Explanation of Provision

    The provision modifies the distribution restrictions 
applicable to section 401(k) plans, section 403(b) annuities, 
and section 457 plans to provide that distribution may occur 
upon severance from employment rather than separation from 
service. In addition, the provisions for distribution from a 
section 401(k) plan based upon a corporation's disposition of 
its assets or a subsidiary are repealed; this special rule is 
no longer necessary under the provision.

                             Effective Date

    The provision is effective for distributions after December 
31, 2000.

5. Purchase of service credit under governmental pension plans (sec. 
        1237 of the bill and secs. 403(b) and 457 of the Code)

                              Present Law

    A qualified retirement plan maintained by a State or local 
government employer may provide that a participant may make 
after-tax employee contributions in order to purchase 
permissive service credit, subject to certain limits (sec. 
415). Permissive service credit means credit for a period of 
service recognized by the governmental plan only if the 
employee voluntarily contributes to the plan an amount (as 
determined by the plan) that does not exceed the amount 
necessary to fund the benefit attributable to the period of 
service and that is in addition to the regular employee 
contributions, if any, under the plan.
    In the case of any repayment of contributions and earnings 
to a governmental plan with respect to an amount previously 
refunded upon a forfeiture of service credit under the plan (or 
another plan maintained by a State or local government employer 
within the same State), any such repayment is not taken into 
account for purposes of the section 415 limits on contributions 
and benefits. Also, service credit obtained as a result of such 
a repayment is not considered permissive service credit for 
purposes of the section 415 limits.
    A participant may not use a rollover or direct transfer of 
benefits from a tax-sheltered annuity (``section 403(b) 
annuity'') or an eligible deferred compensation plan of a tax-
exempt organization of a State or local government (``section 
457 plan'') to purchase permissive service credits or repay 
contributions and earnings with respect to a forfeiture of 
service credit.

                           reasons for change

    The Committee understands that many employees work for 
multiple State or local government employers during their 
careers. The Committee believes that allowing such employees to 
use their section 403(b) annuity and section 457 plan accounts 
to purchase permissive service credits or make repayments with 
respect to forfeitures of service credit will result in more 
significant retirement benefits for employees who would not 
otherwise be able to afford such credits or repayments.

                        explanation of provision

    A participant in a State or local governmental plan is not 
required to include in gross income a direct trustee-to-trustee 
transfer to a governmental defined benefit plan from a section 
403(b) annuity or a section 457 plan if the transferred amount 
is used (1) to purchase permissive service credits under the 
plan, or (2) to repay contributions and earnings with respect 
to an amount previously refunded under a forfeiture of service 
credit under the plan (or another plan maintained by a State or 
local government employer within the same State).

                             effective date

    The provision is effective for transfers after December 31, 
2000.

6. Employers may disregard rollovers for purposes of cash-out rules 
        (sec. 1238 of the bill and sec. 411(a)(11) of the Code)

                              present law

    If an qualified retirement plan participant ceases to be 
employed by the employer that maintains the plan, the plan may 
distribute the participant's nonforfeitable accrued benefit 
without the consent of the participant and, if applicable, the 
participant's spouse, if the present value of the benefit does 
not exceed $5,000. If such an involuntary distribution occurs 
and the participant subsequently returns to employment covered 
by the plan, then service taken into account in computing 
benefits payable under the plan after the return need not 
include service with respect to which a benefit was 
involuntarily distributed unless the employee repays the 
benefit.\32\
---------------------------------------------------------------------------
    \32\ A similiar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
    Generally, a participant may roll over an involuntary 
distribution from a qualified plan to an IRA or to another 
qualified plan.\33\
---------------------------------------------------------------------------
    \33\ Other provisions of the bill expand the kinds of plans to 
which benefits may be rolled over.
---------------------------------------------------------------------------

                           reasons for change

    The present-law cash-out rule reflects a balancing of 
various policies. On the one hand is the desire to assist 
individuals to save for retirement by making it easier to keep 
retirement funds in tax-favored vehicles. On the other hand is 
the recognition that keeping track of small account balances of 
former employees creates administrative burdens for plans.
    The Committee is concerned that, in some cases, the cash-
out rule may discourage plans from accepting rollovers because 
the rollover will increase participants' benefits to above the 
cash-out amount, and increase administrative burdens. The 
Committee believes that disregarding rollovers for purposes of 
the cash-out rule will further the intent of the cash-out rule 
by removing a possible disincentive for plans to accept 
rollovers.

                        explanation of provision

    A plan is permitted to provide that the present value of a 
participant's nonforfeitable accrued benefit is determined 
without regard to the portion of such benefit that is 
attributable to rollover contributions (and any earnings 
allocable thereto).

                             effective date

    The provision is effective for distributions after December 
31, 2000.

           D. Strengthening Pension Security and Enforcement


1. Phase in repeal of 150 percent of current liability funding limit; 
        deduction for contributions to fund termination liability 
        (secs. 1241 and 1242 of the bill and secs. 404(a)(1), 
        412(c)(7), and 4972(c) of the Code)

                              present law

    Under present law, defined benefit pension plans are 
subject to minimum funding requirements designed to ensure that 
pension plans have sufficient assets to pay benefits. A defined 
benefit pension plan is funded using one of a number of 
acceptable actuarial cost methods.
    No contribution is required under the minimum funding rules 
in excess of the full funding limit. The full funding limit is 
generally defined as the excess, if any, of (1) the lesser of 
(a) the accrued liability under the plan (including normal 
cost) or (b) 155 percent of the plan's current liability, over 
(2) the value of the plan's assets (sec. 412(c)(7)).\34\ In 
general, current liability is all liabilities to plan 
participants and beneficiaries accrued to date, whereas the 
accrued liability full funding limit is based on projected 
benefits. The current liability full funding limit is scheduled 
to increase as follows: 160 percent for plan years beginning in 
2001 or 2002, 165 percent for plan years beginning in 2003 and 
2004, and 170 percent for plan years beginning in 2005 and 
thereafter.\35\ In no event is a plan's full funding limit less 
than 90 percent of the plan's current liability over the value 
of the plan's assets.
---------------------------------------------------------------------------
    \34\ The minimum funding requirements, including the full funding 
limit, are also contained in title I of ERISA.
    \35\ As originally enacted in the Pension Protection Act of 1997, 
the current liability full funding limit was 150 percent of current 
liability. The Taxpayer Relief Act of 1997 increased the current 
liability full funding limit to 155 percent in 1999 and 2000, and 
adopted the scheduled increases described in the text.
---------------------------------------------------------------------------
    An employer sponsoring a defined benefit pension plan 
generally may deduct amounts contributed to satisfy the minimum 
funding standard for the plan year. Contributions in excess of 
the full funding limit generally are not deductible. Under a 
special rule, an employer that sponsors a defined benefit 
pension plan (other than a multiemployer plan) which has more 
than 100 participants for the plan year may deduct amounts 
contributed of up to 100 percent of the plan's unfunded current 
liability.

                           reasons for change

    The Committee is concerned that the current liability full 
funding limit may result in inadequate funding of pension plans 
and thus jeopardize pension security. Also, the Committee 
believes that the special deduction rule should be expanded to 
give more plan sponsors incentives to adequately fund their 
plans.

                        explanation of provision

Current liability full funding limit

    The provision gradually increases and then repeals the 
current liability full funding limit. The current liability 
full funding limit is 160 percent of current liability for plan 
years beginning in 2001, 165 percent for plan years beginning 
in 2002, and 170 percent for plan years beginning in 2003. The 
current liability full funding limit is repealed for plan years 
beginning in 2004 and thereafter.

Deduction for contributions to fund termination liability

    The special rule allowing a deduction for unfunded current 
liability generally is extended to all defined benefit pension 
plans, i.e., the provision applies to multiemployer plans and 
plans with 100 or fewer participants. The special rule does not 
apply to plans not covered by the PBGC termination insurance 
program.\36\
---------------------------------------------------------------------------
    \36\ The PBGC termination insurance program does not cover plans of 
professional service employers that have fewer than 25 participants.
---------------------------------------------------------------------------
    The provision also modifies the rule by providing that the 
deduction is for up to 100 percent of unfunded termination 
liability, determined as if the plan terminated at the end of 
the plan year. In the case of a plan with less than 100 
participants for the plan year, termination liability does not 
include the liability attributable to benefit increases for 
highly compensated employees resulting from a plan amendment 
which was made or became effective, whichever is later, within 
the last two years.

                             effective date

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

2. Extension of PBGC missing participants program (sec. 1243 of the 
        bill and secs. 206(f), 401(a)(34), and 4050 of ERISA)

                              present law

    The plan administrator of a defined benefit pension plan 
that is subject to Title IV of ERISA, is maintained by a single 
employer, and terminates under a standard termination is 
required to distribute the assets of the plan. With respect to 
a participant whom the plan administrator cannot locate after a 
diligent search, the plan administrator satisfies the 
distribution requirement only by purchasing irrevocable 
commitments from an insurer to provide all benefit liabilities 
under the plan or transferring the participant's designated 
benefit to the Pension Benefit Guaranty Corporation (``PBGC''), 
which holds the benefit of the missing participant as trustee 
until the PBGC locates the missing participant and distributes 
the benefit.
    The PBGC missing participant program is not available to 
multiemployer plans or defined contribution plans and other 
plans not covered by Title IV of ERISA.

                           reasons for change

    The Committee recognizes that no statutory provision or 
formal regulatory guidance exists concerning an appropriate 
method of handling missing participants in terminated 
multiemployer plans and plans that are not covered by Title IV 
of ERISA. Therefore, sponsors of these plans face uncertainty 
with respect to missing participants. The Committee believes 
that it is appropriate to extend the established PBGC missing 
participant program to these plans in order to reduce 
uncertainty for plan sponsors and increase the likelihood that 
missing participants will receive their retirement benefits.

                        explanation of provision

    The PBGC is directed to prescribe for terminating 
multiemployer plans rules similar to the present-law missing 
participant rules applicable to terminating single employer 
plans that are subject to Title IV of ERISA.
    In addition, to the extent provided in PBGC regulations, 
plan administrators of certain types of plans that are not 
covered by the PBGC missing participant program under present 
law are permitted, but not required, to elect to transfer 
missing participants' benefits to the PBGC upon plan 
termination. Specifically, the provision extends the missing 
participants program to defined contribution plans, defined 
benefit plans that do not have more than 25 active participants 
and are maintained by professional service employers, and the 
portions of defined benefit plans that provide benefits based 
upon the separate accounts of participants and therefore are 
treated as defined contribution plans under ERISA.

                             effective date

    The provision is effective for distributions from 
terminating plans that occur after the PBGC adopts final 
regulations implementing the provision.

3. Excise tax relief for sound pension funding (sec. 1243 of the bill 
        and sec. 4972 of the Code)

                              present law

    Under present law, defined benefit pension plans are 
subject to minimum funding requirements designed to ensure that 
pension plans have sufficient assets to pay benefits. A defined 
benefit pension plan is funded using one of a number of 
acceptable actuarial cost methods.
    No contribution is required under the minimum funding rules 
in excess of the full funding limit. The full funding limit is 
generally defined as the excess, if any, of (1) the lesser of 
(a) the accrued liability under the plan (including normal 
cost) or (b) 155 percent of the plan's current liability, over 
(2) the value of the plan's assets (sec. 412(c)(7)). In 
general, current liability is all liabilities to plan 
participants and beneficiaries accrued to date, whereas the 
accrued liability full funding limit is based on projected 
benefits. The current liability full funding limit is scheduled 
to increase as follows: 160 percent for plan years beginning in 
2001 or 2002, 165 percent for plan years beginning in 2003 and 
2004, and 170 percent for plan years beginning in 2005 and 
thereafter. \37\ In no event is a plan's full funding limit 
less than 90 percent of the plan's current liability over the 
value of the plan's assets.
---------------------------------------------------------------------------
    \37\ As originally enacted in the Pension Protection Act of 1997, 
the current liability full funding limit was 150 percent of current 
liability. The Taxpayer Relief Act of 1997 increased the current 
liability full funding limit to 155 percent in 1999 and 2000, and 
adopted the scheduled increases described in the text. Another 
provision in the bill gradually increases and then repeals the current 
liability full funding limit.
---------------------------------------------------------------------------
    An employer sponsoring a defined benefit pension plan 
generally may deduct amounts contributed to satisfy the minimum 
funding standard for the plan year. Contributions in excess of 
the full funding limit generally are not deductible. Under a 
special rule, an employer that sponsors a defined benefit 
pension plan (other than a multiemployer plan) which has more 
than 100 participants for the plan year may deduct amounts 
contributed of up to 100 percent of the plan's unfunded current 
liability.
    Present law also provides that contributions to defined 
contribution plans are deductible, subject to certain 
limitations.
    Subject to certain exceptions, an employer that makes 
nondeductible contributions to a plan is subject to an excise 
tax equal to 10 percent of the amount of the nondeductible 
contributions for the year. The 10-percent excise tax does not 
apply to contributions to certain terminating defined benefit 
plans. The 10-percent excise tax also does not apply to 
contributions of up to 6 percent of compensation to a defined 
contribution plan for employer matching and employee elective 
deferrals.

                           reasons for change

    The Committee believes that employers should be encouraged 
to adequately fund their pension plans. Therefore, the 
Committee does not believe that an excise tax should be imposed 
on employer contributions that do not exceed the accrued 
liability full funding limit.

                        explanation of provision

    In determining the amount of nondeductible contributions, 
the employer may elect not to take into account contributions 
to a defined benefit pension plan except to the extent they 
exceed the accrued liability full funding limit. Thus, if an 
employer elects, contributions in excess of the current 
liability full funding limit are not subject to the excise tax 
on nondeductible contributions. An employer making such an 
election for a year may not take advantage of the present-law 
exceptions for certain terminating plans and certain 
contributions to defined contribution plans.

                             effective date

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

4. Notice of significant reduction in plan benefit accruals (sec. 1245 
        of the bill and new sec. 4980F of the Code)

                              present law

    Section 204(h) of Title I of ERISA provides that a defined 
benefit pension plan or a money purchase pension plan may not 
be amended so as to provide for a significant reduction in the 
rate of future benefit accrual, unless, after adoption of the 
plan amendment and not less than 15 days before the effective 
date of the plan amendment, the plan administrator provides a 
written notice (``section 204(h) notice''), setting forth the 
plan amendment (or a summary of the amendment written in a 
manner calculated to be understood by the average plan 
participant) and its effective date. The plan administrator 
must provide the section 204(h) notice to each plan 
participant, each alternate payee under an applicable qualified 
domestic relations order (``QDRO''), and each employee 
organization representing participants in the plan. The 
applicable Treasury regulations \38\ provide, however, that a 
plan administrator need not provide the section 204(h) notice 
to any participant or alternate payee whose rate of future 
benefit accrual is reasonably expected not to be reduced by the 
amendment, nor to an employee organization that does not 
represent a participant to whom the section 204(h) notice must 
be provided. In addition, the regulations provide that the rate 
of future benefit accrual is determined without regard to 
optional forms of benefit, early retirement benefits, 
retirement-type subsidiaries, ancillary benefits, and certain 
other rights and features.
---------------------------------------------------------------------------
    \38\ Treas. Reg. sec. 1.411(d)-(6).
---------------------------------------------------------------------------
    A covered amendment generally will not become effective 
with respect to any participants and alternate payees whose 
rate of future benefit accrual is reasonably expected to be 
reduced by the amendment but who do not receive a section 
204(h) notice. An amendment will become effective with respect 
to all participants and alternate payees to whom the section 
204(h) notice was required to be provided if the plan 
administrator (1) has made a good faith effort to comply with 
the section 204(h) notice requirements, (2) has provided a 
section 204(h) notice to each employee organization that 
represents any participant to whom a section 204(h) notice was 
required to be provided, (3) has failed to provide a section 
204(h) notice to no more than a de minimis percentage of 
participants and alternate payees to whom a section 204(h) 
notice was required to be provided, and (4) promptly upon 
discovering the oversight, provides a section 204(h) notice to 
each omitted participant and alternate payee.
    The Internal Revenue Code does not require any notice 
concerning a plan amendment that provides for a significant 
reduction in the rate of future benefit accrual.

                           reasons for change

    The Committee is aware of recent significant publicity 
concerning conversions of traditional defined benefit pension 
plans to ``cash balance'' plans, with particular focus on the 
impact such conversions have on affected workers. Legislation 
has been introduced to address some of the issues relating to 
such conversions.\39\
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    \39\ See, e.g., section 407 of H.R. 1102 introduced by Congressman 
Portman and Congressman Cardin on March 11, 1999, and H.R. 1176 
introduced by Congressman Weller (along with Congressmen Bentsen and 
Ney) on March 18, 1999 (with companion legislation, S. 659, introduced 
by Senator Moynihan). Also, see the conceptual proposal released by the 
Administration on July 13, 1999.
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    The Committee believes that employees are entitled to 
meaningful disclosure concerning plan amendments that may 
result in reductions of future benefit accruals. The Committee 
has determined that present law does not require employers to 
provide such disclosure, particularly in cases where 
traditional defined benefit plans are converted to cash balance 
plans. The Committee also believes that any disclosure 
requirements applicable to plan amendments should strike a 
balance between providing meaningful disclosure and avoiding 
the imposition of unnecessary administrative burdens on 
employers, and that this balance may best be struck through the 
regulatory process with an opportunity for input from affected 
parties.

                        explanation of provision

    The provisions adds to the Internal Revenue Code a 
requirement that the plan administrator of a defined benefit 
pension plan or a money purchase pension plan with more than 
100 participants furnish a written notice concerning a plan 
amendment that provides for a significant reduction in the rate 
of future benefit accrual. The plan administrator is required 
to provide in this notice, in a manner calculated to be 
understood by the average plan participant, sufficient 
information (as defined in Treasury regulations) to allow 
participants to understand the effect of the amendment.
    The plan administrator is required to provide this notice 
to each affected participant, each affected alternate payee, 
and each employee organization representing affected 
participants. For purposes of the provision, an affected 
participant or alternate payee is a participant or alternate 
payee to whom the significant reduction in the rate of future 
benefit accrual is reasonably expected to apply.
    Except to the extent provided by Treasury regulations, the 
plan administrator is required to provide the notice within a 
reasonable time before the effective date of the plan 
amendment.
    The provision imposes on a plan administrator that fails to 
comply with the notice requirement an excise tax equal to $100 
per day per omitted participant and alternate payee. For 
failures due to reasonable cause and not to willful neglect, 
the total excise tax imposed during a taxable year of the 
employer will not exceed $500,000. Furthermore, in the case of 
a failure due to reasonable cause and not to willful neglect, 
the Secretary of the Treasury is authorized to waive the excise 
tax to the extent that the payment of the tax would be 
excessive relative to the failure involved.
    The Committee anticipates that the Secretary will issue the 
necessary regulations within 90 days of enactment. The 
Committee also anticipates that such guidance may be relatively 
detailed because of the need to provide for alternative 
disclosures rather than a single disclosure methodology that 
may not fit all situations, and the need to consider the 
complex actuarial calculations and assumptions involved in 
providing necessary disclosures.

                             effective date

    The provision is effective for plan amendments taking 
effect on or after the date of enactment. The period for 
providing any notice required under the provision will not end 
before the last day of the 3-month period following the date of 
enactment. Prior to the issuance of Treasury regulations, a 
plan will be treated as meeting the requirements of the 
provision if the plan makes a good faith effort to comply with 
such requirements.

                     E. Reducing Regulatory Burdens


1. Repeal of the multiple use test (sec. 1251 of the bill and sec. 
        401(m) of the Code)

                              present law

    Elective deferrals under a qualified cash or deferred 
arrangement (``section 401(k) plan'') are subject to a special 
annual nondiscrimination test (``ADP test''). The ADP test 
compares the actual deferral percentages (``ADPs'') of the 
highly compensated employee group and the nonhighly compensated 
employee group. The ADP for each group generally is the average 
of the deferral percentages separately calculated for the 
employees in the group who are eligible to make elective 
deferrals for all or a portion of the relevant plan year. Each 
eligible employee's deferral percentage generally is the 
employee's elective deferrals for the year divided by the 
employee's compensation for the year.
    The plan generally satisfies the ADP test if the ADP of the 
highly compensated employee group for the current plan year is 
either (1) not more than 125 percent of the ADP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ADP of the nonhighly 
compensated employee group for the prior plan year and not more 
than 2 percentage points greater than the ADP of the nonhighly 
compensated employee group for the prior plan year.
    Employer matching contributions and after-tax employee 
contributions under a defined contribution plan also are 
subject to a special annual nondiscrimination test (``ACP 
test''). The ACP test compares the actual deferral percentages 
(``ACPs'') of the highly compensated employee group and the 
nonhighly compensated employee group. The ACP for each group 
generally is the average of the contribution percentages 
separately calculated for the employees in the group who are 
eligible to make after-tax employee contributions or who are 
eligible for an allocation of matching contributions for all or 
a portion of the relevant plan year. Each eligible employee's 
contribution percentage generally is the employee's aggregate 
after-tax employee contributions and matching contributions for 
the year divided by the employee's compensation for the year.
    The plan generally satisfies the ACP test if the ACP of the 
highly compensated employee group for the current plan year is 
either (1) not more than 125 percent of the ACP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ACP of the nonhighly 
compensated employee group for the prior plan year and not more 
than 2 percentage points greater than the ACP of the nonhighly 
compensated employee group for the prior plan year.
    For any year in which (1) at least one highly compensated 
employee is eligible to participate in an employer's plan or 
plans that are subject to both the ADP test and the ACP test, 
(2) the plan subject to the ADP test satisfies the ADP test but 
the ADP of the highly compensated employee group exceeds 125 
percent of the ADP of the nonhighly compensated employee group, 
and (3) the plan subject to the ACP test satisfies the ACP test 
but the ACP of the highly compensated employee group exceeds 
125 percent of the ACP of the nonhighly compensated employee 
group, an additional special nondiscrimination test (``Multiple 
Use test'') applies to the elective deferrals, employer 
matching contributions, and after-tax employee contributions. 
The plan or plans generally satisfy the Multiple Use test if 
the sum of the ADP and the ACP of the highly compensated 
employee group does not exceed the greater of (1) the sum of 
(A) 1.25 times the greater of the ADP or the ACP of the 
nonhighly compensated employee group, and (B) 2 percentage 
points plus (but not more than 2 times) the lesser of the ADP 
or the ACP of the nonhighly compensated employee group, or (2) 
the sum of (A) 1.25 times the lesser of the ADP or the ACP of 
the nonhighly compensated employee group, and (B) 2 percentage 
points plus (but not more than 2 times) the greater of the ADP 
or the ACP of the nonhighly compensated employee group.

                           reasons for change

    The Committee believes that the ADP test and the ACP test 
are adequate to prevent discrimination in favor of highly 
compensated employees under 401(k) plans and has determined 
that the Multiple Use test unnecessarily complicates 401(k) 
plan administration.

                        explanation of provision

    The provision repeals the Multiple Use test.

                             effective date

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

2. Flexibility in nondiscrimination and line of business rules (sec. 
        1253 of the bill)

                              present law

    A plan is not a qualified retirement plan if the 
contributions or benefits provided under the plan discriminate 
in favor of highly compensated employees (sec. 401(a)(4)). The 
applicable Treasury regulations set forth the exclusive rules 
for determining whether a plan satisfies the nondiscrimination 
requirement. These regulations state that the form of the plan 
and the effect of the plan in operation determine whether the 
plan is nondiscriminatory and that intent is irrelevant.
    Similarly, a plan is not a qualified retirement plan if the 
plan does not benefit a minimum number of employees (sec. 
410(b)). A plan satisfies this minimum coverage requirement if 
and only if it satisfies one of the tests specified in the 
applicable Treasury regulations. If an employer is treated as 
operating separate lines of business, the employer may apply 
the minimum coverage requirements to a plan separately with 
respect to the employees in each separate line of business 
(sec. 414(r)). Under a so-called ``gateway'' requirement, 
however, the plan must benefit a classification of employees 
that does not discriminate in favor of highly compensated 
employees in order for the employer to apply the minimum 
coverage requirements separately for the employees in each 
separate line of business. A plan satisfies this gateway 
requirement only if it satisfies one of the tests specified in 
the applicable Treasury regulations.

                           reasons for change

    It has been brought to the attention of the Committee that 
some plans are unable to satisfy the mechanical tests used to 
determine compliance with the nondiscrimination and line of 
business requirements solely as a result of relatively minor 
plan provisions. The Committee believes that, in such cases, it 
may be appropriate to expand the consideration of facts and 
circumstances in the application of the mechanical tests.

                        explanation of provision

    The Secretary of the Treasury is directed to modify, on or 
before December 31, 2000, the existing regulations issued under 
section 401(a)(4) and section 414(r) in order to expand (to the 
extent that the Secretary may determine to be appropriate) the 
ability of a plan to demonstrate compliance with the 
nondiscrimination and line of business requirements based upon 
the facts and circumstances surrounding the design and 
operation of the plan, even though the plan is unable to 
satisfy the mechanical tests currently used to determine 
compliance.

                             effective date

    The provision is effective on the date of enactment.

3. Modification of timing of plan valuations (sec. 1252 of the bill and 
        sec. 412 of the Code)

                              present law

    Under present law, in the case of plans subject to the 
minimum funding rules, a plan valuation is generally required 
annually. The Secretary may require that a valuation be made 
more frequently in particular cases.
    Prior to the Retirement Protection Act of 1994, plan 
valuations generally were required at least once every three 
years.

                           reasons for change

    While plan valuations are necessary to ensure adequate 
funding of defined benefit pension plans, they also create 
administrative burdens for employers. The Committee believes 
that requiring valuations at least once every three years in 
the case of well-funded plans strikes an appropriate balance 
between funding concerns and employer concerns about plan 
administrative costs.

                        Explanation of Provision

    The provision allows an employer to elect to use the prior 
year's plan valuation in certain cases. The election may be 
made only with respect to a defined benefit plan with assets of 
at least 125 percent of current liability (determined as of the 
valuation date for the preceding year). If the prior year's 
valuation is used, it must be adjusted, as provided in 
regulations, to reflect significant differences in 
participants. An election made under the provision may be 
revoked only with the consent of the Secretary. In any event, a 
plan valuation is required once every three years.40
---------------------------------------------------------------------------
    \40\ As under present law, the Secretary could require that a 
valuation be made more frequently in particular cases.
---------------------------------------------------------------------------

                             Effective Date

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

4. Rules for substantial owner benefits in terminated plans (sec. 1254 
        of the bill and secs. 4021, 4022, 4043 and 4044 of ERISA)

                              Present Law

    Under present law, the Pension Benefit Guaranty Corporation 
(``PBGC'') provides participants and beneficiaries in a defined 
benefit pension plan with certain minimal guarantees as to the 
receipt of benefits under the plan in case of plan termination. 
The employer sponsoring the defined benefit pension plan is 
required to pay premiums to the PBGC to provide insurance for 
the guaranteed benefits. In general, the PBGC will guarantee 
all basic benefits which are payable in periodic installments 
for the life (or lives) of the participant and his or her 
beneficiaries and are non-forfeitable at the time of plan 
termination. The amount of the guaranteed benefit is subject to 
certain limitations. One limitation is that the plan (or an 
amendment to the plan which increases benefits) must be in 
effect for 60 months before termination for the PBGC to 
guarantee the full amount of basic benefits for a plan 
participant, other than a substantial owner. In the case of a 
substantial owner, the guaranteed basic benefit is phased in 
over 30 years beginning with participation in the plan. A 
substantial owner is one who owns, directly or indirectly, more 
than 10 percent of the voting stock of a corporation or all the 
stock of a corporation. Special rules restricting the amount of 
benefit guaranteed and the allocation of assets also apply to 
substantial owners.

                           Reasons for Change

    The Committee believes that the present-law rules 
concerning limitations on guaranteed benefits for substantial 
owners are overly complicated and restrictive and thus may 
discourage some small business owners from establishing defined 
benefit pension plans.

                        Explanation of Provision

    The provision provides that the 60 month phase-in of 
guaranteed benefits applies to a substantial owner with less 
than 50 percent ownership interest. For a substantial owner 
with a 50 percent or more ownership interest (``majority 
owner''), the phase-in depends on the number of years the plan 
has been in effect. The majority owner's guaranteed benefit is 
limited so that it may not be more than the amount phased in 
over 60 months for other participants. The rules regarding 
allocation of assets apply to substantial owners, other than 
majority owners, in the same manner as other participants.

                             Effective Date

    The provision is effective for plan terminations with 
respect to which notices of intent to terminate are provided, 
or for which proceedings for termination are instituted by the 
PBGC after December 31, 2000.

5. ESOP dividends may be reinvested without loss of dividend deduction 
        (sec. 1255 of the bill and sec. 404 of the Code)

                              Present Law

    An employer is entitled to deduct certain dividends paid in 
cash during the employer's taxable year with respect to stock 
of the employer that is held by an employee stock ownership 
plan (``ESOP''). The deduction is allowed with respect to 
dividends that, in accordance with plan provisions, are (1) 
paid in cash directly to the plan participants or their 
beneficiaries, (2) paid to the plan and subsequently 
distributed to the participants or beneficiaries in cash no 
later than 90 days after the close of the plan year in which 
the dividends are paid to the plan, or (3) used to make 
payments on loans (including payments of interest as well as 
principal) that were used to acquire the employer securities 
(whether or not allocated to participants) with respect to 
which the dividend is paid.

                           Reasons for Change

    The Committee believes that it is appropriate to provide 
incentives for the accumulation of retirement benefits and 
expansion of employee ownership. The Committee has determined 
that the present-law rules concerning the deduction of 
dividends on employer stock held by an ESOP discourage 
employers from permitting such dividends to be reinvested in 
employer stock and accumulate for retirement purposes.

                        Explanation of Provision

    In addition to the deductions permitted under present law 
for dividends paid with respect to employer securities that are 
held by an ESOP, an employer is entitled to deduct dividends 
that, at the election of plan participants or their 
beneficiaries, are (1) payable in cash directly to plan 
participants or beneficiaries, (2) paid to the plan and 
subsequently distributed to the participants or beneficiaries 
in cash no later than 90 days after the close of the plan year 
in which the dividends are paid to the plan, or (3) paid to the 
plan and reinvested in qualifying employer securities.

                             Effective Date

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

6. Notice and consent period regarding distributions (sec. 1256 of the 
        bill and sec. 417 of the Code)

                              Present Law

    Notice and consent requirements apply to certain 
distributions from qualified retirement plans. These 
requirements relate to the content and timing of information 
that a plan must provide to a participant prior to a 
distribution, and to whether the plan must obtain the 
participant's consent to the distribution. The nature and 
extent of the notice and consent requirements applicable to a 
distribution depend upon the value of the participant's vested 
accrued benefit and whether the joint and survivor annuity 
requirements (sec. 417) apply to the participant.41
---------------------------------------------------------------------------
    \41\ Similar provisions are contained in Title I of ERISA.
---------------------------------------------------------------------------
    If the present value of the participant's vested accrued 
benefit exceeds $5,000, the plan may not distribute the 
participant's benefit without the written consent of the 
participant. The participant's consent to a distribution is not 
valid unless the participant has received from the plan a 
notice that contains a written explanation of (1) the material 
features and the relative values of the optional forms of 
benefit available under the plan, (2) the participant's right, 
if any, to have the distribution directly transferred to 
another retirement plan or IRA, and (3) the rules concerning 
the taxation of a distribution. If the joint and survivor 
annuity requirements apply to the participant, this notice also 
must contain a written explanation of (1) the terms and 
conditions of the qualified joint and survivor annuity 
(``QJSA''), (2) the participant's right to make, and the effect 
of, an election to waive the QJSA, (3) the rights of the 
participant's spouse with respect to a participant's waiver of 
the QJSA, and (4) the right to make, and the effect of, a 
revocation of a waiver of the QJSA. The plan generally must 
provide this notice to the participant no less than 30 and no 
more than 90 days before the date distribution commences.
    If the participant's vested accrued benefit does not exceed 
$5,000, the terms of the plan may provide for distribution 
without the participant's consent. The plan generally is 
required, however, to provide to the participant a notice that 
contains a written explanation of (1) the participant's right, 
if any, to have the distribution directly transferred to 
another retirement plan or IRA, and (2) the rules concerning 
the taxation of a distribution. The plan generally must provide 
this notice to the participant no less than 30 and no more than 
90 days before the date distribution commences.

                           Reasons for Change

    The Committee understands that an employee is not always 
able to evaluate distribution alternatives, select the most 
appropriate alternative, and notify the plan of the selection 
within a 90-day period. The Committee believes that requiring a 
plan to furnish multiple distribution notices to an employee 
who does not make a distribution election within 90 days is 
administratively burdensome. In addition, the Committee 
believes that participants who are entitled to defer 
distributions should be informed of the impact of a decision 
not to defer distribution on the taxation and accumulation of 
their retirement benefits.

                        Explanation of Provision

    A qualified retirement plan is required to provide the 
applicable distribution notice no less than 30 days and no more 
than 6 months before the date distribution commences. The 
Secretary of the Treasury is directed to modify the applicable 
regulations to reflect the extension of the notice period to 6 
months and to provide that the description of a participant's 
right, if any, to defer receipt of a distribution shall also 
describe the consequences of failing to defer such receipt.

                             Effective Date

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

7. Repeal transition rule relating to certain highly compensated 
        employees (sec. 1257 of the bill and sec. 1114(c)(4) of the Tax 
        Reform Act of 1986)

                              Present Law

    Under present law, for purposes of the rules relating to 
qualified plans, a highly compensated employee is generally 
defined as an employee 42 who (1) was a 5-percent 
owner of the employer at any time during the year or the 
preceding year or (2) either (a) had compensation for the 
preceding year in excess of $80,000 (for 1999) or (b) at the 
election of the employer, had compensation in excess of $80,000 
for the preceding year and was in the top 20 percent of 
employees by compensation for such year.
---------------------------------------------------------------------------
    \40\ An employee includes a self-employed individual.
---------------------------------------------------------------------------
    Under a rule enacted in the Tax Reform Act of 1986, a 
special definition of highly compensated employee applies for 
purposes of the nondiscrimination rules relating to qualified 
cash or deferred arrangements (``section 401(k) plans'') and 
matching contributions. This special definition applies to an 
employer incorporated on December 15, 1924, that meets certain 
specific requirements.

                           Reasons for Change

    The Committee believes that it is appropriate to repeal the 
special definition of highly compensated employee in light of 
the substantial modification of the general definition of 
highly compensated employee in the Small Business Job 
Protection Act of 1996.

                        Explanation of Provision

    The provision repeals the special definition of highly 
compensated employee under the Tax Reform Act of 1986. Thus, 
the present-law definition applies.

                             Effective Date

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

8. Employees of tax-exempt entities (sec. 1258 of the bill)

                              Present Law

    The Tax Reform Act of 1986 provided that nongovernmental 
tax-exempt employers were not permitted to maintain a qualified 
cash or deferred arrangement (``section 401(k) plan''). This 
prohibition was repealed, effective for years beginning after 
December 31, 1996, by the Small Business Job Protection Act of 
1996.
    Treasury regulations provide that, in applying the 
nondiscrimination rules to a section 401(k) plan (or a section 
401(m) plan that is provided under the same general arrangement 
as the section 401(k) plan), the employer may treat as 
excludable those employees of a tax-exempt entity who could not 
participate in the arrangement due to the prohibition on 
maintenance of a section 401(k) plan by such entities. Such 
employees may be disregarded only if more than 95 percent of 
the employees who could participate in the section 401(k) plan 
benefit under the plan for the plan year. 43
---------------------------------------------------------------------------
    \43\ Treas. Reg. sec. 1.410(b)-6(g).
---------------------------------------------------------------------------
    Tax-exempt charitable organizations may maintain a tax-
sheltered annuity (a ``section 403(b) annuity'') that allows 
employees to make salary reduction contributions.

