    [105th Congress Public Law 34]
    [From the U.S. Government Publishing Office]

    <DOC>
    [DOCID: f:publ34.105]

    [[Page 111 STAT. 787]]

                           TAXPAYER RELIEF ACT OF 1997

    [[Page 111 STAT. 788]]

    * Public Law 105-34
     105th Congress

                                     An Act

      To provide for reconciliation <<NOTE: Aug. 5, 1997 -  [H.R. 2014]>>
    pursuant to subsections (b)(2) and (d) of section 105 of the concurrent
                 resolution on the budget for fiscal year 1998.

        Be it enacted by the Senate and House of Representatives of the
    United <<NOTE: Taxpayer Relief Act of 1997.>>  States of America in
    Congress assembled,

    SECTION 1. SHORT TITLE; ETC.

        (a) <<NOTE: 26 USC 1 note.>>  Short Title.--This Act may be cited as
    the ``Taxpayer Relief Act of 1997''.

        (b) Amendment of 1986 Code.--Except as otherwise expressly provided,
    whenever in this Act an amendment or repeal is expressed in terms of an
    amendment to, or repeal of, a section or other provision, the reference
    shall be considered to be made to a section or other provision of the
    Internal Revenue Code of 1986.
    ---------------------------------------------------------------------------
        * Note: This is a hand enrollment pursuant to Public Law 105-
    32.
    ---------------------------------------------------------------------------

        (c) <<NOTE: 26 USC 15 note.>>  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) <<NOTE: 26 USC 6654 note.>>  Waiver of Estimated Tax
    Penalties.--No addition to tax shall be made under section 6654 or 6655
    of the Internal Revenue Code of 1986 for any period before January 1,
    1998, for any payment the due date of which is before January 16, 1998,
    with respect to any underpayment attributable to such period to the
    extent such underpayment was created or increased by any provision of
    this Act.

        (e) Table of Contents.--The table of contents for this Act is as
    follows:

    Sec. 1. Short title; etc.

                            TITLE I--CHILD TAX CREDIT

    Sec. 101. Child tax credit.

                         TITLE II--EDUCATION INCENTIVES

             Subtitle A--Tax Benefits Relating to Education Expenses

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

         Subtitle B--Expanded Education Investment Savings Opportunities

                       Part I--Qualified Tuition Programs

    Sec. 211. Modifications of qualified State tuition programs.

                Part II--Education Individual Retirement Accounts

    Sec. 213. Education individual retirement accounts.

                     Subtitle C--Other Education Initiatives

    Sec. 221. Extension of exclusion for employer-provided educational
               assistance.

    [[Page 111 STAT. 789]]

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

                  TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                         Subtitle A--Retirement Savings

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

                            Subtitle B--Capital Gains

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

                    TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

    Sec. 401. Exemption from alternative minimum tax for small corporations.
    Sec. 402. Repeal of separate depreciation lives for minimum tax
               purposes.
    Sec. 403. Minimum tax not to apply to farmers' installment sales.

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

                   Subtitle A--Estate and Gift Tax Provisions

    Sec. 501. Cost-of-living adjustments relating to estate and gift tax
               provisions.
    Sec. 502. Family-owned business exclusion.
    Sec. 503. Modifications to rate of interest on portion of estate tax
               extended under section 6166.
    Sec. 504. Extension of treatment of certain rents under section 2032A to
               lineal descendants.
    Sec. 505. Clarification of judicial review of eligibility for extension
               of time for payment of estate tax.
    Sec. 506. Gifts may not be revalued for estate tax purposes after
               expiration of statute of limitations.
    Sec. 507. Repeal of throwback rules applicable to certain domestic
               trusts.
    Sec. 508. Treatment of land subject to a qualified conservation
               easement.

                  Subtitle B--Generation-Skipping Tax Provision

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

                              TITLE VI--EXTENSIONS

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

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

    Sec. 701. Tax incentives for revitalization of the District of Columbia.

                     TITLE VIII--WELFARE-TO-WORK INCENTIVES

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

                       TITLE IX--MISCELLANEOUS PROVISIONS

                 Subtitle A--Provisions Relating to Excise Taxes

    Sec. 901. General revenue portion of highway motor fuels taxes deposited
               into Highway Trust Fund.
    Sec. 902. Repeal of tax on diesel fuel used in recreational boats.

    [[Page 111 STAT. 790]]

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

                   Subtitle B--Revisions Relating to Disasters

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

               Subtitle C--Provisions Relating to Employment Taxes

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

               Subtitle D--Provisions Relating to Small Businesses

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

                             Subtitle E--Brownfields

    Sec. 941. Expensing of environmental remediation costs.

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

                     Chapter 1--Additional Empowerment Zones

    Sec. 951. Additional empowerment zones.

                        Chapter 2--New Empowerment Zones

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

      Chapter 3--Treatment Of Empowerment Zones and Enterprise Communities

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

                          Subtitle G--Other Provisions

    Sec. 961. Use of estimates of shrinkage for inventory accounting.
    Sec. 962. Assignment of workmen's compensation liability eligible for
               exclusion relating to personal injury liability assignments.
    Sec. 963. Tax-exempt status for certain State worker's compensation act
               companies.
    Sec. 964. Election for 1987 partnerships to continue exception from
               treatment of publicly traded partnerships as corporations.
    Sec. 965. Exclusion from unrelated business taxable income for certain
               sponsorship payments.
    Sec. 966. Associations of holders of timeshare interests to be taxed
               like other homeowners associations.

    [[Page 111 STAT. 791]]

    Sec. 967. Additional advance refunding of certain Virgin Island bonds.
    Sec. 968. Nonrecognition of gain on sale of stock to certain farmers'
               cooperatives.
    Sec. 969. Increased deductibility of business meal expenses for
               individuals subject to Federal hours of service.
    Sec. 970. Clarification of de minimis fringe benefit rules to no-charge
               employee meals.
    Sec. 971. Exemption of the incremental cost of a clean fuel vehicle from
               the limits on depreciation for vehicles.
    Sec. 972. Temporary suspension of taxable income limit on percentage
               depletion for marginal production.
    Sec. 973. Increase in standard mileage rate expense deduction for
               charitable use of passenger automobile.
    Sec. 974. Clarification of treatment of certain receivables purchased by
               cooperative hospital service organizations.
    Sec. 975. Deduction in computing adjusted gross income for expenses in
               connection with service performed by certain officials.
    Sec. 976. Combined employment tax reporting demonstration project.
    Sec. 977. Elective carryback of existing carryovers of National Railroad
               Passenger Corporation.

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

    Sec. 981. Generalized System of Preferences.

                                TITLE X--REVENUES

                         Subtitle A--Financial Products

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

             Subtitle B--Corporate Organizations and Reorganizations

    Sec. 1011. Tax treatment of certain extraordinary dividends.
    Sec. 1012. Application of section 355 to distributions in connection
               with acquisitions and to intragroup transactions.
    Sec. 1013. Tax treatment of redemptions involving related corporations.
    Sec. 1014. Certain preferred stock treated as boot.
    Sec. 1015. Modification of holding period applicable to dividends
               received deduction.

                      Subtitle C--Administrative Provisions

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

                Subtitle D--Excise and Employment Tax Provisions

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

             Subtitle E--Provisions Relating to Tax-Exempt Entities

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

    [[Page 111 STAT. 792]]

                         Subtitle F--Foreign Provisions

    Sec. 1051. Definition of foreign personal holding company income.
    Sec. 1052. Personal property used predominantly in the United States
               treated as not property of a like kind with respect to
               property used predominantly outside the United States.
    Sec. 1053. Holding period requirement for certain foreign taxes.
    Sec. 1054. Denial of treaty benefits for certain payments through hybrid
               entities.
    Sec. 1055. Interest on underpayments not reduced by foreign tax credit
               carrybacks.
    Sec. 1056. Clarification of period of limitations on claim for credit or
               refund attributable to foreign tax credit carryforward.
    Sec. 1057. Repeal of exception to alternative minimum foreign tax credit
               limit.

                       Subtitle G--Partnership Provisions

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

                         Subtitle H--Pension Provisions

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

                      Subtitle I--Other Revenue Provisions

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

          TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                         Subtitle A--General Provisions

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

            Subtitle B--Treatment of Controlled Foreign Corporations

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

          Subtitle C--Treatment of Passive Foreign Investment Companies

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

    [[Page 111 STAT. 793]]

    Sec. 1124. Effective date.

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

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

                        Subtitle E--Information Reporting

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

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

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

                   Subtitle G--Other Simplification Provisions

    Sec. 1161. Transition rule for certain trusts.
    Sec. 1162. Repeal of stock and securities safe harbor requirement that
               principal office be outside the United States.
    Sec. 1163. Miscellaneous clarifications.

                          Subtitle H--Other Provisions

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

        TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND
                                   BUSINESSES

                 Subtitle A--Provisions Relating to Individuals

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

             Subtitle B--Provisions Relating to Businesses Generally

    Sec. 1211. Modifications to look-back method for long-term contracts.
    Sec. 1212. Minimum tax treatment of certain property and casualty
               insurance companies.
    Sec. 1213. Qualified lessee construction allowances for short-term
               leases.

       Subtitle C--Simplification Relating to Electing Large Partnerships

                           Part I--General Provisions

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

          Part II--Provisions Related to TEFRA Partnership Proceedings

    Sec. 1231. Treatment of partnership items in deficiency proceedings.
    Sec. 1232. Partnership return to be determinative of audit procedures to
               be followed.

    [[Page 111 STAT. 794]]

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

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

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

        Subtitle D--Provisions Relating to Real Estate Investment Trusts

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

        Subtitle E--Provisions Relating to Regulated Investment Companies

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

                        Subtitle F--Taxpayer Protections

    Sec. 1281. Reasonable cause exception for certain penalties.
    Sec. 1282. Clarification of period for filing claims for refunds.
    Sec. 1283. Repeal of authority to disclose whether prospective juror has
               been audited.
    Sec. 1284. Clarification of statute of limitations.
    Sec. 1285. Awarding of administrative costs.

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

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

    [[Page 111 STAT. 795]]

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

                      Subtitle A--Excise Tax Simplification

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

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

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

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

                      Part III--Other Excise Tax Provisions

    Sec. 1431. Authority to grant exemptions from registration requirements.
    Sec. 1432. Repeal of expired provisions.
    Sec. 1433. Simplification of imposition of excise tax on arrows.
    Sec. 1434. Modifications to retail tax on heavy trucks.
    Sec. 1435. Skydiving flights exempt from tax on transportation of
               persons by air.
    Sec. 1436. Allowance or credit of refund for tax-paid aviation fuel
               purchased by registered producer of aviation fuel.

                     Subtitle B--Tax-Exempt Bond Provisions

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

                        Subtitle C--Tax Court Procedures

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

                          Subtitle D--Other Provisions

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

                    TITLE XV--PENSIONS AND EMPLOYEE BENEFITS

                           Subtitle A--Simplification

    Sec. 1501. Matching contributions of self-employed individuals not
               treated as elective employer contributions.

    [[Page 111 STAT. 796]]

    Sec. 1502. Modification of prohibition of assignment or alienation.
    Sec. 1503. Elimination of paperwork burdens on plans.
    Sec. 1504. Modification of 403(b) exclusion allowance to conform to 415
               modifications.
    Sec. 1505. Extension of moratorium on application of certain
               nondiscrimination rules to State and local governments.
    Sec. 1506. Clarification of certain rules relating to employee stock
               ownership plans of S corporations.
    Sec. 1507. Modification of 10-percent tax for nondeductible
               contributions.
    Sec. 1508. Modification of funding requirements for certain plans.
    Sec. 1509. Clarification of disqualification rules relating to
               acceptance of rollover contributions.
    Sec. 1510. New technologies in retirement plans.

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

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

             Subtitle C--Provisions Relating to Certain Health Acts

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

               Subtitle D--Provisions Relating to Plan Amendments

    Sec. 1541. Provisions relating to plan amendments.

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

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

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

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

                            TITLE I--CHILD TAX CREDIT

    SEC. 101. CHILD TAX CREDIT.

        (a) In General.--Subpart A of part IV of subchapter A of chapter 1
    (relating to nonrefundable personal credits) is amended by inserting
    after section 23 the following new section:

    ``SEC. 24. CHILD TAX CREDIT.

        ``(a) Allowance of Credit.--There shall be allowed as a credit
    against the tax imposed by this chapter for the taxable year with
    respect to each qualifying child of the taxpayer an amount equal to $500
    ($400 in the case of taxable years beginning in 1998).
        ``(b) Limitation Based on Adjusted Gross Income.--
                ``(1) In general.--The amount of the credit allowable under
            subsection (a) shall be reduced (but not below zero) by $50

    [[Page 111 STAT. 797]]

            for each $1,000 (or fraction thereof) by which the taxpayer's
            modified adjusted gross income exceeds the threshold amount. For
            purposes of the preceding sentence, the term `modified adjusted
            gross income' means adjusted gross income increased by any
            amount excluded from gross income under section 911, 931, or
            933.
                ``(2) Threshold amount.--For purposes of paragraph (1), the
            term `threshold amount' means--
                        ``(A) $110,000 in the case of a joint return,
                        ``(B) $75,000 in the case of an individual who is
                    not married, and
                        ``(C) $55,000 in the case of a married individual
                    filing a separate return.
            For purposes of this paragraph, marital status shall be
            determined under section 7703.

        ``(c) Qualifying Child.--For purposes of this section--
                ``(1) In general.--The term `qualifying child' means any
            individual if--
                        ``(A) the taxpayer is allowed a deduction under
                    section 151 with respect to such individual for the
                    taxable year,
                        ``(B) such individual has not attained the age of 17
                    as of the close of the calendar year in which the
                    taxable year of the taxpayer begins, and
                        ``(C) such individual bears a relationship to the
                    taxpayer described in section 32(c)(3)(B).
                ``(2) Exception for certain noncitizens.--The term
            `qualifying child' shall not include any individual who would
            not be a dependent if the first sentence of section 152(b)(3)
            were applied without regard to all that follows `resident of the
            United States'.

        ``(d) Additional Credit for Families With 3 or More Children.--
                ``(1) In general.--In the case of a taxpayer with 3 or more
            qualifying children for any taxable year, the amount of the
            credit allowed under this section shall be equal to the greater
            of--
                        ``(A) the amount of the credit allowed under this
                    section (without regard to this subsection and after
                    application of the limitation under section 26), or
                        ``(B) the alternative credit amount determined under
                    paragraph (2).
                ``(2) Alternative credit amount.--For purposes of this
            subsection, the alternative credit amount is the amount of the
            credit which would be allowed under this section if the
            limitation under paragraph (3) were applied in lieu of the
            limitation under section 26.
                ``(3) Limitation.--The limitation under this paragraph for
            any taxable year is the limitation under section 26 (without
            regard to this subsection)--
                        ``(A) increased by the taxpayer's social security
                    taxes for such taxable year, and
                        ``(B) reduced by the sum of--
                              ``(i) the credits allowed under this part
                          other than under subpart C or this section, and
                              ``(ii) the credit allowed under section 32
                          without regard to subsection (m) thereof.

    [[Page 111 STAT. 798]]

                ``(4) Unused credit to be refundable.--If the amount of the
            credit under paragraph (1)(B) exceeds the amount of the credit
            under paragraph (1)(A), such excess shall be treated as a credit
            to which subpart C applies. The rule of section 32(h) shall
            apply to such excess.
                ``(5) Social security taxes.--For purposes of paragraph
            (3)--
                        ``(A) In general.--The term `social security taxes'
                    means, with respect to any taxpayer for any taxable
                    year--
                              ``(i) the amount of the taxes imposed by
                          sections 3101 and 3201(a) on amounts received by
                          the taxpayer during the calendar year in which the
                          taxable year begins,
                              ``(ii) 50 percent of the taxes imposed by
                          section 1401 on the self-employment income of the
                          taxpayer for the taxable year, and
                              ``(iii) 50 percent of the taxes imposed by
                          section 3211(a)(1) on amounts received by the
                          taxpayer during the calendar year in which the
                          taxable year begins.
                        ``(B) Coordination with special refund of social
                    security taxes.--The term `social security taxes' shall
                    not include any taxes to the extent the taxpayer is
                    entitled to a special refund of such taxes under section
                    6413(c).
                        ``(C) Special rule.--Any amounts paid pursuant to an
                    agreement under section 3121(l) (relating to agreements
                    entered into by American employers with respect to
                    foreign affiliates) which are equivalent to the taxes
                    referred to in subparagraph (A)(i) shall be treated as
                    taxes referred to in such subparagraph.

        ``(e) Identification Requirement.--No credit shall be allowed under
    this section to a taxpayer with respect to any qualifying child unless
    the taxpayer includes the name and taxpayer identification number of
    such qualifying child on the return of tax for the taxable year.
        ``(f) Taxable Year Must Be Full Taxable Year.--Except in the case of
    a taxable year closed by reason of the death of the taxpayer, no credit
    shall be allowable under this section in the case of a taxable year
    covering a period of less than 12 months.''.
        (b) Supplemental Credit.--Section 32 is amended by adding at the end
    the following new subsection:
        ``(m) Supplemental Child Credit.--
                ``(1) In general.--In the case of a taxpayer with respect to
            whom a credit is allowed under section 24 for the taxable year,
            there shall be allowed as a credit under this section an amount
            equal to the supplemental child credit (if any) determined for
            such taxpayer for such taxable year under paragraph (2). Such
            credit shall be in addition to the credit allowed under
            subsection (a).
                ``(2) Supplemental child credit.--For purposes of this
            subsection, the supplemental child credit is an amount equal to
            the excess (if any) of--
                        ``(A) the amount determined under section
                    24(d)(1)(A), over
                        ``(B) the amount determined under section
                    24(d)(1)(B).
            The amounts referred to in subparagraphs (A) and (B) shall be
            determined as if section 24(d) applied to all taxpayers.

    [[Page 111 STAT. 799]]

                ``(3) Coordination with section 24.--The amount of the
            credit under section 24 shall be reduced by the amount of the
            credit allowed under this subsection.''.

        (c) High Risk Pools Permitted To Cover Spouses and Dependents of
    High Risk Individuals.--Paragraph (26) of section 501(c) is amended by
    adding at the end the following flush sentence:
            ``A spouse and any qualifying child (as defined in section
            24(c)) of an individual described in subparagraph (B) (without
            regard to this sentence) shall be treated as described in
            subparagraph (B).''.