                           Reasons for Change

    The Committee believes that it is appropriate to modify the 
special rule regarding the treatment of certain employees of a 
tax-exempt organization as excludable for section 401(k) plan 
nondiscrimination testing purposes in light of the provision of 
the Small Business Job Protection Act of 1996 that permits such 
organizations to maintain section 401(k) plans.

                        Explanation of Provision

    The Treasury Department is directed to revise its 
regulations under section 410(b) to provide that employees of a 
tax-exempt charitable organization who are eligible to make 
salary reduction contributions under a section 403(b) annuity 
may be treated as excludable employees for purposes of testing 
a section 401(k) plan, or a section 401(m) plan that is 
provided under the same general arrangement as the section 
401(k) plan of the employer if (1) no employee of such tax-
exempt entity is eligible to participate in the section 401(k) 
or 401(m) plan and (2) at least 95 percent of the employees who 
are not employees of the charitable employer are eligible to 
participate in such section 401(k) plan or section 401(m) plan.
    The revised regulations will be effective for years 
beginning after December 31, 1996.

                             Effective Date

    The provision is effective on the date of enactment.

9. Treatment of employer-provided retirement advice (sec. 1259 of the 
        bill and sec. 132 of the Code)

                              Present Law

    Under present law, certain employer-provided fringe 
benefits are excludable from gross income (sec. 132) and wages 
for employment tax purposes. These excludable fringe benefits 
include working condition fringe benefits and de minimis 
fringes. In general, a working condition fringe benefit is any 
property or services provided by an employer to an employee to 
the extent that, if the employee paid for such property or 
services, such payment would be allowable as a deduction as a 
business expense. A de minimis fringe benefit is any property 
or services provided by the employer the value of which, after 
taking into account the frequency with which similar fringes 
are provided, is so small as to make accounting for it 
unreasonable or administratively impracticable.
    In addition, if certain requirements are satisfied, up to 
$5,250 annually of employer-provided educational assistance is 
excludable from gross income (sec. 127) and wages. This 
exclusion expires with respect to courses beginning after May 
31, 2000.44 Education not excludable under section 
127 may be excludable as a working condition fringe.
---------------------------------------------------------------------------
    \44\ The exclusion does not apply with respect to graduate-level 
courses.
---------------------------------------------------------------------------
    There is no specific exclusion under present law for 
employer-provided retirement planning services. However, such 
services may be excludable as employer-provided educational 
assistance or a fringe benefit.

                           Reasons for Change

    In order to plan adequately for retirement, individuals 
must anticipate retirement income needs and understand how 
their retirement income goals can be achieved. Employer-
sponsored plans are a key part of retirement income planning. 
The Committee believes that employers sponsoring retirement 
plans should be encouraged to provide retirement planning 
services for their employees in order to assist them in 
preparing for retirement.

                        Explanation of Provision

    Qualified retirement planning services provided to an 
employee and his or her spouse are excludable from income and 
wages. The exclusion does not apply with respect to highly 
compensated employees unless the services are available on 
substantially the same terms to each member of the group of 
employees normally provided education and information regarding 
the employer's pension plan. The exclusion is not limited to 
information regarding the plan but includes, for example, 
information regarding how the plan relates to retirement income 
planning as a whole.

                             Effective Date

    The provision is effective with respect to taxable years 
beginning after December 31, 2000.

10. Provisions relating to plan amendments (sec. 1260 of the bill)

                              Present Law

    Plan amendments to reflect amendments to the law generally 
must be made by the time prescribed by law for filing the 
income tax return of the employer for the employer's taxable 
year in which the change in law occurs.

                           Reasons for Change

    The Committee believes that employers should have adequate 
time to amend their plans to reflect amendments to the law.

                        Explanation of Provision

    Any amendments to a plan or annuity contract required to be 
made by the provision are not required to be made before the 
last day of the first plan year beginning on or after January 
1, 2003. In the case of a governmental plan, the date for 
amendments is extended to the last day of the first plan year 
beginning on or after January 1, 2005.

                             Effective Date

    The provision is effective on the date of enactment.

11. Reporting simplification (sec. 1262 of the bill)

                              Present Law

    A plan administrator of a pension, annuity, stock bonus, 
profit-sharing or other funded plan of deferred compensation 
generally must file with the Secretary of the Treasury an 
annual return for each plan year containing certain information 
with respect to the qualification, financial condition, and 
operation of the plan. Title I of ERISA also may require the 
plan administrator to file annual reports concerning the plan 
with the Department of Labor and the Pension Benefit Guaranty 
Corporation (``PBGC''). The plan administrator must use the 
Form 5500 series as the format for the required annual 
return.45 The Form 5500 series annual return/report, 
which consists of a primary form and various schedules, 
includes the information required to be filed with all three 
agencies. The plan administrator satisfies the reporting 
requirement with respect to each agency by filing the Form 5500 
series annual return/report with the Internal Revenue Service 
(``IRS''), which forwards the form to the Department of Labor 
and the PBGC.
---------------------------------------------------------------------------
    \45\ Treas. Reg. sec. 301.6058-1(a).
---------------------------------------------------------------------------
    The Form 5500 series consists of 3 different forms: Form 
5500, Form 5500-C/R, and Form 5500-EZ. Form 5500 is the most 
comprehensive of the forms and requires the most detailed 
financial information. Form 5500-C/R requires less information 
than Form 5500, and Form 5500-EZ, which consists of only 1 
page, is the simplest of the forms.
    The size of the plan determines which form a plan 
administrator must file. If the plan has more than 100 
participants at the beginning of the plan year, the plan 
administrator generally must file Form 5500. If the plan has 
fewer than 100 participants at the beginning of the plan year, 
the plan administrator generally may file Form 5500-C/R. A plan 
administrator generally may file Form 5500-EZ if (1) the only 
participants in the plan are the sole owner of a business that 
maintains the plan (and such owner's spouse), or partners in a 
partnership that maintains the plan (and such partners' 
spouses), (2) the plan is not aggregated with another plan in 
order to satisfy the minimum coverage requirements of section 
410(b), (3) the employer is not a member of a related group of 
employers, and (4) the employer does not receive the services 
of leased employees. If the plan satisfies the eligibility 
requirements for Form 5500-EZ and the total value of the plan 
assets as of the end of the plan year and all prior plan years 
does not exceed $100,000, the plan administrator is not 
required to file a return.

                           Reasons for Change

    The Committee believes that simplification of the reporting 
requirements applicable to plans of small employers will 
encourage such employers to provide retirement benefits for 
their employees.

                        Explanation of Provision

    The Secretary of the Treasury is directed to provide for 
the filing of a simplified annual return substantially similar 
to the Form 5500-EZ by a plan that (1) covers less than 25 
employees on the first day of the plan year, (2) is not 
aggregated with another plan in order to satisfy the minimum 
coverage requirements of section 410(b), (3) is maintained by 
an employer that is not a member of a related group of 
employers, and (4) is maintained by an employer that does not 
receive the services of leased employees.

                             Effective Date

    The provision is effective on the date of enactment.

12. Model plans for small businesses (sec. 1261 of the bill)

                              Present Law

    The Internal Revenue Service (``IRS'') previously has 
established uniform plan 46 and prototype plan 
47 programs that were designed, in part, to simplify 
the preparation of qualified retirement plan documents and the 
determination letter application process. Neither the IRS nor 
the Secretary of the Treasury previously have issued model plan 
documents.
---------------------------------------------------------------------------
    \46\ Rev. Proc. 84-46, 1984-2 C.B. 787.
    \47\ Rev. Proc. 84-23, 1984-1 C.B. 457; Rev. Proc. 89-9, 1989-1 
C.B. 780; Rev. Proc. 89-13, 1989-1 C.B. 801.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that the availability of model 
retirement plans, or the expanded availability of pre-approved 
prototype plan documents, will encourage small employers to 
provide retirement benefits for their employees.

                        Explanation of Provision

    The Secretary of the Treasury is directed to issue, not 
later than December 31, 2000, at least one model defined 
contribution plan document and at least one model defined 
benefit plan document that fit the needs of small businesses 
and that is treated as meeting the requirements of section 
401(a) with respect to the form of the plan. To the extent that 
the requirements of section 401(a) are modified after the 
issuance of the model plans, the Secretary is directed to 
issue, in a timely manner, model amendments that, if adopted in 
a timely manner by an employer that adopts a model plan, will 
cause the model plan to be treated as meeting the requirements 
of section 401(a), as modified, with respect to the form of the 
plan.
    Alternatively, the Secretary is permitted, in its 
discretion, to enhance and simplify the existing prototype plan 
programs in a manner that achieves the purposes of the model 
plans.

                             Effective Date

    The provision is effective on the date of enactment.

13. Improvement to Employee Plans Compliance Resolution System (sec. 
        1263 of the bill)

                              Present Law

    A retirement plan that is intended to be a tax-qualified 
plan provides retirement benefits on a tax-favored basis if the 
plan satisfies all of the requirements of section 401(a). 
Similarly, an annuity that is intended to be a tax-sheltered 
annuity provides retirement benefits on a tax-favored basis if 
the program satisfies all of the requirements of section 
403(b). Failure to satisfy all of the applicable requirements 
of section 401(a) or section 403(b) may disqualify a plan or 
annuity for the intended tax-favored treatment.
    The Internal Revenue Service (``IRS'') has established the 
Employee Plans Compliance Resolution System (``EPCRS''), which 
is a comprehensive system of correction programs for sponsors 
of retirement plans and annuities that are intended, but have 
failed, to satisfy the requirements of section 401(a) and 
section 403(b), as applicable.48 EPCRS permits 
employers to correct compliance failures and continue to 
provide their employees with retirement benefits on a tax-
favored basis.
---------------------------------------------------------------------------
    \48\ Rev. Proc. 98-22, 1998-12 I.R.B. 11, as modified by Rev. Proc. 
99-13, 1999-5, I.R.B. 52.
---------------------------------------------------------------------------
    The IRS has designed EPCRS to (1) encourage operational and 
formal compliance, (2) promote voluntary and timely correction 
of compliance failures, (3) provide sanctions for compliance 
failures identified on audit that are reasonable in light of 
the nature, extent, and severity of the violation, (4) provide 
consistent and uniform administration of the correction 
programs, and (5) permit employers to rely on the availability 
of EPCRS in taking corrective actions to maintain the tax-
favored status of their retirement plans and annuities.
    The basic elements of the programs that comprise EPCRS are 
self-correction, voluntary correction with IRS approval, and 
correction on audit. The Administrative Policy Regarding Self-
Correction (``APRSC'') permits a plan sponsor that has 
established compliance practices to correct certain 
insignificant failures at any time (including during an audit), 
and certain significant failures within a 2-year period, 
without payment of any fee or sanction. The Voluntary 
Compliance Resolution (``VCR'') program, the Walk-In Closing 
Agreement Program (``Walk-In CAP''), and the Tax-Sheltered 
Annuity Voluntary Correction (``TVC'') program permit an 
employer, at any time before an audit, to pay a limited fee and 
receive IRS approval of a correction. For a failure that is 
discovered on audit and corrected, the Audit Closing Agreement 
Program (``Audit CAP'') provides for a sanction that bears a 
reasonable relationship to the nature, extent, and severity of 
the failure and that takes into account the extent to which 
correction occurred before audit.
    The IRS has expressed its intent that EPCRS will be updated 
and improved periodically in light of experience and comments 
from those who use it.

                           Reasons for Change

    The Committee commends the IRS for the establishment of 
EPCRS and agrees with the IRS that EPCRS should be updated and 
improved periodically. The Committee believes that future 
improvements should facilitate use of the compliance and 
correction programs by small employers and expand the 
flexibility of the programs.

                        Explanation of Provision

    The Secretary of the Treasury is directed to continue to 
update and improve EPCRS, giving special attention to (1) 
increasing the awareness and knowledge of small employers 
concerning the availability and use of EPCRS, (2) taking into 
account special concerns and circumstances that small employers 
face with respect to compliance and correction of compliance 
failures, (3) extending the duration of the self-correction 
period under APRSC for significant compliance failures, (4) 
expanding the availability to correct insignificant compliance 
failures under APRSC during audit, and (5) assuring that any 
tax, penalty, or sanction that is imposed by reason of a 
compliance failure is not excessive and bears a reasonable 
relationship to the nature, extent, and severity of the 
failure.

                             Effective Date

    The provision is effective on the date of enactment.

                  TITLE XIII. MISCELLANEOUS PROVISIONS


  A. Expand the Exclusion From Income for Certain Foster Care Payments


            (sec. 1301 of the bill and sec. 131 of the Code)


                              present law

    Generally, a foster care provider may exclude qualified 
foster care payments, (including difficulty of care payments) 
from gross income if certain requirements are 
satisfied.49 First, such payments must be paid to 
the foster care providers by either (1) a State or political 
subdivision of a State; or (2) a tax-exempt placement agency. 
Second, the payments, including difficulty of care payments, 
must be paid to the foster care provider for the care of a 
``qualified foster individual'' in the foster care provider's 
home. A qualified foster individual is an individual living in 
a foster care family home in which the individual was placed 
by: (1) an agency of the State or a political subdivision of a 
State; or (2) a tax-exempt placement agency if such individual 
was under the age of 19 at the time of placement. Third, the 
exclusion of foster care payments generally applies to 
qualified foster care payments for five or fewer foster care 
individuals over the age of 19 in a foster home. In the case of 
difficulty of care payments, the exclusion applies to payments 
for ten or fewer foster care individuals under the age of 19 in 
a foster home and to payments for five or fewer foster care 
individuals at least age 19 in a foster home.
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    \49\ A difficulty of care payment is a payment designated by the 
person making such payment as compensation for providing the additional 
care of a qualified foster care individual which is required by reason 
of a physicial, mental, or emotional handicap of such individual and 
with respect to which the State has determined that there is a need for 
additional compensation.
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                           reasons for change

    The Committee recognizes that some States want to use both 
taxable and tax-exempt organizations to improve the 
administration of their foster care programs (e.g., out-
sourcing of the placement function of their foster care 
program). This provision is intended to give the States more 
flexibility in meeting the goals of foster care without 
expanding the application of the exclusion to payments which 
are not made under the State's foster care program.

                        explanation of provision

    The bill makes two principal modifications to the exclusion 
for qualified foster care payments. First, the bill expands the 
list of persons eligible to make qualified foster care 
payments. Therefore, the exclusion applies to qualified 
payments made pursuant to a foster care program of a State or 
local government which are paid by either: (1) a State or 
political subdivision of a State; or (2) a qualified foster 
care placement agency, whether taxable or tax-exempt. Second, 
the bill expands the list of persons eligible to place foster 
care individuals. Specifically, the bill allows placements by 
either: (1) a State or a political subdivision of a State; or 
(2) a qualified foster care placement agency. For these 
purposes, a qualified foster care placement agency is defined 
as any placement agency which is licensed or certified by: (1) 
a State or political subdivision of a State; or (2) an entity 
designated by a State or political subdivision thereof, for the 
foster care program of such State or political subdivision to 
make payments to providers of foster care.
    The bill allows State and local governments to employ both 
tax-exempt and taxable entities to administer their foster care 
programs more efficiently; however, it does not extend the 
exclusion to payments outside such foster care programs (e.g., 
payments to a foster care provider from friends or relatives of 
foster care individual in its care).

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 1999.

     B. Provide Exclusion for Mileage Reimbursements by Charitable 
                             Organizations


         (sec. 1302 of the bill and new sec. 138A of the Code)


                              present law

    In computing taxable income, individuals who do not elect 
the standard deduction may claim itemized deductions, including 
a deduction (subject to certain limitations) for charitable 
contributions or gifts made during the taxable year to a 
qualified charitable organization or governmental entity (sec. 
170). Individuals who elect the standard deduction may not 
claim a deduction for charitable contributions made during the 
taxable year.
    No charitable contribution deduction is allowed for a 
contribution of services. However, unreimbursed expenditures 
made incident to providing donated services to a qualified 
charitable organization--such as out-of-pocket transportation 
expenses necessarily incurred in performing donated services--
may constitute a deductible contribution (Treas. Reg. sec. 
1.170A-1(g)).50 However, no charitable contribution 
deduction is allowed for traveling expenses (including expenses 
for meals and lodging) while away from home, whether paid 
directly or by reimbursement, unless there is no significant 
element of personal pleasure, recreation, or vacation in such 
travel (sec. 170(j)). Moreover, a taxpayer may not deduct as a 
charitable contribution out-of-pocket expenditures incurred on 
behalf of a charity if such expenditures are made for the 
purposes of influencing legislation (sec. 170(f)(6)).
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    \50\ Treasury Regulation section 1.170A-1(g) allows taxpayers to 
deduct only their own unreimbursed expenses incurred in performing 
services for a qualified charitable organization, and not expenses 
incident to a third party's performance of services. See Davis v. 
United States, 495 U.S. 472 (1990).
---------------------------------------------------------------------------
    For purposes of computing the charitable contribution 
deduction for the use of a passenger automobile (including 
vans, pickups, and panel trucks) in connection with providing 
donated services to a qualified charitable organization, the 
standard mileage rate is 14 cents per mile (sec. 170(i)). 
Volunteer drivers who are reimbursed for mileage expenses have 
taxable income to the extent the reimbursement exceeds 14 cents 
per mile.

                           reasons for change

    The Committee believes that it is important to recognize 
the valuable contributions made by volunteers to charitable 
organizations by providing an exclusion from income up to the 
applicable business rate for volunteers who receive 
reimbursements for the costs of using their automobiles while 
performing services for charitable organizations.

                        explanation of provision

    Under the bill, reimbursement by an entity or organization 
described in section 170(c) (including public charities and 
private foundations) for the costs of using an automobile in 
connection with providing donated services is excludable from 
the gross income of the volunteer, provided that (1) 
reimbursement does not exceed the rate prescribed for business 
use, and (2) applicable recordkeeping requirements are 
satisfied. The bill does not permit a volunteer to exclude a 
reimbursement from income if the volunteer claims a deduction 
or credit with respect to his or her automobile transportation 
expenses incurred in connection with providing donated 
services.

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 1999.

     C. Expand Employer Reporting on Annual Wage and Tax Statements


           (sec. 1303 of the bill and sec. 6051 of the Code)


                              present law

    An employer must provide certain information annually to 
each employee in the form of a wage and tax statement (``Form 
W-2''). The information required to be included on such form 
includes the individual's name, address, social security number 
and a statement of total wages, tips, and other compensation 
for the year. The form must also include the amount of federal 
income tax withheld as well as the employee's share of social 
security and medicare taxes withheld for the year by the 
employer. There is no requirement that the form include a 
statement of the employer's share of social security and 
medicare taxes paid by the employer with respect to that 
individual.

                           reasons for change

    The Committee believes that American workers should be 
informed of the true level of taxation under Social Security 
and Medicare. The Committee believes that this additional 
information will allow more informed decision making on 
possible reforms of these two programs.

                        explanation of provision

    The bill requires the Form W-2 to include a statement of 
social security and medicare taxes paid by the employer on 
behalf of each employee.

                             effective date

    The provision is effective with respect to Form W-2's with 
respect to remuneration paid after December 31, 1999.

 D. Survivor Benefits of Public Safety Officers Killed in the Line of 
                                  Duty


            (sec. 1304 of the bill and sec. 101 of the Code)


                              present law

    The Taxpayer Relief Act of 1997 included a provision 
providing that an amount paid as a survivor annuity on account 
of the death of a public safety officer who is killed in the 
line of duty is excludable from income to the extent the 
survivor annuity is attributable to the officer's service as a 
law enforcement officer. The survivor annuity must be provided 
under a governmental plan to the surviving spouse (or former 
spouse) of the public safety officer or to a child of the 
officer. Public safety officers include law enforcement 
officers, firefighters, rescue squad or ambulance crew. The 
provision does not apply with respect to the death of a public 
safety officer if it is determined by the appropriate 
supervising authority that (1) the death was caused by the 
intentional misconduct of the officer or by the officer's 
intention to bring about the death, (2) the officer was 
voluntarily intoxicated at the time of death, (3) the officer 
was performing his or her duties in a grossly negligent manner 
at the time of death, or (4) the actions of the individual to 
whom payment is to be made were a substantial contributing 
factor to the death of the officer.
    The provision applies to amounts received in taxable years 
beginning after December 31, 1996, with respect to individuals 
dying after that date.

                           reasons for change

    The Committee believes that survivors of public safety 
officers killed in the line of duty should all receive the same 
tax treatment, regardless of when the officer died.

                        explanation of provision

    The provision extends the present-law treatment of survivor 
annuities with respect to public safety officers killed in the 
line of duty to payments received in taxable years beginning 
after December 31, 1999, with respect to individuals dying on 
or before December 31, 1996.

                             effective date

    The provision is effective on the date of enactment.

     E. Distributions From Publicly Traded Partnerships Treated as 
          Qualifying Income of Regulated Investment Companies


  (secs. 1311 and 1312 of the bill and secs. 851(b) and 469(k) of the 
                                 Code)


                              present law

    A regulated investment company (``RIC'') generally is 
treated as a conduit for Federal income tax purposes. In 
computing its taxable income, a RIC deducts dividends paid to 
its shareholders to achieve conduit treatment (sec. 852(b)). In 
order to qualify for conduit treatment, a RIC must be a 
domestic corporation that, at all times during the taxable 
year, is registered under the Investment Company Act of 1940 as 
a management company or as a unit investment trust, or has 
elected to be treated as a business development company under 
that Act (sec. 851(a)). In addition, the corporation must elect 
RIC status, and must satisfy certain other requirements (sec. 
851(b)).
    One of the requirements is that at least 90 percent of its 
gross income is derived from dividends, interest, payments with 
respect to securities loans, and gains from the sale or other 
disposition of stock or securities or foreign currencies, or 
other income (including but not limited to gains from options, 
futures, or forward contracts) derived with respect to its 
business of investing in such stock, securities, or currencies. 
Income derived from a partnership is treated as meeting this 
requirement only to the extent such income is attributable to 
items of income of the partnership that would meet the 
requirement if realized by the RIC in the same manner as 
realized by the partnership (the ``look-through'' rule for 
partnership income). Under present law, no distinction is made 
under this rule between a publicly traded partnership and any 
other partnership.
    Present law provides that a publicly traded partnership 
means a partnership, interests in which are traded on an 
established securities market, or are readily tradable on a 
secondary market (or the substantial equivalent thereof). In 
general, a publicly traded partnership is treated as a 
corporation (sec. 7704(a)), but an exception to corporate 
treatment is provided if 90 percent or more of its gross income 
is interest, dividends, real property rents, or certain other 
types of qualifying income (sec. 7704(c) and (d)).
    A special rule for publicly traded partnerships applies 
under the passive loss rules. The passive loss rules limit 
deductions and credits from passive trade or business 
activities (sec. 469). Deductions attributable to passive 
activities, to the extent they exceed income from passive 
activities, generally may not be deducted against other income. 
Deductions and credits that are suspended under these rules are 
carried forward and treated as deductions and credits from 
passive activities in the next year. The suspended losses from 
a passive activity are allowed in full when a taxpayer disposes 
of his entire interest in the passive activity to an unrelated 
person. The special rule for publicly traded partnerships 
provides that the passive loss rules are applied separately 
with respect to items attributable to each publicly traded 
partnership (sec. 469(k)). Thus, income or loss from the 
publicly traded partnership is treated as separate from income 
or loss from other passive activities.

                           reasons for change

    The Committee understands that mutual funds are an 
increasingly important part of the capital markets. They are 
deterred by the 90-percent rule and the look-through rule of 
present law from deriving more than 10 percent of their income 
from partnerships (including publicly traded partnerships) 
whose income is not income such as dividends, interest, or 
other income that would qualify under the 90 percent rule if 
realized by the mutual fund in the same manner as by the 
partnership. This makes it more difficult for publicly traded 
partnerships to raise capital. Thus, the Committee bill 
modifies these limitations in the case of publicly traded 
partnerships. In addition, so that the separate application of 
the passive loss rules is not avoided by passing publicly 
traded partnership income through a mutual fund, the passsive 
loss rules are applied to mutual funds in a similar manner.

                        explanation of provision

    The provision modifies the 90 percent test with respect to 
income of a RIC to include income derived from an interest in a 
publicly traded partnership. The provision also modifies the 
lookthrough rule for partnership income of a RIC so that it 
applies only to income from a partnership other than a publicly 
traded partnership.
    The provision provides that the special rule for publicly 
traded partnerships under the passive loss rules (requiring 
separate treatment) applies to a RIC holding an interest in a 
publicly traded partnership, with respect to items attributable 
to the interest in the publicly traded partnership.

                             effective date

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

F. Equalize the Tax Treatment of ``Clean Fuel'' Vehicles and Oversized 
                                Vehicles


        (sec. 1313 of the bill and sec. 30 and 179A of the Code)


                              present law

    Taxpayers may claim a credit of 10 percent of the cost of 
an electric vehicle up to a maximum credit of $4,000 (sec. 30). 
Taxpayers may claim an immediate deduction (expensing) for up 
to $50,000 of the cost of a qualified clean-fuel vehicle which 
is a truck or van with a gross vehicle weight greater than 13 
tons or a bus with a seating capacity of at least 20 adults 
(sec. 179A). For the purposes of the deduction permitted under 
section 179A, electric trucks, vans, or buses are not qualified 
clean fuel vehicles.

                           reasons for change

    The purchase of a large truck, van, or bus requires a 
substantial cost. The Committee observes that, under present 
law, a taxpayer purchasing a large electric vehicle may claim a 
credit against tax liability with a maximum value of $4,000, 
while a taxpayer purchasing a large ``clean fuel'' vehicle may 
expense up to $50,000 of cost. These two alternatives do not 
produce equivalent tax benefits. The Committee believes that a 
taxpayer's choice between these such ``environmentally 
friendly'' vehicles should be based on the merits of the 
vehicles and not on a disparity in tax benefits.

                        explanation of provision

    The bill provides that an electric truck or van with a 
gross vehicle weight rating greater than 13 tons or an electric 
bus which has seating capacity of at least 20 adults is a 
qualified clean fuel vehicle for which the taxpayer may expense 
up to $50,000 of cost and that such vehicles are not eligible 
for the electric vehicle credit.

                             effective date

    The provision is effective for vehicles placed in service 
after December 31, 1999.

                    G. Nuclear Decommissioning Costs


           (sec. 1314 of the bill and sec. 468A of the Code)


                              present law

    Special rules dealing with nuclear decommissioning reserve 
funds were adopted by Congress in the Deficit Reduction Act of 
1984 (``1984 Act'') when tax issues regarding the time value of 
money were addressed generally. Under general tax accounting 
rules, a deduction for accrual basis taxpayers generally is 
deferred until there is economic performance for the item for 
which the deduction is claimed. However, the 1984 Act contains 
an exception to those rules under which a taxpayer responsible 
for nuclear power plant decommissioning may elect to deduct 
contributions made to a qualified nuclear decommissioning fund 
for future payment costs. Taxpayers who do not elect this 
provision are subject to the general rules in the 1984 Act.
    A qualified decommissioning fund is a segregated fund 
established by the taxpayer that is used exclusively for the 
payment of decommissioning costs, taxes on fund income, payment 
of management costs of the fund, and making investments. The 
fund is prohibited from dealing with the taxpayer that 
established the fund. The income of the fund is taxed at a 
reduced rate of 20 percent \51\ for taxable years beginning 
after December 31, 1995.
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    \51\ As originally enacted in 1984, the fund paid tax on its 
earnings at the top corporate rate and, as a result, there would be no 
present-value tax benefit of making deductible contributions to the 
fund. Also, as originally enacted, the funds in the trust could be 
invested only in certain low risk investments. Subsequent amendments to 
the provision have reduced the rate of tax on the fund to 20 percent, 
and removed the restrictions on the type of permitted investments that 
the fund can make.
---------------------------------------------------------------------------
    Contributions to the fund are deductible in the year made 
to the extent that these amounts were collected as part of the 
cost of service to ratepayers. Withdrawal of funds by the 
taxpayer to pay for decommissioning expenses are included in 
income at that time, but the taxpayer also is entitled to a 
deduction at that time for decommissioning expenses as economic 
performance for those costs occurs.
    A taxpayer's contributions to the fund may not exceed the 
amount of nuclear decommissioning costs included in the 
taxpayer's cost of service for ratemaking purposes for the 
taxable year. Additionally, in order to prevent accumulations 
of funds over the remaining life of a nuclear power plant in 
excess of those required to pay future decommissioning costs 
and to ensure that contributions to the funds are not deducted 
more rapidly than level funding, taxpayers must obtain a ruling 
from the IRS to establish the maximum contribution that may be 
made to the fund.
    If the decommissioning fund fails to comply with the 
qualification requirements or when the decommissioning is 
substantially completed, the fund's qualification may be 
terminated, in which case the amounts in the fund must be 
included in income of the taxpayer.
    A qualified decommissioning fund may be transferred in 
connection with the sale, exchange or other transfer of the 
nuclear power plant to which it relates. If the transferee is a 
regulated public utility and meets certain other requirements, 
the transfer will be treated as a nontaxable transaction. No 
gain or loss will be recognized on the transfer of the 
qualified decommissioning fund and the transferee will take the 
transferor's basis in the fund.52 The transferee is 
required to obtain a new ruling amount from the IRS, or accept 
a discretionary determination by the IRS.53 However, 
if the transferee does not qualify to continue the qualified 
decommissioning fund, the balance in the fund will be treated 
as distributed (and thus taxable) at the time of the transfer.
---------------------------------------------------------------------------
    \52\ Treas. Regs. sec. 1.468A-6.
    \53\ Treas. Regs. sec. 1.468A-6(f).
---------------------------------------------------------------------------
    State and Federal regulators may require utilities to set 
aside funds for nuclear decommissioning purposes in excess of 
the amount allowed as a deductible contribution to a qualified 
decommissioning fund. In addition, the taxpayer may have set 
aside funds prior to the effective date of the qualified 
decommissioning fund rules. In some cases, a deduction may have 
been taken for such amounts at the time they were set 
aside.54 These nonqualified funds are not eligible 
for the special rules that apply to qualified decommissioning 
funds. Since 1984, no deduction has been allowed with respect 
to the contribution or segregation of nonqualified funds, and 
the income on nonqualified funds is taxed to the taxpayer at 
the taxpayer's marginal rate.
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    \54\ Prior to July 17, 1984 (the date of enactment of the Deficit 
Reduction Act of 1984), accrual basis taxpayers could be deduct items 
without regard to the time the items were economically performed. Some 
taxpayers may have taken the position that amounts irrevocably set 
aside for nuclear decommissioning purposes prior to July 17, 1984 were 
deductible.
---------------------------------------------------------------------------

                           reasons for change

    The Committee is concerned that appropriate incentives be 
provided to insure that adequate funds are available for the 
decommissioning of nuclear power plants. The Committee believes 
that it is appropriate to extend those incentives to all funds 
that have previously been irrevocably set aside for 
decommissioning purposes. In addition, the Committee does not 
believe that it is appropriate to impose the cost of service 
limitation on the amount that can be contibuted to a qualified 
nuclear decommissioning fund if electric generation has been 
deregulated by a State.
    The Committee recognizes that electricity deregulation has 
been occurring, and continues to occur, at the State level. 
Although the deregulation process creates the need for tax-
related changes, the Committee is wary of making significant 
tax changes except in the context of broader Federal 
electricity restructuring legislation. The Committee believes, 
however, that the bill's limited changes to the nuclear 
decommissioning fund rulese are an appropriate interim measure 
and that the more fundamental changes required by electricity 
restructuring should be delayed until the appropriate time.

                        explanation of provision

    The cost of service requirement for deductible 
contributions to nuclear decommissioning funds is repealed. 
Taxpayers, including unregulated taxpayers, are allowed a 
deduction for amounts contributed to a qualified nuclear 
decommissioning fund. As under current law, however, the 
maximum contribution and deduction for a taxable year can not 
exceed the IRS ruling amount for that year.
    The provision also clarifies the Federal income tax 
treatment of the transfer of qualified nuclear decommissioning 
funds. No gain or loss is recognized to the transferor or the 
transferee as a result of the transfer of a qualified fund in 
connection with the transfer of the power plant with respect to 
which the fund was established.
    The provision provides an election to transfer the balance 
of certain nonqualified funds to qualified fund. Any portion of 
the amount transferred that has not previously been deducted is 
allowed as a deduction over the remainder of the useful life of 
the nuclear power plant (as determined for the purpose of the 
ruling amount) beginning with the first taxable year that 
begins after 2001. If a qualified fund that has received a 
transfer from a nonqualified fund is transferred to another 
person, that person will be entitled to the deduction at the 
same time and in the same manner as the transferor. Thus, if 
the transferor was not subject to tax at the time and thus 
would have been unable to utilize the deduction, the transferee 
will similarly not be able to utilize the deduction. A taxpayer 
is not considered to have a basis in any qualified nuclear 
decommissioning fund.
    Nonqualified funds eligible to be transferred to a 
qualified fund are funds that have been irrevocably set aside 
pursuant to the requirements of a state of Federal agency 
exclusively for the purpose of funding the decommissioning of 
the taxpayer's nuclear power plant. Funds that constitute a 
``prepaid decommissioning fund'' or ``external sinking trust 
fund'' that would qualify for the purpose of providing 
financial assurance that funds will be available for the 
decommisioning process under 10 CFR 50.75 are expected to meet 
the definition of nonqualified funds for this purpose.
    A new ruling amount must be obtained following the transfer 
of nonqualified funds to a qualified fund.

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 1999.

    H. Permit Consolidation of Life and Nonlife Insurance Companies


(sec. 1315 of the bill and secs. 1503(c)(2), 1504(b)(2), and 1504(c) of 
                               the Code)


                              Present Law

    Under present law, an affiliated group of corporations 
means one or more chains of includible corporations connected 
through stock ownership with a common parent corporation (sec. 
1504(a)(1)). The stock ownership requirement consists of an 80-
percent voting and value test. In general, an affiliated group 
of corporations may file a consolidated tax return for Federal 
income tax purposes.
    Life insurance companies (subject to tax under section 801) 
generally are not treated as includible corporations, and 
therefore may not be included in a consolidated return of an 
affiliated group including nonlife-insurance companies, unless 
the common parent of the group elects to treat the life 
insurance companies as includible corporations (sec. 
1504(c)(2)).
    Under the election to treat life insurance companies as 
includible corporations of an affiliated group, two special 5-
year limitation rules apply. The first 5-year rule provides 
that a life insurance company may not be treated as an 
includible corporation until it has been a member of the group 
for the 5 taxable years immediately preceding the taxable year 
for which the consolidated return is filed (sec. 1504(c)(2)). 
The second 5-year rule provides that any net operating loss of 
a nonlife-insurance member of the group may not offset the 
taxable income of a life insurance member for any of the first 
5 years the life insurance company has been a member of the 
group (sec. 1503(c)(2)). This rule applies to nonlife losses 
for the current taxable year or as a carryover or carryback.
    A separate 35-percent limitation also applies under the 
election to treat life insurance companies as includible 
corporations of an affiliated group (sec. 1503(c)(1)). This 
rule provides that if the non-life-insurance members of the 
group have a net operating loss, then the amount of the loss 
that is not absorbed by carrybacks against the nonlife-
insurance members' income may offset the life insurance 
members' income only to the extent of the lesser of: (1) 35 
percent of the amount of the loss; or (2) 35 percent of the 
life insurance members' taxable income. The unused portion of 
the loss is available as a carryover and is added to 
subsequent-year losses, subject to the same 35-percent 
limitation.