        (d) Conforming Amendments.--
                (1) Section 1324(b)(2) of title 31, United States Code, is
            amended by inserting before the period at the end ``, or enacted
            by the Taxpayer Relief Act of 1997''.
                (2) Paragraph (2) of section 6213(g) (relating to the
            definition of mathematical or clerical errors) is amended by
            striking ``and'' at the end of subparagraph (G), by striking the
            period at the end of subparagraph (H) and inserting ``, and'',
            and by inserting after subparagraph (H) the following new
            subparagraph:
                        ``(I) an omission of a correct TIN required under
                    section 24(e) (relating to child tax credit) to be
                    included on a return.''.
                (3) The table of sections for subpart A of part IV of
            subchapter A of chapter 1 is amended by inserting after the item
            relating to section 23 the following new item:
                    ``Sec. 24. Child tax credit.''.

        (e) <<NOTE: 26 USC 24 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

                         TITLE II--EDUCATION INCENTIVES

             Subtitle A--Tax Benefits Relating to Education Expenses

    SEC. 201. HOPE AND LIFETIME LEARNING CREDITS.

        (a) In General.--Subpart A of part IV of subchapter A of chapter 1
    (relating to nonrefundable personal credits) is amended by inserting
    after section 25 the following new section:

    ``SEC. 25A. HOPE AND LIFETIME LEARNING CREDITS.

        ``(a) Allowance of Credit.--In the case of an individual, there
    shall be allowed as a credit against the tax imposed by this chapter for
    the taxable year the amount equal to the sum of--
                ``(1) the Hope Scholarship Credit, plus
                ``(2) the Lifetime Learning Credit.

        ``(b) Hope Scholarship Credit.--
                ``(1) Per student credit.--In the case of any eligible
            student for whom an election is in effect under this section for
            any taxable year, the Hope Scholarship Credit is an amount equal
            to the sum of--
                        ``(A) 100 percent of so much of the qualified
                    tuition and related expenses paid by the taxpayer during
                    the taxable year (for education furnished to the
                    eligible student

    [[Page 111 STAT. 800]]

                    during any academic period beginning in such taxable
                    year) as does not exceed $1,000, plus
                        ``(B) 50 percent of such expenses so paid as exceeds
                    $1,000 but does not exceed the applicable limit.
                ``(2) Limitations applicable to hope scholarship credit.--
                        ``(A) Credit allowed only for 2 taxable years.--An
                    election to have this section apply with respect to any
                    eligible student for purposes of the Hope Scholarship
                    Credit under subsection (a)(1) may not be made for any
                    taxable year if such an election (by the taxpayer or any
                    other individual) is in effect with respect to such
                    student for any 2 prior taxable years.
                        ``(B) Credit allowed for year only if individual is
                    at least \1/2\ time student for portion of year.--The
                    Hope Scholarship Credit under subsection (a)(1) shall
                    not be allowed for a taxable year with respect to the
                    qualified tuition and related expenses of an individual
                    unless such individual is an eligible student for at
                    least one academic period which begins during such year.
                        ``(C) Credit allowed only for first 2 years of
                    postsecondary education.--The Hope Scholarship Credit
                    under subsection (a)(1) shall not be allowed for a
                    taxable year with respect to the qualified tuition and
                    related expenses of an eligible student if the student
                    has completed (before the beginning of such taxable
                    year) the first 2 years of postsecondary education at an
                    eligible educational institution.
                        ``(D) Denial of credit if student convicted of a
                    felony drug offense.--The Hope Scholarship Credit under
                    subsection (a)(1) shall not be allowed for qualified
                    tuition and related expenses for the enrollment or
                    attendance of a student for any academic period if such
                    student has been convicted of a Federal or State felony
                    offense consisting of the possession or distribution of
                    a controlled substance before the end of the taxable
                    year with or within which such period ends.
                ``(3) Eligible student.--For purposes of this subsection,
            the term `eligible student' means, with respect to any academic
            period, a student who--
                        ``(A) meets the requirements of section 484(a)(1) of
                    the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)),
                    as in effect on the date of the enactment of this
                    section, and
                        ``(B) is carrying at least \1/2\ the normal full-
                    time work load for the course of study the student is
                    pursuing.
                ``(4) Applicable limit.--For purposes of paragraph (1)(B),
            the applicable limit for any taxable year is an amount equal to
            2 times the dollar amount in effect under paragraph (1)(A) for
            such taxable year.

        ``(c) Lifetime Learning Credit.--
                ``(1) Per taxpayer credit.--The Lifetime Learning Credit for
            any taxpayer for any taxable year is an amount equal to 20
            percent of so much of the qualified tuition and related expenses
            paid by the taxpayer during the taxable year (for education
            furnished during any academic period beginning in

    [[Page 111 STAT. 801]]

            such taxable year) as does not exceed $10,000 ($5,000 in the
            case of taxable years beginning before January 1, 2003).
                ``(2) Special rules for determining expenses.--
                        ``(A) Coordination with hope scholarship.--The
                    qualified tuition and related expenses with respect to
                    an individual who is an eligible student for whom a Hope
                    Scholarship Credit under subsection (a)(1) is allowed
                    for the taxable year shall not be taken into account
                    under this subsection.
                        ``(B) Expenses eligible for lifetime learning
                    credit.--For purposes of paragraph (1), qualified
                    tuition and related expenses shall include expenses
                    described in subsection (f)(1) with respect to any
                    course of instruction at an eligible educational
                    institution to acquire or improve job skills of the
                    individual.

        ``(d) Limitation Based on Modified Adjusted Gross Income.--
                ``(1) In general.--The amount which would (but for this
            subsection) be taken into account under subsection (a) for the
            taxable year shall be reduced (but not below zero) by the amount
            determined under paragraph (2).
                ``(2) Amount of reduction.--The amount determined under this
            paragraph is the amount which bears the same ratio to the amount
            which would be so taken into account as--
                        ``(A) the excess of--
                              ``(i) the taxpayer's modified adjusted gross
                          income for such taxable year, over
                              ``(ii) $40,000 ($80,000 in the case of a joint
                          return), bears to
                        ``(B) $10,000 ($20,000 in the case of a joint
                    return).
                ``(3) Modified adjusted gross income.--The term `modified
            adjusted gross income' means the adjusted gross income of the
            taxpayer for the taxable year increased by any amount excluded
            from gross income under section 911, 931, or 933.

        ``(e) Election To Have Section Apply.--
                ``(1) In general.--No credit shall be allowed under
            subsection (a) for a taxable year with respect to the qualified
            tuition and related expenses of an individual unless the
            taxpayer elects to have this section apply with respect to such
            individual for such year.
                ``(2) Coordination with exclusions.--An election under this
            subsection shall not take effect with respect to an individual
            for any taxable year if any portion of any distribution during
            such taxable year from an education individual retirement
            account is excluded from gross income under section 530(d)(2).

        ``(f) Definitions.--For purposes of this section--
                ``(1) Qualified tuition and related expenses.--
                        ``(A) In general.--The term `qualified tuition and
                    related expenses' means tuition and fees required for
                    the enrollment or attendance of--
                              ``(i) the taxpayer,
                              ``(ii) the taxpayer's spouse, or
                              ``(iii) any dependent of the taxpayer with
                          respect to whom the taxpayer is allowed a
                          deduction under section 151,

    [[Page 111 STAT. 802]]

                    at an eligible educational institution for courses of
                    instruction of such individual at such institution.
                        ``(B) Exception for education involving sports,
                    etc.--Such term does not include expenses with respect
                    to any course or other education involving sports,
                    games, or hobbies, unless such course or other education
                    is part of the individual's degree program.
                        ``(C) Exception for nonacademic fees.--Such term
                    does not include student activity fees, athletic fees,
                    insurance expenses, or other expenses unrelated to an
                    individual's academic course of instruction.
                ``(2) Eligible educational institution.--The term `eligible
            educational institution' means an institution--
                        ``(A) which is described in section 481 of the
                    Higher Education Act of 1965 (20 U.S.C. 1088), as in
                    effect on the date of the enactment of this section, and
                        ``(B) which is eligible to participate in a program
                    under title IV of such Act.

        ``(g) Special Rules.--
                ``(1) Identification requirement.--No credit shall be
            allowed under subsection (a) to a taxpayer with respect to the
            qualified tuition and related expenses of an individual unless
            the taxpayer includes the name and taxpayer identification
            number of such individual on the return of tax for the taxable
            year.
                ``(2) Adjustment for certain scholarships, etc.--The amount
            of qualified tuition and related expenses otherwise taken into
            account under subsection (a) with respect to an individual for
            an academic period shall be reduced (before the application of
            subsections (b), (c), and (d)) by the sum of any amounts paid
            for the benefit of such individual which are allocable to such
            period as--
                        ``(A) a qualified scholarship which is excludable
                    from gross income under section 117,
                        ``(B) an educational assistance allowance under
                    chapter 30, 31, 32, 34, or 35 of title 38, United States
                    Code, or under chapter 1606 of title 10, United States
                    Code, and
                        ``(C) a payment (other than a gift, bequest, devise,
                    or inheritance within the meaning of section 102(a)) for
                    such individual's educational expenses, or attributable
                    to such individual's enrollment at an eligible
                    educational institution, which is excludable from gross
                    income under any law of the United States.
                ``(3) Treatment of expenses paid by dependent.--If a
            deduction under section 151 with respect to an individual is
            allowed to another taxpayer for a taxable year beginning in the
            calendar year in which such individual's taxable year begins--
                        ``(A) no credit shall be allowed under subsection
                    (a) to such individual for such individual's taxable
                    year, and
                        ``(B) qualified tuition and related expenses paid by
                    such individual during such individual's taxable year
                    shall be treated for purposes of this section as paid by
                    such other taxpayer.
                ``(4) Treatment of certain prepayments.--If qualified
            tuition and related expenses are paid by the taxpayer during a
            taxable year for an academic period which begins during

    [[Page 111 STAT. 803]]

            the first 3 months following such taxable year, such academic
            period shall be treated for purposes of this section as
            beginning during such taxable year.
                ``(5) Denial of double benefit.--No credit shall be allowed
            under this section for any expense for which a deduction is
            allowed under any other provision of this chapter.
                ``(6) No credit for married individuals filing separate
            returns.--If the taxpayer is a married individual (within the
            meaning of section 7703), this section shall apply only if the
            taxpayer and the taxpayer's spouse file a joint return for the
            taxable year.
                ``(7) Nonresident aliens.--If the taxpayer is a nonresident
            alien individual for any portion of the taxable year, this
            section shall apply only if such individual is treated as a
            resident alien of the United States for purposes of this chapter
            by reason of an election under subsection (g) or (h) of section
            6013.

        ``(h) Inflation Adjustments.--
                ``(1) Dollar limitation on amount of credit.--
                        ``(A) In general.--In the case of a taxable year
                    beginning after 2001, each of the $1,000 amounts under
                    subsection (b)(1) shall be increased by an amount equal
                    to--
                              ``(i) such dollar amount, multiplied by
                              ``(ii) the cost-of-living adjustment
                          determined under section 1(f)(3) for the calendar
                          year in which the taxable year begins, determined
                          by substituting `calendar year 2000' for `calendar
                          year 1992' in subparagraph (B) thereof.
                        ``(B) Rounding.--If any amount as adjusted under
                    subparagraph (A) is not a multiple of $100, such amount
                    shall be rounded to the next lowest multiple of $100.
                ``(2) Income limits.--
                        ``(A) In general.--In the case of a taxable year
                    beginning after 2001, the $40,000 and $80,000 amounts in
                    subsection (d)(2) shall each be increased by an amount
                    equal to--
                              ``(i) such dollar amount, multiplied by
                              ``(ii) the cost-of-living adjustment
                          determined under section 1(f)(3) for the calendar
                          year in which the taxable year begins, determined
                          by substituting `calendar year 2000' for `calendar
                          year 1992' in subparagraph (B) thereof.
                        ``(B) Rounding.--If any amount as adjusted under
                    subparagraph (A) is not a multiple of $1,000, such
                    amount shall be rounded to the next lowest multiple of
                    $1,000.

        ``(i) Regulations.--The Secretary may prescribe such regulations as
    may be necessary or appropriate to carry out this section, including
    regulations providing for a recapture of the credit allowed under this
    section in cases where there is a refund in a subsequent taxable year of
    any amount which was taken into account in determining the amount of
    such credit.''.
        (b) Extension of Procedures Applicable to Mathematical or Clerical
    Errors.--Paragraph (2) of section 6213(g) (relating to the definition of
    mathematical or clerical errors), as amended by section 101, is amended
    by striking ``and'' at the end of subparagraph (H), by striking the
    period at the end of subparagraph (I)

    [[Page 111 STAT. 804]]

    and inserting ``, and'', and by inserting after subparagraph (I) the
    following new subparagraph:
                        ``(J) an omission of a correct TIN required under
                    section 25A(g)(1) (relating to higher education tuition
                    and related expenses) to be included on a return.''.

        (c) Returns Relating to Tuition and Related Expenses.--
                (1) In general.--Subpart B of part III of subchapter A of
            chapter 61 (relating to information concerning transactions with
            other persons) is amended by inserting after section 6050R the
            following new section:

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

        ``(a) In General.--Any person--
                ``(1) which is an eligible educational institution which
            receives payments for qualified tuition and related expenses
            with respect to any individual for any calendar year, or
                ``(2) which is engaged in a trade or business and which, in
            the course of such trade or business, makes payments during any
            calendar year to any individual which constitute reimbursements
            or refunds (or similar amounts) of qualified tuition and related
            expenses of such individual,

    shall make the return described in subsection (b) with respect to the
    individual at such time as the Secretary may by regulations prescribe.
        ``(b) Form and Manner of Returns.--A return is described in this
    subsection if such return--
                ``(1) is in such form as the Secretary may prescribe,
                ``(2) contains--
                        ``(A) the name, address, and TIN of the individual
                    with respect to whom payments described in subsection
                    (a) were received from (or were paid to),
                        ``(B) the name, address, and TIN of any individual
                    certified by the individual described in subparagraph
                    (A) as the taxpayer who will claim the individual as a
                    dependent for purposes of the deduction allowable under
                    section 151 for any taxable year ending with or within
                    the calendar year, and
                        ``(C) the--
                              ``(i) aggregate amount of payments for
                          qualified tuition and related expenses received
                          with respect to the individual described in
                          subparagraph (A) during the calendar year, and
                              ``(ii) aggregate amount of reimbursements or
                          refunds (or similar amounts) paid to such
                          individual during the calendar year, and
                        ``(D) such other information as the Secretary may
                    prescribe.

        ``(c) Application to Governmental Units.--For purposes of this
    section--
                ``(1) a governmental unit or any agency or instrumentality
            thereof shall be treated as a person, and
                ``(2) any return required under subsection (a) by such
            governmental entity shall be made by the officer or employee
            appropriately designated for the purpose of making such return.

        ``(d) Statements To Be Furnished to Individuals With Respect to Whom
    Information Is Required.--Every person

    [[Page 111 STAT. 805]]

    required to make a return under subsection (a) shall furnish to each
    individual whose name is required to be set forth in such return under
    subparagraph (A) or (B) of subsection (b)(2) a written statement
    showing--
                ``(1) the name, address, and phone number of the information
            contact of the person required to make such return, and
                ``(2) the aggregate amounts described in subparagraph (C) of
            subsection (b)(2).

    The written statement required under the preceding sentence shall be
    furnished on or before January 31 of the year following the calendar
    year for which the return under subsection (a) was required to be made.
        ``(e) Definitions.--For purposes of this section, the terms
    `eligible educational institution' and `qualified tuition and related
    expenses' have the meanings given such terms by section 25A.
        ``(f) Returns Which Would Be Required To Be Made by 2 or More
    Persons.--Except to the extent provided in regulations prescribed by the
    Secretary, in the case of any amount received by any person on behalf of
    another person, only the person first receiving such amount shall be
    required to make the return under subsection (a).
        ``(g) Regulations.--The Secretary shall prescribe such regulations
    as may be necessary to carry out the provisions of this section. No
    penalties shall be imposed under part II of subchapter B of chapter 68
    with respect to any return or statement required under this section
    until such time as such regulations are issued.''.
                (2) Assessable penalties.--
                        (A) Subparagraph (B) of section 6724(d)(1) (relating
                    to definitions) is amended by redesignating clauses (ix)
                    through (xiv) as clauses (x) through (xv), respectively,
                    and by inserting after clause (viii) the following new
                    clause:
                              ``(ix) section 6050S (relating to returns
                          relating to payments for qualified tuition and
                          related expenses),''.
                        (B) Paragraph (2) of section 6724(d) is amended by
                    striking ``or'' at the end of the next to last
                    subparagraph, by striking the period at the end of the
                    last subparagraph and inserting ``, or'', and by adding
                    at the end the following new subparagraph:
                        ``(Z) section 6050S(d) (relating to returns relating
                    to qualified tuition and related expenses).''.
                (3) Clerical amendment.--The table of sections for subpart B
            of part III of subchapter A of chapter 61 is amended by
            inserting after the item relating to section 6050R the following
            new item:
                    ``Sec. 6050S. Returns relating to higher education
                                    tuition and related expenses.''.

        (d) Coordination With Section 135.--Subsection (d) of section 135 is
    amended by redesignating paragraphs (2) and (3) as paragraphs (3) and
    (4), respectively, and by inserting after paragraph (1) the following
    new paragraph:
                ``(2) Coordination with higher education credit.--The amount
            of the qualified higher education expenses otherwise taken into
            account under subsection (a) with respect to the education of an
            individual shall be reduced (before the application of
            subsection (b)) by the amount of such expenses which are taken
            into account in determining the credit allowable

    [[Page 111 STAT. 806]]

            to the taxpayer or any other person under section 25A with
            respect to such expenses.''.

        (e) Clerical Amendment.--The table of sections for subpart A of part
    IV of subchapter A of chapter 1 is amended by inserting after the item
    relating to section 25 the following new item:
                    ``Sec. 25A. Higher education tuition and related
                                    expenses.''.

        (f) <<NOTE: 26 USC 25A note.>>  Effective Dates.--
                (1) In general.--The amendments made by this section shall
            apply to expenses paid after December 31, 1997 (in taxable years
            ending after such date), for education furnished in academic
            periods beginning after such date.
                (2) Lifetime learning credit.--Section 25A(a)(2) of the
            Internal Revenue Code of 1986 shall apply to expenses paid after
            June 30, 1998 (in taxable years ending after such date), for
            education furnished in academic periods beginning after such
            dates.

    SEC. 202. DEDUCTION FOR INTEREST ON EDUCATION LOANS.