                           Reasons for Change

    The Committee understands that the five-year limitation 
rules under the election to treat life insurance companies as 
includible corporations give rise to considerable complexity in 
application, especially as the two five-year rules interact 
with each other. The Committee believes that desirable 
simplification of the tax law can be achieved by repeal of the 
two five-year rules.

                        Explanation of Provision

    The provision repeals the two 5-year limitation rules under 
the election to treat life insurance companies as includible 
corporations of an affiliated group. The provision also repeals 
the rule that a life insurance corporation is not an includible 
corporation unless the common parent makes an election to treat 
life insurance companies as includible corporations. Thus, 
under the provision, a life insurance company is treated as an 
includible corporation starting with the first taxable year for 
which it becomes a member of the affiliated group and otherwise 
meets the definition of an includible corporation. In addition, 
any net operating loss of a nonlife-insurance member of the 
group can offset the taxable income of a life insurance member 
starting with the first taxable year for which it becomes a 
member of the affiliated group and otherwise meets the 
definition of an includible corporation. The provision retains 
the 35-percent limitation of present law with respect to any 
life insurance company that is an includible corporation of an 
affiliated group.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2004.
    To the extent that a consolidated net operating loss is 
created or increased by the provision, the loss may not be 
carried back to a taxable year beginning before January 1, 
2005. In addition, no affilated group terminates solely by 
reason of the provision. The provision waives the 5-year 
waiting period for reconsolidation under section 1504(a)(3), in 
the case of any corporation that was previously an includible 
corporation, but was subsequently deemed not to be an 
includible corporation as a result of becoming a subsidiary of 
a corporation that was not an includible corporation by reason 
of the 5-year rule of section 1504(c)(2) (providing that a life 
insurance company may not be treated as an includible 
corporation until it has been a member of the group for the 5 
taxable years immediately preceding the taxable year for which 
the consolidated return is filed).

   I. Consolidate Code Provisions Governing the Hazardous Substance 
     Superfund and the Leaking Underground Storage Tank Trust Fund


      (sec. 1321 of the bill and secs. 9507 and 9508 of the Code)


                              Present Law

    Present law includes two separate Trust Funds to finance 
similar ground and water cleanup programs related to hazardous 
substances. These funds are the Hazardous Substance Superfund 
(the ``Superfund'') and the Leaking Underground Storage Tank 
Trust Fund (the ``LUST Trust Fund''). Amounts in both Trust 
Funds are available as provided in cross-referenced 
authorization and appropriations Acts.

                           Reasons for Change

    The Committee observes that both the Superfund and the LUST 
Trust Fund provide monies for remediation of soil and 
groundwater related to contamination generally from chemicals 
and petroleum products in the case of the Superfund and 
generally from petroleum products in the case of the LUST Trust 
Fund. Because of the similarity of purpose of the two present-
law trust funds, the Committee believes there will be some 
administrative economies to be gained from combining the two 
present-law trust funds into one Environmental Remediation 
Trust Fund.

                        Explanation of Provision

    The Code provisions governing the Superfund and the LUST 
Trust Fund are consolidated into a single Environmental 
Remediation Trust Fund (the ``Environmental Trust Fund''). 
Amounts in the consolidated Trust Fund (i.e., all amounts in 
both of the present-law Trust Funds) are available for 
expenditure, as provided in appropriations Acts, for the 
combined purposes of the two present-law Trust Funds, as of 
July 12, 1999.
    Provisions like those currently included in the Highway 
Trust Fund, the Aquatic Resources Trust Fund, and the Vaccine 
Injury Compensation Trust Fund clarifying that expenditures 
from the Environmental Trust Fund may occur only as provided in 
the Code are incorporated into the new Trust Fund statute, 
notwithstanding provisions of any other Act (including 
subsequently enacted non-revenue Act legislation). If any 
subsequent non-revenue legislation provides for expenditures 
not provided for in the Code, or if any executive agency 
authorizes such expenditure in contravention of the Code 
restrictions, excise tax and other Federal revenues otherwise 
to be deposited in the Environmental Trust Fund will be 
retained in the General Fund beginning on the date of enactment 
of such legislation or the date of such executive agency 
action. Furthermore, no future interest will accrue on the 
unobligated balances of the Environmental Trust Fund.

                             Effective Date

    The provision is effective on October 1, 1999.

J. Repeal Certain Excise Taxes on Rail Diesel Fuel and Inland Waterway 
                              Barge Fuels


      (sec. 1322 of the bill and secs. 4041 and 4042 of the Code)


                              Present Law

    Under present law, diesel fuel used in trains is subject to 
a 4.4-cents-per gallon excise tax. Revenues from 4.3 cents per 
gallon of this excise tax are retained in the General Fund of 
the Treasury. The remaining 0.1 cent per gallon is deposited in 
the Leaking Underground Storage Tank (``LUST'') Trust Fund.
    Similarly, fuels used in barges operating on the designated 
inland waterways system is subject to a 4.3-cents-per-gallon 
General Fund excise tax. This tax is in addition to the 20.1-
cents-per-gallon tax rates that are imposed on fuels used in 
these barges to fund the Inland Waterways Trust Fund and the 
Leaking Underground Storage Tank Trust Fund.
    In both cases, the 4.3-cents-per-gallon excise tax rates 
are permanent. The LUST tax is scheduled to expire after March 
31, 2005.

                           Reasons for Change

    The Committee notes that in 1993 the Congress enacted the 
present-law 4.3-cents-per-gallon excise tax as a motor fuels 
tax on almost all motor fuel uses with the receipts payable to 
the General Fund. Since that time, the Congress has diverted 
the 4.3-cents-per-gallon excise tax for most uses to specified 
trust funds which provide benefits for those motor fuel users 
who ultimately bear the burden of these taxes. As a result, the 
Committee finds that generally only rail and barge operators 
remain as motor fuel users subject to the 4.3-cents-per-gallon 
excise tax who receive no benefits from a dedicated trust fund 
as a result of their tax burden. The Committee observes that 
rail and barge operators compete with other transportation 
service providers who benefit from expenditures paid from 
dedicated trust funds. The Committee concluded that it is 
inequitable and distortive of transportation decisions to 
continue to impose the 4.3-cents-per-gallon excise tax on 
diesel fuel used in trains and barges. In addition, the 
Committee notes that upon repeal of the 4.3-cents-per-gallon 
excise tax applicable to rail diesel fuel that rail diesel fuel 
would be subject only to the 0.1-cent-per-gallon excise tax for 
deposit in the LUST Trust Fund. The Committee believes that 
some simplicity of excise tax administration will be achieved 
by repeal of the remaining 0.1-cent-per-gallon excise tax 
(deposited in the LUST Trust Fund) on diesel fuel used by 
trains. Further, this repeal is consistent with the general 
rule that only these taxpayers subject to a tax on motor fuels 
for other purposes are subject to the LUST tax.

                        Explanation of Provision

    The 0.1-cent-per-gallon LUST tax on diesel fuel used in 
trains is repealed. (The LUST tax is an add-on tax on otherwise 
taxable fuels. Upon repeal of the 4.3-cents-per-gallon General 
Fund tax on diesel fuel used in trains, this tax automatically 
would expire absent affirmative action by Congress to impose it 
separately. The effect of this separate provision to repeal the 
LUST tax of fuel used in trains two years earlier that 
otherwise would occur.)
    In addition, the 4.3-cents-per-gallon General Fund excise 
tax rates on diesel fuel used in trains and fuels used in 
barges operating on the designated inland waterways system is 
repealed.

                            Effective Dates

    The repeal of the 0.1-cent-per-gallon LUST tax on diesel 
fuel used in trains is effective on October 1, 1999. The repeal 
of the 4.3-cents-per-gallon excise taxes on train diesel and 
inland waterway barge fuels is effective after September 30, 
2003.
    Repeal of these taxes is contingent upon enactment as part 
of the bill of a separate provision that consolidates the Code 
provisions governing the Hazardous Substance Superfund and the 
Leaking Underground Storage Tank Trust Fund into an 
Environmental Remediation Trust Fund.

              K. Repeal Excise Tax on Fishing Tackle Boxes


           (sec. 1323 of the bill and sec. 4162 of the Code)


                              Present Law

    Under present law, a 10-percent manufacturer's excise tax 
is imposed on specified sport fishing equipment. Examples of 
taxable equipment include fishing rods and poles, fishing 
reels, artificial bait, fishing lures, line and hooks, and 
fishing tackle boxes. Revenues from the excise tax on sport 
fishing equipment are deposited in the Sport Fishing Account of 
the Aquatic Resources Trust Fund. Monies in the fund are spent, 
subject to an existing permanent appropriation, to support 
Federal-State sport fish enhancement and safety programs.

                           Reasons for Change

    The Committee observes that fishing ``tackle boxes'' are 
little different in design and appearance from ``tool boxes,'' 
yet the former are subject to a Federal excise tax at a rate of 
10-percent, while the latter are not subject to Federal excise 
tax. This excise tax can create a sufficiently large price 
difference that some fishermen will choose to use a ``tool 
box'' to hold their hooks and lures rather than a traditional 
``tackle box.'' The Committee finds that such a distortion of 
consumer choice places an inappropriate burden on the 
manufacturers and purchasers of traditional tackle boxes, 
particularly in comparison to the modest amount of revenue 
raised by the present-law provision, and that this burden 
warrants repeal of the tax. The Committee also believes that 
elimination of the excise tax on tackle boxes will provide some 
modest simplification of the tax system for both taxpayers and 
the Internal Revenue Service.

                        Explanation of Provision

    The excise tax on fishing tackle boxes is repealed.

                             Effective Date

    The provision is effective beginning 30 days after the date 
of enactment.

        L. Modify Excise Tax on Arrow Components and Accessories


           (sec. 1324 of the bill and sec. 4161 of the Code)


                              Present Law

    A 12.4 percent excise tax is imposed on the sale by a 
manufacturer or importer of any shaft, point, nock, or vane 
designed for use as part of an arrow which (1) is over 18 
inches long, or (2) is designed for use with a taxable bow (if 
shorter than 18 inches). An 11-percent tax is imposed on 
certain bows and on certain accessories for taxable bows and 
arrows.

                           Reasons for Change

    The Committee believes that modifications must be made to 
the present-law tax on arrows and points to better reflect 
current design and practice in the manufacture of arrows and 
points.

                        Explanation of Provision

    The bill makes two modifications to the excise tax on 
arrows and arrow accessories. First, the bill extends the 12.4-
percent tax on arrow components to inserts and outserts 
designed for use with taxable arrows. Inserts and outserts are 
defined as articles used to attach a point to an arrow shaft. 
Second, the bill reclassifies ``broadheads,'' or arrow points 
designed for hunting fish or large animals, as arrow 
accessories subject to the 11-percent tax rather than arrow 
points subject to the 12.4-percent tax (as under present law).

                             Effective Date

    The provisions of the bill apply to sales by manufacturers 
beginning on the first day of the first calendar quarter that 
begins more than 30 days after the bill's enactment.

     M. Increase Low-income Housing Tax Credit Cap and Make Other 
                             Modifications


         (secs. 1331-1337 of the bill and sec. 42 of the Code)


                              Present Law

In general

    The low-income housing tax credit may be claimed over a 10-
year period for the cost of rental housing occupied by tenants 
having incomes below specified levels. The credit percentage 
for newly constructed or substantially rehabilitated housing 
that is not Federally subsidized is adjusted monthly by the 
Internal Revenue Service so that the 10 annual installments 
have a present value of 70 percent of the total qualified 
expenditures. The credit percentage for new substantially 
rehabilitated housing that is Federally subsidized and for 
existing housing that is substantially rehabilitated is 
calculated to have a present value of 30 percent qualified 
expenditures.

Credit cap

    The aggregate credit authority provided annually to each 
State is $1.25 per resident, except in the case of projects 
that also receive financing with proceeds of tax-exempt bonds 
issued subject to the private activity bond volume limit and 
certain carry-over amounts,

Expenditure test

    Generally, the building must be placed in service in the 
year in which it receives an allocation to qualify for the 
credit. An exception is provided in the case where the taxpayer 
has expended an amount equal to 10-percent or more of the 
taxpayer's reasonably expected basis in the building by the end 
of the calendar year in which the allocation is received and 
certain other requirements are met.

Basis of building eligible for the credit

    Buildings receiving assistance under the HOME investment 
partnerships act (``HOME'') are not eligible for the enhanced 
credit for buildings located in high cost areas (i.e., 
qualified census tracts and difficult development areas). Under 
the enhanced credit, the 70-percent and 30-percent credit are 
increased to a 91-percent and 39-percent credit, respectfully.
    Eligible basis is generally limited to the portion of the 
building used by qualified low-income tenants for residential 
living and some common areas.

State allocation plans

    Each State must develop a plan for allocating credits and 
such plan must include certain allocation criteria including: 
(1) project location; (2) housing needs characteristics; (3) 
project characteristics; (4) sponsor characteristics; (5) 
participation of local tax-exempts; (6) tenant populations with 
special needs; and (7) public housing waiting lists. The State 
allocation plan must also give preference to housing projects: 
(1) that serve the lowest income tenants; and (2) that are 
obligated to serve qualified tenants for the longest periods.

Credit administration

    There are no explicit requirements that housing credit 
agencies perform a comprehensive market study of the housing 
needs of the low-income individuals in the area to be served by 
the project, nor that such agency conduct site visits to 
monitor for compliance with habitability standards.

Stacking rule

    Authority to allocate credits remains at the State (as 
opposed to local) government level unless State law provides 
otherwise. 55 Generally, credits may be allocated 
only from volume authority arising during the calendar year in 
which the building is placed in service, except in the case of: 
(1) credits claimed on additions to qualified basis; (2) 
credits allocated in a later year pursuant to an earlier 
binding commitment made no later than the year in which the 
building is placed in service; and (3) carryover allocations.
---------------------------------------------------------------------------
    \55\ For example, constitutional home rule cities in Illinois are 
guaranteed their proportionate share of the $1.25 amount, based on 
their population relative to that of the State as a whole.
---------------------------------------------------------------------------
    Each State annually receives low-income housing credit 
authority equal to $1.25 per State resident for allocation to 
qualified low-income projects. 56 In addition to 
this $1.25 per resident amount, each State's ``housing credit 
ceiling'' includes the following amounts: (1) the unused State 
housing credit ceiling (if any) of such State for the preceding 
calendar year; 57 (2) the amount of the State 
housing credit ceiling (if any) returned in the calendar year; 
58 and (3) the amount of the national pool (if any) 
allocated to such State by the Treasury Department.
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    \56\ A State's population, for these purpoes, is the most recent 
estimate of the State's population released by the Bureau of the Census 
before the beginning of the year to which the limitation applies. Also, 
for these purposes, the District of Columbia and the U.S. possessions 
(i.e., Puerto Rico, the Virgin Islands, Guam, the Northern Marianas and 
American Samoa) are treated as States.
    \57\ The unused State housing credit ceiling is the amount (if 
positive) of the previous year's annual credit limitation plus credit 
returns less the credit actually allocated in that year.
    \58\ Credit returns are the sum of any amounts allocated to 
projects within a State which fail to become a qualified low-income 
housing project within the allowable time period plus any amounts 
allocated to a project within a State under an allocation which is 
canceled by mutual consent of the housing credit agency and the 
allocation recipient.
---------------------------------------------------------------------------
    The national pool consists of States' unused housing credit 
carryovers. For each State, the unused housing credit carryover 
for a calendar year consists of the excess (if any) of the 
unused State housing credit ceiling for such year over the 
excess (if any) of the aggregate housing credit dollar amount 
allocated for such year over the sum of $1.25 per resident and 
the credit returns for such year. The amounts in the national 
pool are allocated only to a State which allocated its entire 
housing credit ceiling for the preceding calendar year, and 
requested a share in the national pool not later than May 1 of 
the calendar year. The national pool allocation to qualified 
States is made on a pro rata basis equivalent to the fraction 
that a State's population enjoys relative to the total 
population of all qualified States for that year.
    The present-law stacking rule provides that a State is 
treated as using its annual allocation of credit authority 
($1.25 per State resident) and any returns during the calendar 
year followed by any unused credits carried forward from the 
preceding year's credit ceiling and finally any applicable 
allocations from the National pool.

                           Reasons for Change

    The Committee believes that the credit acts as a stimulus 
for low-income housing. It believes that the expansion of the 
credit cap will allow the construction and substantial 
rehabilitation of more affordable rental housing for low-income 
individuals in the future. The other changes to the credit 
program are intended to improve the operation of the credit.

                        Explanation of Provision

Credit cap

    The $1.25 per capita cap is increased to $1.75 per capita. 
This increase is phased-in by increasing the credit cap by 10 
cents per capita each year for five years. The credit cap would 
be: $1.35 in calendar year 2000; $1.45 in calendar 2001; $1.55 
in calendar year 2002; $1.65 in calendar year 2003; and $1.75 
in calendar year 2004. The $1.75 per capita credit cap is 
indexed for inflation beginning in 2004.

Expenditure test

    The bill allows a building which receives an allocation in 
the second half of a calendar to qualify under the 10-percent 
test if the taxpayer expends an amount equal to 10-percent or 
more of the taxpayer's reasonably expected basis in the 
building within six months of receiving the allocation 
regardless of whether the 10-percent test is met by the end of 
the calendar year.

Basis of building eligible for the credit

    The bill makes three changes to the basis rules of the 
credit. First, buildings receiving HOME assistance are made 
eligible for the enhanced credit. Second, the definition of 
qualified census tracts for purposes of the enhanced credit is 
expanded to include any census tracts with a poverty rate of 25 
percent or more. Third, the bill extends the credit to a 
portion of the building used as a community service facility 
not in excess of 20 percent of the total eligible basis in the 
building. A community service facility is defined as any 
facility designed to serve primarily individuals whose income 
is 60 percent or less of area median income.

State allocation plans

    The bill strikes the plan criteria relating to 
participation of local tax-exempts, replacing it with two other 
criteria: tenant populations of individuals with children and 
projects intended for eventual tenant ownership. It also 
provides that the present-law criteria relating to sponsor 
characteristics include whether the project involves the use of 
existing housing as part of a community revitalization plan. 
Also, the bill adds a third category of housing projects to the 
preferential list. That third category is for projects located 
in qualified census tracts which contribute to a concerted 
community revitalization plan.

Credit administration

    The bill requires a comprehensive market study of the 
housing needs of the low-income individuals in the area to be 
served by the project and a written explanation available to 
the general public for any allocation not made in accordance 
with the established priorities and selection criteria of the 
housing credit agency. It also requires site inspections by the 
housing credit agency to monitor compliance with habitability 
standards applicable to the project.

Stacking rule

    The bill modifies the stacking rule so that each State 
would be treated as using its allocation of the unused State 
housing credit ceiling (if any) from the preceding calendar 
before the current year's allocation of credit (including any 
credits returned to the State) and then finally any National 
pool allocations.

                             Effective Date

    In general, the bill is effective for calendar years 
beginning after December 31, 2000, and buildings placed-in-
service after such date in the case of projects that also 
receive financing with proceeds of tax-exempt bonds subject to 
the private activity bond volume limit which are issued after 
such date. The increase and indexing of the credit cap is 
effective for calendar years after December 31, 1999.

              N. Entrepreneurial Equity Capital Formation


 (secs. 1341-1347 of the bill and secs. 851, 1044 and 1202 of the Code)


                              Present Law

    Under present law, a taxpayer may elect to roll over 
without payment of tax any capital gain realized upon the sale 
of publicly-traded securities where the taxpayer uses the 
proceeds from the sale to purchase common stock in a 
specialized small business investment company (``SSBIC'') 
within 60 days of the sale of the securities. The maximum 
amount of gain that an individual may roll over under this 
provision for a taxable year is limited to the lesser of (1) 
$50,000 or (2) $500,000 reduced by any gain previously excluded 
under this provision. For corporations, these limits are 
$250,000 and $1 million.
    In addition, under present law, an individual may exclude 
50 percent of the gain \59\ from the sale of qualifying small 
business stock held more than five years. An SSBIC is 
automatically deemed to satisfy the active business requirement 
which a corporation must satisfy to qualify its stock for the 
exclusion.
---------------------------------------------------------------------------
    \59\ The portion of the capital gain included in income is subject 
to a maximum regular tax rate of 28 percent, and 42 percent of the 
excluded gain is a minimum tax preference.
---------------------------------------------------------------------------
    Regulated investment companies (``RICs'') are entitled to 
deduct dividends paid to shareholders. To qualify for the 
deduction, 90 percent of the company's income must be derived 
from dividends, interest and other specified passive income, 
the company must distribute 90 percent of its investment 
income, and at least 50 percent of the value of its assets must 
be invested in certain diversified investments.
    For purposes of these provisions, an SSBIC means any 
partnership or corporation that is licensed by the Small 
Business Administration under section 301(d) of the Small 
Business Investment Act of 1958 (as in effect on May 13, 1993). 
SSBICs make long-term loans to, or equity investments in, small 
businesses owned by persons who are socially or economically 
disadvantaged.

                           reasons for change

    The Committee believes that the provision will make 
investments in SSBICs more attractive by providing tax 
advantages of deferral and lower capital gains taxes.

                        explanation of provision

    Under the bill, the tax-free rollover provision is expanded 
by (1) extending the 60-day period to 180 days, (2) making 
preferred stock (as well as common stock) in an SSBIC an 
eligible investment, and (3) increasing the lifetime caps to 
$750,000 in the case of an individual and to $2 million in the 
case of a corporation, and repealing the annual caps.
    The bill also provides that an SSBIC that is organized as a 
corporation may convert to a partnership without imposition of 
a tax to either the corporation or its shareholders, by 
transferring its assets to a partnership in which it holds at 
least an 80-percent interest and then liquidating. The 
corporation is required to distribute all its earnings and 
profits before liquidating. The transaction must take place 
within 180 days of enactment of the bill. The partnership will 
be liable for a tax on any ``built-in'' gain in the assets 
transferred by the corporation at the time of the conversion.
    The 50-percent exclusion for gain on the sale of qualifying 
small business stock is increased to 60 percent where the 
taxpayer, or a pass-through entity in which the taxpayer holds 
an interest, sells qualifying stock of an SSBIC.
    For purposes of determining status as a RIC eligible for 
the dividends received deduction, the proposal would treat 
income derived by a SSBIC from its limited partner interest in 
a partnership whose business operations the SSBIC does not 
actively manage as income qualifying for the 90-percent test; 
would deem the SSBIC to satisfy the 90-percent distribution 
requirement if it distributes all its income that it is 
permitted to distribute under the Small Business Investment Act 
of 1958; and would deem the RIC diversification of assets 
requirement to be met to the extent the SSBIC's investments are 
permitted under that Act.

                             effective date

    The rollover and small business stock provisions of the 
proposal are effective for sales after date of enactment. The 
RIC provisions are effective for taxable years beginning after 
date of enactment.

 O. Accelerate Scheduled Increase in State Volume Limits on Tax-Exempt 
                         Private Activity Bonds


            (sec. 1331 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 (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 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).
    The current annual volume limits that apply to private 
activity tax-exempt bonds increase to $75 per resident of each 
State or $225 million, if greater, beginning in calendar year 
2007. The increase is, ratably phased in, beginning with $55 
per capita or $165 million, if greater, in calendar year 2003.

                           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 to $75 per resident of each State 
or $225 million (if greater).

                             effective date

    The volume limit increases are effective for calender years 
after December 31, 1999.

          P. Tax Treatment of Alaska Native Settlement Trusts


          (sec. 1332 of the bill and new sec. 646 of the Code)


                              present law

    An Alaska Native Settlement Corporation (``ANC'') may 
establish a Settlement Trust (``Trust'') under section 39 of 
the Alaska Native Claims Settlement Act (``ANCSA'') \60\ and 
transfer money or other property to such Trust for the benefit 
of beneficiaries who constitute all or a class of the 
shareholders of the ANC, to promote the health, education and 
welfare of the beneficiaries and preserve the heritage and 
culture of Alaska Natives.
---------------------------------------------------------------------------
    \60\ 43 U.S.C. 1601 et seq.
---------------------------------------------------------------------------
    With certain exceptions, once an ANC has made a conveyance 
to a Trust, the assets conveyed shall not be subject to 
attachment, distraint, or sale or execution of judgement, 
except with respect to the lawful debts and obligations of the 
trust.
    The Internal Revenue Service has indicated that 
contributions to a Trust constitute distributions to the 
beneficiary-shareholders at the time of the contribution and 
are treated as dividends to the extent of earnings and profits 
as provided under section 301 of the Code. The Trust and its 
beneficiaries are taxed according to the rules of Subchapter J 
of the Code.

                           reasons for change

    The Committee believes that contributions to a Trust by an 
ANC should not be taxed as distributions to beneficiary-
shareholders at the time of the contribution. If and when such 
principal amounts of the Trust are ultimately distributed to 
beneficiaries, however, tax at ordinary income rates will 
apply. Such a distribution might occur only many years after 
the original contribution, thus the deferral on the original 
contribution is expected to provide relief. Tax is imposed at 
the time the principal is distributed in order to prevent the 
ANC from contributing assets to a Trust as a conduit and 
immediately liquidating the Trust to avoid the shareholder tax 
on corporate distributions.
    This change permits the contribution of assets to the Trust 
in a manner that reduces the impact of the corporate structure 
of ANC's on the establishment of Trusts. Once the Trust is 
established, ordinary trust tax principles apply with respect 
to Trust and beneficiary taxation. Income retained by the Trust 
will be taxed as ordinary income or capital gains, in 
accordance with the normal trust provisions. Amounts taxed at 
the trust level and later distributed to beneficiaries will not 
be taxed to the beneficiaries when distributed.

                        explanation of provision

    An Alaska Native Corporation may establish a Trust under 
section 39 of ANCSA and if the Trust makes an election for its 
first taxable year ending after December 31, 1999, no amount 
will be includible in the gross income of a beneficiary of such 
Trust by reason of a contribution to the Trust. \6\
---------------------------------------------------------------------------
    \61\ If the ANC conveys appreciated assets to the trust, the 
section 311 corporate level tax on the appreciation continues to apply 
as under present law.
---------------------------------------------------------------------------
    The earnings and profits of the ANC are not reduced by the 
amount of such contribution. However, the ANC earnings and 
profits are reduced (up to the amount of the contribution) as 
distributions are thereafter made by the Trust which would 
exceed the Trusts's total undistributed net income for all 
prior years during which an election is in effect plus the 
Trust's distributable net income for the current year, computed 
under Subchapter J. Beneficiaries of the Trust would be taxed 
on such excess distributions as ordinary income, and reporting 
to beneficiaries for such amounts could be made on Form 1099 
rather than Form K-1.
    Apart from these rules, the Trust and its beneficiaries 
are, as under present law, subject to tax in accordance with 
the rules of Subchapter J.
    Certain additional restrictions apply. If the beneficial 
interests in the Trust or shares of the ANC may be sold or 
exchanged to a person in a manner that would not be permitted 
under ANCSA (generally, to a person other than an Alaska 
Native), then future contributions to the Trust are treated as 
distributions to the beneficiaries at the time of contribution 
as under present law, and the ``excess'' distribution 
provisions described above do not apply with respect to such 
contributions.
    In the case of an electing Trust, distributions to 
beneficiaries that reduce the earnings and profits of an ANC 
are subject to withholding to the extent that such 
distributions, on an annualized basis, exceed the sum of the 
standard deduction and personal exemption for the taxable year.

                             effective date

    The provision is effective for taxable years of Settlement 
Trusts, and contributions to such Trusts, after December 31, 
1999.

 Q. Increase Joint Committee on Taxation Refund Review Threshold to $2 
                                Million


           (sec. 1353 of the bill and sec. 6405 of the Code)


                              present law

    No refund or credit in excess of $1,000,000 of any income 
tax, estate or gift tax, or certain other specified taxes, may 
be made until 30 days after the date a report on the refund is 
provided to the Joint Committee on Taxation (sec. 6405). A 
report is also required in the case of certain tentative 
refunds. Additionally, the staff of the Joint Committee on 
Taxation conducts post-audit reviews of large deficiency cases 
and other select issues.

                           reasons for change

    The Committee believes that it is appropriate to increase 
the refund review threshold, which has been set at $1,000,000 
since 1990. Increasing it will accelerate the issuance of 
refunds between $1,000,000 and $2,000,000 to the taxpayers 
involved. In addition, this increase will free up significant 
resources of both the Internal Revenue Service and the staff of 
the Joint Committee on Taxation, without materially impairing 
the ability to monitor problems in the administration of the 
tax laws.

                        Explanation of Provision

    The provision increases the threshold above which refunds 
must be submitted to the Joint Committee on Taxation for review 
from $1,000,000 to $2,000,000. The staff of the Joint Committee 
on Taxation would continue to exercise its existing statutory 
authority to conduct a program of expanded post-audit reviews 
of large deficiency cases and other select issues, and the IRS 
is expected to cooperate fully in this expanded program.

                             Effective Date

    The provision is effective on the date of enactment, except 
that the higher threshold does not apply to a refund or credit 
with respect to which a report was made before the date of 
enactment.

                 R. Clarification of Depreciation Study


                         (sec. 1354 of the bill)


                              present law

    The Secretary of the Treasury (or his delegate) is directed 
to conduct a comprehensive study of the recovery periods and 
depreciation methods under section 168 of the Code, and to 
provide recommendations for determining such periods and 
methods in a more rational manner. The Secretary of the 
Treasury (or his delegate) is directed to submit the results of 
the study and recommendations to the House Ways and Means and 
Senate Finance Committees by March 31, 2000.

                           reasons for change

    The Committee wishes to insure that the treatment of long-
lived real property used in connection with a franchise is 
included in the study.

                        explanation of provision

    The Secretary of the Treasury (or his delegate) is directed 
to include a study of such periods and methods applicable to 
section 1250 property used in connection with a franchise 
(within the meaning of section 1253) and owned by the 
franchisee in the study of recovery periods and depreciation 
methods under section 168 of the Code that is due to be 
submitted to the House Ways and Means and Senate Finance 
Committees by March 31, 2000.

                             Effective Date

    The provision is effective on the date of enactment.

                        S. Tax Court Provisions


1. Tax Court filing fee (sec. 1361 of the bill and sec. 7451 of the 
        Code)

                              present law

    Section 7451 authorizes the Tax Court to impose a fee of up 
to $60 for the filing of any petition ``for the redetermination 
of a deficiency or for a declaratory judgment under part IV of 
this subchapter or under section 7428 or for judicial review 
under section 6226 or section 6228(a).'' The statute does not 
specifically authorize the Tax Court to impose a filing fee for 
the filing of a petition for review of the IRS's failure to 
abate interest under section 6404 or for administrative costs 
under section 7430. The practice of the Tax Court is to impose 
a $60 filing fee in all cases commenced by petition. \62\
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    \62\ See Rule 20(a) of the Tax Court Rules of Practices and 
Procedure.
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                           Reasons for Change

    The Committee believes it is appropriate to expand the Tax 
Court filing fee to apply to any cases commenced by the filing 
of a petition.

                        Explanation of Provision

    Under the bill, section 7451 is amended to provide that the 
Tax Court is authorized to charge a filing fee of up to $60 in 
all cases commenced by the filing of a petition.

                             Effective Date

    The provision is effective on the date of enactment.

2. Use of practitioner fee (sec. 1362 of the bill and sec. 7475 of the 
        Code)

                              Present Law

    Section 7475 authorizes the Tax Court to impose on 
practitioners a fee of up to $30 per year and permits these 
fees to be used to employ independent counsel to pursue 
disciplinary matters.

                           Reasons for Change

    The Committee believes it is appropriate for Tax Court fees 
imposed on practitioners also to be available to provide 
services to pro se taxpayers.

                        Explanation of Provision

    The bill provides that Tax Court fees imposed on 
practitioners also are available to provide services to pro se 
taxpayers.

                             effective date

    The provision is effective on the date of enactment.

3. Tax Court authority to apply equitable recoupment (sec. 1363 of the 
        bill and sec. 6214 of the Code)

                              present law

    Equitable recoupment is a common-law equitable principle 
which permits the defensive use of an otherwise time-barred 
claim to reduce or defeat an opponent's claim if both claims 
arise from the same transaction. U.S. District Courts and the 
U.S. Court of Federal Claims, the two Federal tax refund 
forums, may apply equitable recoupment in deciding tax refund 
cases.\63\ In Estate of Mueller v. Commissioner \64\, the Tax 
Court held that it may apply equitable recoupment in deciding 
cases over which it has jurisdiction. However, the Court of 
Appeals for the Sixth Circuit recently held that the Tax Court 
may not apply the doctrine of equitable recoupment.\65\
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    \63\ See Stone v. White, 301 U.S. 532 (1937), Bull v. United 
States, 295 U.S. 247 (1935).
    \64\ 101 T.C. 551 (1993).
    \65\ See Estate of Mueller v. Commissioner, 153 F.3d 302 (6th Cir. 
1998), cert. denied, 67 U.S.L.W. 3525 (U.S. Feb. 22, 1999) (No. 98-
794).In an earlier case, the Supreme Court specifically reserved ruling 
on whether the Tax Curt may apply equitable recoupment in a case over 
which it otherwise has jurisdiction. United States v. Dalm, 494 U.S. 
596, 611 n.8 (1990).
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                           reasons for change

    The Committee believes that the doctrine of equitable 
recoupment should also be available in the Tax Court.

                        explanation of provision

    Under the bill, Section 6214(b) is amended to provide that 
the Tax Court may apply the principle of equitable recoupment 
to the same extent that it may be applied in Federal civil tax 
cases by the District Courts and the Court of Federal 
Claims.66
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    \66\ No inference is intended with respect to whether the Tax Court 
has the authority to continue to apply other equitable principles in 
deciding matters over which it has jurisdiction.
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                             effective date

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment.

 T. Allow Certain Wholesale Distributors and Control State Entities To 
       Elect To Be Treated as Distilled Spirits Plants Operators


 (sec. 1371 of the bill and secs. 5002, 5005, 5011, 5113, 5171, 5178, 
       5212, 5214, 5232, 5551, 5601, 5602, and 5684 of the Code)


                              Present Law

    Distilled spirits produced or imported (or brought) into 
the United States are subject to a $13.50 per proof gallon 
excise tax. A proof gallon is a U.S. gallon consisting of 50 
percent alcohol. The tax is imposed on removal of the distilled 
spirits from the distillery where produced in the case of 
domestically produced spirits. In the case of distilled spirits 
imported in bulk and transferred to a U.S. distillery, the tax 
is imposed upon removal from the distillery. In the case of 
bottled distilled spirits imported into the United States, the 
tax is imposed on removal of the spirits from customs custody 
or the first customs bonded warehouse in the United States (or 
in a foreign trade zone) to which the spirits are transferred.