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

    ``SEC. 221. INTEREST ON EDUCATION LOANS.

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

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

                ``(2) Limitation based on modified adjusted gross income.--
                        ``(A) In general.--The amount which would (but for
                    this paragraph) be allowable as a deduction under this
                    section shall be reduced (but not below zero) by the
                    amount determined under subparagraph (B).
                        ``(B) Amount of reduction.--The amount determined
                    under this subparagraph is the amount which bears the
                    same ratio to the amount which would be so taken into
                    account as--
                              ``(i) the excess of--
                                        ``(I) the taxpayer's modified
                                    adjusted gross income for such taxable
                                    year, over
                                        ``(II) $40,000 ($60,000 in the case
                                    of a joint return), bears to
                              ``(ii) $15,000.

    [[Page 111 STAT. 807]]

                        ``(C) Modified adjusted gross income.--The term
                    `modified adjusted gross income' means adjusted gross
                    income determined--
                              ``(i) without regard to this section and
                          sections 135, 137, 911, 931, and 933, and
                              ``(ii) after application of sections 86, 219,
                          and 469.
                    For purposes of sections 86, 135, 137, 219, and 469,
                    adjusted gross income shall be determined without regard
                    to the deduction allowed under this section.

        ``(c) Dependents Not Eligible for Deduction.--No deduction shall be
    allowed by this section to an individual for the taxable year if a
    deduction under section 151 with respect to such individual is allowed
    to another taxpayer for the taxable year beginning in the calendar year
    in which such individual's taxable year begins.
        ``(d) Limit on Period Deduction Allowed.--A deduction shall be
    allowed under this section only with respect to interest paid on any
    qualified education loan during the first 60 months (whether or not
    consecutive) in which interest payments are required. For purposes of
    this paragraph, any loan and all refinancings of such loan shall be
    treated as 1 loan.
        ``(e) Definitions.--For purposes of this section--
                ``(1) Qualified education loan.--The term `qualified
            education loan' means any indebtedness incurred to pay qualified
            higher education expenses--
                        ``(A) which are incurred on behalf of the taxpayer,
                    the taxpayer's spouse, or any dependent of the taxpayer
                    as of the time the indebtedness was incurred,
                        ``(B) which are paid or incurred within a reasonable
                    period of time before or after the indebtedness is
                    incurred, and
                        ``(C) which are attributable to education furnished
                    during a period during which the recipient was an
                    eligible student.
            Such term includes indebtedness used to refinance indebtedness
            which qualifies as a qualified education loan. The term
            `qualified education loan' shall not include any indebtedness
            owed to a person who is related (within the meaning of section
            267(b) or 707(b)(1)) to the taxpayer.
                ``(2) Qualified higher education expenses.--The term
            `qualified higher education expenses' means the cost of
            attendance (as defined in section 472 of the Higher Education
            Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before
            the date of the enactment of this Act) at an eligible
            educational institution, reduced by the sum of--
                        ``(A) the amount excluded from gross income under
                    section 127, 135, or 530 by reason of such expenses, and
                        ``(B) the amount of any scholarship, allowance, or
                    payment described in section 25A(g)(2).
            For purposes of the preceding sentence, the term `eligible
            educational institution' has the same meaning given such term by
            section 25A(f)(2), except that such term shall also include an
            institution conducting an internship or residency program
            leading to a degree or certificate awarded by an institution of
            higher education, a hospital, or a health care facility which
            offers postgraduate training.
                ``(3) Eligible student.--The term `eligible student' has the
            meaning given such term by section 25A(b)(3).

    [[Page 111 STAT. 808]]

                ``(4) Dependent.--The term `dependent' has the meaning given
            such term by section 152.

        ``(f) Special Rules.--
                ``(1) Denial of double benefit.--No deduction shall be
            allowed under this section for any amount for which a deduction
            is allowable under any other provision of this chapter.
                ``(2) Married couples must file joint return.--If the
            taxpayer is married at the close of the taxable year, the
            deduction shall be allowed under subsection (a) only if the
            taxpayer and the taxpayer's spouse file a joint return for the
            taxable year.
                ``(3) Marital status.--Marital status shall be determined in
            accordance with section 7703.

        ``(g) Inflation Adjustments.--
                ``(1) In general.--In the case of a taxable year beginning
            after 2002, the $40,000 and $60,000 amounts in subsection (b)(2)
            shall each be increased by an amount equal to--
                        ``(A) such dollar amount, multiplied by
                        ``(B) the cost-of-living adjustment determined under
                    section 1(f)(3) for the calendar year in which the
                    taxable year begins, determined by substituting
                    `calendar year 2001' for `calendar year 1992' in
                    subparagraph (B) thereof.
                ``(2) Rounding.--If any amount as adjusted under paragraph
            (1) is not a multiple of $5,000, such amount shall be rounded to
            the next lowest multiple of $5,000.''.

        (b) Deduction Allowed Whether or Not Taxpayer Itemizes Other
    Deductions.--Subsection (a) of section 62 is amended by inserting after
    paragraph (16) the following new paragraph:
                ``(17) Interest on education loans.--The deduction allowed
            by section 221.''.

        (c) Reporting Requirement.--
                (1) In general.--Section 6050S(a)(2) (relating to returns
            relating to higher education tuition and related expenses) is
            amended to read as follows:
                ``(2) which is engaged in a trade or business and which, in
            the course of such trade or business--
                        ``(A) makes payments during any calendar year to any
                    individual which constitutes reimbursements or refunds
                    (or similar amounts) of qualified tuition and related
                    expenses of such individual, or
                        ``(B) except as provided in regulations, receives
                    from any individual interest aggregating $600 or more
                    for any calendar year on 1 or more qualified education
                    loans,''.
                (2) Information.--Section 6050S(b)(2) is amended--
                        (A) by inserting ``or interest'' after ``payments''
                    in subparagraph (A), and
                        (B) in subparagraph (C), by striking ``and'' at the
                    end of clause (i), by inserting ``and'' at the end of
                    clause (ii), and by inserting after clause (ii) the
                    following:
                              ``(iii) aggregate amount of interest received
                          for the calendar year from such individual,''.
                (3) Definition.--Section 6050S(e) is amended by inserting
            ``, and except as provided in regulations, the term `qualified
            education loan' has the meaning given such term by section
            221(e)(1)'' after ``section 25A''.

    [[Page 111 STAT. 809]]

        (d) Clerical Amendment.--The table of sections for part VII of
    subchapter B of chapter 1 is amended by striking the last item and
    inserting the following new items:
                    ``Sec. 221. Interest on education loans.
                    ``Sec. 222. Cross reference.''.

        (e) <<NOTE: 26 USC 62 note.>>  Effective Date.--The amendments made
    by this section shall apply to any qualified education loan (as defined
    in section 221(e)(1) of the Internal Revenue Code of 1986, as added by
    this section) incurred on, before, or after the date of the enactment of
    this Act, but only with respect to--
                (1) any loan interest payment due and paid after December
            31, 1997, and
                (2) the portion of the 60-month period referred to in
            section 221(d) of the Internal Revenue Code of 1986 (as added by
            this section) after December 31, 1997.

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

        (a) In General.--Paragraph (2) of section 72(t) (relating to
    exceptions to 10-percent additional tax on early distributions from
    qualified retirement plans) is amended by adding at the end the
    following new subparagraph:
                        ``(E) Distributions from individual retirement plans
                    for higher education expenses.--Distributions to an
                    individual from an individual retirement plan to the
                    extent such distributions do not exceed the qualified
                    higher education expenses (as defined in paragraph (7))
                    of the taxpayer for the taxable year. Distributions
                    shall not be taken into account under the preceding
                    sentence if such distributions are described in
                    subparagraph (A), (C), or (D) or to the extent paragraph
                    (1) does not apply to such distributions by reason of
                    subparagraph (B).''.

        (b) Definition.--Section 72(t) is amended by adding at the end the
    following new paragraph:
                ``(7) Qualified higher education expenses.--For purposes of
            paragraph (2)(E)--
                        ``(A) In general.--The term `qualified higher
                    education expenses' means qualified higher education
                    expenses (as defined in section 529(e)(3)) for education
                    furnished to--
                              ``(i) the taxpayer,
                              ``(ii) the taxpayer's spouse, or
                              ``(iii) any child (as defined in section
                          151(c)(3)) or grandchild of the taxpayer or the
                          taxpayer's spouse,
                    at an eligible educational institution (as defined in
                    section 529(e)(5)).
                        ``(B) Coordination with other benefits.--The amount
                    of qualified higher education expenses for any taxable
                    year shall be reduced as provided in section
                    25A(g)(2).''.

        (c) <<NOTE: 26 USC 72 note.>>  Effective Date.--The amendments made
    by this section shall apply to distributions after December 31, 1997,
    with respect to expenses paid after such date (in taxable years ending
    after such date), for education furnished in academic periods beginning
    after such date.

    [[Page 111 STAT. 810]]

         Subtitle B--Expanded Education Investment Savings Opportunities

                       PART I--QUALIFIED TUITION PROGRAMS

    SEC. 211. MODIFICATIONS OF QUALIFIED STATE TUITION PROGRAMS.

        (a) Qualified Higher Education Expenses To Include Room and Board.--
    Paragraph (3) of section 529(e) (defining qualified higher education
    expenses) is amended to read as follows:
                ``(3) Qualified higher education expenses.--
                        ``(A) In general.--The term `qualified higher
                    education expenses' means tuition, fees, books,
                    supplies, and equipment required for the enrollment or
                    attendance of a designated beneficiary at an eligible
                    educational institution.
                        ``(B) Room and board included for students under
                    guaranteed plans who are at least half-time.--
                              ``(i) In general.--In the case of an
                          individual who is an eligible student (as defined
                          in section 25A(b)(3)) for any academic period,
                          such term shall also include reasonable costs for
                          such period (as determined under the qualified
                          State tuition program) incurred by the designated
                          beneficiary for room and board while attending
                          such institution. For purposes of subsection
                          (b)(7), a designated beneficiary shall be treated
                          as meeting the requirements of this clause.
                              ``(ii) Limitation.--The amount treated as
                          qualified higher education expenses by reason of
                          the preceding sentence shall not exceed the
                          minimum amount (applicable to the student)
                          included for room and board for such period in the
                          cost of attendance (as defined in section 472 of
                          the Higher Education Act of 1965, 20 U.S.C.
                          1087ll, as in effect on the date of the enactment
                          of this paragraph) for the eligible educational
                          institution for such period.''.

        (b) Additional Modifications.--
                (1) Member of family.--Paragraph (2) of section 529(e)
            (relating to other definitions and special rules) is amended to
            read as follows:
                ``(2) Member of family.--The term `member of the family'
            means--
                        ``(A) an individual who bears a relationship to
                    another individual which is a relationship described in
                    paragraphs (1) through (8) of section 152(a), and
                        ``(B) the spouse of any individual described in
                    subparagraph (A).''.
                (2) Eligible educational institution.--Section 529(e) is
            amended by adding at the end the following:
                ``(5) Eligible educational institution.--The term `eligible
            educational institution' means an institution--
                        ``(A) which is described in section 481 of the
                    Higher Education Act of 1965 (20 U.S.C. 1088), as in
                    effect on the date of the enactment of this paragraph,
                    and
                        ``(B) which is eligible to participate in a program
                    under title IV of such Act.''.
                (3) Estate and gift tax treatment.--
                        (A) Gift tax treatment.--

    [[Page 111 STAT. 811]]

                              (i) Paragraph (2) of section 529(c) is amended
                          to read as follows:
                ``(2) Gift tax treatment of contributions.--For purposes of
            chapters 12 and 13--
                        ``(A) In general.--Any contribution to a qualified
                    tuition program on behalf of any designated
                    beneficiary--
                              ``(i) shall be treated as a completed gift to
                          such beneficiary which is not a future interest in
                          property, and
                              ``(ii) shall not be treated as a qualified
                          transfer under section 2503(e).
                        ``(B) Treatment of excess contributions.--If the
                    aggregate amount of contributions described in
                    subparagraph (A) during the calendar year by a donor
                    exceeds the limitation for such year under section
                    2503(b), such aggregate amount shall, at the election of
                    the donor, be taken into account for purposes of such
                    section ratably over the 5-year period beginning with
                    such calendar year.''.
                              (ii) Paragraph (5) of section 529(c) is
                          amended to read as follows:
                ``(5) Other gift tax rules.--For purposes of chapters 12 and
            13--
                        ``(A) Treatment of distributions.--Except as
                    provided in subparagraph (B), in no event shall a
                    distribution from a qualified tuition program be treated
                    as a taxable gift.
                        ``(B) Treatment of designation of new beneficiary.--
                    The taxes imposed by chapters 12 and 13 shall apply to a
                    transfer by reason of a change in the designated
                    beneficiary under the program (or a rollover to the
                    account of a new beneficiary) only if the new
                    beneficiary is a generation below the generation of the
                    old beneficiary (determined in accordance with section
                    2651).''.
                        (B) Estate tax treatment.--Paragraph (4) of section
                    529(c) is amended to read as follows:
                ``(4) Estate tax treatment.--
                        ``(A) In general.--No amount shall be includible in
                    the gross estate of any individual for purposes of
                    chapter 11 by reason of an interest in a qualified
                    tuition program.
                        ``(B) Amounts includible in estate of designated
                    beneficiary in certain cases.--Subparagraph (A) shall
                    not apply to amounts distributed on account of the death
                    of a beneficiary.
                        ``(C) Amounts includible in estate of donor making
                    excess contributions.--In the case of a donor who makes
                    the election described in paragraph (2)(B) and who dies
                    before the close of the 5-year period referred to in
                    such paragraph, notwithstanding subparagraph (A), the
                    gross estate of the donor shall include the portion of
                    such contributions properly allocable to periods after
                    the date of death of the donor.''.
                (4) Prohibition against investment direction.--Section
            529(b)(5) is amended by inserting ``directly or indirectly''
            after ``may not''.

        (c) Coordination With Education Savings Bond.--Section 135(c)(2)
    (defining qualified higher education expenses) is amended by adding at
    the end the following:

    [[Page 111 STAT. 812]]

                        ``(C) Contributions to qualified state tuition
                    program.--Such term shall include any contribution to a
                    qualified State tuition program (as defined in section
                    529) on behalf of a designated beneficiary (as defined
                    in such section) who is an individual described in
                    subparagraph (A); but there shall be no increase in the
                    investment in the contract for purposes of applying
                    section 529(c)(3)(A) by reason of any portion of such
                    contribution which is not includible in gross income by
                    reason of this subparagraph.''.

        (d) Clarification of Taxation of Distributions.--Subparagraph (A) of
    section 529(c)(3) is amended by striking ``section 72'' and inserting
    ``section 72(b)''.
        (e) Technical Amendments.--
                (1)(A) The heading for part VIII of subchapter F of chapter
            1 is amended to read as follows:

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

                (B) The table of parts for subchapter F of chapter 1 is
            amended by striking the item relating to part VIII and
            inserting:
                    ``Part VIII. Higher education savings entities.''.

                (2)(A) Section 529(d) is amended to read as follows:

        ``(d) Reports.--Each officer or employee having control of the
    qualified State tuition program or their designee shall make such
    reports regarding such program to the Secretary and to designated
    beneficiaries with respect to contributions, distributions, and such
    other matters as the Secretary may require. The reports required by this
    subsection shall be filed at such time and in such manner and furnished
    to such individuals at such time and in such manner as may be required
    by the Secretary.''.
                (B) Paragraph (2) of section 6693(a) (relating to failure to
            provide reports on individual retirement accounts or annuities)
            is amended by striking ``and'' at the end of subparagraph (A),
            by striking the period at the end of subparagraph (B) and
            inserting ``, and'', and by adding at the end the following new
            subparagraph:
                        ``(C) Section 529(d) (relating to qualified State
                    tuition programs).''.
                (C) The section heading for section 6693 is amended by
            striking ``individual retirement'' and inserting ``certain tax-
            favored''.
                (D) The item relating to section 6693 in the table of
            sections for part I of subchapter B of chapter 68 is amended by
            striking ``individual retirement'' and inserting ``certain tax-
            favored''.

        (f) <<NOTE: 26 USC 529 note.>>  Effective Dates.--
                (1) In general.--Except as otherwise provided in this
            subsection, the amendments made by this section shall take
            effect on January 1, 1998.
                (2) Expenses to include room and board.--The amendment made
            by subsection (a) shall take effect as if included in the
            amendments made by section 1806 of the Small Business Job
            Protection Act of 1996.
                (3) Eligible educational institution.--The amendment made by
            subsection (b)(2) shall apply to distributions after

    [[Page 111 STAT. 813]]

            December 31, 1997, with respect to expenses paid after such date
            (in taxable years ending after such date), for education
            furnished in academic periods beginning after such date.
                (4) Coordination with education savings bonds.--The
            amendment made by subsection (c) shall apply to taxable years
            beginning after December 31, 1997.
                (5) Estate and gift tax changes.--
                        (A) Gift tax changes.--Paragraphs (2) and (5) of
                    section 529(c) of the Internal Revenue Code of 1986, as
                    amended by this section, shall apply to transfers
                    (including designations of new beneficiaries) made after
                    the date of the enactment of this Act.
                        (B) Estate tax changes.--Paragraph (4) of such
                    section 529(c) shall apply to estates of decedents dying
                    after June 8, 1997.
                (6) Transition rule for pre-august 20, 1996 contracts.--In
            the case of any contract issued prior to August 20, 1996,
            section 529(c)(3)(C) of the Internal Revenue Code of 1986 shall
            be applied for taxable years ending after August 20, 1996,
            without regard to the requirement that a distribution be
            transferred to a member of the family or the requirement that a
            change in beneficiaries may be made only to a member of the
            family.

                PART II--EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS

    SEC. 213. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

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

    ``SEC. 530. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

        ``(a) General Rule.--An education individual retirement account
    shall be exempt from taxation under this subtitle. Notwithstanding the
    preceding sentence, the education individual retirement account shall be
    subject to the taxes imposed by section 511 (relating to imposition of
    tax on unrelated business income of charitable organizations).
        ``(b) Definitions and Special Rules.--For purposes of this section--
                ``(1) Education individual retirement account.--The term
            `education individual retirement account' means a trust created
            or organized in the United States exclusively for the purpose of
            paying the qualified higher education expenses of the designated
            beneficiary of the trust (and designated as an education
            individual retirement account at the time created or organized),
            but only if the written governing instrument creating the trust
            meets the following requirements:
                        ``(A) No contribution will be accepted--
                              ``(i) unless it is in cash,
                              ``(ii) after the date on which such
                          beneficiary attains age 18, or
                              ``(iii) except in the case of rollover
                          contributions, if such contribution would result
                          in aggregate contributions for the taxable year
                          exceeding $500.