                           Reasons for Change

    The Committee observes that imported distilled spirits may 
be warehoused, in bonded warehouses, and the excise tax on the 
imported spirits could be paid upon dispatch of the spirits 
from the warehouse to a retail outlet, assuming that the 
spirits were transferred direct to retail from the first 
warehouse in which they were located upon entry into the United 
States. The domestic distiller, on the other hand, pays the 
excise tax on distilled spirits upon removal from the 
distillery, even though such spirits may be marketed through an 
independent wholesaler prior to shipment to retail outlets. The 
Committee believes that wholesalers lose more time value of 
money on their tax payments with regard to domestic spirits 
prior to recovery from retail sales than with respect to 
imported spirits they handle. The Committee believes it is 
appropriate to equalize the timing of the payment of the 
distilled spirits excise tax.

                        Explanation of Provision

In general

    The bill allows certain wholesale dealers and certain 
control State entities 67 (collectively, ``bonded 
dealers'') to elect to become distilled spirits taxpayers. 
Bonded dealers qualifying to receive non-tax-paid distilled 
spirits from distilled spirits plants under this provision must 
be approved by the Treasury Department and post appropriate 
bond as required under present law for operators of distilled 
spirits plants.68 The election to become a bonded 
dealer must be made in the manner prescribed the Treasury 
Department and is governed by the rules applicable to 
applications for basic permits under section 204(a)(2) of Title 
27 of the U.S. Code (the ``Federal Alcohol Administration 
Act'').69 Code regulations relating to operation of 
distilled spirits plants, other than requirements directly 
related to production and bottling of distilled spirits, are 
extended to qualified bonded dealers.
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    \67\ A control State entity is a State or political subdivision of 
a State in which only the State or political subdivision is allowed by 
law to perform distilled spirits operations.
    \68\ The provision does not affect (i.e., narrow or expand) the 
circumstances in which distilled spirits may be transferred without 
payment of tax from a distilled spirits plant (the first warehouse in 
which spirits are landed in the case of bottled imported spirits). 
Thus, transfers of bottled distilled spirits between distilled spirits 
premises, or between customs bonded warehouses is not permitted.
    \69\ If an otherwise qualified wholesale distributor or control 
State entity applies for bonded dealer status, and the Treasury 
Department has not acted on that application within nine months of its 
filing, the wholesale distributor or control State entity is permitted 
to operate as a bonded dealer until action is taken on the application. 
This exception applies only to wholesale distributors that have 
received basic permits as an importer, wholesaler, or both, and have 
obtained a bond required under the Code, prior to filing an application 
for bonded dealer status. The requirement that a basis permit have been 
issued is waived in the case of controlled State entities making the 
election.
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    As under present law, excise tax will be determined in all 
cases upon removal from the distilled spirits plant or upon 
importation; however, in the case of distilled spirits 
transferred to a bonded dealer, payment of the tax will be 
delayed until the distilled spirits are removed from the bonded 
dealer's premises. All removals (including removals to other 
bonded dealers) of non-tax-paid distilled spirits by bonded 
dealers are subject to tax.
    Operators of distilled spirits plants and importers will be 
required to certify to bonded dealers the amount of tax due 
with respect to all distilled spirits transferred without 
payment of tax. Bonded dealers are liable for the full amount 
of tax reflected in the certification supplied by the operator 
of distilled spirits plant from which the spirits are 
transferred without payment of tax. Distilled spirits plant 
operators remain liable for any understatement of tax on the 
certifications.
    Only wholesale distributors or control State entities 
having gross receipts from the sale of distilled spirits within 
the United States in the 12-month period preceding the date on 
which the election is made equal to or exceeding $10 million 
may qualify as bonded dealers. Additionally, except in the case 
of control State entities, bonded dealers qualify only if they 
sell distilled spirits exclusively to other wholesale 
distributors (including other bonded dealers) or to independent 
retail dealers. Retail dealers, other than control State 
entities, are not permitted to be bonded dealers. For purposes 
of this rule, a wholesale distributor is treated as a retail 
dealer if the dealer directly, or indirectly through common 
ownership by or of a third party, more than 10 percent of a 
retail dealer.

Imposition of new surtax on non-tax-paid distilled spirits transferred 
        to premises of bonded dealers

    As a condition of being granted and retaining bonded 
dealers status, electing wholesale distributors and control 
State entities are subject to a new Federal excise surtax equal 
to 1.5 percent of their liability for distilled spirits tax. 
The surtax is imposed in the same manner as thepresent-law 
distilled spirits tax; payment of the tax must be made in the same 
manner as the underlying distilled spirits excise tax. The surtax will 
expire after December 31, 2010.

Rules governing payment of distilled spirits excise taxes

    Subject to two exceptions, payment of excise tax by bonded 
dealers generally is subject to the same rules as apply to 
payment by operators of distilled spirits plants under present 
law.70 First, a special accelerated payment 
requirement applies to distilled spirits tax (including the new 
1.5-percent surtax) imposed on non-tax-paid spirits transferred 
to bonded dealers. Under this special payment requirement, on 
each September 20, bonded dealers will be required to pay all 
excise tax deposits that otherwise would be due for the period 
September 16-30 and for all semi-monthly periods in the months 
of October and November. The bill includes a safe harbor 
against underpayment penalties and interest if this advance 
payment equals at least the amount that was due in the previous 
September 20 (or would have been due had the bonded dealer been 
qualified to receive non-tax-paid distilled spirits).
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    \70\ In addition to non-tax-paid distilled spirits, bonded dealers 
are permitted to store on their business premises, tax-paid distilled 
spirits and other alcoholic beverages and untaxed merchandise.
---------------------------------------------------------------------------
    Second, all bonded dealers must pay their distilled spirits 
excise tax (including the new surtax) by electronic funds 
transfer.

Studies and reports

    The bill directs the Treasury Department to study and 
report to the House Committee on Ways and Means and the Senate 
Committee on Finance whether administrative efficiencies could 
result from cooperative tax collection agreements between the 
Federal Government and States. This report is due no later than 
the date which is one year after the bill's enactment.
    The bill further directs the Treasury Department to study 
and report to these two Committees, the effect allowing bonded 
dealers to receive non-tax-paid distilled spirits on taxpayer 
compliance with the provisions of Code section 5010 (the ``wine 
and flavors credits''). This report is due no later than June 
1, 2002.

                             Effective Date

    The provision is effective beginning on the first day of 
the first calendar quarter that begins at least 120 days after 
the bill's enactment.

            TITLE XIV. EXTENSION OF EXPIRING TAX PROVISIONS


A. Extension of Research and Experimentation Credit and Increase in the 
         Rates for the Alternative Incremental Research Credit


            (sec. 1401 of the bill and sec. 41 of the Code)


                              Present Law

General rule

    Section 41 provides for a research tax credit equal to 20 
percent of the amount by which a taxpayer's qualified research 
expenditures for a taxable year exceeded its base amount for 
that year. The research tax credit expired and generally does 
not apply to amounts paid or incurred after June 30, 1999.
    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. 71
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    \71\ 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-based 
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 applies to the 
taxable year in which the election is made 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'').72
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    \72\ 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 is 
technological in nature, the application of which is intended 
to be useful in the development of a new or improved business 
component of the taxpayer, and must 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 five years--
i.e., generally, for the period July 1, 1999, through June 30, 
2004.
    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.

                             Effective Date

    The extension of the research credit is effective for 
qualified research expenditures paid or incurred during the 
period July 1, 1999, through June 30, 2004. The increase in the 
credit rate under the alternative incremental research credit 
is effective for taxable years beginning after June 30, 1999.

    B. Extend Exceptions Under Subpart F for Active Financing Income


       (sec. 1402 of the bill and secs. 953 and 954 of the Code)


                              Present Law

    Under the subpart F rules, 10-percent 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. In addition, 10-percent U.S. 
shareholders of a CFC 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, foreign base company services income, and insurance 
income apply for subpart F purposes for certain income that is 
derived in the active conduct of a banking, financing, or 
similar business, or in the conduct of an insurance business 
(so-called ``active financing income''). These exceptions are 
applicable only for taxable years beginning in 
1999.73
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    \73\ Temporary exceptions from the subpart F provisions for certain 
active financing income applied only for taxable years beginning in 
1998. Those exceptions were extended and modified as part of the 
present-law provision.
---------------------------------------------------------------------------
    With respect to income derived in the active conduct of a 
banking, financing, or similar business, a CFC is required to 
be predominantly engaged in such business and to conduct 
substantial activity with respect to such business in order to 
qualify for the exceptions. In addition, certain nexus 
requirements apply, which provide that income derived by a CFC 
or a qualified business unit (``QBU'') of a CFC from 
transactions with customers is 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. Moreover, the exceptions apply to 
income derived from certain cross border transactions, provided 
that certain requirements are met. Additional exceptions from 
foreign personal holding company income apply for certain 
income derived by a securities dealer within the meaning of 
section 475 and for gain from the sale of active financing 
assets.
    In the case of insurance, in addition to a temporary 
exception from foreign personal holding company income for 
certain income of a qualifying insurance company with respect 
to risks located within the CFC's country of creation or 
organization, certain temporary exceptions from insurance 
income and from foreign personal holding company income apply 
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, additional temporary 
exceptions from insurance income and from foreign personal 
holding company income apply for certain income of certain CFCs 
or branches with respect to risks located in a country other 
than the United States, provided that the requirements for 
these exceptions are met.

                           Reasons for Change

    In the Taxpayer Relief Act of 1997, one-year temporary 
exceptions from foreign personal holding company income were 
enacted 74 for income from the active conduct of an 
insurance, banking, financing, or similar business. In the Tax 
and Trade Relief Extension Act of 1998 (the ``1998 
Act''),75 the Congress extended the temporary 
exceptions for an additional year, with certain modifications 
designed to treat various types of businesses with active 
financing income more similarly to each other than did the 1997 
provision. The Committee believes that it is appropriate to 
extend the temporary exceptions, as modified in the 1998 Act, 
for another five years.
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    \74\ The President canceled this provision in1997 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).
    \75\ Division J of H.R. 4328, the Omnibus Consolidated and 
Emergency Supplemental Appropriations Act, 1999.
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                        Explanation of Provision

    The bill extends for five years the present-law temporary 
exceptions from subpart F foreign personal holding company 
income, foreign base company services income, and insurance 
income for certain income that is derived in the active conduct 
of a banking, financing, or similar business, or in the conduct 
of an insurance business.

                             Effective Date

    The provision is effective for taxable years of a foreign 
corporation beginning after December 31, 1999, and before 
January 1, 2005, and for taxable years of U.S. shareholders 
with or within which such taxable years of such foreign 
corporation end.

 C. Extend Suspension of Net Income Limitation on Percentage Depletion 
                    From Marginal Oil and Gas Wells


           (sec. 1403 of the bill and sec. 613A of the Code)


                              Present Law

    The Code permits taxpayers to recover their investments in 
oil and gas wells through depletion deductions. In the case of 
certain properties, the deductions may be determined using the 
percentage depletion method. Among the limitations that apply 
in calculating percentage depletion deductions is a restriction 
that, for oil and gas properties, the amount deducted may not 
exceed 100 percent of the net income from that property in any 
year (sec. 613(a)).
    Special percentage depletion rules apply to oil and gas 
production from ``marginal'' properties (sec. 613A(c)(6)). 
Marginal production is defined as domestic crude oil and 
natural gas production from stripper well property or from 
property substantially all of the production from which during 
the calendar year is heavy oil. Stripper well property is 
property from which the average daily production is 15 barrel 
equivalents or less, determined by dividing the average daily 
production of domestic crude oil and domestic natural gas from 
producing wells on the property for the calendar year by the 
number of wells. Heavy oil is domestic crude oil with a 
weighted average gravity of 20 degrees API or less (corrected 
to 60 degrees Farenheit). Under one such special rule, the 100-
percent-of-net-income limitation does not apply to domestic oil 
and gas production from marginal properties during taxable 
years beginning after December 31, 1997, and before January 1, 
2000.

                           Reasons for Change

    The Committee notes that oil is, and will continue to be, 
vital to the American economy. The Committee observes that low 
oil prices have created substantial economic hardship in the 
oil industry and particularly in those communities where the 
majority of jobs are related to providing this vital commodity 
to the nation. Skilled workers and industry know-how will be 
critical to the exploration for and production of oil and gas 
in the future. The Committee, therefore, is concerned that the 
current economic hardship in the industry could lead to 
business failures and job losses. The Committee understands 
that many of these businesses are cash starved. The Committee 
finds it appropriate to extend the present-law rule suspending 
the 100-percent-of-net-income limitation with respect to oil 
and gas production from marginal wells. The Committee believes 
that by reducing current taxable income, less cash will have to 
be devoted to income tax payments and the current cash position 
of many such businesses will improve, helping them weather this 
current economic storm.

                        Explanation of Provision

    The bill extends the present-law rule suspending the 100-
percent-of-net-income limitation with respect to oil and gas 
production from marginal wells to include taxable years 
beginning after December 31, 1999, and before January 1, 2005.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1999.

               D. Extend the Work Opportunity Tax Credit


            (sec. 1404 of the bill and sec. 51 of the Code)


                              Present Law

    The work opportunity tax credit (``WOTC'') is available on 
an elective basis for employers hiring individuals from one or 
more of eight targeted groups. The credit generally is equal to 
a percentage of qualified wages. The credit percentage is 25 
percent for employment of at least 120 hours but less than 400 
hours and 40 percent for employment of 400 hours or more. 
Qualified wages consist of wages attributable to service 
rendered by a member of a targeted group during the one-year 
period beginning with the day the individual begins work for 
the employer.
    Generally, no more than $6,000 of wages during the first 
year of employment is permitted to be taken into account with 
respect to any individual. Thus, the maximum credit per 
individual is $2,400. With respect to qualified summer youth 
employees, the maximum credit is 40 percent of up to $3,000 of 
qualified first-year wages, for a maximum credit of $1,200. The 
credit is only effective for wages paid to, or incurred with 
respect to, qualified individuals who began work for the 
employer before July 1, 1999.
    The employer's deduction for wages is reduced by the amount 
of the credit.

                           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 (e.g., lacking in work 
experience) 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. The 
Committee also believes that the electronic filing of the 
request for certification (the ``Form 8850'') will reduce the 
administrative burden involved in claiming the credit and 
encourage more employers to participate in the program.

                        Explanation of Provision

    The bill extends the WOTC for 30 months (through December 
31, 2001).
    The bill also directs to the Secretary of the Treasury to 
expedite procedures to allow taxpayers to satisfy their WOTC 
filing requirements (e.g., Form 8850) by electronic means.

                             Effective Date

    Generally, the provision is effective for wages paid to, or 
incurred with respect to, qualified individuals who begin work 
for the employer on or after July 1, 1999, and before January 
1, 2002.

                E. Extend the Welfare-To-Work Tax Credit


            (sec. 1404 of the bill and sec. 51A of the Code)


                              Present Law

    The Code provides a tax credit to employers on the first 
$20,000 of eligible wages paid to qualified long-term family 
assistance (``TANF'') recipients during the first two years of 
employment. The credit is 35 percent of the first $10,000 of 
eligible wages in the first year of employment and 50 percent 
of the first $10,000 of eligible wages in the second year of 
employment. The maximum credit is $8,500 per qualified 
employee.
    Qualified long-term family assistance recipients are: (1) 
members of a family that has received family assistance for at 
least 18 consecutive months ending on the hiring date; (2) 
members of a family that has received family assistance for a 
total of at least 18 months (whether or not consecutive) after 
August 5, 1997 (the date of enactment of this credit) if they 
are hired within 2 years after the date that the 18-month total 
is reached; and (3) members of a family who are no longer 
eligible for family assistance because of either Federal or 
State time limits, if they are hired within 2 years after the 
Federal or State time limits made the family ineligible for 
family assistance.
    Eligible wages include cash wages paid to an employee plus 
amounts paid by the employer for the following: (1) educational 
assistance excludable under a section 127 program (or that 
would be excludable but for the expiration of sec. 127); (2) 
health plan coverage for the employee, but not more than the 
applicable premium defined under section 4980B(f)(4); and (3) 
dependent care assistance excludable under section 129.
    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 June 30, 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 30 months, 
so that the credit is available for eligible individuals who 
begin work for an employer before January 1, 2002.

                             Effective Date

    The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after July 1, 1999, and before January 1, 2002.

                  TITLE XV. REVENUE OFFSET PROVISIONS


       A. Expand Reporting of Cancellation of Indebtedness Income


           (sec. 1501 of the bill and sec. 6050P of the Code)


                              Present Law

    Under section 61(a)(12), a taxpayer's gross income includes 
income from the discharge of indebtedness. Section 6050P 
requires ``applicable entities'' to file information returns 
with the Internal Revenue Service (IRS) regarding any discharge 
of indebtedness of $600 or more.
    The information return must set forth the name, address, 
and taxpayer identification number of the person whose debt was 
discharged, the amount of debt discharged, the date on which 
the debt was discharged, and any other information that the IRS 
requires to be provided. The information return must be filed 
in the manner and at the time specified by the IRS. The same 
information also must be provided to the person whose debt is 
discharged by January 31 of the year following the discharge.
    ``Applicable entities'' include: (1) the Federal Deposit 
Insurance Corporation (FDIC), the Resolution Trust Corporation 
(RTC), the National Credit Union Administration, and any 
successor or subunit of any of them; (2) any financial 
institution (as described in sec. 581 (relating to banks) or 
sec. 591(a) (relating to savings institutions)); (3) any credit 
union; (4) any corporation that is a direct or indirect 
subsidiary of an entity described in (2) or (3) which, by 
virtue of being affiliated with such entity, is subject to 
supervision and examination by a Federal or State agency 
regulating such entities; and (5) an executive, judicial, or 
legislative agency (as defined in 31 U.S.C. sec. 3701(a)(4)).
    Failures to file correct information returns with the IRS 
or to furnish statements to taxpayers with respect to these 
discharges of indebtedness are subject to the same general 
penalty that is imposed with respect to failures to provide 
other types of information returns. Accordingly, the penalty 
for failure to furnish statements to taxpayers is generally $50 
per failure, subject to a maximum of $100,000 for any calendar 
year. These penalties are not applicable if the failure is due 
to reasonable cause and not to willful neglect.

                           Reasons for Change

    The Committee believes that it is appropriate to treat 
discharges of indebtedness that are made by similar entities in 
a similar manner. Accordingly, the Committee believes that it 
is appropriate to extend the scope of this information 
reporting provision to include indebtedness discharged by any 
organization a significant trade or business of which is the 
lending of money (such as finance companies and credit card 
companies whether or not affiliated with financial 
institutions).

                        Explanation of Provision

    The bill requires information reporting on indebtedness 
discharged by any organization a significant trade or business 
of which is the lending of money (such as finance companies and 
credit card companies whether or not affiliated with financial 
institutions).

                             Effective Date

    The provision is effective with respect to discharges of 
indebtedness after December 31, 1999.

                     B. Extension of IRS User Fees


         (sec. 1502 of the bill and new sec. 7527 of the Code)


                              Present Law

    The IRS provides written responses to questions of 
individuals, corporations, and organizations relating to their 
tax status or the effects of particular transactions for tax 
purposes. The IRS generally charges a fee for requests for a 
letter ruling, determination letter, opinion letter, or other 
similar ruling or determination. Public Law 104-117 
76 extended the statutory authorization for these 
user fees 77 through September 30, 2003.
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    \76\ An Act to provide that members of the Armed Forces performing 
services for the peackeeping efforts in Bosnia and Herzegovina, 
Croatia, and Macedonia shall be entitled to tax benefits in the same 
manner as if such services were performed in a combat zone, and for 
other purposes (March 20, 1996).
    \77\ These user fees were originally enacted in section 10511 of 
the Revenue Act of 1987 (Public Law 100-203, December 22, 1987).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that it is appropriate to extend the 
statutory authorization for these user fees for an additional 
six years.

                        Explanation of Provision

    The bill extends the statutory authorization for these user 
fees through September 30, 2009. The bill also moves the 
statutory authorization for these fees into the Internal 
Revenue Code.

                             Effective Date

    The provision, including moving the statutory authorization 
for these fees into the Code and repealing the off-Code 
statutory authorization for these fees, is effective for 
requests made after the date of enactment.

    C. Impose Limitation on Prefunding of Certain Employee Benefits


      (sec. 1503 of the bill and secs. 419A and 4976 of the Code)


                              Present Law

    Under present law, contributions to a welfare benefit fund 
generally are deductible when paid, but only to the extent 
permitted under the rules of sections 419 and 419A. The amount 
of an employer's deduction in any year for contributions to a 
welfare benefit fund cannot exceed the fund's qualified cost 
for the year minus the fund's after-tax income for the year. 
With certain exceptions, the term qualified cost means the sum 
of (1) the amount that would be deductible for benefits 
provided during the year if the employer paid them directly and 
was on the cash method of accounting, and (2) within limits, 
the amount of any addition to a qualified asset account for the 
year. A qualified asset account includes any account consisting 
of assets set aside for the payment of disability benefits, 
medical benefits, supplemental unemployment compensation or 
severance pay benefits, or life insurance benefits. The account 
limit for a qualified asset account for a taxable year is 
generally the amount reasonably and actuarially necessary to 
fund claims incurred but unpaid (as of the close of the taxable 
year) for benefits with respect to which the account is 
maintained and the administrative costs incurred with respect 
to those claims. Specific additional reserves are allowed for 
future provision of post-retirement medical and life insurance 
benefits.
    The deduction limits of sections 419 and 419A for 
contributions to welfare benefit funds do not apply in the case 
of certain 10-or-more employer plans. A plan is a 10-or-more 
employer plan if (1) more than one employer contributes to it, 
and (2) no employer is normally required to contribute more 
than 10 percent of the total contributions contributed under 
the plan by all employers. The exception is not available if 
the plan maintains experience-rating arrangements with respect 
to individual employers.
    If any portion of a welfare benefit fund reverts to the 
benefit of an employer, an excise tax equal to 100 percent of 
the reversion is imposed on the employer.

                           Reasons for Change

    The Committee understands that the exception to the welfare 
benefit fund deduction limits for 10-or-more employer plans has 
been utilized to fund retirement-type benefits that avoid the 
dollar limitations and other rules applicable to qualified 
retirement plans and the deduction timing rules applicable to 
nonqualified deferred compensation arrangements. Congress 
intended the exception to apply to a multiple employer welfare 
benefit plan under which the relationship of a participating 
employer to the plan is similar to the relationship of an 
insured to an insurer, and did not intend the exception to 
apply if the liability of any employer under the plan is 
determined on the basis of experience rating, which can create, 
in effect, a single-employer plan within a 10-or-more-employer 
arrangement. It is difficult to identify whether experience 
rating is present with respect to the provision of some 
benefits, such as severance pay and certain death benefits, 
because of the complexity of the arrangements. Therefore, the 
Committee believes that it is appropriate to limit the benefits 
for which the 10-or-more employer exception is available.

                        Explanation of Provision

    Under the provision, the present-law exception to the 
deduction limit for 10-or-more employer plans is limited to 
plans that provide only medical benefits, disability benefits, 
and qualifying group-term life insurance benefits to plan 
beneficiaries. For purposes of this provision, qualifying 
group-term life insurance benefits do not include any 
arrangements that permit a plan beneficiary to directly or 
indirectly access all or part of the account value of any life 
insurance contract, whether through a policy loan, a partial or 
complete surrender of the policy, or otherwise. It is intended 
that qualifying group-term life insurance benefits do not 
include any arrangement whereby a plan beneficiary may receive 
a policy without a stated account value that has the potential 
to give rise to an account value whether through the exchange 
of such policy for another policy that would have an account 
value or otherwise. The 10-or- more employer plan exception is 
no longer available with respect to plans that provide 
supplemental unemployment compensation, severance pay, or life 
insurance (other than qualifying group-term life insurance) 
benefits. Thus, the generally applicable deduction limits 
(sections 419 and 419A) apply to plans providing these 
benefits.
    In addition, if any portion of a welfare benefit fund 
attributable to contributions that are deductible pursuant to 
the 10-or-more employer exception (and earnings thereon) is 
used for a purpose other than for providing medical benefits, 
disability benefits, or qualifying group-term life insurance 
benefits to plan beneficiaries, such portion is treated as 
reverting to the benefit of the employers maintaining the fund 
and is subject to the imposition of the 100-percent excise tax. 
Thus, for example, cash payments to employees upon termination 
of the fund, and loans or other distributions to the employee 
or employer, would be treated as giving rise to a reversion 
that is subject to the excise tax.
    Under the provision, no inference is intended with respect 
to the validity of any 10-or-more employer arrangement under 
the provisions of present law.

                             Effective Date

    The provision is effective with respect to contributions 
paid or accrued on or after June 9, 1999, in taxable years 
ending after such date.

  D. Increase Elective Withholding Rate for Nonperiodic Distributions 
                    From Deferred Compensation Plans


           (sec. 1504 of the bill and sec. 3405 of the Code)


                              Present Law

    Present law provides that income tax withholding is 
required on designated distributions from employer compensation 
plans (whether or not such plans are tax qualified), individual 
retirement arrangements (``IRAs''), and commercial annuities 
unless the payee elects not to have withholding apply. A 
designated distribution does not include any payment (1) that 
is wages, (2) the portion of which it is reasonable to believe 
is not includible in gross income, 78 (3) that is 
subject to withholding of tax on nonresident aliens and foreign 
corporations (or would be subject to such withholding but for a 
tax treaty), or (4) that is a dividend paid on certain employer 
securities (as defined in sec. 404(k)(2)).
---------------------------------------------------------------------------
    \78\ All IRA distributions are treated as if includible in income 
for purposes of this rule. A technical correction contained in the bill 
modifies this rule in the case of Roth IRAs.
---------------------------------------------------------------------------
    Tax is generally withheld on the taxable portion of any 
periodic payment as if the payment is wages to the payee. A 
periodic payment is a designated distribution that is an 
annuity or similar periodic payment.
    In the case of a nonperiodic distribution, tax generally is 
withheld at a flat 10-percent rate unless the payee makes an 
election not to have withholding apply. A nonperiodic 
distribution is any distribution that is not a periodic 
distribution. Under current administrative rules, an individual 
receiving a nonperiodic distribution can designate an amount to 
be withheld in addition to the 10-percent otherwise required to 
be withheld.
    Under present law, in the case of a nonperiodic 
distribution that is an eligible rollover distribution, tax is 
withheld at a 20-percent rate unless the payee elects to have 
the distribution rolled directly over to an eligible retirement 
plan (i.e., an IRA, a qualified plan (sec. 401(a)) that is a 
defined contribution plan permitting direct deposits of 
rollover contributions, or a qualified annuity plan (sec. 
403(a)). In general, an eligible rollover distribution includes 
any distribution to an employee of all or any portion of the 
balance to the credit of the employee in a qualified plan or 
qualified annuity plan. An eligible rollover distribution does 
not include any distribution that is part of a series of 
substantially equal periodic payments made (1) for the life (or 
life expectancy) of the employee or for the joint lives (or 
joint life expectancies) of the employee and the employee's 
designated beneficiary, or (2) over the a specified period of 
10 years or more. An eligible rollover distribution also does 
not include any distribution required under the minimum 
distribution rules of section 401(a)(9), hardship distributions 
from section 401(k) plans, or the portion of a distribution 
that is not includible in income. The payee of an eligible 
rollover distribution can only elect not to have withholding 
apply by making the direct rollover election.

                           Reasons for Change

    The present-law 10-percent withholding rate is lower than 
the lowest income tax rate. Increasing the withholding rate to 
the lowest income tax rate makes it more likely that 
individuals who want withholding will have the correct amount 
of tax withheld.

                        Explanation of Provision

    Under the bill, the withholding rate for nonperiodic 
distributions would be increased from 10 percent to 15 percent. 
As under present law, unless the distribution is an eligible 
rollover distribution, the payee could elect not to have 
withholding apply. The bill does not modify the 20-percent 
withholding rate that applies to any distribution that is an 
eligible rollover distribution.

                             Effective Date

    The provision is effective for distributions made after 
December 31, 1999.

               E. Modify Treatment of Closely-Held REITs


            (sec. 1505 of the bill and sec. 856 of the Code)


                              Present Law

    In general, a real estate investment trust (``REIT'') is an 
entity that receives most of its income from passive real 
estate related investments and that receives pass-through 
treatment for income that is distributed to shareholders. If an 
electing entity meets the qualifications for REIT status, the 
portion of its income that is distributed to the investors each 
year generally is taxed to the investors without being 
subjected to tax at the REIT level.
    A REIT must satisfy a number of tests on a year-by-year 
basis that relate to the entity's: (1) organizational 
structure; (2) source of income; (3) nature of assets; and (4) 
distribution of income.
    Under the organizational structure test, except for the 
first taxable year for which an entity elects to be a REIT, the 
beneficial ownership of the entity must be held by 100 or more 
persons. Generally, no more than 50 percent of the value of the 
REIT's stock can be owned by five or fewer individuals during 
the last half of the taxable year. Certain attribution rules 
apply in making this determination. No similar rule applies to 
corporate ownership of a REIT. Certain transactions have been 
structured to attempt to achieve special tax benefits for an 
entity that controls a REIT.

                           Reasons for Change

    The Committee is aware of a number of situations in which a 
closely held REIT may be used as a conduit to recharacterize 
items of income. Some cases causing concern have already been 
addressed by legislation (e.g., ``liquidating reits,'' which 
attempted to eliminate tax on income for a period of years) or 
by regulations (e.g., ``step-down preferred'' stock, which 
attempted to provide a corporate borrower with a deduction for 
payment of principal as well as interest on a loan).
    Nevertheless, the Committee is concerned that closely-held 
REITs may be used to obtain other tax benefits, chiefly from 
the ability to recharacterize the income earned by the REIT as 
a dividend to the REIT owners, as well as to control the timing 
of such a dividend. Therefore, the provision adds new ownership 
restrictions designed to limit opportunities for inappropriate 
income recharacterization.
    In certain limited cases, the Committee believes that 
additional time to satisfy the new requirements should be 
granted to enable the REIT to establish an operating history 
before going REIT public.

                        Explanation of Provision

    The provision imposes as an additional requirement for REIT 
qualification that, except for the first taxable year for which 
an entity elects to be a REIT, no one person can own stock of a 
REIT possessing 50 percent or more of the combined voting power 
of all classes of votingstock or 50 percent or more of the 
total value of shares of all classes of stock of the REIT. For purposes 
of determining a person's stock ownership, rules similar to attribution 
rules for REIT qualification under present law apply (secs. 856(d)(5) 
and 856(h)(3)). The provision does not apply to ownership by a REIT of 
50 percent or more of the stock (by vote or value) of another REIT.
    An exception applies for a limited period to certain 
``incubator REITs''. An incubator REIT is a corporation that 
elects to be treated as an incubator REIT and that meets all 
the following other requirements. (1) it has only voting common 
stock outstanding, (2) not more than 50 percent of the 
corporation's real estate assets consist of mortgages, (3) from 
not later than the beginning of the last half of the second 
taxable year, at least 10 percent of the corporation's capital 
is provided by lenders or equity investors who are unrelated to 
the corporation's largest shareholder, (4) the directors of the 
corporation adopt a resolution setting forth an intent to 
engage in a going public transaction, and (5) no predecessor 
entity (including any entity from which the electing incubator 
REIT acquired assets in a transaction in which gain or loss was 
not recognized in whole or in part) had elected incubator REIT 
status.
    The new ownership requirement does not apply to an electing 
incubator REIT until the end of the REIT's third taxable year; 
and may be extended for an additional two taxable years if the 
REIT so elects. However, a REIT cannot elect the additional two 
year extension unless the REIT agrees that if it does not 
engage in a going public transaction by the end of the extended 
eligibility period, it is required to pay Federal income taxes 
for the two years of the extended period as if it had not made 
an incubator REIT election and had ceased to qualify as a REIT 
for those two taxable years. In such case, the corporation is 
required to file appropriate amended returns with 3 months of 
the close of the extended eligibility period. Interest is 
payable, but no substantial underpayment penalties apply except 
in cases where there is a finding that incubator REIT status 
was elected for a principal purpose other than as part of a 
reasonable plan to engage in a going public transaction. 
Notification of shareholders and any other person whose tax 
position would reasonably be expected to be affected is also 
required.
    If an electing incubator REIT does not elect to extend its 
initial 2-year extended eligibility period and has not engaged 
in a going public transaction by the end of such period, it 
must satisfy the new control requirements as of the beginning 
of its fourth taxable year (i.e., immediately after the close 
of the last taxable year of the two-year initial extension 
period) or it is required to notify its shareholders and other 
persons that may be affected by its tax status, and pay Federal 
income tax as a corporation that has ceased to qualify as a 
REIT as of that time.
    If the Secretary of the Treasury determines that an 
incubator REIT election was filed for a principal purpose other 
than as part of a reasonable plan to undertake a going public 
transaction, an excise tax of $20,000 is imposed on each of the 
corporation's directors for each taxable year for which the 
election was in effect.
    A going public transaction is defined as either (1) a 
public offering of shares of stock of the incubator REIT, (2) a 
transaction, or series of transactions, that result in the 
incubator REIT stock being regularly traded on an established 
securities market (as defined in section 897) and being held by 
shareholders unrelated to persons who held such stock before it 
began to be so regularly traded, or (3) any transaction 
resulting in ownership of the REIT by 200 or more persons 
(excluding the largest single shareholder) who in the aggregate 
own at least 50 percent of the stock of the REIT. Attribution 
rules apply in determining ownership of stock.

                             Effective Date

    The provision is effective for entities electing REIT 
status for taxable years ending after July 12, 1999. Any entity 
that is a controlled entity on July 12, 1999, that is a REIT 
for a taxable year including such date, and that has 
significant business assets or activities as of such date will 
not be subject to the proposal.
    Under this rule, a controlled entity with significant 
business assets or activities as of July 12, 1999 can be 
grandfathered even if it makes its first REIT election after 
that date with its return for the taxable year including that 
date. In such a case, the significant assets in place as of 
July 12, 1999 must be real estate assets that would be 
qualified real estate assets for purposes of the REIT asset 
rules. The assets and activities in place on that date must 
also be of a type that would produce qualified real estate-
related income for a REIT.

F. Limit Conversion of Character of Income From Constructive Ownership 
                              Transactions


         (sec. 1506 of the bill and new sec. 1260 of the Code)


                              Present Law

    The maximum individual income tax rate on ordinary income 
and short-term capital gain is 39.6 percent, while the maximum 
individual income tax rate on long-term capital gain generally 
is 20 percent. Long-term capital gain means gain from the sale 
or exchange of a capital asset held more than one year. For 
this purpose, gain from the termination of a right with respect 
to property which would be a capital asset in the hands of the 
taxpayer is treated as capital gain.\79\
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    \79\ Section 1234A. as amended by the Taxpayer Relief Act of 1997.
---------------------------------------------------------------------------
    A pass-thru entity (such as a partnership) generally is not 
subject to Federal income tax. Rather, each owner includes its 
share a of pass-thru entity's income, gain, loss, deduction or 
credit in its taxable income. Generally, the character of the 
item is determined at the entity level and flows through to the 
owners. Thus, for example, the treatment of an item of income 
by a partnership as ordinary income, short-term capital gain, 
or long-term capital gain retains its character when reported 
by each of the partners.
    Investors may enter into forward contracts, notional 
principal contracts, and other similar arrangements with 
respect to property that provides the investor with the same or 
similar economic benefits as owning the property directly but 
with potentially different tax consequences (as to the 
character and timing of any gain).

                           Reasons for Change

    The Committee is concerned with the use of derivative 
contracts by taxpayers in arrangements that are primarily 
designed to convert what otherwise would be ordinary income and 
short-term capital gain into long-term capital gain. Of 
particular concern are derivative contracts with respect to 
partnerships and other pass-through entities. The use of such 
derivative contracts results in the taxpayer being taxed in a 
more favorable manner than had the taxpayer actually acquired 
an ownership interest in the entity. The current rules designed 
to prevent the conversion of ordinary income into capital gain 
(sec. 1258) only apply to transactions where the taxpayer's 
expected return is attributable solely to the time value of the 
taxpayer's net investment.
    One example of a conversion transaction involving a 
derivative contract is when a taxpayer enters into an 
arrangement with a securities dealer \80\ whereby the dealer 
agrees to pay the taxpayer any appreciation with respect to a 
notional investment in a ``hedge fund'' partnership. In return, 
the taxpayer agrees to pay the securities dealer any 
depreciation in the value of the notional investment. The 
arrangement lasts for more than one year. The taxpayer is in 
the same economic position as if he or she owned the interest 
in the hedge fund. However, the taxpayer may treat any 
appreciation resulting from the contractual arrangement as 
long-term capital gain. Moreover, any tax attributable to such 
gain is deferred until the arrangement is terminated.
---------------------------------------------------------------------------
    \80\ Assuming the securities dealer purchases the financial asset, 
the dealer would mark both the financial asset and the contractual 
arrangement to market under Code sec. 475, and the economic 
consequences of the two positions would offset each other.
---------------------------------------------------------------------------

                        Explanation of Provision

    The provision limits the amount of long-term capital gain a 
taxpayer could recognize from certain derivative contracts 
(``constructive ownership transaction'') with respect to 
certain financial assets. The amount of long-term capital gain 
is limited to the amount of such gain the taxpayer would have 
had if the taxpayer held the asset directly during the term of 
the derivative contract. Any gain in excess of this amount is 
treated as ordinary income. An interest charge is imposed on 
the amount of gain that is treated as ordinary income. The bill 
does not alter the tax treatment of the long-term capital gain 
that is not treated as ordinary income.
    A taxpayer is treated as having entered into a constructive 
ownership transaction if the taxpayer (1) holds a long position 
under a notional principal contract with respect to the 
financial asset, (2) enters into a forward contract to acquire 
the financial asset, (3) is the holder of a call option, and 
the grantor of a put option, with respect to a financial asset, 
and the options have substantially equal strike prices and 
substantially contemporaneous maturity dates, or (4) to the 
extent provided in regulations, enters into one or more 
transactions, or acquires one or more other positions, that 
have substantially the same effect as any of the transactions 
described.
    The Committee anticipates that Treasury regulations, when 
issued, will provide specific standards for determining when 
other types of financial transactions, like those specified in 
the provision, have the effect of replicating the economic 
benefits of direct ownership of a financial asset (and will be 
treated as a constructive ownership transaction).
    A ``financial asset'' is defined as (1) any equity interest 
in a pass-thru entity, and (2) to the extent provided in 
regulations, any debt instrument and any stock in a corporation 
that is not a pass-thru entity. A ``pass-thru entity'' refers 
to (1) a regulated investment company, (2) a real estate 
investment trust, (3) an S corporation, (4) a partnership, (5) 
a trust, (6) a common trust fund, (7) a passive foreign 
investment company, (8) a foreign personal holding company, and 
(9) a foreign investment company.
    The amount of recharacterized gain is calculated as the 
excess of the amount of long-term gain the taxpayer would have 
had absent this provision over the ``net underlying long-term 
capital gain'' attributable to the financial asset. The net 
underlying long-term capital gain is the amount of net capital 
gain the taxpayer would have realized if it had acquired the 
financial asset for its fair market value on the date the 
constructive ownership transaction was opened and sold the 
financial asset on the date the transaction was closed (only 
taking into account gains and losses that would have resulted 
from the constructive ownership of the financial asset).\81\ 
The long-term capital gains rate on the net underlying long-
term capital gain is determined by reference to the individual 
capital gains rates in section 1(h).
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    \81\ A taxpayer must establish the amount of the net underlying 
long-term capital gain with clear and convincing evidence; otherwise, 
the amount is deemed to be zero.
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    Example 1: On January 1, 2000, Taxpayer enters into a 
three-year notional principal contract (a constructive 
ownership transaction) with a securities dealer whereby, on the 
settlement date, the dealer agrees to pay Taxpayer the amount 
of any increase in the notional value of an interest in an 
investment partnership (the financial asset). After three 
years, the value of the notional principal contract increased 
by $200,000, of which $150,000 is attributable to ordinary 
income and net short-term capital gain ($50,000 is attributable 
to net long-term capital gains). The amount of the net 
underlying long-term capital gains is $50,000, and the amount 
of gain that is recharacterized as ordinary income is $150,000 
(the excess of $200,000 of long-term gain over the $50,000 of 
net underlying long-term capital gain).
    An interest charge is imposed on the underpayment of tax 
for each year that the constructive ownership transaction was 
open. The interest charge is the amount of interest that would 
be imposed under section 6601 had the recharacterized gain been 
included in the taxpayer's gross income during the term of the 
constructive ownership transaction. The recharacterized gain is 
treated as having accrued such that the gain in each successive 
year is equal to the gain in the prior year increased by a 
constant growth rate \82\ during the term of the constructive 
ownership transaction.
---------------------------------------------------------------------------
    \82\ The accrual rate is the applicable Federal rate on the day the 
transaction closed.
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    Example 2: Same facts as in example 1, and assume the 
applicable Federal rate on December 31, 2002, is six percent. 
For purposes of calculating the interest charge, Taxpayer must 
allocate the $150,000 of recharacterized ordinary income to the 
three year-term of the constructive ownership transaction as 
follows: $47,116.47 is allocated to year 2000, $49,943.46 is 
allocated to year 2001, and $52,940.07 is allocated to year 
2002.
    A taxpayer is treated as holding a long position under a 
notional principal contract with respect to a financial asset 
if the person (1) has the right to be paid (or receive credit 
for) all or substantially all of the investment yield 
(including appreciation) on the financial asset for a specified 
period, and (2) is obligated to reimburse (or provide credit) 
for all or substantially all of any decline in the value of the 
financial asset. A forward contract is a contract to acquire in 
the future (or provide or receive credit for the future value 
of) any financial asset.
    If the constructive ownership transaction is closed by 
reason of taking delivery of the underlying financial asset, 
the taxpayer is treated as having sold the contracts, options, 
or other positions that are part of the transaction for its 
fair market value on the closing date. However, the amount of 
gain that is recognized as a result of having taken delivery is 
limited to the amount of gain that is treated as ordinary 
income by reason of this provision (with appropriate basis 
adjustments for such gain).
    The provision does not apply to any constructive ownership 
transaction if all of the positions that are part of the 
transaction are marked to market under the Code or regulations. 
The provision also does not apply to transactions entered into 
by tax-exempt organizations and foreign taxpayers.
    The Treasury Department is authorized to prescribe 
regulations as necessary to carry out the purposes of the 
provision, including to (1) permit taxpayers to mark to market 
constructive ownership transactions in lieu of the provision, 
and (2) exclude certain forward contracts that do not convey 
substantially all of the economic return with respect to a 
financial asset.

                             Effective Date

    The provision applies to transactions entered into on or 
after July 12, 1999.

 G. Treatment of Excess Pension Assets Used for Retiree Health Benefits


            (sec. 1507 of the bill and sec. 420 of the Code)


                              Present Law

    Defined benefit pension plan assets generally may not 
revert to an employer prior to the termination of the plan and 
the satisfaction of all plan liabilities. A reversion prior to 
plan termination may constitute a prohibited transaction and 
may result in disqualification of the plan. Certain limitations 
and procedural requirements apply to a reversion upon plan 
termination. Any assets that revert to the employer upon plan 
termination are includible in the gross income of the employer 
and subject to an excise tax. The excise tax rate, which may be 
as high as 50 percent of the reversion, varies depending upon 
whether or not the employer maintains a replacement plan or 
makes certain benefit increases. Upon plan termination, the 
accrued benefits of all plan participants are required to be 
100-percent vested.
    A pension plan may provide medical benefits to retired 
employees through a section 401(h) account that is a part of 
such plan. A qualified transfer of excess assets of a defined 
benefit pension plan (other than a multiemployer plan) into a 
section 401(h) account that is a part of such plan does not 
result in plan disqualification and is not treated as a 
reversion to the employer or a prohibited transaction. 
Therefore, the transferred assets are not includible in the 
gross income of the employer and are not subject to the excise 
tax on reversions.
    Qualified transfers are subject to amount and frequency 
limitations, use requirements, deduction limitations, vesting 
requirements and minimum benefit requirements. Excess assets 
transferred in a qualified transfer may not exceed the amount 
reasonably estimated to be the amount that the employer will 
pay out of such account during the taxable year of the transfer 
for qualified current retiree health liabilities. No more than 
one qualified transfer with respect to any plan may occur in 
any taxable year.
    The transferred assets (and any income thereon) must be 
used to pay qualified current retiree health liabilities 
(either directly or through reimbursement) for the taxable year 
of the transfer. Transferred amounts generally must benefit all 
pension plan participants, other than key employees, who are 
entitled upon retirement to receive retiree medical benefits 
through the section 401(h) account. Retiree health benefits of 
key employees may not be paid (directly or indirectly) out of 
transferred assets. Amounts not used to pay qualified current 
retiree health liabilities for the taxable year of the transfer 
are to be returned at the end of the taxable year to the 
general assets of the plan. These amounts are not includible in 
the gross income of the employer, but are treated as an 
employer reversion and are subject to a 20-percent excise tax.
    No deduction is allowed for (1) a qualified transfer of 
excess pension assets into a section 401(h) account, (2) the 
payment of qualified current retiree health liabilities out of 
transferred assets (and any income thereon) or (3) a return of 
amounts not used to pay qualified current retiree health 
liabilities to the general assets of the pension plan.
    In order for the transfer to be qualified, accrued 
retirement benefits under the pension plan generally must be 
100-percent vested as if the plan terminated immediately before 
the transfer.
    The minimum benefit requirement requires each group health 
plan under which applicable heath benefits are provided to 
provide substantially the same level of applicable health 
benefits for the taxable year of the transfer and the following 
4 taxable years. The level of benefits that must be maintained 
is based on benefits provided in the year immediately preceding 
the taxable year of the transfer. Applicable health benefits 
are health benefits or coverage that are provided to (1) 
retirees who, immediately before the transfer, are entitled to 
receive such benefits upon retirement and who are entitled to 
pension benefits under the plan and (2) the spouses and 
dependents of such retirees.
    The provision permitting a qualified transfer of excess 
pension assets to pay qualified current retiree health 
liabilities expires for taxable years beginning after December 
31, 2000.\83\
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    \83\ Title I of the Employee Retirement Income Security Act of 
1974, as amended (``ERISA''), provides that plan participants, the 
Secretaries of Treasury and the Department of Labor, the plan 
administrator, and each employee organization representing plan 
participants must be notified 60 days before a qualified transfer of 
excess assets to a retiree health benefits account occurs (ERISA sec. 
103(e)). ERISA also provides that a qualified transfer is not a 
prohibited transaction under ERISA (ERISA sec. 408(b)(13)) or a 
prohibited reversion of assets to the employer (ERISA sec. 403(c)(1)). 
For purposes of these provisions, a qualified transfer is generally 
defined as a transfer pursuant to section 420 of the Internal Revenue 
Code, as in effect on January 1, 1995.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that it is appropriate to provide a 
temporary extension of the present-law rule permitting an 
employer to make a qualified transfer of excess pension assets 
to a section 401(h) account for retiree health benefits as long 
as the security of employees' pension benefits is not 
threatened by the transfer. In light of the increasing cost of 
retiree health benefits, the Committee also believes that it is 
appropriate to replace the minimum benefit requirement 
applicable to qualified transfers under present law with a 
minimum cost requirement.

                        Explanation of Provision

    The present-law provision permitting qualified transfers of 
excess defined benefit pension plan assets to provide retiree 
health benefits under a section 401(h) account is extended 
through September 30, 2009. In addition, the present-law 
minimum benefit requirement is replaced by the minimum cost 
requirement that applied to qualified transfers before December 
9, 1994, to section 401(h) accounts. Therefore, each group 
health plan or arrangement under which applicable health 
benefits are provided is required to provide a minimum dollar 
level of retiree health expenditures for the taxable year of 
the transfer and the following 4 taxable years. The minimum 
dollar level is the higher of the applicable employer costs for 
each of the 2 taxable years immediately preceding the taxable 
year of the transfer. The applicable employer cost for a 
taxable year is determined by dividing the employer's qualified 
current retiree health liabilities by the number of individuals 
to whom coverage for applicable health benefits was provided 
during the taxable year.

                             Effective Date

    The provision is effective with respect to qualified 
transfers of excess defined benefit pension plan assets to 
section 401(h) accounts after December 31, 2000, and before 
October 1, 2009. The modification of the minimum benefit 
requirement is effective with respect to transfers after the 
date of enactment.

  H. Modify Installment Method and Prohibit Its Use by Accrual Method 
                               Taxpayers


     (sec. 1508 of the bill and sections 453 and 453A of the Code)


                              Present Law

    An accrual method taxpayer is generally required to 
recognize income when all the events have occurred that fix the 
right to the receipt of the income and the amount of the income 
can be determined with reasonable accuracy. The installment 
method of accounting provides an exception to this general 
principle of income recognition by allowing a taxpayer to defer 
the recognition of income from the disposition of certain 
property until payment is received. Sales to customers in the 
ordinary course of business are not eligible for the 
installment method, except for sales of property that is used 
or produced in the trade or business of farming and sales of 
timeshares and residential lots if an election to pay interest 
under section 453(l)(2)(B)) is made.
    A pledge rule provides that if an installment obligation is 
pledged as security for any indebtedness, the net proceeds \84\ 
of such indebtedness are treated as a payment on the 
obligation, triggering the recognition of income. Actual 
payments received on the installment obligation subsequent to 
the receipt of the loan proceeds are not taken into account 
until such subsequent payments exceed the loan proceeds that 
were treated as payments. The pledge rule does not apply to 
sales of property used or produced in the trade or business of 
farming, to sales of timeshares and residential lots where the 
taxpayer elects to pay interest under section 453(l)(2)(B), or 
to dispositions where the sales price does not exceed $150,000.
---------------------------------------------------------------------------
    \84\ The net proceeds equal the gross loan proceeds less the direct 
expenses of obtaining the loan.
---------------------------------------------------------------------------
    An additional rule requires the payment of interest on the 
deferred tax that is attributable to most large installment 
sales.

                           Reasons for Change

    The Committee believes that the installment method is 
inconsistent with the use of the accrual method of accounting 
and should not be allowed in situations where the disposition 
of property would otherwise be reported using the accrual 
method. The Committee is concerned that the continued use of 
the installment method in such situations would allow a 
deferral of gain that is inconsistent with the requirement of 
the accrual method that income be reported in the period it is 
earned, rather than the period it is received.
    The Committee also believes that the installment method, 
where its use is appropriate, should not serve to defer the 
recognition of gain beyond the time when funds are received. 
Accordingly, the Committee believes that proceeds of a loan 
should be treated in the same manner as a payment on an 
installment obligation if the loan is dependent on the 
existence of the installment obligation, such as where the loan 
is secured by the installment obligation or can be satisfied by 
the delivery of the installment obligation.

                        Explanation of Provision

Prohibition on the use of the installment method for accrual method 
        dispositions

    The provision generally prohibits the use of the 
installment method of accounting for dispositions of property 
that would otherwise be reported for Federal income tax 
purposes using an accrual method of accounting. The provision 
does not change present law regarding the availability of the 
installment method for dispositions of property used or 
produced in the trade or business of farming. The provision 
also does not change present law regarding the availability of 
the installment method for dispositions of timeshares or 
residential lots if the taxpayer elects to pay interest under 
section 453(l).
    The provision does not change the ability of a cash method 
taxpayer to use the installment method. For example, a cash 
method individual owns all of the stock of a closely held 
accrual method corporation. This individual sells his stock for 
cash, a ten year note, and a percentage of the gross revenues 
of the company for the next ten years. The provision would not 
change the ability of this individual to use the installment 
method in reporting the gain on the sale of the stock.

Modifications to the pledge rule

    The provision modifies the pledge rule to provide that 
entering into any arrangement that gives the taxpayer the right 
to satisfy an obligation with an installment note will be 
treated in the same manner as the direct pledge of the 
installment note. For example, a taxpayer disposes of property 
for an installment note. The disposition is properly reported 
using the installment method. The taxpayer only recognizes gain 
as it receives the deferred payment. However, were the taxpayer 
to pledge the installment note as security for a loan, it would 
be required to treat the proceeds of such loan as a payment on 
the installment note, and recognize the appropriate amount of 
gain. Under the provision, the taxpayer would also be required 
to treat the proceeds of a loan as payment on the installment 
note to the extent the taxpayer had the right to ``put'' or 
repay the loan by transferring the installment note to the 
taxpayer's creditor. Other arrangements that have a similar 
effect would be treated in the same manner.
    The modification of the pledge rule applies only to 
installment sales where the pledge rule of present law applies. 
Accordingly, the provision does not apply to installment method 
sales made by a dealer in timeshares and residential lots where 
the taxpayer elects to pay interest under section 453(l)(2)(B), 
to sales of property used or produced in the trade or business 
of farming, or to dispositions where the sales price does not 
exceed $150,000, since such sales are not subject to the pledge 
rule under present law.

                             Effective Date

    The provision is effective for sales or other dispositions 
entered into on or after the date of enactment.

  I. Limitation on Use of Non-Accrual Experience Method of Accounting


            (sec. 1509 of the bill and sec. 448 of the Code)


                              Present Law

    An accrual method taxpayer generally must recognize income 
when all the events have occurred that fix the right to receive 
the income and the amount of the income can be determined with 
reasonable accuracy. An accrual method taxpayer may deduct the 
amount of any receivable that was previously included in income 
that becomes worthless during the year.
    Accrual method taxpayers are not required to include in 
income amounts to be received for the performance of services 
which, on the basis of experience, will not be collected (the 
``non-accrual experience method''). The availability of this 
method is conditioned on the taxpayer not charging interest or 
a penalty for failure to timely pay the amount charged.
    A cash method taxpayer is not required to include an amount 
in income until it is received. A taxpayer may not use the cash 
method if purchase, production, or sale of merchandise is a 
material income producing factor. Such taxpayers generally are 
required to keep inventories and use an accrual method of 
accounting. In addition, corporations (and partnerships with 
corporate partners) generally may not use the cash method of 
accounting if their average annual gross receipts exceed $5 
million. An exception to this $5 million rule is provided for 
qualified personal service corporations. A qualified personal 
service corporation is a corporation (1) substantially all of 
whose activities involve the performance of services in the 
fields of health, law, engineering, architecture, accounting, 
actuarial science, performing arts or consulting and (2) 
substantially all of the stock of which is owned by current or 
former employees performing such services, their estates or 
heirs. Qualified personal service corporations are allowed to 
use the cash method without regard to whether their average 
annual gross receipts exceed $5 million.

                           Reasons for Change

    The Committee understands that the use of the non-accrual 
experience method provides the equivalent of a bad debt 
reserve, which generally is not available to taxpayers using 
the accrual method of accounting. The Committee believes that 
accrual method taxpayers should be treated similarly, unless 
there is a strong indication that different treatment is 
necessary to clearly reflect income or to address a particular 
competitive situation.
    The Committee understands that accrual basis providers of 
qualified personal services (services in the fields of health, 
law, engineering, architecture, accounting, actuarial science, 
performing arts or consulting) compete on a regular basis with 
competitors using the cash method of accounting. The Committee 
believes that this competitive situation justifies the 
continued availability of the non-accrual experience method 
with respect to amounts due to be received for the performance 
of qualified personal services. The Committee believes that it 
is important to avoid the disparity of treatment between 
competing cash and accrual method providers of qualified 
personal services that could result if the non-accrual 
experience method were eliminated with regard to amounts to be 
received for such services.

                        Explanation of Provision

    The bill provides that the non-accrual experience method 
will be available only for amounts to be received for the 
performance of qualified personal services. Amounts to be 
received for the performance of all other services will be 
subject to the general rule regarding inclusion in income. 
Qualified personal services are personal services in the fields 
of health, law, engineering, architecture, accounting, 
actuarial science, performing arts or consulting. As under 
present law, the availability of the method is conditioned on 
the taxpayer not charging interest or a penalty for failure to 
timely pay the amount.

                             Effective Date

    The provision is effective for taxable years ending after 
the date of enactment. Any change in the taxpayer's method of 
accounting necessitated as a result of the proposal will be 
treated as a voluntary change initiated by the taxpayer with 
the consent of the Secretary of the Treasury. Any required 
section 481(a) adjustment is to be taken into account over a 
period not to exceed four years under principles consistent 
with those in Rev. Proc. 98-60. 85
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    \85\ 1998-51 I.R.B. 16.
---------------------------------------------------------------------------

  J. Deny the Exclusion of Gain on the Sale of a Principal Residence 
 Which Was Acquired in a Like-Kind Exchange Within the Prior Five Years


            (sec. 1510 of the bill and sec. 121 of the Code)


                               Present Law

    Under present law, a 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) that is equal to the fraction of 
the two years that the ownership and use requirements are met. 
There are no special rules relating to the sale or exchange of 
a principal residence that was acquired in a like-kind exchange 
within the prior five years.

                           Reasons for Change

    The Committee believes that principal residences which were 
acquired in a tax deferred like-kind exchange should not also 
be eligible for the capital gain exclusion for principal 
residences for a period of five years after the like-kind 
exchange.

                        Explanation of Provision

    The bill denies the principal residence exclusion (sec. 
121) for gain on the sale or exchange of a principal residence 
if such principal residence was acquired in a like-kind 
exchange in which any gain was not recognized within the prior 
five years.

                             Effective Date

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

                  TITLE XVI. 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.

Amendments related to the Tax and Trade Relief Extension Act of 1998 
        (sec. 1601 of the bill)

    Exempt organizations.--The provision clarifies that 
nonexempt charitable trusts and nonexempt private foundations 
are subject to the public disclosure requirements of section 
6104(d).
    Capital gains.--The provision clarifies that if (1) a 
charitable remainder trust sold section 1250 property after 
July 28, 1997, and before January 1, 1998, (2) the property was 
held more than one year but not more than 18 months, and (3) 
the capital gain is distributed after December 31, 1997, then 
any capital gain attributable to depreciation will be taxed at 
25 percent (rather than 28 percent). Treasury has published a 
notice (Notice 99-17, 1999-14 I.R.B., April 5, 1999) providing 
that the gain is taxed at 25 percent.
    Vaccine Trust Fund.--In the Tax and trade Relief Extension 
Act of 1998, the tax on vaccines against rotavirus 
gastroenteritis and the technical correction regarding the 
Vaccine Injury Compensation Trust Fund expenditure purposes 
were inadvertently included twice, once in the spending title 
and once in the revenue title. In addition, in the spending 
title, the effective date of the substantive change to the 
expenditure program is drafted erroneously, such that claims to 
the Trust Fund for this new expenditure purpose cannot be paid. 
The provisions clarify that the intended vaccine tax and Trust 
Fund provisions regarding program spending authority are those 
included in the revenue title, and modify the revenue title 
provisions as necessary to allow spending for the new purpose 
created elsewhere in the Act.

Amendments related to the Internal Revenue Service Restructuring and 
        Reform Act of 1998 (sec. 1602 of the bill)

    IRS restructuring.--When the Office of the Chief Inspector 
was replaced by the Treasury Inspector General for Tax 
Administration (TIGTA) under the IRS Restructuring and Reform 
Act of 1998, Inspection's responsibilities were assigned to the 
TIGTA. TIGTA personnel are Treasury, rather than IRS, 
personnel. TIGTA personnel still need to make investigative 
disclosures to carry out the duties they took over from 
Inspection and their additional tax administration 
responsibilities. However, section 6103(k)(6) refers only to 
``internal revenue'' personnel. The provision clarifies that 
section 6103(k)(6) permits TIGTA personnel to make 
investigative disclosures.
    Compliance.--Section 3509 of the IRS Restructuring and 
Reform Act of 1998 expanded the disclosure rules of section 
6110 to also cover Chief Counsel advice (sec. 6110(i)). This is 
a conforming change related to ongoing investigations. The 
provision adds to section 6110(g)(5)(A), after the words 
technical advice memorandum, ``or Chief Counsel advice.''

Amendments Related to the Taxpayer Relief Act of 1997 (sec. 1603 of the 
        bill)

    Roth IRAs.--Code section 3405 provides for withholding with 
respect to designated distributions from certain tax-favored 
arrangements, including IRAs. In general, section 
3405(e)(1)(B)(ii) excludes from the definition of a designated 
distribution the portion of any distribution which it is 
reasonable to believe is excludable from gross income. However, 
all distributions from IRAs are treated as includible in 
income. The exception was consistent with prior law when all 
IRA distributions were taxable, but does not account for the 
tax-free nature of certain Roth IRA distributions. The 
provision extends the exception to Roth IRAs.
    Transportation benefits.--Under present law, salary 
reduction amounts are generally treated as compensation for 
purposes of the limits on contributions and benefits under 
qualified plans. In addition, an employer can elect whether or 
not to include such amounts for nondiscrimination testing 
purposes. The IRS Reform Act permitted employers to offer a 
cash option in lieu of qualified transportation benefits. The 
provision treats salary reduction amounts used for qualified 
transportation benefits the same as other salary reduction 
amounts for purposes of defining compensation under the 
qualified plan rules.
    Tax Court jurisdiction.--The Tax Court recently held that 
its jurisdiction pursuant to section 7436 extends only to 
employment status, not to the amount of employment tax in 
dispute (Henry Randolph Consulting v. Comm'r, 112 T.C. #1, Jan. 
6, 1999). The provision provides that the Tax Court also has 
jurisdiction over the amount.

Amendments to other acts (sec. 1604 of the bill)

    Worthless securities.--Section 165(g)(3) provides a special 
rule for worthless securities of an affiliated corporation. The 
test for affiliation in section 165(g)(3)(A) is the 80-percent 
vote test for affiliated groups under section 1504(a) that was 
in effect prior to 1984. When section 1504(a) was amended in 
the Deficit Reduction Act of 1984 to adopt the vote and value 
test of present law, no corresponding change was made to 
section 165(g)(3)(A), even though the tests had been identical 
until then. The provision conforms the affiliation test of 
section 165(g)(3)(A) to the test in section 1504(a)(2), 
effective for taxable years beginning after December 31, 1984.
    Work opportunity tax credit.--Section 51(d)(2) refers to 
eligibility for the work opportunity tax credit with respect to 
certain welfare recipients without taking into account the 
enactment of the temporary assistance for needy families 
(``TANF'') program. The provisions conform references in the 
work opportunity tax credit to the operation of TANF, effective 
as if included in the amendments made by section 1201 of the 
Small Business Job Protection Act of 1996.
    IRAs for nonworking spouses.--Section 1427 of the Small 
Business Job Protection Act of 1996 expanded the IRA deduction 
for nonworking spouses. The maximum permitted IRA contributions 
is generally limited by the individual's earned income. 
However, under present law, it is possible for a nonworking (or 
lesser earning) spouse to make IRA contributions in excess of 
the couple's combined earned income. The following example 
illustrates present law.
    Example: Suppose H and W retire in the middle of January, 
1999. In that year, H earns $1,000 and W earns $500. Both are 
active participants in an employer-sponsored retirement plan. 
Their modified AGI is $60,000. They make no Roth IRA 
contributions. Before application of the income phase-out 
rules, the maximum deductible IRA contribution that H can make 
is $1,000 (sec. 219(b)(1)). After application of the income 
phase-out rule in section 219(g), H's maximum contribution is 
$200, and H contributes that amount to an IRA. Under 
408(o)(2)(B), H can make nondeductible contributions of $800 
($1,000-$200). W's maximum permitted deductible contribution 
under section 219(c)(1)(B), before the income phase-out, is 
$1,300 (the sum of H and W's earned income ($1,500), less H's 
deductible IRA contribution ($200)). Under the income phase-
out, W's deductible contribution is limited to $200, and she 
can make a nondeductible contribution of $1,000 ($1,300-$200). 
The total permitted contributions for H and W are $2,300 
($1,000 for H plus $1,300 for W). The combined contribution 
should be limited to $1,500, their combined earned income.
    The provision provides that the contributions for the 
spouse with the lesser income cannot exceed the combined earned 
income of the spouses. The provision is effective as if 
included with section 1427 of the Small Business Job Protection 
Act of 1996 (i.e., for taxable years beginning after December 
31, 1996).
    Insurance.--The legislative history of section 7702A(a) 
(enacted in the Technical and Miscellaneous Revenue Act of 
1988) indicated that if a life insurance contract became a 
modified endowment contract (``MEC''), then the MEC status 
could not be eliminated by exchanging the MEC for another 
contract. Section 7702A(a)((2), however, arguably might be read 
to allow a policyholder to exchange a MEC for a contract that 
does not fail the 7-pay test of section 7702A(b), then exchange 
the second contract for a third contract, which would not 
literally have been received in exchange for a contract that 
failed to meet the 7-pay test. The provision clarifies section 
7702A(a)(2) to correspond to the legislative history, effective 
as if enacted with the Technical and Miscellaneous Revenue Act 
of 1988 (generally, for contracts entered into on or after June 
21, 1988).
    Insurance.--Under section 7702A, if a life insurance 
contract that is not a modified endowment contract is actually 
or deemed exchanged for a new life insurance contract, then the 
7-pay limit under the new contract is first be computed without 
reference to the premium paid using the cash surrender value of 
the old contract, and then would be reduced by 1/7 of the 
premium paid taking into account the cash surrender value of 
the old contract. For example, if the old contract had a cash 
surrender value of $14,000 and the 7-pay premium on the new 
contract would equal $10,000 per year but for the fact that 
there was an exchange, the 7-pay premium on the new contract 
would equal $8,000 ($10,000-$14,000/7). However, section 
7702a(c)(3)(A) arguably might be read to suggest that if the 
cash surrender value on the new contract was $0 in the first 
two years (due to surrender charges), then the 7-pay premium 
might be $10,000 in this example, unintentionally permitting 
policyholders to engage in a series of ``material changes'' to 
circumvent the premium limitations in section 7702A. The 
provision clarifies section 7702A(c)(3)(A) to refer to the cash 
surrender value of the old contract, effective as if enacted 
with the Technical and Miscellaneous Revenue Act of 1988 
(generally, for contracts entered into on or after June 21, 
1988).
    Definition of lump-sum distribution.--Section 1401(b) of 
the Small Business Job Protection Act of 1996 Act repealed 5-
year averaging for lump-sum distributions. The definition of 
lump-sum distribution was preserved for other provisions, 
primarily those relating to NUA in employer securities. The 
definition was moved from section 402(d)(4)(A) to section 
402(e)(4)(D)(i). This definition included the following 
sentence: ``A distribution of an annuity contract from a trust 
or annuity plan referred to in the first sentence of this 
subparagraph shall be treated as a lump sum distribution.'' The 
provision adds this language back into the definition of lump-
sum distribution, effective as if included with section 1401 of 
the Small Business Job Protection Act of 1996. The sentence is 
relevant to section 401(k)(10)(B), which permits certain 
distributions if made as a ``lump-sum distribution.''
    Losses from section 1256 contracts.--Section 6411 allows 
tentative refunds for NOL carrybacks, business credit 
carrybacks and, for corporations only, capital loss carrybacks. 
Individuals normally cannot carry back a capital loss. However, 
section 1212(c) does allow a carryback of section 1256 losses, 
if elected by the taxpayer. The provision amends section 
6411(a) by including a reference to section 1212(c), effective 
as if included with section 504 of the Economic Recovery Tax 
Act of 1981.

Clerical changes (sec. 1605 f the bill)

    Individual.--Section 67(f), as enacted in 1988, has a cross 
reference to ``the last sentence of section 162(a).'' 
Additional ``last sentences'' were later added at the end of 
section 162(a) in 1992 and 1997. The provision corrects the 
reference in section 67(f).
    Excess contributions.--The provision modifies the heading 
for section 408(d)(5) to ``Distributions of excess 
contributions after due date for taxable year and certain 
excess rollover contributions.''
    Qualified State tuition programs.--Under section 
529(e)(3)(B) (enacted in the Small Business Job Protection Act 
of 1996), qualified higher education expenses include room and 
board expenses of a designated beneficiary who is enrolled at 
least half-time in a degree program, regardless of whether the 
qualified state tuition program is a prepaid (i.e., guaranteed) 
program or a savings program. Therefore, the provision deletes 
the words ``under guaranteed plans'' from the heading of 
section 529(e)(3)(B).
    S corporations.--Sections 678(e) and 6103(e)(1)(D)(v) refer 
to ``an electing small business corporation under subchapter S 
of chapter 1.'' The reference was inadvertently not changed to 
``S corporation'' when the Subchapter S Revision Act was 
enacted in 1982, and the provision corrects the reference.
    Foreign-Military FSCs.--The Tax Reform Act of 1976 added 
section 995(b)(3)(B), limiting DISC benefits relating to 
``military property,'' which is defined by reference to a list 
under the ``Military Security Act of 1954.'' That Act properly 
was titled the ``Mutual Security Act of 1954,'' and it had been 
repealed and superseded by the ``International Security 
Assistance and Arms Export Control Act of 1976'' (signed into 
law June 30, 1976). Section 923 (relating to FSCs) also refers 
to the definition in section 995(b)(3)(B). Treasury regulations 
correctly reference the International Security Assistance and 
Arms Export Control Act of 1976. The provision names the 
correct Act in the statute.
    Private foundation excise taxes.--Section 4946 provides a 
definition of ``government official'' for purposes of 
determining acts of self-dealing under section 4941. In section 
4946(c)(3)(B), the definition refers to ``compensation at the 
lowest rate prescribed for GS-16 * * *.'' The provision changes 
this language so that it refers to compensation at the lowest 
rate prescribed for Senior Executive Service (SES) positions.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statements are made 
concerning the roll call votes of the Committee on Ways and 
Means in its consideration of the bill, H.R. 2488.