    [[Page 111 STAT. 814]]

                        ``(B) The trustee is a bank (as defined in section
                    408(n)) or another person who demonstrates to the
                    satisfaction of the Secretary that the manner in which
                    that person will administer the trust will be consistent
                    with the requirements of this section or who has so
                    demonstrated with respect to any individual retirement
                    plan.
                        ``(C) No part of the trust assets will be invested
                    in life insurance contracts.
                        ``(D) The assets of the trust shall not be
                    commingled with other property except in a common trust
                    fund or common investment fund.
                        ``(E) Upon the death of the designated beneficiary,
                    any balance to the credit of the beneficiary shall be
                    distributed within 30 days after the date of death to
                    the estate of such beneficiary.
                ``(2) Qualified higher education expenses.--
                        ``(A) In general.--The term `qualified higher
                    education expenses' has the meaning given such term by
                    section 529(e)(3), reduced as provided in section
                    25A(g)(2).
                        ``(B) Qualified state tuition programs.--Such term
                    shall include amounts paid or incurred to purchase
                    tuition credits or certificates, or to make
                    contributions to an account, under a qualified State
                    tuition program (as defined in section 529(b)) for the
                    benefit of the beneficiary of the account.
                ``(3) Eligible educational institution.--The term `eligible
            educational institution' has the meaning given such term by
            section 529(e)(5).

        ``(c) Reduction in Permitted Contributions Based on Adjusted Gross
    Income.--
                ``(1) In general.--The maximum amount which a contributor
            could otherwise make to an account under this section shall be
            reduced by an amount which bears the same ratio to such maximum
            amount as--
                        ``(A) the excess of--
                              ``(i) the contributor's modified adjusted
                          gross income for such taxable year, over
                              ``(ii) $95,000 ($150,000 in the case of a
                          joint return), bears to
                        ``(B) $15,000 ($10,000 in the case of a joint
                    return).
                ``(2) Modified adjusted gross income.--For purposes of
            paragraph (1), the term `modified adjusted gross income' means
            the adjusted gross income of the taxpayer for the taxable year
            increased by any amount excluded from gross income under section
            911, 931, or 933.

        ``(d) Tax Treatment of Distributions.--
                ``(1) In general.--Any distribution shall be includible in
            the gross income of the distributee in the manner as provided in
            section 72(b).
                ``(2) Distributions for qualified higher education
            expenses.--
                        ``(A) In general.--No amount shall be includible in
                    gross income under paragraph (1) if the qualified higher
                    education expenses of the designated beneficiary during
                    the taxable year are not less than the aggregate
                    distributions during the taxable year.

    [[Page 111 STAT. 815]]

                        ``(B) Distributions in excess of expenses.--If such
                    aggregate distributions exceed such expenses during the
                    taxable year, the amount otherwise includible in gross
                    income under paragraph (1) shall be reduced by the
                    amount which bears the same ratio to the amount which
                    would be includible in gross income under paragraph (1)
                    (without regard to this subparagraph) as the qualified
                    higher education expenses bear to such aggregate
                    distributions.
                        ``(C) Election to waive exclusion.--A taxpayer may
                    elect to waive the application of this paragraph for any
                    taxable year.
                ``(3) Special rules for applying estate and gift taxes with
            respect to account.--Rules similar to the rules of paragraphs
            (2), (4), and (5) of section 529(c) shall apply for purposes of
            this section.
                ``(4) Additional tax for distributions not used for
            educational expenses.--
                        ``(A) In general.--The tax imposed by this chapter
                    for any taxable year on any taxpayer who receives a
                    payment or distribution from an education individual
                    retirement account which is includible in gross income
                    shall be increased by 10 percent of the amount which is
                    so includible.
                        ``(B) Exceptions.--Subparagraph (A) shall not apply
                    if the payment or distribution is--
                              ``(i) made to a beneficiary (or to the estate
                          of the designated beneficiary) on or after the
                          death of the designated beneficiary,
                              ``(ii) attributable to the designated
                          beneficiary's being disabled (within the meaning
                          of section 72(m)(7)), or
                              ``(iii) made on account of a scholarship,
                          allowance, or payment described in section
                          25A(g)(2) received by the account holder to the
                          extent the amount of the payment or distribution
                          does not exceed the amount of the scholarship,
                          allowance, or payment.
                        ``(C) Excess contributions returned before due date
                    of return.--Subparagraph (A) shall not apply to the
                    distribution of any contribution made during a taxable
                    year on behalf of a designated beneficiary to the extent
                    that such contribution exceeds $500 if--
                              ``(i) such distribution is received on or
                          before the day prescribed by law (including
                          extensions of time) for filing such contributor's
                          return for such taxable year, and
                              ``(ii) such distribution is accompanied by the
                          amount of net income attributable to such excess
                          contribution.
                    Any net income described in clause (ii) shall be
                    included in gross income for the taxable year in which
                    such excess contribution was made.
                ``(5) Rollover contributions.--Paragraph (1) shall not apply
            to any amount paid or distributed from an education individual
            retirement account to the extent that the amount received is
            paid into another education individual retirement account for
            the benefit of the same beneficiary or a member of the family
            (within the meaning of section 529(e)(2)) of such

    [[Page 111 STAT. 816]]

            beneficiary not later than the 60th day after the date of such
            payment or distribution. The preceding sentence shall not apply
            to any payment or distribution if it applied to any prior
            payment or distribution during the 12-month period ending on the
            date of the payment or distribution.
                ``(6) Change in beneficiary.--Any change in the beneficiary
            of an education individual retirement account shall not be
            treated as a distribution for purposes of paragraph (1) if the
            new beneficiary is a member of the family (as so defined) of the
            old beneficiary.
                ``(7) Special rules for death and divorce.--Rules similar to
            the rules of paragraphs (7) and (8) of section 220(f) shall
            apply.

        ``(e) Tax Treatment of Accounts.--Rules similar to the rules of
    paragraphs (2) and (4) of section 408(e) shall apply to any education
    individual retirement account.
        ``(f) Community Property Laws.--This section shall be applied
    without regard to any community property laws.
        ``(g) Custodial Accounts.--For purposes of this section, a custodial
    account shall be treated as a trust if the assets of such account are
    held by a bank (as defined in section 408(n)) or another person who
    demonstrates, to the satisfaction of the Secretary, that the manner in
    which he will administer the account will be consistent with the
    requirements of this section, and if the custodial account would, except
    for the fact that it is not a trust, constitute an account described in
    subsection (b)(1). For purposes of this title, in the case of a
    custodial account treated as a trust by reason of the preceding
    sentence, the custodian of such account shall be treated as the trustee
    thereof.
        ``(h) Reports.--The trustee of an education individual retirement
    account shall make such reports regarding such account to the Secretary
    and to the beneficiary of the account with respect to contributions,
    distributions, and such other matters as the Secretary may require. The
    reports required by this subsection shall be filed at such time and in
    such manner and furnished to such individuals at such time and in such
    manner as may be required.''.
        (b) Tax on Prohibited Transactions.--
                (1) In general.--Paragraph (1) of section 4975(e) (relating
            to prohibited transactions) is amended by striking ``or'' at the
            end of subparagraph (D), by redesignating subparagraph (E) as
            subparagraph (F), and by inserting after subparagraph (D) the
            following new subparagraph:
                        ``(E) an education individual retirement account
                    described in section 530, or''.
                (2) Special rule.--Subsection (c) of section 4975 is amended
            by adding at the end of subsection (c) the following new
            paragraph:
                ``(5) Special rule for education individual retirement
            accounts.--An individual for whose benefit an education
            individual retirement account is established and any contributor
            to such account shall be exempt from the tax imposed by this
            section with respect to any transaction concerning such account
            (which would otherwise be taxable under this section) if section
            530(d) applies with respect to such transaction.''.

        (c) Failure To Provide Reports on Education Individual Retirement
    Accounts.--Paragraph (2) of section 6693(a) (relating to failure to
    provide reports on individual retirement accounts or

    [[Page 111 STAT. 817]]

    annuities) is amended by striking ``and'' at the end of subparagraph
    (B), by striking the period at the end of subparagraph (C) and inserting
    ``, and'', and by adding at the end the following new subparagraph:
                        ``(D) Section 530(h) (relating to education
                    individual retirement accounts).''.

        (d) Tax on Excess Contributions.--
                (1) In general.--Subsection (a) of section 4973 is amended
            by striking ``or'' at the end of paragraph (2), by adding ``or''
            at the end of paragraph (3), and by inserting after paragraph
            (3) the following new paragraph:
                ``(4) an education individual retirement account (as defined
            in section 530),''.
                (2) Excess contributions defined.--Section 4973 is amended
            by adding at the end the following new subsection:

        ``(e) Excess Contributions to Education Individual Retirement
    Accounts.--For purposes of this section--
                ``(1) In general.--In the case of education individual
            retirement accounts maintained for the benefit of any 1
            beneficiary, the term `excess contributions' means--
                        ``(A) the amount by which the amount contributed for
                    the taxable year to such accounts exceeds $500, and
                        ``(B) any amount contributed to such accounts for
                    any taxable year if any amount is contributed during
                    such year to a qualified State tuition program for the
                    benefit of such beneficiary.
                ``(2) Special rules.--For purposes of paragraph (1), the
            following contributions shall not be taken into account:
                        ``(A) Any contribution which is distributed out of
                    the education individual retirement account in a
                    distribution to which section 530(d)(4)(C) applies.
                        ``(B) Any contribution described in section
                    530(b)(2)(B) to a qualified State tuition program.
                        ``(C) Any rollover contribution.''.