                       Motion to Report the Bill

    The bill, H.R. 2488, as amended, was ordered favorably 
reported by a roll call vote of 23 yeas to 13 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   ........  Mr. Coyne......................  ........        X
Mrs. Johnson...........................        X   ........  Mr. Levin......................  ........        X
Mr. Houghton...........................        X   ........  Mr. Cardin.....................  ........        X
Mr. Herger.............................        X   ........  Mr. McDermott..................
Mr. McCrery............................        X   ........  Mr. Kleczka....................  ........        X
Mr. Camp...............................        X   ........  Mr. Lewis (GA).................  ........        X
Mr. Ramstad............................        X   ........  Mr. Neal.......................  ........        X
Mr. Nussle.............................        X   ........  Mr. McNulty....................  ........  ........
Mr. Johnson............................        X   ........  Mr. Jefferson..................  ........        X
Ms. Dunn...............................        X   ........  Mr. Tanner.....................  ........        X
Mr. Collins............................        X   ........  Mr. Becerra....................  ........        X
Mr. Portman............................        X   ........  Mrs. Thurman...................  ........  ........
Mr. English............................        X   ........  Mr. Doggett....................  ........        X
Mr. Watkins............................        X   ........
Mr. Hayworth...........................        X   ........
Mr. Weller.............................        X   ........
Mr. Hulshof............................        X   ........
Mr. McInnis............................        X   ........
Mr. Lewis (KY).........................        X   ........
Mr. Foley..............................        X   ........
----------------------------------------------------------------------------------------------------------------

                          Votes on Amendments

    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. Stark, to provide a 50-percent 
refundable tax credit to Medicare beneficiaries to help pay for 
$2,000 per year in prescription drugs starting in 2002, rising 
to $5,000 by 2008, was defeated by a roll call vote of 11 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   Mr. Coyne......................        X   ........
Mrs. Johnson...........................  ........        X   Mr. Levin......................        X   ........
Mr. Houghton...........................  ........        X   Mr. Cardin.....................        X   ........
Mr. Herger.............................  ........        X   Mr. McDermott..................  ........  ........
Mr. McCrery............................  ........        X   Mr. Kleczka....................        X   ........
Mr. Camp...............................  ........        X   Mr. Lewis (GA).................        X   ........
Mr. Ramstad............................  ........        X   Mr. Neal.......................        X   ........
Mr. Nussle.............................  ........        X   Mr. McNulty....................  ........  ........
Mr. Johnson............................  ........        X   Mr. Jefferson..................        X   ........
Ms. Dunn...............................  ........        X   Mr. Tanner.....................        X   ........
Mr. Collins............................  ........        X   Mr. Becerra....................        X   ........
Mr. Portman............................  ........        X   Mrs. Thurman...................  ........  ........
Mr. English............................  ........        X   Mr. Doggett....................        X   ........
Mr. Watkins............................  ........        X
Mr. Hayworth...........................  ........        X
Mr. Weller.............................  ........        X
Mr. Hulshof............................  ........        X
Mr. McInnis............................  ........        X
Mr. Lewis (KY).........................  ........        X
Mr. Foley..............................  ........        X
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Matsui, to prevent all provisions other 
than expiring provisions and revenue offsets from taking effect 
and to reserve all on-budget surpluses pending subsequent 
legislation to strengthen Social Security was defeated by a 
roll call vote of 13 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   Mr. Coyne......................        X   ........
Mrs. Johnson...........................  ........        X   Mr. Levin......................        X   ........
Mr. Houghton...........................  ........        X   Mr. Cardin.....................        X   ........
Mr. Herger.............................  ........        X   Mr. McDermott..................  ........  ........
Mr. McCrery............................  ........        X   Mr. Kleczka....................        X   ........
Mr. Camp...............................  ........        X   Mr. Lewis (GA).................        X   ........
Mr. Ramstad............................  ........        X   Mr. Neal.......................        X   ........
Mr. Nussle.............................  ........        X   Mr. McNulty....................  ........  ........
Mr. Johnson............................  ........        X   Mr. Jefferson..................        X   ........
Ms. Dunn...............................  ........        X   Mr. Tanner.....................        X   ........
Mr. Collins............................  ........        X   Mr. Becerra....................        X   ........
Mr. Portman............................  ........        X   Mrs. Thurman...................        X   ........
Mr. English............................  ........        X   Mr. Doggett....................        X   ........
Mr. Watkins............................  ........        X
Mr. Hayworth...........................  ........        X
Mr. Weller.............................  ........        X
Mr. Hulshof............................  ........        X
Mr. McInnis............................  ........        X
Mr. Lewis (KY).........................  ........        X
Mr. Foley..............................  ........        X
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Neal to make all provisions other than 
expiring provisions and revenue offsets contingent on 
certifications regarding social security, Medicare, and a 
balanced budget, was defeated by a roll call vote of 13 yeas to 
22 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   Mr. Coyne......................        X   ........
Mrs. Johnson...........................  ........        X   Mr. Levin......................        X   ........
Mr. Houghton...........................  ........        X   Mr. Cardin.....................        X   ........
Mr. Herger.............................  ........        X   Mr. McDermott..................  ........  ........
Mr. McCrery............................  ........        X   Mr. Kleczka....................        X   ........
Mr. Camp...............................  ........        X   Mr. Lewis (GA).................        X   ........
Mr. Ramstad............................  ........        X   Mr. Neal.......................        X   ........
Mr. Nussle.............................  ........        X   Mr. McNulty....................  ........  ........
Mr. Johnson............................  ........        X   Mr. Jefferson..................        X   ........
Ms. Dunn...............................  ........        X   Mr. Tanner.....................        X   ........
Mr. Collins............................  ........        X   Mr. Becerra....................        X   ........
Mr. Portman............................  ........        X   Mrs. Thurman...................        X   ........
Mr. English............................  ........        X   Mr. Doggett....................        X   ........
Mr. Watkins............................  ........        X
Mr. Hayworth...........................  ........        X
Mr. Weller.............................  ........        X
Mr. Hulshof............................  ........        X
Mr. McInnis............................  ........        X
Mr. Lewis (KY).........................  ........        X
Mr. Foley..............................  ........        X
----------------------------------------------------------------------------------------------------------------

    An amendment by Messrs. Cardin, Stark and Levin to require 
a pro rata reduction in the tax reductions (other than expiring 
provisions) and to reserve funds for Medicare solvency and a 
prescription drug benefit, was defeated by a roll call vote of 
13 yeas to 22 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   Mr. Coyne......................        X   ........
Mrs Johnson............................  ........        X   Mr. Levin......................        X   ........
Mr. Houghton...........................  ........        X   Mr. Cardin.....................        X   ........
Mr. Herger.............................  ........        X   Mr. McDermott..................  ........  ........
Mr. McCrery............................  ........        X   Mr. Kleczka....................        X   ........
Mr. Camp...............................  ........        X   Mr. Lewis (GA).................        X   ........
Mr. Ramstad............................  ........        X   Mr. Neal.......................        X   ........
Mr. Nussle.............................  ........        X   Mr. McNulty....................  ........  ........
Mr. Johnson............................  ........        X   Mr. Jefferson..................        X   ........
Ms. Dunn...............................  ........  ........  Mr. Tanner.....................        X   ........
Mr. Collins............................  ........        X   Mr. Becerra....................        X   ........
Mr. Portman............................  ........        X   Mrs. Thurman...................  ........  ........
Mr. English............................  ........        X   Mr. Doggett....................        X   ........
Mr. Watkins............................  ........        X
Mr. Hayworth...........................  ........        X
Mr. Weller.............................  ........        X
Mr. Hulshof............................  ........        X
Mr. McInnis............................  ........        X
Mr. Lewis (KY).........................  ........        X
Mr. Foley..............................  ........        X
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Tanner to limit the tax reductions and 
to preserve 50 percent of projected non-social security 
surpluses for debt reduction, was defeated by a roll call vote 
of 13 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   Mr. Coyne......................        X   ........
Mrs. Johnson...........................  ........        X   Mr. Levin......................        X   ........
Mr. Houghton...........................  ........        X   Mr. Cardin.....................        X   ........
Mr. Herger.............................  ........        X   Mr. McDermott..................  ........  ........
Mr. McCrery............................  ........        X   Mr. Kleczka....................        X   ........
Mr. Camp...............................  ........        X   Mr. Lewis (GA).................        X   ........
Mr. Ramstad............................  ........        X   Mr. Neal.......................        X   ........
Mr. Nussle.............................  ........        X   Mr. McNulty....................  ........  ........
Mr. Johnson............................  ........        X   Mr. Jefferson..................        X   ........
Ms. Dunn...............................  ........        X   Mr. Tanner.....................        X   ........
Mr. Collins............................  ........        X   Mr. Becerra....................        X   ........
Mr. Portman............................  ........        X   Mrs. Thurman...................  ........  ........
Mr. English............................  ........        X   Mr. Doggett....................        X   ........
Mr. Watkins............................  ........        X
Mr. Hayworth...........................  ........        X
Mr. Weller.............................  ........        X
Mr. Hulshof............................  ........        X
Mr. McInnis............................  ........        X
Mr. Lewis (KY).........................  ........        X
Mr. Foley..............................  ........        X
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Kleczka for an above-the-line deduction 
for the prescription drug insurance coverage of Medicare 
beneficiaries, was defeated by a roll call vote of 13 yeas to 
22 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
            Representatives                 Yea       Nay            Representatives             Yea       Nay
----------------------------------------------------------------------------------------------------------------
Mr. Archer.............................  ........        X   Mr. Rangel.....................        X   ........
Mr. Crane..............................  ........  ........  Mr. Stark......................        X   ........
Mr. Thomas.............................  ........        X   Mr. Matsui.....................        X   ........
Mr. Shaw...............................  ........        X   Mr. Coyne......................        X   ........
Mrs. Johnson...........................  ........        X   Mr. Levin......................        X   ........
Mr. Houghton...........................  ........        X   Mr. Cardin.....................        X   ........
Mr. Herger.............................  ........        X   Mr. McDermott..................  ........  ........
Mr. McCrery............................  ........        X   Mr. Kleczka....................        X   ........
Mr. Camp...............................  ........        X   Mr. Lewis (GA).................        X   ........
Mr. Ramstad............................  ........        X   Mr. Neal.......................        X   ........
Mr. Nussle.............................  ........        X   Mr. McNulty....................  ........  ........
Mr. Johnson............................  ........        X   Mr. Jefferson..................        X   ........
Ms. Dunn...............................  ........        X   Mr. Tanner.....................        X   ........
Mr. Collins............................  ........        X   Mr. Becerra....................        X   ........
Mr. Portman............................  ........        X   Mrs. Thurman...................  ........  ........
Mr. English............................  ........        X   Mr. Doggett....................        X   ........
Mr. Watkins............................  ........        X
Mr. Hayworth...........................  ........        X
Mr. Weller.............................  ........        X
Mr. Hulshof............................  ........        X
Mr. McInnis............................  ........        X
Mr. Lewis (KY).........................  ........        X
Mr. Foley..............................  ........        X
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d)(2) of rule XIII of the Rules 
of the House of Representatives, the following statement is 
made concerning the affects on the budget of the bill, H.R. 
2488, as reported.
    The bill is estimated to have the following effects on 
budget receipts for fiscal years 1999-2009:

                                                            ESTIMATED BUDGET EFFECTS OF THE ``FINANCIAL FREEDOM ACT OF 1999,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS
                                                                                            [Fiscal years 1999-2009, in millions of dollars]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                  Provision                                  Effective                   1999      2000       2001       2002       2003       2004       2005       2006        2007        2008        2009     1999- 2004  1999- 2009
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Title I. Family Tax Relief Provisions

A. 10% Across-the-Board Income Tax Rate Cut-- tyba 12/31/00..........................  ........  ........    -13,167    -19,360    -20,156    -21,131    -40,369     -50,237     -52,821     -76,361    -111,551     -73,814    -405,153
 reduce regular income tax and AMT rates by:
 2.5% for 2001 through 2004, 5.0% for 2005
 through 2007, 7.5% in 2008, and 10% in 2009
 and thereafter.
B. Marriage Penalty Relief
    1. Adjust the standard deduction for      tyba 12/31/00..........................  ........  ........     -1,266     -3,125     -5,153     -5,854     -5,713      -5,838      -5,976      -6,003      -5,599     -15,398     -44,527
     married couples filing joint returns to
     twice that of a single taxpayer; phase-
     in ratably over 3 years beginning in
     2001.
    2. Adjust student loan interest           tyba 12/31/99..........................  ........       -36       -149       -173       -199       -231       -237        -239        -247        -253        -254        -787      -2,017
     deduction income limits for married
     couples filing joint returns to twice
     that of a single taxpayer; repeal 60-
     month rule (for everyone) beginning in
     2000.
    3. Increase the Roth IRA conversion       tyba 12/31/99..........................  ........       205        536        370         89       -183       -374        -675        -547        -326         -90       1,018        -994
     income limit for married couples filing
     joint returns to $160,000 beginning in
     2000.
C. Repeal the Individual Minimum Tax--make    tyba 12/31/98 & tyba 12/31/02..........  ........      -980       -989     -1,348     -2,458     -4,158     -6,007      -8,388     -11,016     -18,798     -27,406      -9,933     -81,548
 permanent the present-law provision to
 allow nonrefundable personal credits fully,
 effective for 1999 and thereafter; repeal
 90% limit on foreign tax credits effective
 for taxable years beginning after 12/31/01;
 phaseout the individual AMT by paying the
 following percent of AMT liability; 80% in
 2003, 70% in 2004, 60% in 2005, 50% in 2006
 and 2007; repeal in 2008; unused AMT credit
 carryovers as of repeal may be used to
 offset 90% of regular tax (repeal
 eliminates AMT marriage penalty).
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Family Tax Relief Provisions.  .......................................  ........       811    -15,035    -23,636    -27,877    -31,557    -52,700     -65,377     -70,607    -101,741    -144,900     -98,914    -534,239
                                                                                      ==================================================================================================================================================
 Title II. Savings and Investment Tax Relief
                 Provisions

1. Exclusion of interest and dividend income  tyba 12/31/00..........................  ........  ........       -353     -1,771     -2,083     -3,245     -3,315      -3,335      -3,428      -3,424      -3,064      -7,452     -24,018
 ($200 joint returns)/$100 (all others) for
 2001 and 2002; $400 (joint returns)/$200
 (all others) for 2003 and thereafter; apply
 to all interest and dividends (other than
 tax-exempt interest, capital gain
 dividends, cooperative patronage dividends,
 and ESOP dividends).
2. Reduce individual capital gains rates      giiia /6/30/99 \1\.....................  ........      -731     -3,784     -5,804     -5,773     -5,828     -5,884      -5,978      -5,948      -5,953      -5,962     -21,920     -51,645
 from 20%/10% to 15%/7.5% (same assets and 1-
 year holding period as under present law);
 reduce recapture rate from 25% to 20%; 28%
 rate remains as under present law; repeal
 mark-to-market and 18%/8% rates for 5-year
 holding period.
3. Reduce tax on capital gains of designated  tyba 12/3/99...........................  ........       -12        -59        -67        -75        -85        -96        -110        -123        -137        -153        -298        -917
 settlement funds to individual capital
 gains rates under the bill.
4. Suspend 5-year holding period requirement  sa DOE.................................  ........        -5        -12        -13        -13        -14        -14         -15         -15         -16         -16         -57        -133
 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 residence is
 located.
5. Suspend 5-year holding period requirement  sa DOE.................................  ........       -18        -26        -28        -29        -30        -31         -32         -33         -34         -35        -131        -296
 (for a maximum of 5 years) relating to gain
 on sale of principal residence by employee
 who is sent out of the United States by an
 employer.
6. Modify treatment of worthless securities   sbwi tyba 12/31/99.....................  ........        -8        -12        -12        -11        -11        -10         -10         -10         -10         -10         -58        -108
 of certain financial institutions.
7. Clarify the tax treatment of income and    DOE....................................  ........     (\2\)          1          1          1          1          1           1           1           1           1           4           9
 losses from derivatives.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Savings and Investment Tax     .......................................  ........      -774     -4,245     -7,694     -7,983     -9,212     -9,349      -9,479      -9,556      -9,573      -9,239     -29,912     -77,108
       Relief Provisions.
                                                                                      ==================================================================================================================================================
   Title III. Business Investment and Job
             Creation Provisions

1. Reduce tax on capital gains of             tyba 12/31/99..........................  ........       -47       -119       -247       -511       -825     -1,222      -1,645      -2,198      -2,863      -3,633      -1,749     -13,310
 corporations to 34.1% in 2000, 33.9% in
 2001, 32.7% in 2002, 31.7% in 2003, 30.8%
 in 2004, 29.8% in 2005, 29.2% in 2006, 28%
 in 2007, 27.4% in 2008, 26.2% in 2009, and
 25% in 2010 and thereafter; apply same rate
 for all gains includible in income in the
 taxable year.
2. Corporate AMT: repeal 90% limit on         tyba 12/31/01..........................  ........  ........  .........       -138     -1,121     -2,024     -1,916      -1,517      -1,121      -2,037      -2,644      -3,283     -12,519
 foreign tax credits, effective for taxable
 years beginning after 12/31/01; allow AMT
 credit carryovers to offset current year's
 minimum tax liability: 20% in 2003, 30% in
 2004, 40% in 2005, 50% in 2006 and 2007;
 repeal in 2008: unused AMT credit
 carryovers after repeal may be used to
 offset 90% of regular tax.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Business Investment and Job    .......................................  ........       -47       -119       -385     -1,632     -2,849     -3,138      -3,162      -3,319      -4,900      -6,277      -5,032     -25,829
       Creation Provisions.
                                                                                      ==================================================================================================================================================
  Title IV. Education Tax Relief Provisions

1. Education savings accounts (formerly       tyba 12/31/00..........................  ........  ........        -46       -152       -230       -311       -394        -475        -566        -651        -726        -739      -3,552
 ``Education IRAs'')--increase the annual
 contribution limit to $2,000; expand the
 definition of qualified education expenses
 to include elementary and secondary
 education expenses (and after-school
 programs); allow ESAs to be used for
 special needs beneficiaries; allow
 corporations and other entities to
 contribute to ESAs; allow contributions
 until April 15 of following year; and allow
 taxpayer to exclude ESA distribution from
 gross income and claim HOPE or Lifetime
 Learning credit as long as they are not
 used for same expenses.
2. Qualified tuition plans--permit private    tyba 12/31/00..........................  ........  ........        -11        -37        -56        -82       -114        -146        -181        -211        -239        -186      -1,078
 institutions to establish tax-deferred
 prepaid tuition plans beginning in 2001;
 allow tax-free distributions from State
 plans beginning 2001 and tax-free
 distributions from private plans in 2004;
 permit one tax-free rollover every 12
 months for benefit of same beneficiary; and
 allow taxpayer to exclude plan
 distributions from income and claim HOPE or
 Lifetime Learning credit as long as not
 used for same expenses.
3. Exclude from tax awards under the          tyba 12/31/93 & tyba 12/31/99..........  ........        -3         -3         -3         -3         -3         -4          -4          -4          -4          -5         -16         -36
 following programs: National Health Corps
 Scholarship program, beginning in 1994; F.
 Edward Hebert Armed Forces Health
 Professions Scholarship program, beginning
 in 1994; National Institutes of Health
 Undergraduate Scholarship Program,
 beginning in 1994; and similar State-
 sponsored scholarship programs, beginning
 in 2000.
4. Increase the school construction small     cya 1999...............................  ........     (\3\)         -2         -4         -5        -13        -14         -14         -15         -16         -17         -25        -102
 issuer arbitrage rebate exception from $10
 million to $15 million.
5. Provide new 4-year expenditure schedule    bia 12/31/99...........................  ........       -13       -120       -236       -274       -292       -307        -310        -305        -300        -293        -935      -2,450
 for bonds for public school construction
 under the arbitrage rebate rules.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Education Tax Relief           .......................................  ........       -16       -182       -432       -568       -701       -833        -949      -1,071      -1,182      -1,280      -1,901      -7,218
       Provisions.
                                                                                      ==================================================================================================================================================
 Title V. Health Care Tax Relief Provisions

1. Provide an above-the-line deduction for    tyba 12/31/00..........................  ........  ........       -416     -1,567     -2,447     -3,035     -3,241      -3,460      -4,379      -6,834      -8,848      -7,466     -34,228
 health insurance expenses for which the
 taxpayer pays at least 50% of the premium,
 phased in as follows: 25% in 2001, 40% in
 2002, 50% in 2003 through 2006, 75% in
 2007, and 100% in 2008 and thereafter; for
 purposes of the 50% payment rule, all
 health plans for a single employer are
 combined; health insurance deduction does
 not apply to any month in which the
 taxpayer is enrolled in Medicare, Medicaid,
 Champus, VA, Indian Health Service,
 Children's Health Insurance or Federal
 Employees Health Benefits (non-COBRA)
 programs.
2. Provide an above-the-line deduction for    tyba 12/31/00..........................  ........  ........        -40       -306       -555       -745       -801        -857        -991      -1,573      -2,146      -1,646      -8,014
 long-term care insurance expenses for which
 the taxpayer pays at least 50% of the
 premium, phased in as follows 25% in 2001,
 40% in 2002, 50% in 2003 through 2006, 75%
 in 2007, and 100% in 2008 and thereafter.
3. Allow long-term care insurance to be       typa 12/31/00..........................  ........  ........        -99       -133       -137       -151       -173        -197        -218        -228        -247        -519      -1,582
 offered as part of cafeteria plans \4\.
4. Expand medical savings accounts (MSAs)--   tyba 12/13/00..........................  ........  ........       -109       -326       -370       -414       -458        -502        -546        -590        -634      -1,217      -3,947
 make the program permanent and repeal the
 750,000 cap on taxpayer participation;
 allow any employer to offer MSAs to its
 employees; lower the minimum deductible to
 $1,000 for individual coverage ($2,000 for
 family coverage); allow MSA contributions
 equal to 100% of the deductible under the
 policy; allow both employer and employee
 contributions; allow MSAs to be part of a
 cafeteria plan.
5. Provide an additional dependency           tyba 12/31/99..........................  ........      -180       -276       -275       -283       -304       -324        -350        -394        -418        -428      -1,317      -3,231
 deduction to caretakers of elderly family
 members.
6. Increase the time period for measuring     eia 12/31/99...........................  ........        -5         -8         -9        -10        -10        -11         -12         -13         -14         -15         -42        -107
 eligible expenses qualifying for the orphan
 drug tax credit.
7. Include the Streptococcus Pneumoniae       (\5\)..................................  ........         4          7          9         10         10         10          10          10          10          11          39          91
 vaccine to the list of taxable vaccines in
 the Federal vaccine insurance program;
 study of program.
8. Above-the-line deduction for prescription  tyba DOE...............................                                                                   No Revenue Effect
 drug insurance coverage of Medicare
 beneficiaries if certain Medicare and Low-
 Income Assistance provisions in effect.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Health Care Tax Relief         .......................................  ........      -181       -941     -2,607     -3,792     -4,649     -4,998      -5,368      -6,531      -9,647     -12,307     -12,168     -51,018
       Provisions.
                                                                                      ==================================================================================================================================================
    Title VI. Death Tax Relief Provisions

1. Phase in repeal of estate, gift, and       dda & gma 12/31/00.....................  ........  ........  .........     -5,140     -6,142     -6,964     -7,901      -9,567     -11,266     -13,039     -15,238     -18,246     -75,257
 generation-skipping transfer taxes:
 beginning in 2001, convert the unified
 credit into a true exemption, repeal the 5%
 ``bubble'' (which phases out the lower
 rates and part of the unified credit), and
 repeal rates in excess of 50%; in 2002
 through 2004, reduce all rates by 1
 percentage point a year; in 2005 through
 2008, reduce all rates by 2 percentage
 points a year but do not go below the
 lowest and highest income tax rates under
 the bill's broad-based income tax relief;
 for 2002 through 2008, proportionately
 reduce Stte tax credit rates; beginning in
 2009, repeal all of these taxes; beginning
 in 2009, carryover basis applies to
 nonspouse transfers by gift or by death
 after 12/31/08; estates with total assets
 of fair market value of $2 million or less
 and spouse transfers continue to receive
 step up in basis.
2. Simplification of generation-skipping      generally DOE..........................  ........        -3         -5         -7        -10        -10        -10         -10         -10         -10         -10         -35         -85
 transfer tax rules.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Death Tax Relief Provisions..  .......................................  ........        -3         -5     -5,147     -6,152     -6,974     -7,911      -9,577     -11,276     -13,049     -15,248     -18,281     -75,342
                                                                                      ==================================================================================================================================================
    Title VII. Distressed Communities and
            Industries Provisions

1. Designate 20 Renewal Communities; provide  DOE....................................  ........  ........       -130       -256       -293       -296       -308        -335        -426        -109         -18        -975      -2,172
 various incentives (zero capital gains tax
 on certain 5-year investments; special
 deduction for real estate revitalization
 expenditures; special expensing for certain
 business property; work opportunity tax
 credit; Brownfield remediation expenses;
 family development accounts) beginning 1/1/
 01 and ending 12/31/07 \6\.
2. Provide that Federal farm production       DOE....................................                                                              Negligible Revenue Effect
 payments are taxable in the year of receipt
 (override constructive receipt if farmer
 has an election to take the payments in an
 earlier year).
3. Allow 5-year carryback of oil and gas net  lii tyba 12/31/98......................  ........       -46        -28        -24        -21        -20        -20         -21         -21         -22         -23        -139        -246
 operating losses.
4. Increase maximum reforestation expenses    epoii tyba 12/31/98....................        -4       -10        -17        -25        -31        -36        -38         -39         -37         -33         -29        -122        -298
 qualifying for amortization and credit from
 $10,000 to $25,000; remove cap on
 amortization of reforestation costs in 2000
 through 2003.
5. Allow steel manufacturers to use           tyba 12/31/98..........................        18       -83        -36        -22        -13         -7         -4          -2          -1       (\3\)       (\3\)        -181        -187
 alternative minimum tax credit carryovers
 to reduce 90% of AMT liability.
6. Suspend the 65% of taxable income limit    tyba 12/31/98 & tybb 1/1/05............  ........       -10        -12        -15        -17        -20        -10  ..........  ..........  ..........  ..........         -74         -84
 on percentage depletion for 6 years.
7. Allow geological and geophysical costs to  cpoii tyba 12/31/99....................  ........       -16        -25        -26        -27        -27        -28         -29         -29         -30         -31        -121        -268
 be deducted currently.
8. Allow delay rental payments to be          tyba 12/31/99..........................  ........        -3         -4         -4         -4         -4         -4          -4          -3          -4          -5         -19         -39
 deducted currently.
9. Modify the refining threshold in section   tyba 12/31/99..........................  ........        -1         -2         -2         -2         -2         -2          -2          -2          -2          -2          -9         -19
 613(d)(4) from ``on any given day''.
10. Section 631(b) treatment of sales of      sa DOE.................................                                                               Negligible Revenue Effect
 timber.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Distressed Communities and     .......................................       -22      -169       -254       -374       -408       -412       -414        -432        -519        -200        -108      -1,640      -3,313
       Industries Provisions.
                                                                                      ==================================================================================================================================================
    Title VIII. Small Business Tax Relief
                 Provisions

1. Accelerate 100% self-employed health       tyba 12/31/99..........................  ........      -245     -1,007     -1,040       -657  .........  .........  ..........  ..........  ..........  ..........      -2,949      -2,949
 insurance deduction.
2. Increase section 179 expensing to $30,000  tyba 12/31/99..........................  ........      -790       -880       -189        -95          2        -31         -90        -142        -157        -160      -1,954      -2,533
3. Accelerate repeal of the FUTA surtax.....  yba 12/31/04...........................  ........  ........  .........  .........  .........  .........     -1,029        -421         -21      -1,058        -413  ..........  ..........
4. Restore 80% business meals deduction       tyba 12/31/04..........................  ........  ........  .........  .........  .........  .........       -293        -899      -1,594      -2,376      -3,247  ..........      -8,409
 (excluding entertainment expenses)--
 increase 5 percentage points a year.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Small Business Tax Relief      .......................................  ........    -1,035     -1,887     -1,229       -752          2     -1,353      -1,410      -1,757      -1,475      -2,994      -4,903     -13,891
       Provisions.
                                                                                      ==================================================================================================================================================
   Title IX. International Competitiveness
                 Provisions

1. Allocate interest deduction on worldwide   tyba 12/31/01..........................  ........  ........  .........       -850     -2,722     -2,972     -3,146      -3,383      -3,636      -3,909      -4,202      -6,499     -24,775
 basis (including controlled foreign
 corporations).
2. Accelerate look-through treatment for      tyba 12/31/01..........................  ........  ........  .........       -116       -451       -172        -63         -32         -22         -17         -12        -739        -885
 dividends of 10/50 companies and for
 separate basket excess credit carryovers.
3. Exception from subpart F treatment for     tyba 12/31/01..........................  ........  ........  .........         -3        -10        -13        -15         -17         -20         -23         -25         -26        -126
 certain pipeline transportation and
 electricity transmission income.
4. Recharacterize overall domestic loss.....  tyba 12/31/04..........................  ........  ........  .........  .........  .........  .........       -206        -444        -471        -494        -529  ..........      -2,144
5. Repeal FSC 50% limitation for military     tyba 12/31/01..........................  ........  ........  .........        -45       -108       -121       -136        -153        -173        -194        -215        -274      -1,145
 property.
6. Treatment of regulated investment          mf tyba 12/31/04.......................  ........  ........  .........  .........  .........  .........        -82        -153        -162        -171        -182  ..........        -750
 companies.
7. Repeal special foreign tax credit rules    tyba 12/31/04..........................  ........  ........  .........  .........  .........  .........       -351        -922      -1,024      -1,136      -1,259  ..........      -4,692
 for foreign oil and gas income.
8. Treasury study on treating the European    DOE....................................                                                                   No Revenue Effect
 Union as one country for purposes of same-
 country exceptions under subpart F.
9. Authorize the President to waive the       DOE....................................                                                                   No Revenue Effect
 denial of the foreign tax credit under
 certain circumstances.
10. Prohibit disclosure of advance pricing    DOE....................................                                                               Negligible Revenue Effect
 agreements (APAs) and related information;
 require the IRS to submit to Congress an
 annual report of such agreements; APA user
 fee.
11. Increase the section 911 exclusion by     1/1/03.................................  ........  ........  .........  .........        -24        -48        -80        -107        -131        -155        -184         -72        -729
 $3,000 per year starting in 2003 until it
 reaches $95,000; index for inflation in
 2008, for inflation occurring after 2006.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of International Competitiveness  .......................................  ........  ........  .........     -1,014     -3,315     -3,281     -4,079      -5,211      -5,639      -6,099      -6,608      -7,610     -35,246
       Provisions.
                                                                                      ==================================================================================================================================================
 Title X. Tax-Exempt Organization Provisions

1. Provide a tax exemption for organizations  tyba 12/31/99..........................  ........        -2         -4         -4         -4         -5         -5          -6          -7          -8          -8         -18         -53
 created by a State to provide property and
 casualty insurance coverage for property
 for which such coverage is otherwise
 unavailable.
2. Modify special provision for a permanent   tyba 12/31/99..........................  ........     (\3\)         -1         -1      (\3\)      (\3\)      (\2\)       (\3\)          -1       (\3\)       (\3\)          -2          -3
 university fund.
3. Deny deduction and impose excise tax with  (\7\)..................................                                                               Negligible Revenue Effect
 respect to charitable split-dollar life
 insurance arrangements.
4. Authorize the Secretary of the Treasury    DOE....................................                                                               Negligible Revenue Effect
 to grant waivers from section 4941
 prohibitions.
5. Extend declaratory judgment remedy to      DOE....................................                                                               Negligible Revenue Effect
 certain organizations seeking
 determinations of tax-exempt status.
6. Modify section 512(b)(13) to exempt        DOE & proaa 12/31/99...................  ........        -7         -9        -11        -11        -11        -11         -12         -12         -12         -13         -49        -110
 income received by a tax-exempt
 organization from certain subsidiaries when
 fair market value pricing is used, excess
 of fair market value subject to UBIT and
 20% penalty tax, and extension of
 transition relief for certain binding
 contracts.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Tax-Exempt Organization        .......................................  ........        -9        -14        -16        -15        -16        -16         -18         -20         -20         -21         -69        -166
       Provisions.
                                                                                      ==================================================================================================================================================
Title XI. Real Estate Tax Relief Provisoions

1. Real estate investment trust (REIT)
 provisions:
    a. Impose 10% vote or value test........  tyba 12/31/00..........................  ........  ........          2          8          8          8          9           9           9          10          10          26          73
    b. Treatment of income and services       tyba 12/13/00..........................  ........  ........         60        158         53         23         -9         -45         -84        -127        -173         294        -145
     provided by taxable REIT subsidiaries.
    c. Special foreclosure rule for health    tyba 12/31/00..........................                                                               Negligible Revenue Effect
     care REITs.
    d. Conformity with RIC 90% distribution   tyba 12/31/00..........................  ........  ........          1          1          1          1          1           1           1           1           3           5
     rules.
    e. Clarification of definition of         tyba 12/31/00..........................                                                               Negligible Revenue Effect
     independent operators for REITs.
    f. Modification of earnings and profits   da 12/31/00............................  ........  ........         -6         -3         -3         -3         -4          -4          -4          -4         -16         -35
     rules.
2. Modify at-risk rules for publicly traded   diia 12/13/99..........................  ........     (\3\)         -2         -4         -5         -6         -8         -10         -12         -14         -16         -19         -78
 securities.
3. Amend section 110 to eliminate 15-year     -apa 12/31/99..........................  ........        -8        -16        -22        -28        -34        -40         -42         -43         -44         -46        -108        -323
 limitation.
4. Amend section 118 to clarify the tax       apa 12/31/99...........................  ........        -1         -2         -6        -10        -14        -18         -22         -27         -31         -36         -32        -166
 treatment of certain construction
 allowances or contributions received by
 retail operators.
5. Low-income housing tax credit--increae     tyba 12/31/99..........................  ........        -4        -21        -63       -132       -231       -357        -504        -664        -836      -1,021        -450      -3,833
 per capita credit by $0.10 per year through
 2004; thereafter COLA; change stacking;
 change credit allocation rules.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Real Estate Tax Relief         .......................................  ........       -13         16         69       -116       -256       -426        -617        -824      -1,045      -1,285        -302      -4,502
       Provisions.
                                                                                      ==================================================================================================================================================
    Title XII. Pension Reform Provisions

A. Provisions for Expanding Coverage
    1. Increase contribution and benefit
     limits:
        a. Increase defined benefit dollar    yba 12/31/00...........................  ........  ........        -18        -31        -40        -45        -48         -50         -53         -55         -57        -134        -396
         limit to $160,000.
        b. Lower early retirement age to 62;  yba 12/31/00...........................  ........  ........         -3         -4         -4         -4         -5          -5          -5          -5          -5         -16         -40
         lower normal retirement age to 65.
        c. Increase annual addition           12/31/00...............................  ........  ........         -6        -11        -13        -14        -15         -16         -16         -17         -18         -44        -125
         limitation for defined contribution
         plans to $40,000 \8\.
        d. Increase qualified plan            yba 12/31/00...........................  ........  ........        -40        -69        -78        -83        -89         -95        -101        -107        -113        -270        -776
         compensation limited to $200,000
         \8\.
        e. Increase limitation on exclusion   yba 12/31/00...........................  ........  ........       -127       -307       -454       -559       -630        -680        -726        -757        -781      -1,448      -5,021
         for elective deferrals to $11,000
         in 2001, $12,000 in 2002, $13,000
         in 2003, $14,000 in 2004, $15,000
         in 2005; index in $500 increments
         thereafter \8\.
        f. Increase limits on deferrals       yba 12/31/00...........................  ........  ........        -51        -90       -104       -115       -123        -130        -138        -143        -146        -360      -1,039
         under deferred compensation plans
         of State-local governments and tax-
         exempt organizations to $11,000 in
         2001, $12,000 in 2002, $13,000 in
         2003, $14,000 in 2004, $15,000 in
         2005; index in $500 increments
         thereafter (twice the dollar limit
         in 3 years before retirement) \8\.
        g. Increase limitation on SIMPLE      yba 12/31/00...........................  ........  ........         -5        -14        -22        -27        -29         -29         -30         -32         -33         -67        -220
         elective contributions to $7,000 in
         2001, $8,000 in 2002, $9,000 in
         2003, $10,000 in 2004; index in
         $500 increments thereafter \8\.
    2. Plan loans for subchapter S owners,    yba 12/31/00...........................  ........  ........        -20        -30        -32        -35        -37         -39         -41         -44         -46        -117        -325
     partners, and sole proprietors.
    3. Modification of top-heavy rules......  yba 12/31/00...........................  ........  ........         -3         -7         -9        -10        -11         -13         -14         -15         -17         -29         -99
    4. Elective deferrals not taken into      yba 12/31/00...........................  ........  ........        -38        -71        -81        -85        -89         -93         -97        -101        -104        -275        -759
     account for purposes of deduction
     limits.
    5. Reduce PBGC premium for new plans of   pea 12/31/00...........................  ........  ........    -(\10\)    -(\10\)    -(\10\)    -(\10\)    -(\10\)     -(\10\)     -(\10\)     -(\10\)     -(\10\)         -15         -40
     small employers; additonal PBGC premium
     relief for plans with 25 or fewer
     employees \9\.
    6. Phase-in of additonal PBGC premium     pea 12/31/00...........................  ........  ........         -1         -1         -1         -2         -2          -2          -2          -2          -2          -4         -12
     for new plans \9\.
    7. Repeal of coordination requirements    yba 12/31/00...........................  ........  ........        -16        -22        -22        -22        -22         -23         -24         -25         -26         -82        -202
     for deferred compensation plans of
     State and local governments and tax-
     exempt organizations.
    8. Elimination of user fee for            rma 12/31/00...........................  ........  ........        -17         -8         -8         -9         -9          -9          -9         -10         -10         -42         -88
     determination requests regarding small
     employer pension plans \9\.
    9. Definition of compensation for         yba 12/31/00...........................  ........  ........         -1         -2         -3         -3         -3          -3          -3          -3          -3          -9         -24
     purposes of deduction limits \8\.
    10. Option to treat elective deferrals    tyba 12/31/00..........................  ........  ........         50        100        131        144         89          -2        -104        -218        -345         426        -155
     as after-tax contributions.
    11. Increase minimum benefit under        yba 12/31/00...........................  ........  ........         -2         -5         -7         -7         -7          -8          -8          -8          -8         -22         -61
     defined benefit plans from $10,000 to
     $40,000 in $10,000 increments, and
     repeal limitation relating to defined
     contribution plans.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Provisions for Expanding    .......................................  ........  ........       -297       -575       -780       -878     -1,033      -1,200      -1,374      -1,545      -1,717      -2,508      -9,382
       Coverage.
                                                                                      ==================================================================================================================================================
B. Provisions for Enhancing Fairness for
 Women
    1. Additional salary reduction catch-up   yba 12/31/00...........................  ........  ........        -60       -122       -109        -77        -65         -64         -66         -66         -66        -368        -694
     contributions.
    2. Equitable treatment for contributions  yba 12/31/00...........................  ........  ........        -50        -75        -81        -87        -92         -97        -103        -107        -110        -294        -804
     of employees to defined contribution
     plans \8\.
    3. Faster vesting of certain employer     pyba 12/31/00..........................                                                              Negligible Revenue Effect
     matching contributions.
    4. Simplify and update the minimum        yba 12/31/00...........................  ........  ........       -118       -212       -239       -268       -297        -330        -366        -402        -441        -837      -2,673
     distribution rules by modifying post-
     death distribution rules, reducing (to
     10%) the excise tax on failure to make
     minimum distributions, and directing
     the Treasury to simplify and finalize
     regulations relating to the minimum
     distribution rules.
    5. Clarification of tax treatment of      tdapma 12/31/00........................                                                              Negligible Revenue Effect
     division of section 457 plan benefits
     upon divorce.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Provisions for Enhancing    .......................................  ........  ........       -228       -409       -429       -432       -454        -491        -535        -575        -617      -1,499      -4,171
       Fairness for Women.
                                                                                      ==================================================================================================================================================
C. Provisions for Increasing Portability for
 Participants
    1. Rollovers allowed among governmental   dma 12/31/00...........................  ........  ........         -7        -11        -12        -12        -12         -13         -13         -13         -14         -41        -106
     section 457 plans, section 403(b)
     plans, and qualified plans.
    2. Rollovers of IRAs to workplace         dma 12/31/00...........................                                                              Negligible Revenue Effect
     retirement plans.
    3. Rollovers of after-tax retirement      dma 12/31/00...........................                                                              Negligible Revenue Effect
     plan contributions.
    4. Expand rollover opportunities for      dma 12/31/00...........................                                                              Negligible Revenue Effect
     surviving spouses by providing that the
     surviving spouse may make a rollover
     into an employer plan, not just an IRA.
    5. Waiver of 60-day rule................  dma 12/31/00...........................                                                              Negligible Revenue Effect
    6. Treatment of forms of qualified plan   yba 12/31/00...........................                                                              Negligible Revenue Effect
     distributions.
    7. Rationalization of restrictions on     da 12/31/00............................                                                              Negligible Revenue Effect
     distributions.
    8. Purchase of service credit in          ta 12/31/00............................                                                              Negligible Revenue Effect
     governmental defined benefit plans.
    9. Employers may disregard rollovers for  da 12/31/00............................                                                              Negligible Revenue Effect
     cash-out amounts.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Provisions for Increasing   .......................................  ........  ........         -7        -11        -12        -12        -12         -13         -13         -13         -14         -41        -106
       Portability for Participants.
                                                                                      ==================================================================================================================================================
D. Provisions for Strengthening Pension
 Security and Enforcement
    1. Phase-in repeal of 150% of current     yba 12/31/00...........................  ........  ........         -7        -21        -33        -36        -36         -38         -38         -39         -41         -98        -290
     liability funding limit; extend maximum
     deduction rule.
    2. Missing plan participants............  (\11\).................................                                                              Negligible Revenue Effect
    3. Excise tax relief for sound pension    yba 12/31/00...........................  ........  ........         -2         -3         -3         -3         -3          -3          -3          -3          -3         -11         -26
     funding \9\.
    4. Notice of significant reduction in     pateo/a DOE............................                                                               Negligible Revenue Effect
     plan benefit accruals.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Provisions for              .......................................  ........  ........         -9        -24        -36        -39        -41         -41         -42         -44        -109        -316
       Strengthening Pension Security and
       Enforcement.
                                                                                      ==================================================================================================================================================
E. Provisions for Reducing Regulatory
 Burdens
    1. Repeal of multiple use test..........  yba 12/31/00...........................                                                            Considered in Other Provisions
    2. Flexibility in nondiscrimination and   DOE....................................                                                               Negligible Revenue Effect
     line of business rules \12\.
    3. Modification of timing of plan         pyba 12/31/00..........................                                                               Negligible Revenue Effect
     valuations.
    4. Rules for substantial owner benefits   noitta 12/31/00........................                                                               Negligible Revenue Effect
     in terminated plans \9\.
    5. ESOP dividends may be reinvested       tyba 12/31/00..........................  ........  ........        -19        -44        -56        -61        -63         -66         -69         -71         -74        -180        -523
     without loss of dividend deduction.
    6. Notice and consent period regarding    yba 12/31/00...........................                                                                   No Revenue Effect
     distributions.
    7. Repeal transition rule relating to     pyba 12/31/00..........................  ........  ........         -2         -3         -3         -3         -3          -3          -4          -4          -4         -10         -28
     certain highly compensated employees.
    8. Employees of tax-exempt entities \12\  DOE....................................                                                               Negligible Revenue Effect
    9. Treatment of employer-provided         yba 12/31/00...........................                                                               Negligible Revenue Effect
     retirement advice.
    10. Provisions relating to plan           DOE....................................                                                                   No Revenue Effect
     amendments.
    11. Pension plan reporting                DOE....................................                                                                   No Revenue Effect
     simplification \12\.
    12. Model pension plans for small         DOE....................................                                                                   No Revenue Effect
     businesses \12\.
    13. Intermediate sanctions \12\.........  DOE....................................                                                               Negligible Revenue Effect
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Subtotal of Provisions for Reducing     .......................................  ........  ........        -21        -47        -59        -64        -66         -69         -73         -75         -78        -190        -551
       Regulatory Burdens.
      Total of Pension Reform Provisions....  .......................................  ........  ........       -562     -1,066     -1,286     -1,425     -1,604      -1,814      -2,036      -2,250      -2,470      -4,347     -14,526
                                                                                      ==================================================================================================================================================
    Title XIII. Miscellaneous Provisions

1. Tax exclusion for certain foster care      tyba 12/31/99..........................  ........        -6        -14        -21        -29        -37        -44         -52         -61         -70         -80        -106        -414
 payments.
2. Tax exclusion for mileage reimbursements   tyba 12/31/99..........................  ........     (\3\)      (\3\)      (\3\)      (\3\)      (\3\)      (\3\)       (\3\)       (\3\)       (\3\)       (\3\)          -1          -2
 by public charities not in excess of
 standard business mileage rate.
3. Repeal 0.1 cent per gallon LUST tax on     10/1/99 & 10/1/03......................  ........        -2         -2         -2         -2       -117       -125        -128        -131        -134        -137        -125        -780
 railroads (10/1/99); consolidate Superfund
 and LUST trust funds; repeal 4.3-cents-per-
 gallon tax on railroad fuel and inland
 waterway fuel currently paid into the
 General Fund (10/1/03).
4. Repeal 10% excise tax on fishing tackle    30da DOE...............................  ........        -3         -3         -3         -3         -3         -3          -3          -3          -3          -3         -15         -30
 boxes \13\.
5. Equalize the tax treatment of ``clean      1/1/00.................................     (\3\)     (\3\)      (\3\)      (\2\)      (\2\)      (\2\)      (\2\)       (\2\)       (\2\)       (\2\)       (\2\)       (\3\)       (\2\)
 fuel'' vehicle and oversized electric
 vehicles.
6. Nuclear decommissioning costs: one-time    .......................................  ........       -24        -51        -89       -126       -128       -130        -131        -132        -132        -132        -418      -1,075
 transfer of non-qualified funds, with
 amortization over remaining useful life
 beginning in 2002; modify section 468A to
 eliminate cost of service requirement in
 determining nuclear decommissioning costs
 and clarify treatment of funds transfers.
7. Accelerate increase private activity bond  cya 1999...............................  ........       -22        -89       -186       -277       -345       -384        -398        -387        -360        -331        -919      -2,779
 volume cap.
8. Repeal 5-year limitations relating to      tyba 12/31/04..........................  ........  ........  .........  .........  .........  .........       -102        -206        -210        -214        -217  ..........        -949
 life insurance companies filing a
 consolidated tax return with an affiliated
 group of nonlife insurance companies.
9. Allow income from publicly traded          mf tyba 12/31/00.......................  ........  ........         -4         -9        -13        -17        -20         -23         -25         -28         -30         -43        -170
 partnerships to be qualifying income for
 regulated investment companies.
10. Exempt from tax distributions from        da 12/31/99............................  ........     (\3\)         -1         -2         -2         -2         -2          -2          -1          -1          -1          -7         -13
 Alaska Native Corporations to Alaska Native
 Settlement Trusts; income earned by the
 trust treated as under present law;
 distribution of principal to beneficiaries
 taxed as ordinary income.
11. Increase the Joint Committee on Taxation  DOE....................................                                                               Negligible Revenue Effect
 refund review threshold from $1 million to
 $2 million.
12. Tax Court provisions \9\................  DOE....................................                                                               Negligible Revenue Effect
13. Modification to Form W-2 to report        rpa 12/31/99...........................                                                                   No Revenue Effect
 employer's share of Social Security and
 Medicare taxes.
14. Add inserts and outserts to arrow excise  fcqb 30da DOE..........................                                                               Negligible Revenue Effect
 tax; reduce excise tax rate on
 ``broadhead'' arrow points.
15. Public safety officer survivors.........  (\15\).................................  ........        -1         -2         -2         -2         -2         -2          -1          -1          -1          -1          -8         -15
16. Allow wholesale dealers with sales of     DOE....................................  ........    (\16\)     (\16\)     (\16\)     (\16\)     (\16\)     (\16\)      (\16\)      (\16\)      (\16\)      (\16\)       (\3\)       (\3\)
 distilled spirits in excess of $10 million
 to receive distilled spirits in bond; with
 additional 1.5% tax on tax liabilities.
17. Specialized small business investment     sa & tybo/a DOE........................  ........     (\3\)      (\3\)      (\3\)      (\3\)         -1         -1          -1          -2          -2          -2          -1          -9
 companies.
18. Clarification of depreciation study.....  .......................................                                                                   No Revenue Effect
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Miscellaneous Provisions.....  .......................................  ........       -58       -166       -314       -454       -652       -813        -945        -953        -945        -934      -1,643      -6,236
                                                                                      ==================================================================================================================================================
Title XIV. Extension of Expired and Expiring
                 Provisions

1. Research credit, and increase in AIC       (\17\).................................  ........    -1,657     -1,853     -2,226     -2,537     -2,238     -1,340        -707        -433        -127  ..........     -10,510     -13,115
 rates by 1 percentage point (through 6/30/
 04).
2. Exemption from Subpart F for active        tybi 2000..............................  ........      -187       -827       -992     -1,190     -1,369     -1,156  ..........  ..........  ..........  ..........      -4,565      -5,721
 financing income (through 12/31/04).
3. Suspension of 100% net income limitation   tyba 12/31/99..........................  ........       -23        -35        -36        -36        -37        -13  ..........  ..........  ..........  ..........        -167        -180
 for marginal properties (through 12/31/04).
4. Work opportunity tax credit (through 12/   wpoifibwa 6/30/99......................  ........      -229       -321       -293       -151        -58        -19          -3  ..........  ..........  ..........      -1,053      -1,074
 31/01).
5. Welfare-to-work tax credit (through 12/31/ wpoifibwa 6/30/99......................  ........       -49        -77        -79        -47        -19         -7          -2  ..........  ..........  ..........        -271        -280
 01).
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Extension of Expired and       .......................................  ........    -2,145     -3,133     -3,626     -3,961     -3,721     -2,535        -712        -433        -127  ..........     -16,566     -20,370
       Expiring Provisions.
                                                                                      ==================================================================================================================================================
     Title XV. Revenue Offset Provisions

1. Information reporting on cancellation of   coda 12/31/99..........................  ........  ........          7          7          7          7          7           7           7           7           7          28          63
 indebtedness by non-bank financial
 institutions.
2. Extension of IRS user fees (through 9/30/  9/30/03................................  ........  ........  .........  .........  .........         50         53          56          59          61          64          50         343
 99) (\9\).
3. Impose limitation on pre-funding of        pmo/a 6/9/99...........................        22        93        141        147        149        140        129         118         105          90          74         693       1,209
 certain employee benefits.
4. Increase to 15% (from 10%) optional        dma 12/31/99...........................  ........        51          1          1          1          1          1           1           1           1           1          54          58
 withholding rate for nonperiodic payments
 from deferred compensation plans.
5. Modify treatment of closely-held REITs,    tyea 7/12/99...........................  ........         2          5          5          5          6          6           6           6           7           7          23          55
 with incubator REIT exception.
6. Prevent the conversion of ordinary income  teio/a 7/12/99.........................  ........        15         45         47         49         51         54          58          62          66          70         207         517
 or short-term capital gains into income
 eligible for long-term capital gain rates.
7. Allow employers to transfer excess         tmi tyba 12/31/00......................  ........  ........         19         38         39         40         41          42          42          43          44         136         348
 defined benefit plan assets to a special
 account for health benefits of retirees
 (through 9/30/09).
8. Repeal installment method for most         iseio/a DOE............................  ........       477        677        406        257         72          8          21          35          48          62       1,889       2,063
 accrual basis taxpayers; adjust pledge
 rules.
9. Limit use of non-accrual experience        tyea DOE...............................  ........        77         60         33         28         10         12          14          16          18          20         208         288
 method of accounting to amounts to be
 received for the performance of qualified
 professional services.
10. Exclusion of like-kind exchange property  seopra DOE.............................  ........         3          7          8          9         10         11          12          13          14          15          37         102
 from nonrecognition treatment on the sale
 of a personal residence.
                                                                                      --------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Revenue Offset Provisions....  .......................................        22       718        962        692        544        387        322         335         346         355         364       3,325       5,046
                                                                                      ==================================================================================================================================================
Title XVI. Tax Technical Correction           .......................................                                                                  No Revenue Effect
 Provisions.
      Net Total.............................  .......................................  ........    -4,543    -25,545    -46,779    -57,767     65,316    -89,847    -104,736    -114,195    -151,898    -203,307    -199,963    -863,958
Addendum: Tax Cut Target (Updated as a        .......................................  ........    -5,000    -29,000    -68,000    -45,000    -54,000    -70,000    -116,000    -141,000    -155,000    -182,000    -200,000    -864,000
 Result of the July 1, 1999, Congressional
 Budget Office Revision).
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimate assumes that effective date includes prior installment sales.
\2\ Gain of less than $500,000.
\3\ Loss of less than $500,000.
\4\ Estimate assumes concurrent enactment of the above-the-line deduction for health and long-term care insurance (item 1, under Health Care Tax Relief Provisions).
\5\ Effective for vaccine sales the date after the date on which the Centers for Disease Control make final recommendation for routine administration of conjugate Streptococcus Pneumonia vaccines to children.
\6\ Estimate does not include outlay effects of renewal community provision.
\7\ Effective for transfers made after 2/8/99 and for premiums paid after the date of enactment.
\8\ Proposal includes interaction with other provisions in Provisions for Expanding Coverage.
\9\ Estimate provided by Congressional Budget Office.
\10\ Loss of less than $5 million.
\11\ Effective for distributions from terminating that occur after the PBGC has adopted final regulations implementing provision.
\12\ Directs the Secretary of the Treasury to modify rules through regulations.
\13\ The Congressional Budget Office estimates that this provision would reduce outlays by $11 million from 1999 thorough 2004 and by $32 million from 1999 through 2009.
\14\ Generally effective for taxable years beginning after 12/31/99. The provision relating to transfer of non-qualified funds is effective for taxable years beginning after 12/3/01.
\15\ Effective for payments received after 12/31/99 with respect to all officers.
\16\ Negligible revenue effect.
\17\ Extension of credit effective for expenses incurred after 6/30/99; increase in AIC rates effective for taxable years beginning after 6/30/99.

Legend for ``Effective'' column; apa = amounts paid after; bia = bonds issued after; coda = cancellation of indebtedness after; cpoii = costs paid or incurred in; cya = calendar year after; da = distributions after; dda = decedents
  dying after; diia = debt instruments issued after; dma = distributions made after; DOE = date of enactment; eia = expenses incurred after; epoii = expenses paid or incurred in; fcqb = first calendar quarter beginning at least;
  giiia = gains includible in income after; gma = gifts made after; iseio/a = installment sales entered into on or after; lii = losses incurred in; mf = mutual funds; noitta = notice of intent to terminate after; pateo/a = plan
  amendments taking effect on or after; pea = plans established after; pmo/a = payments made on or after; proaa = payments received or accrued after; pyba = plan years beginning after; ma = requests made after; rpa = remuneration
  paid after; sa = sales after; sbwi = stock becoming worthless in; soeopra = sales or exchanges of personal residences after; ta = transfers after; tdapma = transfer, distributions, and payments made after; teio/a = transactions
  entered into on or after; tmi = transfer made in; tyba = taxable years beginning after; tybb = taxable years beginning before; tybi = taxable years beginning in; tybo/a = taxable years beginning on or after; tyea = taxable years
  ending after; wpoifibwa = wages paid or incurred for individuals beginning work after; yba = years beginning after; and
Note.--Details may not add to total due to rounding.

Source: Joint Committee on Taxation.

    B. Statement Regarding New Budget Authority and Tax Expenditures


Budget authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority.

Tax expenditures

    In compliance with clause 2(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
revenue-reducing income tax provisions (other than the 
individual tax rate reduction, the increased standard deduction 
for married taxpayers, and the foreign tax credit provisions) 
involve increased tax expenditures, and the revenue-increasing 
income tax provisions (other than information reporting on 
cancellation of indebtedness by non-bank financial institutions 
and optional withholding for nonqualified deferred 
compensation) involve reduced tax expenditures. (See amounts in 
table in Part IV.A., above.)

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the Congressional Budget Office (CBO), the 
following statement is made: The Committee estimate of the 
budgetary effects of the bill, prepared by the Joint Committee 
on Taxation, appears above. The letter from CBO was not 
received in a timely manner, and therefore, will need to be 
provided in a supplemental report.

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


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee advises that it was a result of the Committee's 
oversight review concerning the tax burden on individuals, 
families, small businesses, and others, education savings 
incentives, investment incentives, incentives for distressed 
communities and industries, international tax relief, treatment 
of certain tax-exempt organizations, real estate tax relief, 
pension reforms, certain miscellaneous tax provisions, 
extension of tax provisions expiring in 1999, certain revenue 
offsets, and necessary technical corrections to recent tax 
legislation, and the Fiscal Year 2000 Budget Resolution tax 
reduction instructions, that the Committee concluded that it is 
appropriate and timely to enact the revenue reconciliation 
provisions included in the bill as reported.

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

    With respect to clause 3(c)(4) of rule XII of the Rules of 
the House of Representatives, the Committee advises that no 
oversight findings or recommendations have been submitted to 
this Committee by the Committee on Government Reform with 
respect to the provisions contained in the bill.

                 C. Constitutional Authority Statement

    With respect to clause 3(d)(1) of rule XIII 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 8 (``The Congress shall have Power To lay 
and collect Taxes, Duties, Imposts and Excises . . .''), 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 following provisions 
of the bill contain Federal mandates on the private sector (for 
amounts, see table in Part IV.A., above): (1) add certain 
vaccines against streptococcus pneumoniae to the list of 
taxable vaccines, (2) impose 10 percent vote or value test, (3) 
treatment of income and services provided by taxable REIT 
subsidiaries, (4) impose 1.5 percent surtax on distilled 
spirits wholesale dealers and control State entities, (5) 
information reporting on cancellation of indebtedness by non-
bank financial institutions, (6) impose limitation on 
prefunding of certain employee benefits, (7) modify treatment 
of closely held REITs, with incubator REIT exception, (8) 
prevent the conversion of ordinary income or short-term capital 
gains into income eligible for long-term capital gains rates, 
(9) repeal installment method for most accrual basis taxpayers, 
(10) limit use of nonaccrual experience method of accounting to 
amounts to be received for the performance of qualified 
professional services, and (11) exclusion of like-kind exchange 
property from nonrecognition treatment on the sale of a 
personal residence.
    The costs required to comply with each Federal private 
sector mandate generally are no greater than the estimated 
budget effects of the provision. Benefits from the provisions 
include improved administration of the Federal tax laws and a 
more accurate measurement of income for Federal income tax 
purposes.
    The provision that adds Streptococcus Pneumoniae vaccine to 
the list of taxable vaccines for purposes of the vaccine excise 
tax and the 1.5 percent surtax on distilled spirits wholesale 
dealers and control State entities impose Federal 
intergovernmental mandates on State, local, and tribal 
governments. The staff of the Joint Committee on Taxation 
estimates that the direct costs of complying with these Federal 
intergovernmental mandates will not exceed $50,000,000 in 
either the first fiscal year or in any of the 4 fiscal years 
following the first fiscal year. The Committee intends that 
these Federal intergovernmental mandates be unfunded because 
(1) the net revenues from the Federal vaccine excise tax are 
used to finance the Federal Vaccine Injury Compensation Trust 
Fund and (2) as with other excise taxes, it is expected that 
the 1.5 percent surtax on distilled spirits will not be borne 
by the States, but rather will be passed on to the consumers of 
alcoholic beverages. Since these Federal excise taxes are 
imposed on the private sector and on State, local, and tribal 
governments, they do not affect the competitive balance between 
such governments and the private sector.

                E. Applicability of House Rules XXI5(b)

    Rule XXI5(b) 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.

                       F. Tax Complexity Analysis

    The following tax complexity analysis is provided pursuant 
to section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998, which requires the staff of the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service (``IRS'') and the Treasury Department) to 
provide a complexity analysis of tax legislation reported by 
the House Committee on Ways and Means, the Senate Committee on 
Finance, or a Conference Report containing tax provisions. The 
complexity analysis is required to report on the complexity and 
administrative issues raised by provisions that directly or 
indirectly amend the Internal Revenue Code and that have 
widespread applicability to individuals or small businesses. 
For each such provision identified by the staff of the Joint 
Committee on Taxation, a summary description of the provision 
is provided, along with an estimate of the number and the type 
of affected taxpayers, and a discussion regarding the relevant 
complexity and administrative issues.
    Following the analysis of the staff of the Joint Committee 
on Taxation are the comments of the IRS regarding each of the 
provisions included in the complexity analysis, including a 
discussion of the likely effect on IRS forms and any expected 
impact on the IRS.

1. Broad-based tax relief provision (sec. 101 of the bill)

Summary description of provision

    The broad-based tax relief provision reduces the regular 
income tax rates by 10 percent over a ten-year period (2000-
2009). Each rate is reduced by a total of 2.5 percent for 
taxable years beginning in 2001, 5 percent in 2005, 7.5 percent 
in 2008 and 10 percent in 2009. The provision does not apply to 
the tax rates applied to capital gains. The tax rates which are 
reduced are rounded up annually to the nearest one-tenth of a 
percent.

Number and type of affected taxpayers

    It is estimated that the reduction of the regular income 
tax rates will affect approximately 99 million individual 
income tax returns. It is estimated that, of this number, 
approximately 80 million individual tax returns have incomes 
less than $75,000.

Discussion

    It is not anticipated that individuals will need to keep 
additional records due to this provision. The rate reduction 
should not result in an increase in disputes with the IRS, nor 
will regulatory guidance be necessary to implement this 
provision. In addition, the provision should not increase 
individuals' tax preparation costs. For taxpayers with incomes 
of $100,000 or less, the tax liability is generally determined 
from tax tables. For those taxpayers, the new rates will be 
incorporated into the tax tables; i.e., individuals who use 
those tables will not be required to perform additional 
calculations.

2. Marriage penalty relief relating to the basic standard deduction for 
        married couples filing a joint return (sec. 111 of the bill)

Summary description of provision

    This provision increases the basic standard deduction for a 
married couple filing a joint return to twice the basic 
standard deduction for an unmarried individual in each taxable 
year. This increase is phased in over three years (2001-2003).

Number and type of affected taxpayers

    It is estimated that increasing the basic standard 
deduction for joint filers will affect approximately 23 million 
individual income tax returns. It is estimated that, of this 
number, approximately 20 million individual income tax returns 
have incomes less than $75,000.

Discussion

    It is not anticipated that individuals will need to keep 
additional records due to this provision. The higher basic 
standard deduction should not result in an increase in disputes 
with the IRS, nor will regulatory guidance be necessary to 
implement this provision. In addition, the provision should not 
increase individuals' tax preparation costs.
    Some taxpayers who currently itemize deductions may respond 
to the provision by claiming the increased standard deduction 
in lieu of itemizing. Such taxpayers will no longer have to 
file Schedule A to Form 1040 or need to engage in the record 
keeping inherent in itemizing below-the-line deductions. This 
reduction in complexity and record keeping may also result in a 
decline in the number of individuals using a tax preparation 
service (or a decline in the cost of using such a service). It 
may also reduce the number of disputes between taxpayers and 
the IRS regarding substantiation of itemized deductions.

3. Partial exclusion of interest and dividend income (sec. 201 of the 
        bill)

Summary description of provision

    The provision provides individuals with an exclusion from 
income for most types of interest and dividends. The maximum 
exclusion from income for individuals is $100 of combined 
interest and dividends ($200 for married couples filing 
jointly) for taxable years 2001 and 2002. The maximum exclusion 
is increased to $200 of combined interest and dividends ($400 
for married couples filing jointly) for taxable years 2003 and 
thereafter.

Number and type of affected taxpayers

    It is estimated that providing a partial exclusion for 
interest and dividend income will affect approximately 65 
million individual income tax returns. It is estimated that, of 
this number, 44 million have incomes less than $75,000.

Discussion

    It is not anticipated that individuals will need to keep 
additional records due to this provision, nor should the 
provision result in an increase in disputes with the IRS. It is 
not expected that the provision will increase individuals' tax 
preparation costs. Individuals with interest and dividend 
income in excess of the exclusion amount will have to perform 
one additional calculation, i.e., subtracting the amount of 
excludable interest and dividend income.
    The effect of the provision on filing requirements will 
depend on how the IRS responds to the provision. The 
legislative history to the provision encourages the IRS to 
implement the provision so as to simplify the process of 
completing tax forms to the greatest extent practicable, for 
example, by raising the administratively-established dollar 
thresholds for filing Schedule B or for being able to use the 
Form 1040EZ. For example, if the IRS raises the threshold by 
the amount of the exclusion, then taxpayers with only a small 
amount of taxable interest or dividend income (taking into 
account the exclusion) will not have to file Schedule B.

4. Individual capital gains rates (sec. 202 of the bill)

Summary description of provision

    The provision reduces the present-law individual capital 
gain rates of 10, 20, and 25 percent to 7.5, 15, and 20 percent 
respectively, effective for transactions on or after July 1, 
1999. The provision also repeals certain reduced rates for 
property held more than 5 years which would otherwise apply 
beginning after 2000.

Number and type of affected taxpayers

    It is estimated that reducing the tax rates on capital 
gains will affect approximately 19 million taxpayers. It is 
estimated that, of this number, approximately 12 million 
individual income tax returns have incomes of less than 
$75,000.

Discussion

    It is not anticipated that individuals will need to keep 
additional records due to this provision, because the provision 
is only a rate change. To the extent that a lower capital gains 
rate encourages more taxpayers to attempt to convert ordinary 
income into capital gains, the provision may result in an 
increase in disputes with the IRS. Additional regulatory 
guidance should not be necessary to implement the provision. 
The provision should not increase the tax preparation cost of 
individuals using a tax preparation service, expect possibly 
for the 1999 year when two rate schedules will be in effect 
(i.e., for sales on or after July 1, 1999, and for sales before 
July 1, 1999).
    The change in rates will not create additional complexity 
compared to the present-law rate structure, except in the 1999 
tax year, when two different rate structures apply depending on 
the date of the transaction. Because the provision repeals the 
reduced rate for five-year property that was scheduled to take 
effect after 2000, it will simplify the forms and record 
keeping requirements with respect to capital gains in the years 
after 2000.

5. Repeal of the temporary federal unemployment ``FUTA'' surtax (sec. 
        803 of the bill)

Summary description of provision

    Under present law, in addition to the regular FUTA tax of 
0.6 percent of taxable wages, a temporary surtax of 0.2 percent 
of taxable wages applies through 2007. The provision repeals 
the temporary FUTA surtax after December 31, 2004.

Number and type of affected taxpayers

    It is estimated that the repeal of the FUTA surtax will 
affect over six million small businesses.

Discussion

    It is not anticipated that small businesses will need to 
keep additional records due to this provision, nor is it 
anticipated that this provision will result in an increase in 
disputes with the IRS. Additional regulatory guidance should 
not be necessary to implement this provision. The provision 
should not increase the tax preparation cost of small 
businesses using a tax preparation service.

6. Restore 80-percent meals deduction (sec. 804 of the bill)

Summary description of provision

    The provision phases in an increase from 50 percent to 80 
percent in the deductible percentage of business meal (food and 
beverage) expenses. The increase in the deductible percentage 
is phased in according to the following schedule:

        Taxable years beginning in--               Deductible percentage
2005..............................................................    55
2006..............................................................    60
2007..............................................................    65
2008..............................................................    70
2009..............................................................    75
2010 and thereafter...............................................    80

    The provision is effective for taxable years beginning 
after 2004.

Number and type of affected taxpayers

    It is estimated that almost all small businesses will be 
affected by the provision.

Discussion

    Because the provision increases the percentage deduction 
only with respect to meals and not entertainment, small 
businesses may have to keep additional records to distinguish 
between the two types of expenditures. The provision may lead 
to additional disputes between small businesses and the IRS 
regarding the nature of an expenditure, particularly in 
business situations where the meal and entertainment is 
provided as a package for a single price. No new regulatory 
changes would be needed to implement the provision (although a 
conforming change to regulations to reflect the increasing 
percentage would be appropriate). The provision may increase 
complexity because the percentage of the deduction is phased 
in.

7. Expand employer reporting of annual wage and tax statements (sec. 
        1303 of the bill)

Summary description of provision

    Under present law, an employer must provide certain 
information annually to each employee in the form of a wage and 
tax statement (``Form W-2''), including the employee's portion 
of Social Security and Medicare taxes. The provision requires 
the Form W-2 to separately state the employer's share of Social 
Security and Medicare taxes.

Number and type of affected taxpayers

    It is estimated that almost all small businesses will be 
affected by the expansion of the reporting requirements on the 
Form W-2.

Discussion

    It is not anticipated that individuals will need to keep 
additional records due to this provision, nor is it anticipated 
that this provision will result in an increase in disputes with 
the IRS.
    The provision will impose an additional administrative 
burden on small employers, because they will need to report 
additional information. However, this information is generally 
readily available; the amount of payroll taxes imposed on the 
employer is generally the same amount the employer is 
withholding and reporting with respect the employee's share of 
payroll taxes.

                        Department of the Treasury,
                                  Internal Revenue Service,
                                     Washington, DC, July 15, 1999.
Ms. Lindy I. Paull,
Chief of Staff, Joint Committee on Taxation,
Washington, DC.
    Dear Ms. Paull: Attached are the Internal Revenue Service's 
(IRS) comments on the seven provisions from the Committee on 
Ways and Means markup of the ``Financial Freedom Act of 1999'' 
that you identified for complexity analysis in your letter of 
July 13, 1999. The comments are based on the Joint Committee on 
Taxation staff description (JCX-42-99) of the provisions and 
the statutory language for the Act published in the Daily Tax 
Report of the Bureau of National Affairs for Wednesday, July 
14, 1999.
    Due to the short turnaround time, our comments are 
provisional and subject to change upon a more complete and in-
depth analysis of the provisions.
            Sincerely,
                                               Charles O. Rossotti.
    Attachment.

IRS Comments on Seven Tax Provisions Identified for Complexity Analysis

10-percent reduction in regular income tax rates over ten years
    Tax rate changes mandated by the provision would be 
incorporated in the tax tables and tax rate schedules during 
IRS' annual update of these items. Changes to the tax rates 
shown in the instructions for Forms 1040, 1040A, 1040EZ, 
1040NR, and 1041, and on Forms 1040-ES, 1041, W-4V, 6251, 8801, 
and 8814 would be required for the 2001, 2005, 2008, and 2009 
forms. Other forms (e.g., Form 8752) would also be affected. No 
new forms would be required. Programming changes to the tax 
computation process would be required to reflect the new rates.
    Applying a three-digit tax rate percentage (as opposed to 
currently applying a two-digit percentage, most often) would 
cause math errors by some taxpayers who use the tax rate 
schedules or who figure estimated tax payments. Forms 1040 with 
incorrect tax calculations would have to be sent to Error 
Resolution for correction. This could result in delays in 
processing returns and in issuing refunds, as well as 
additional telephone inquiries. Manual processing of these 
erroneous returns would increase IRS' processing costs.
Marriage penalty tax relief
    This provision would require changes to the standard 
deduction amount for married taxpayers filing jointly shown on 
Forms 1040, 1040A, 1040EZ, and 1040-ES and in the instructions 
for Forms 1040, 1040A, and 1040EZ for each year over the three-
year phase-in period (2001-2003). No new forms would be 
required. Programming changes to the tax computation process 
would be required to reflect the increased standard deduction 
for married taxpayers filling jointly.
Reduction in individual capital gains tax rates
            Tax forms
    Applying the reduced rates to gains from 1999 sales after 
June 30 (as opposed to all 1999 sales) would require the 
following major changes to the 1999 Schedule D (Form 1040) and 
the worksheets in its instructions:
    --In Part I of Schedule D, a new column (g) with 5 lines 
for gain or loss after June 30 would be added.
    --In Part II, column (g) would be redesignated for gain or 
loss after June 30. The determination of 28% rate gain or loss 
would be moved to a new 5-line worksheet in the Schedule D 
instructions.
    --In Part IV, 10 additional lines would be added to figure 
the gains subject to new rates (7.5%, 15%, and 20% for 
unrecaptured section 1250 gain). One line would be removed 
because of the new 28% rate gain worksheet.
    --The worksheet for unrecaptured section 1250 gain would be 
expanded to add a new 9-line column for gain or loss after June 
30.
    It would also preclude the IRS from adding a new simplified 
15-line worksheet that the IRS planned to include in the 1999 
Form 1040 instructions for most taxpayers with no capital gains 
other than capital gain distributions. These taxpayers would 
have used this worksheet in lieu of completing Schedule D to 
figure their tax.
    The mid-year 1999 effective date would also require 
conforming changes for the following 1999 forms: Schedule D-1 
(Form 1040); Schedule D for Forms 1041, 1065, and 1120S; and 
Forms 2439, 4797, 6251, and 6781. In addition, the 1999 
Schedules K-1 for Forms 1041, 1065, and 1120S would need to be 
revised to add lines for gain or loss after June 30, 1999, for 
short-term gain or loss, long-term gain or loss, and section 
1231 gain or loss. Finally, the 1999 Forms 1099-DIV and 1099-B 
should be revised, but since they have already been 
distributed, the IRS would probably issue an announcement 
explaining how to report post-June 30, 1999, transactions to 
recipients on a substitute or separate statement. No new forms 
would be required.
    Generally, the above changes apply only to the 1999 forms 
and instructions. The forms and instructions for 2000 and later 
years would revert to the 1998 format, except that they would 
reflect the reduced capital gains tax rates. However, fiscal 
year 1998-99 taxpayers with a taxable year ending after June 
30, 1999, may also be affected by the mid-year 1999 effective 
date. These taxpayers file 1998 tax forms for their 1998-99 
fiscal year. Because the 1998 forms are already in print, the 
IRS would issue an announcement similar to Announcement 97-109, 
1997-45 I.R.B. 12, which was issued to reflect new reporting 
requirements necessitated by the 1997 capital gains tax rate 
changes. The announcement would explain how taxpayers must 
complete the 1998 forms to reflect the reduced rates for gains 
after June 30, 1999. The 1998 forms include Schedules D for 
Forms 1040 and 1041 and Schedules K-1 for Forms 1041, 1065, and 
1120S.
    If the reduced rates were made applicable to all 
transactions during a calendar year (instead of transactions 
after June 30), and section 202(c)(5) of the bill were struck, 
most of the major changes described above could be eliminated.
            Processing and programming
    The above changes to the 1999 forms caused by the mid-year 
effective date would require extensive revision of computer 
programs for processing those returns. While revisions of this 
kind late in the calendar year always pose difficulties, the 
problem is especially severe this year because of the special 
requirements in preparing for the Century Date Change. By 
August 1, 1999, the IRS will have already completed nearly all 
programming in preparation for the 2000 filing season. By 
October 1, 1999, all systems must be frozen in order to allow 
for final end-to-end testing of IRS systems. The IRS also must 
work with independent vendors of tax preparation software to 
test their systems so that it can correctly receive 
electronically filed returns beginning shortly after January 1, 
2000.
    If the mid-year effective date is retained, the IRS would 
be forced to complete testing of computer programs for 
processing during the 2000 filing season using the existing law 
and would be unable to process 1999 returns reporting capital 
gains under the new law until later in the filing season, 
possibly not until March 2000. At a minimum, this means that 
those taxpayers who have capital gains and who are due refunds 
would not be able to receive them until late in the filing 
season. In addition, since about 25 million returns include 
Schedule D and since these returns would not be processed until 
late in the season during the peak period, this might delay 
processing of some other returns. With these delays for so many 
returns, the IRS would expect an increased number of taxpayer 
phone calls concerned about delays in refunds thereby reducing 
the opportunity for other taxpayers to get assistance.
    The added complexity of Schedule D would lead to increased 
taxpayer error. During processing, these returns would have to 
be sent to Error Resolution for correction. This could cause 
additional delay in return processing and in the issuance of 
refunds. It also would increase the IRS' processing costs.
    Customer Service would need to issue a Taxpayer Education 
Bulletin Board item soon after enactment and subsequently 
incorporate this change into several sections of IRM Part 21. 
Customer Service would also need to train the Customer Service 
Representatives in the provision prior to the year 2000 filing 
season.
Partial exclusion for interest and dividend income
    To implement this provision, the IRS would add one box to 
Form 1099-DIV for 2001 (for nonqualifying dividends). The IRS 
would also add to Forms 1040 and 1040A three lines--total 
interest and dividends, exclusion, and taxable amount. The IRS 
would add to Form 1040-EZ (and the TeleFile Record) two lines--
exclusion (for interest) and taxable amount--which could impact 
the scanability of the 1040EZ. Also, the IRS would add a 
deduction line on page 1 of Form 1041 to allow estates and 
trusts to claim the dividend and interest exclusion. No new 
forms would be required.
Repeal of FUTA surtax
    The provision would require a change to the FUTA tax rate 
on Forms 940, 940-EZ, and 940-PR for 2005. The rate would be 
reduced from 6.2% to 6.0%. No new forms would be required. 
Programming changes to the FUTA tax computation process would 
be necessary to reflect the reduced rate.
Restoration of 80-percent deduction for meal expenses
    This provision would require the addition of a new 5-line 
column on Form 2106 and a new line on Form 2106-EZ to account 
for the different limits on meal expenses and entertainment 
expenses. Currently, the same 50% limit generally applies to 
both types of expenses. Minor changes to the instructions for 
Schedules C, C-EZ, E and F of Form 1040; Form 1065; and the 
Form 1120 series would also be required. No new forms would be 
required.
Inclusion of employer Social Security taxes on W-2
    The following forms would have to be reformatted to allow 
for two extra boxes for calendar year 2000: Form W-2, Form W-
2VI (U.S. Virgin Islands), Form W-2AS (American Samoa), Form 
499 R-2/W-2PR (Puerto Rico), Form W-2GU (Guam), and Form W-2CM 
(Commonwealth of the Northern Mariana Islands).\1\ No new forms 
would be required.
---------------------------------------------------------------------------
    \1\ Form 499 R-2/W-2PR is revised by Puerto Rico, and Form W-2CM is 
revised by the Commonwealth of the Northern Mariana Islands.
---------------------------------------------------------------------------
    The IRS proposed a major format revision of Form W-2 for 
2000, but industry groups and our advisory group asked us to 
delay the revision until 2001 because of Y2K computer problems. 
In Announcement 99-34, 1999-15 I.R.B. 8, the IRS announced it 
would not make major changes to Form W-2 until 2001, unless 
legislation requires it.
    These two new boxes would impose added burden on employers 
for information that is not used by the IRS or the Social 
Security Administration (SSA). These boxes also would have the 
potential to confuse taxpayers who currently use the existing 
social security and Medicare tax withheld boxes to complete 
other worksheets and forms, such as Form 8812, Additional Child 
Tax Credit. Because space is at a premium on Form W-2, the IRS 
prefers to require only information actually needed by the IRS, 
SSA, and taxpayers.

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

    In the opinion of the committee, in order to expedite the 
business of the House of Representatives, it is necessary to 
dispense with the requirements of clause 3(e) of rule XIII of 
the Rules of the House of Representatives (relating to showing 
changes in existing law made by the bill as reported).

                         VII. DISSENTING VIEWS

I. Misplaced priorities
    The Republicans on this Committee have made their budget 
priorities clear. They are willing to risk the future of Social 
Security and Medicare and to reject the budgetary discipline 
that has resulted in low interest rates and contributed to the 
current economic expansion. They refuse to enter into serious 
bipartisan discussions with the President of the United States. 
Their only priority is a reckless tax bill based on uncertain 
economic projections and on unrealistic assumptions about 
draconian cuts in future government spending for law 
enforcement, defense, education, veterans, farm programs, 
environmental protection, and other general government 
functions.
    The Democratic members of the Committee on Ways and Means 
are united in opposing the Republican budget priorities. 
Unfortunately, the votes in the Committee clearly indicate that 
the Republican members of this Committee have embraced their 
Leadership's reckless budget priorities. The Republicans on the 
Committee voted en bloc:
    1. To defeat an amendment that would have reduced the tax 
cuts by half and devoted the savings to paying off the National 
debt. The only sure way to promote economic growth is to pay 
down the National debt. Otherwise we leave our children and 
grandchildren with a huge burden.
    2. To defeat an amendment that would have reserved the 
funds necessary for the Social Security solvency plan proposed 
recently by Chairman Archer and Congressman Shaw. By defeating 
this amendment, the Committee Republicans turned their back on 
the Chairman's own Social Security plan because, with the tax 
cuts, his plan would require a $1.1 trillion increase in the 
public debt. It is not credible to pretend that the Committee 
tax bill and the Chairman's Social Security plan are 
compatible.
    3. To defeat an amendment to put the tax cuts on hold until 
Social Security and Medicare solvency is ensured and until 
there is a Medicare prescription drug benefit. Voting for tax 
cuts is easy. We should first accomplish the difficult task of 
protecting these vital programs.
    4. To defeat an amendment that would have reserved the 
funds necessary to preserve the solvency of the Medicare system 
until 2027 and to provide a prescription drug benefit for 
Medicare beneficiaries.
    5. To defeat an amendment that would have provided a 
prescription drug benefit for Medicare beneficiaries comparable 
to that provided in the President's plan announced in June, but 
without the payment of premiums by beneficiaries.
    This tax cut is premature, given that no non-Social-
Security surpluses have yet materialized. The Republicans 
assert that their tax bill will leave sufficient resources to 
ensure the solvency of both the Social Security and Medicare 
programs. They point to the $2 trillion set-aside in the House-
passed Social Security lockbox and argue that those funds will 
be sufficient for both programs. That assertion is so 
fraudulent that it must embarrass many of the members of the 
Republican Party. Devoting that $2 trillion to the Social 
Security system does not extend the solvency of the Social 
Security system by one day. If any of that money is used to 
extend the solvency of the Medicare program, it will accelerate 
the date on which the Social Security system becomes insolvent. 
The Republicans hope that the public will ignore a basic 
economic fact: you cannot spend the same dollar more than once.
    The Republicans have attempted to cloak their reckless tax 
bill in moral terms. They have been unsuccessful in that 
effort. Our Federal government's debt has grown by $3 trillion 
since 1980. We have all enjoyed the government services and 
consumption that was funded by that debt increase. The 
responsible and moral course of action would have the 
generation of Americans who ran up that debt bear the burden of 
paying it off. Instead, the Republican majority on the 
Committee has decided that the debt burden should be passed 
onto our children and their children. No matter how hard the 
Republicans may try to obfuscate this issue, their fiscally 
irresponsible tax bill will require the issuance of an 
additional $1 trillion in public debt obligations over the next 
10 years and approximately an additional $3 trillion over the 
following 10 years. Congressman John Tanner has quite 
accurately described the Republican's budgetary strategy as 
equivalent to ``an intergenerational mugging.''
    The burden of that increase in the National debt will also 
be borne by consumers, home purchasers, farmers, and small 
businesses in the form of higher interest rates. The 
Republicans cannot avoid the basic rule of supply and demand. 
The more the Federal government has to borrow, the higher the 
interest rates will be. Federal Reserve Board Chairman Alan 
Greenspan has stated that eliminating a substantial portion of 
the National debt could result in a reduction in interest 
rates. Taxpayers will benefit in two ways from debt reduction--
lower Federal expenditures for interest payments and lower 
interest rates for the economy. The only guaranteed way to 
reduce the Federal spending is to pay down the National debt.
    The Republicans have argued that their tax bill is 
necessary to protect against higher Federal spending. If an 
outside observer had watched the Committee's consideration of 
the bill, that observer would have come away with the strong 
impression that the Republican Party did not control both 
Houses of Congress. They do, and if they choose not to spend 
the money, it will not be spent. They spent an entire day 
arguing strenuously that their tax bill is necessary to protect 
the public from the Republican-controlled Congress.
    The experience of the 1980's indicates that reckless tax 
reductions do not ensure equivalent reductions in spending, 
they only ensure large deficits. The Republicans like to blame 
the deficits of the 1980's on the Democratic Congresses and not 
on the Republican Presidents that presided over that deficit 
spending. The fact is that the Democratic Congresses, for 
virtually every fiscal year during the 1980's, appropriated no 
more money than what was recommended in the Republican 
President's budget requests. After the Republican tax cut bill 
of 1981, Democratic Congresses constantly reduced Federal 
spending in relationship to the total economy.
    The procedures for considering this bill reflect its true, 
fiscally irresponsible nature. The Committee consideration of 
this 400-page bill that will cost nearly a $1 trillion lasted 
only about 15 hours. The details of that bill were not released 
until midnight of the day before the Committee consideration 
began--even though press releases on its provisions were 
released during the prior week. New provisions were added by 
the Chairman minutes before the markup began. The refusal to 
release the details of the bill in a timely and fair manner 
denied both Democratic and Republican members an opportunity to 
analyze its impact. The Chairman's actions reflect an uneasy 
recognition that the details of the bill could not bear 
scrutiny.
    Our form of government requires a respect for both 
institutions of government and procedures. The procedures 
followed for the consideration of this bill did not bring 
credit to the Committee, and we hope that they will not be 
repeated in the future.
II. Reducing the Federal debt
    This Country has an historical opportunity to reduce our 
$3.6 trillion debt. Tax cuts at this time are for the ``me'' 
generation. Reducing the debt is for the future--our children, 
grandchildren and their families.
    The lesson of recent outstanding economic performance is 
not that it is time to abandon efforts to reduce Federal debt. 
Reductions in debt have, and will, make it possible to restrain 
interest rates, which is good for families with mortgages, not 
just businesses. Reducing debt means that after two decades of 
draining away the Nation's savings, the Federal government now 
can put money back into the national savings bank. Instead of 
impeding capital formation, the government can encourage it.
    Reducing Federal debt is good for the economy. This tax 
bill does the opposite. In contrast, the President's budget 
updated this July would retire Federal debt held by the public 
by the year 2015 and budget interest costs would fall from $229 
billion to zero.
    Chairman Alan Greenspan testified before the Committee 
earlier this year that the wise course would be to let these 
budget surpluses run to see if they are real. He stated that 
his preference that the surpluses be allowed to run for a while 
and unwind a good deal of the debt which has accumulated over 
the years. It is hardly necessary to try to tax-cut stimulate 
an economy that has been growing rapidly and which has the 
lowest unemployment rate in 29 years.
    Without a doubt, debt reduction would promote long-term 
economic growth by increasing national saving and freeing up 
capital to expand the Nation's productive capacity. 
Consequently, debt reduction would ensure that more real 
economic resources are available to meet the needs of future 
generations in retirement, the true test of successful Social 
Security and Medicare reform. Moreover, budget surpluses are 
uncertain in nature (and become more so the more distant in the 
future they are expected to occur), but tax cuts are fixed in 
law. Thus, in the event that budget surpluses are smaller than 
anticipated (or do not materialize at all), tax cuts could 
force the Congress to dip into Social Security surpluses. This 
is an outcome Democrats and Republicans alike sought to prevent 
by passing Social Security lock box legislation earlier this 
year. A policy of debt reduction not only avoids this 
possibility but, by reducing the amount of interest paid on the 
debt, allows the Congress to redirect budget dollars to Social 
Security or Medicare, much as the President has suggested.

III. Social Security first

    Since the emergency of Federal budget surpluses, the 
question has been asked again and again: Should the Congress 
cut taxes before it acts to strengthen Social Security and 
Medicare? The Republicans' tax bill offers the wrong answer to 
this vitally important question about our Nation's priorities. 
They would spend virtually all projected non-Social Security 
surpluses to cut taxes before such surpluses have been 
realized, without the support of the American people and within 
a month of the Federal Reserve's decision to raise interest 
rates to restrain growth. As a result, the bill fails to set 
aside the resources necessary to strengthen Social Security and 
Medicare--the Nation's premier domestic programs--and to keep 
our Nation's promises to future retirees.
    The United States currently is enjoying a period of 
incredible economic and fiscal prosperity. However, due to 
long-term demographic trends, major challenges await. The twin 
pillars of retirement security in the United States--Social 
Security and Medicare--will encounter financing shortfalls in 
the first few decades of the next century. Together, these two 
programs, in one way or another, touch the lives of all 
Americans. Together, Social Security and Medicare provide a 
dependable source of income and health care for all elderly 
Americans and form a bulwark against poverty in old age. 
Together, Social Security and Medicare represent what is best 
about our Country.
    In this context, the Congress should act responsibly, not 
expediently. The Congress should address these challenges 
squarely and resolutely and should place them ahead of any 
other priority on its agenda. The Congress should act now to 
strengthen Social Security and Medicare, while it has budget 
surpluses ahead of it and the American people behind it. 
Instead, the Republicans proposed a massive tax cut that not 
only disproportionately benefits the wealthy, but also denies 
Social Security and Medicare the resources they needed to meet 
our Nation's obligations to future retirees.
    In a time of great prosperity, why would we want to shirk 
our responsibilities to the people who count on Social Security 
and Medicare being there when they retire? Why would we want to 
pass up a historic opportunity to strengthen Social Security 
and Medicare?
    The Democrats offered an amendment to make the Congress' 
priorities consistent with those of the American people and to 
make tax cuts contingent on extended solvency for Social 
Security and Medicare. The amendment would not have eliminated 
the tax cuts contained in the bill. Rather, it would have 
postponed those tax cuts until the Congress reaches an 
agreement on how best to meet the challenges that Social 
Security and Medicare will face in the decades ahead. 
Republicans unanimously rejected this fiscally responsible 
amendment, confirming that they are concerned more about the 
wealthiest members of our society than they are about America's 
working families.
    The bill would preclude the President's Medicare plan, as 
well as any number of Social Security plans. During two days of 
hearings in the Committee last month, Members of Congress 
described an array of plans to resolve Social Security's 
projected financing shortfall. No fewer than six of the 
solvency plans relied on large infusions of general revenues to 
accomplish their goal. In fact, both of the plans suggested by 
Members of this Committee--one by Congressman Stark and the 
other by Chairman Archer and Congressman Shaw--would depend on 
annual transfers of general revenues equal to about 2 percent 
of taxable payroll into the Social Security system. However, 
since both parties agree on the desirability of locking-up 
Social Security surpluses strictly to pay for previously-
promised Social Security benefits, the only budget surpluses 
available to finance the transfers under either the Archer-Shaw 
plan or the Stark bill are on-budget surpluses. Yet, the 
combination of the Republicans' tax cut and the funds necessary 
for either of these plans would exceed available on-budget 
surpluses by upwards of $200 billion per year. Thus, it is 
fiscally irresponsible to cut taxes to the extent envisioned by 
the Republicans and to address Social Security's financing 
shortfall through either the Archer-Shaw plan or the Stark 
bill. It is clear that this would quickly bring back the budget 
deficits the Congress struggled for years to eliminate.
    The Democrats also attempted to resolve this particular 
shortcoming but were blocked by the Republicans. Democrats 
offered an amendment to reserve projected on-budget surpluses 
for Social Security reform. Therefore, when the Congress 
decided to pursue substantive Social Security reform, whether 
through the Archer-Shaw plan, the Stark bill, or some other 
legislative vehicle, it would have the resources necessary to 
put Social Security on sound financial footing for the next 75 
years. The amendment made clear how much violence a mammoth tax 
cut would do to efforts to strengthen Social Security and 
Medicare. Nonetheless, Republicans ignored reality and voted 
unanimously against the solution.

IV. Save Medicare and assist those with medical needs

    The Republicans have refused to save Medicare, provide a 
Medicare drug benefit, or help those who really need help in 
meeting the costs of health insurance and caring for a family 
member. Their priorities are clear and will be judged by the 
public.
    The Republicans defeated the Democrats' efforts to save 
Medicare. The Republicans defeated an amendment to extend the 
life of the Medicare Hospital Insurance Trust Fund from its 
current exhaustion date of 2015 to the year 2027, well into the 
retirement of the ``baby boom'' generation. They also defeated 
efforts to provide immediate and meaningful prescription drug 
help for Medicare beneficiaries. The Republicans lost a major 
chance to save Medicare and to begin a substantial prescription 
drug benefit through the easiest step possible--the dedication 
of 15% of the surplus to Medicare. In accommodating a parade of 
special interests, Medicare beneficiaries are left facing a 
difficult future, with no help in obtaining prescription drugs.
    The Republicans rejected the Democrats' effort to save 
Medicare for the ``baby boomers.'' The Republicans defeated an 
amendment to adopt President Clinton's plan to save the 
Medicare Hospital Insurance Trust Fund and to provide for an 
essential modernization--a pharmaceutical benefit for 
beneficiaries. By the simple act of transferring 15% of the 
projected surplus to Medicare, the Democrats' amendment would 
have achieved 12 more years of solvency and started an annual 
prescription drug benefit of $1000 in 2002, rising to $2500 by 
2008.
    There are only three ways to save Medicare for the future. 
As the number of beneficiaries grows from today's 39 million to 
about 75 million in 2030, we can (1) cut payments to hospitals 
and doctors, (2) increase costs on beneficiaries by making them 
pay more, or (3) add new resources. We believe that any honest 
policymaker will admit that we need a combination of all three 
steps to ensure the survival of a program that continues to 
offer quality care.
    By rejecting the Democrats' efforts to save resources for 
Medicare, the Republicans are setting the stage for future 
massive cuts in benefits to seniors and the disabled, crippling 
cuts to hospitals, nursing homes, and home health agencies, or 
a massive future tax increase at a time when the economy may 
not be able to handle such an increase. Thechoice seems 
obvious: Save resources for Medicare today, or face impossible choices 
in the future.
    No one can dispute the need for more resources in the 
future. The number of Medicare beneficiaries will roughly 
double from about 39 million now to about 75 million in 2030. 
More of these seniors will be living longer, with those over 85 
making up the fastest growing group.
    Also, as the number of beneficiaries doubles, total 
Medicare spending as a percent of Gross Domestic Product will 
roughly double over the next 30 years from 2.55% in 1999 to 
4.88% in 2030. Again, we clearly will need more resources. We 
should save surpluses now to meet this growth.
    In addition, the number of workers per Medicare beneficiary 
will fall from 3.9 in 1998 to 2.3 in 2030. We must make it 
easier now for those fewer workers of the year 2030 to pay 
taxes to support retirees and the disabled. That means 
dedicating additional revenues or surpluses now by retiring 
debt.
    Other options for extending the life of the Hospital Trust 
Fund are unacceptable. The Medicare Hospital Trust Fund runs 
out of money in 2015. The Medicare Trustees estimate that to 
bring the HI program into actuarial balance, over just the next 
25 years, would require either that outlays be further reduced 
by 11% or that income be increased 12%. By voting not to save 
15% of the surplus for Medicare, thus extending the Trust Fund 
to 2027, Republicans are in effect voting for additional major 
hospital cuts or future tax increases. The option of shifting 
more costs to seniors and the disabled also is unacceptable to 
Democrats. Medicare is already one of the lowest value retiree 
benefit plans in the industrialized world and worth less than 
the value of the average private insurance/employer plan. This 
is why the Democrats believe a prescription drug benefit is 
critical at this time. Under the Balanced Budget Act of 1993, 
costs are already being shifted to seniors. We should not shift 
more, especially when so many seniors are still low income and 
the median per capita income of those over 65 was $13,324 in 
1998. For all these reasons, it is essential that we provide 
more resources for Medicare over the long-run. There will never 
be an easier way to do that than to dedicate a portion of the 
current surpluses to Medicare in lieu of excessive tax cuts 
today.
    The early passage of a prescription drug benefit is 
essential. You can not have a modern health insurance program 
without pharmaceutical coverage. Many drugs reduce other 
expenses, such as hospitalization and surgery.
    Over one-third of Medicare beneficiaries (about 15 million 
people) have no prescription coverage. Those who often do have 
very poor coverage. For example, Medigap plans are very limited 
and cost more than the value of the insurance they provide. 
Five million beneficiaries who have some drug coverage in an 
HMO are facing sharp cutbacks or cancellations being announced 
daily. Medicaid coverage is often severely limited. Employer-
provided retiree drug coverage has been cut about 20% between 
1993 and 1997 and is steadily decreasing. The average Medicare 
beneficiary spends about $942/year on drugs, about half paid by 
third parties, but 14% spend more than $1000 out of pocket, and 
4% (about 1.5 million) spend more than $2000/year.
    The Democrats offered its version of the President's 
prescription benefit proposal, because we believe that a drug 
benefit should be available for all as a social insurance 
program. Medicare is not a welfare or Medicaid program. The 
benefit should be available universally, not just for the low-
income.
    Finally, the Republicans tax deductions for health 
insurance do little or nothing to solve the problem of the 
uninsured. The Republican's provisions to provide deductions 
for the cost of buying health insurance and long term care 
insurance, an extra personal exemption for caregivers, and an 
expansion of Medical Savings Accounts will only help people in 
upper-income brackets. These are the people most likely to 
already have health insurance and savings for long term care. 
Republicans seem to forget the simple fact that people tend not 
to have health insurance because they don't have enough family 
income. Those with low family income do not pay much in taxes, 
and are little helped by tax deductions.
    The fair approach would be to provide tax credits for the 
cost of health and long-term care insurance and the cost of 
caring for a disabled family member. The President has proposed 
a $1000 tax credit for some of the expenses of caring for a 
disabled family member, and Democrats have introduced his bill; 
providing for a refundable tax credit. That would be a true 
help to families, many of whom have had to give up jobs and 
income to take care of a family member. In contrast, the 
Republican bill would provide a tax benefit worth at most $400 
for taxpayers in the 15% bracket. The benefit would rise to 
$1000 for those few individuals whose income after all 
deductions exceeds $250,000. This provision indicates clearly 
which income class the Republicans wish to benefit. In 
addition, about 6 million people who were uninsured or 
purchased indi-

vidual insurance did not file tax returns in 1996. Obviously, 
the Republican health proposals do nothing for those people.

V. Fairness to all Americans

    The Republican's fiscally irresponsible tax cuts are skewed 
to the affluent and just plain unfair to most Americans. The 
Joint Committee on Taxation (JCT) has estimated the 
distribution of tax cuts in this bill in the year 2004. 
Taxpayers with incomes over $200,000 get 32.4% of the tax cuts 
in the year 2004, but they comprise only 1.9% of all taxpayers 
and pay 24.9% of all Federal taxes. Although this 24.9% tax 
share may be impressive, their share of the Republican's tax 
cut is larger. Republicans typically cite the share of income 
taxes paid by the wealthy, but they ignored the payroll and 
other taxes that fall disproportionately on those who are not 
so affluent. The JTC estimates also show that those with 
incomes over $100,000 get 51.8% of the tax cuts, but they 
comprise only 8.8% of all taxpayers and pay 46.1% of all 
Federal taxes. In contrast, the lower- and middle-income groups 
get smaller shares of the huge tax cut in relation to their 
share of the population and their share of current Federal 
taxes.
    The tilt in the year 2004 distribution of tax cuts, in 
fact, is even greater than shown by the JCT methodology. The 
JCT does not ``distribute'' the effects of the estate/gift tax 
repeal nor the cuts in corporate income taxes. And the benefits 
of the capital gains tax cut are understated. While a tax cut 
of 5 percentage points in the capital gains tax rate is, for 
example surely worth $2500 to a taxpayer with $50,000, in 
capital gains, the JCT builds a ``realizations response'' into 
its revenue estimates which reduce the potential revenue loss. 
Only the revenue loss is measured in the JCT distribution 
tables, not what the tax cut is worth to the affected 
taxpayers.
    Tens of millions of tax-paying households will not benefit 
from a 10% cut in income tax rates. After Budget Chairman 
Kasich proposed a 10% rate cut earlier this year, the JCT 
estimated that, in the year 2000, forty-eight million 
households would not get any benefit from the proposal. The 
major reason for left-out households is that most do not owe 
income tax under current law. Although they may not owe any 
income tax, most of them pay Federal payroll and other Federal 
taxes.
    The Republican's 10% tax rate cut is skewed to the affluent 
because it cuts only the progressive Federal tax, while leaving 
the regressive Federal taxes unchanged. It is easiest to 
understand the unfairness of the Republican's tax cut by 
illustrating its effects as though it would be immediately 
effective, even though this bill phases in the tax cuts over 
ten years. According to earlier JCT estimates, households with 
incomes between $20,000 and $30,000 would get an average tax 
cut of $120 in a year; households with incomes above $200,000 
would get an average tax cut of $9221. Households with incomes 
between $20,000 and $30,000 would get a 3.3% cut in Federal 
taxes; households with incomes above $200,000 get a 6.1% cut in 
taxes. (The JCT calculates the percentage cut in taxes relative 
to total Federal taxes, not just the income tax.) Households 
with incomes between $20,000 and $30,000 would get a 3.5% share 
of the tax cut; households with incomes above $200,000 get a 
31.5% share of the tax cut.
    The share of this tax cut for a high income group exceeds 
the group's share of current-law Federal taxes, according to 
the JCT. The share of this tax cut for a middle- or lower-
income group is less that the group's share of current-law 
Federal taxes.
    The capital gains tax cuts are especially unfair. The 
Republican's bill cuts capital gains tax rates again, after 
they were cut in 1997. The tax rates on long-term capital gains 
would be cut from the current 20 percent and 10 percent to 15 
percent and 7.5 percent, respectively. These are 25% reductions 
from the current rates. However, capital gains tax cut favor 
the affluent because a huge proportion of capital gains are 
realized by a small fraction of very affluent taxpayers.
    According to the JCT, taxpayers with incomes over $100,000 
account for only 8% of all taxpayers. But they account for 36% 
of all income and for 88% of all long-term capital gains in 
1999. Taxpayers with incomes over $200,000 account for only 2% 
of all taxpayers. But they account for 20% of total income and 
76% of all long-term capital gains. Accordingly, the 
Republican's capital gains tax cut is worth much more to 
affluent taxpayers than to middle-income taxpayers. 
Furthermore, a much higher proportion of affluent taxpayers 
have capital gains.
    Seventy-five percent of taxpayers with incomes over 
$200,000 have capital gains, according to the JCT. Their 
average taxable gain is $137,000. A reduction in the capital 
gains tax rate from 20% to 15% is worth an average of $6850 
(0.05 x 137,000) for these top income taxpayers. In contrast, 
only 14% of taxpayers with incomes between $40,000 and $50,000 
have capital gains. Their average capital gain is $2600. Their 
capital gains tax cut is worth $130 or less.
    Whatever ones views might be about the fairness of cutting 
individual tax rates, rather than relieving regressive Federal 
tax, this bill makes middle-income taxpayers wait ten years for 
the full 10% rate cut, while the very affluent with large 
capital gains get the capital gains tax cut right away 
(particularly since the effective date is retroactive to July 
1, 1999.)
    Two supporting tables based on JTC estimates are attached 
to this statement.

V. Conclusion

    It is a sad day in America when Republican Representatives 
are willing to go through the motions of crafting the ``tax cut 
of the Century'' knowing that their actions are nothing but a 
joke. There are factions of the Republican party that must be 
satisfied before the elections. This bill allows them to say 
they did. But did what? All they have done is promote a huge 
tax cut for some of their constituency (who we believe know 
full well the folly of their actions) and told the public with 
a straight face that the tax benefits will be realized by all. 
Worse, they have betrayed the public's hope and expectation 
that Social Security and Medicare solvency would be addressed 
by this Congress. In the end, they have betrayed future 
generations by refusing to pay down any of our government's 
outstanding debt.

                        DISTRIBUTION OF TAX CHANGES UNDER ARCHER TAX PROPOSAL--YEAR 2004
----------------------------------------------------------------------------------------------------------------
                                           Change in       Percent Distribution of--                    Average
                                            Federal  ------------------------------------   Percent     tax cut
              Income group                   taxes                              Current    change in      per
                                          (Millions)    Tax cut    Taxpayers   law taxes     taxes     household
----------------------------------------------------------------------------------------------------------------
Less than $10,000.......................        -$17         0.0        14.4         0.4        -0.2         -$1
$10,000 to $20,000......................       -$364         0.9        17.8         2.0        -1.0        -$14
$20,000 to $30,000......................     -$1,332         3.2        14.8         5.0        -1.5        -$62
$30,000 to $40,000......................     -$2,163         5.1        11.7         6.5        -1.9       -$127
$40,000 to $50,000......................     -$2,729         6.5         9.3         7.3        -2.1       -$201
$50,000 to $75,000......................     -$7,155        17.0        15.1        17.6        -2.3       -$325
$75,000 to $100,000.....................     -$6,545        15.5         8.1        15.1        -2.4       -$554
$100,000 to $200,000....................     -$8,137        19.3         6.8        21.1        -2.2       -$818
$200,000 and over.......................    -$13,663        32.4         1.9        24.9        -3.1     -$4,835
                                         -----------------------------------------------------------------------
      Total, all taxpayers..............    -$42,105       100.0       100.0       100.0        -2.4       -$289
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation, Distributional Effects of the Financial Freedom Act of 1999, July 13, 1999,
  JCX-44-99 and background on the distribution of numbers of taxpayers from JCT table #D-99-15, Feb. 12, 1999.
Table prepared from JCT estimates by Ways and Means Committee Democratic Staff.


                                DISTRIBUTION OF LONG-TERM REALIZED CAPITAL GAINS
----------------------------------------------------------------------------------------------------------------
                                         Percent of--                                      Average capital gain
                             ------------------------------------                                 among--
                                                       Taxpayers     Total    Percent of -----------------------
        Income group                                    within      capital      total
                                 Total       Total      income       gains       gains    Those with      All
                               taxpayers    income    group with  (millions)                 gains     taxpayers
                                                         gains
----------------------------------------------------------------------------------------------------------------
Less than $10,000...........       $16.1         1.4         1.2        $444         0.1      $1,626         $20
$10,000 to $20,000..........        19.0         5.9         2.6       1,071         0.3       1,582          41
$20,000 to $30,000..........        14.6         7.6         5.7       2,244         0.7       1,926         111
$30,000 to $40,000..........        11.5         8.4        10.3       4,227         1.2       2,579         266
$40,000 to $50,000..........         9.4         8.9        13.9       4,795         1.4       2,630         367
$50,000 to $75,000..........        14.3        18.4        20.8      14,638         4.3       3,544         738
$75,000 to $100,000.........         7.2        13.1        29.7      14,855         4.3       4,982       1,479
$100,000 to $200,000........         6.1        16.8        47.5      42,082        12.2      10,463       4,974
$200,000 and over...........         1.8        19.5        75.0     259,958        75.5     137,181     102,872
                             -----------------------------------------------------------------------------------
      Total, all taxpayers..       100.0       100.0        13.4    $344,314       100.0     $18,507     $2,480
----------------------------------------------------------------------------------------------------------------
Source: Joint Committee on Taxation, July 9, 1999, table #D-99-49 and computations from this data.

                                   C.B. Rangel.
                                   William J. Jefferson.
                                   Sander M. Levin.
                                   William J. Coyne.
                                   Richard E. Neal.
                                   Ben Cardin.
                                   John Lewis.
                                   Lloyd Doggett.
                                   Jerry Kleczka.
                                   Robert T. Matsui.
                                   John Tanner.
                                   Xavier Becerra.
                                   Pete Stark.
                                   Jim McDermott.

                                

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