        (e) Technical Amendments.--
                (1) Section 26(b)(2) is amended by redesignating
            subparagraphs (E) through (P) as subparagraphs (F) through (Q),
            respectively, and by inserting after subparagraph (D) the
            following new subparagraph:
                        ``(E) section 530(d)(3) (relating to additional tax
                    on certain distributions from education individual
                    retirement accounts),''.
                (2) Subparagraph (C) of section 135(c)(2), as added by the
            preceding section, is amended by inserting ``, or to an
            education individual retirement account (as defined in section
            530) on behalf of an account beneficiary,'' after ``(as defined
            in such section)''.
                (3) The table of sections for part VIII of subchapter F of
            chapter 1 is amended by adding at the end the following new
            item:
                    ``Sec. 530. Education individual retirement accounts.''.

        (f) <<NOTE: 26 USC 26 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    [[Page 111 STAT. 818]]

                     Subtitle C--Other Education Initiatives

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

        (a) In General.--Subsection (d) of section 127 (relating to
    educational assistance programs) is amended to read as follows:
        ``(d) Termination.--This section shall not apply to expenses paid
    with respect to courses beginning after May 31, 2000.''.
        (b) <<NOTE: 26 USC 127 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to taxable years beginning after December
    31, 1996.

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

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

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

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

        (b) <<NOTE: 26 USC 148 note.>>  Effective Date.--The amendments made
    by this section shall apply to bonds issued after December 31, 1997.

    SEC. 224. CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT FOR
                ELEMENTARY OR SECONDARY SCHOOL PURPOSES.

        (a) Contributions of Computer Technology and Equipment for
    Elementary or Secondary School Purposes.--Subsection (e) of section 170
    is amended by adding at the end the following new paragraph:
                ``(6) Special rule for contributions of computer technology
            and equipment for elementary or secondary school purposes.--
                        ``(A) Limit on reduction.--In the case of a
                    qualified elementary or secondary educational
                    contribution, the reduction under paragraph (1)(A) shall
                    be no greater than the amount determined under paragraph
                    (3)(B).
                        ``(B) Qualified elementary or secondary educational
                    contribution.--For purposes of this paragraph, the term
                    `qualified elementary or secondary educational

    [[Page 111 STAT. 819]]

                    contribution' means a charitable contribution by a
                    corporation of any computer technology or equipment, but
                    only if--
                              ``(i) the contribution is to--
                                        ``(I) an educational organization
                                    described in subsection (b)(1)(A)(ii),
                                    or
                                        ``(II) an entity described in
                                    section 501(c)(3) and exempt from tax
                                    under section 501(a) (other than an
                                    entity described in subclause (I)) that
                                    is organized primarily for purposes of
                                    supporting elementary and secondary
                                    education,
                              ``(ii) the contribution is made not later than
                          2 years after the date the taxpayer acquired the
                          property (or in the case of property constructed
                          by the taxpayer, the date the construction of the
                          property is substantially completed),
                              ``(iii) the original use of the property is by
                          the donor or the donee,
                              ``(iv) substantially all of the use of the
                          property by the donee is for use within the United
                          States for educational purposes in any of the
                          grades K-12 that are related to the purpose or
                          function of the organization or entity,
                              ``(v) the property is not transferred by the
                          donee in exchange for money, other property, or
                          services, except for shipping, installation and
                          transfer costs,
                              ``(vi) the property will fit productively into
                          the entity's education plan, and
                              ``(vii) the entity's use and disposition of
                          the property will be in accordance with the
                          provisions of clauses (iv) and (v).
                        ``(C) Contribution to private foundation.--A
                    contribution by a corporation of any computer technology
                    or equipment to a private foundation (as defined in
                    section 509) shall be treated as a qualified elementary
                    or secondary educational contribution for purposes of
                    this paragraph if--
                              ``(i) the contribution to the private
                          foundation satisfies the requirements of clauses
                          (ii) and (v) of subparagraph (B), and
                              ``(ii) within 30 days after such contribution,
                          the private foundation--
                                        ``(I) contributes the property to an
                                    entity described in clause (i) of
                                    subparagraph (B) that satisfies the
                                    requirements of clauses (iv) through
                                    (vii) of subparagraph (B), and
                                        ``(II) notifies the donor of such
                                    contribution.
                        ``(D) Special rule relating to construction of
                    property.--For the purposes of this paragraph, the rules
                    of paragraph (4)(C) shall apply.
                        ``(E) Definitions.--For the purposes of this
                    paragraph--
                              ``(i) Computer technology or equipment.--The
                          term `computer technology or equipment' means
                          computer software (as defined by section
                          197(e)(3)(B)), computer or peripheral equipment
                          (as defined by section

    [[Page 111 STAT. 820]]

                          168(i)(2)(B)), and fiber optic cable related to
                          computer use.
                              ``(ii) Corporation.--The term `corporation'
                          has the meaning given to such term by paragraph
                          (4)(D).
                        ``(F) Termination.--This paragraph shall not apply
                    to any contribution made during any taxable year
                    beginning after December 31, 1999.''.

        (b) <<NOTE: 26 USC 170 note.>>  Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1997.

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

        (a) Certain Loans by Exempt Organizations.--
                (1) In general.--Paragraph (2) of section 108(f) (defining
            student loan) is amended by striking ``or'' at the end of
            subparagraph (B) and by striking subparagraph (D) and inserting
            the following:
                        ``(D) any educational organization described in
                    section 170(b)(1)(A)(ii) if such loan is made--
                              ``(i) pursuant to an agreement with any entity
                          described in subparagraph (A), (B), or (C) under
                          which the funds from which the loan was made were
                          provided to such educational organization, or
                              ``(ii) pursuant to a program of such
                          educational organization which is designed to
                          encourage its students to serve in occupations
                          with unmet needs or in areas with unmet needs and
                          under which the services provided by the students
                          (or former students) are for or under the
                          direction of a governmental unit or an
                          organization described in section 501(c)(3) and
                          exempt from tax under section 501(a).
            The term `student loan' includes any loan made by an educational
            organization so described or by an organization exempt from tax
            under section 501(a) to refinance a loan meeting the
            requirements of the preceding sentence.''.
                (2) Exception for discharges on account of services
            performed for certain lenders.--Subsection (f) of section 108 is
            amended by adding at the end the following new paragraph:
                ``(3) Exception for discharges on account of services
            performed for certain lenders.--Paragraph (1) shall not apply to
            the discharge of a loan made by an organization described in
            paragraph (2)(D) (or by an organization described in paragraph
            (2)(E) from funds provided by an organization described in
            paragraph (2)(D)) if the discharge is on account of services
            performed for either such organization.''.

        (b) <<NOTE: 26 USC 108 note.>>  Effective Date.--The amendments made
    by this section shall apply to discharges of indebtedness after the date
    of the enactment of this Act.

    SEC. 226. INCENTIVES FOR EDUCATION ZONES.

        (a) In General.--Subchapter U of chapter 1 (relating to additional
    incentives for empowerment zones) is amended by redesignating part IV as
    part V, by redesignating section 1397E as section 1397F, <<NOTE: 26 USC
    1397D, 1397F.>> and by inserting after part III the following new part:

    [[Page 111 STAT. 821]]

                    ``PART IV--INCENTIVES FOR EDUCATION ZONES

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

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

        ``(a) Allowance of Credit.--In the case of an eligible taxpayer who
    holds a qualified zone academy bond on the credit allowance date of such
    bond which occurs during the taxable year, there shall be allowed as a
    credit against the tax imposed by this chapter for such taxable year the
    amount determined under subsection (b).
        ``(b) Amount of Credit.--
                ``(1) In general.--The amount of the credit determined under
            this subsection with respect to any qualified zone academy bond
            is the amount equal to the product of--
                        ``(A) the credit rate determined by the Secretary
                    under paragraph (2) for the month in which such bond was
                    issued, multiplied by
                        ``(B) the face amount of the bond held by the
                    taxpayer on the credit allowance date.
                ``(2) Determination.--During each calendar month, the
            Secretary shall determine a credit rate which shall apply to
            bonds issued during the following calendar month. The credit
            rate for any month is the percentage which the Secretary
            estimates will permit the issuance of qualified zone academy
            bonds without discount and without interest cost to the issuer.

        ``(c) Limitation Based on Amount of Tax.--The credit allowed under
    subsection (a) for any taxable year shall not exceed the excess of--
                ``(1) the sum of the regular tax liability (as defined in
            section 26(b)) plus the tax imposed by section 55, over
                ``(2) the sum of the credits allowable under part IV of
            subchapter A (other than subpart C thereof, relating to
            refundable credits).

        ``(d) Qualified Zone Academy Bond.--For purposes of this section--
                ``(1) In general.--The term `qualified zone academy bond'
            means any bond issued as part of an issue if--
                        ``(A) 95 percent or more of the proceeds of such
                    issue are to be used for a qualified purpose with
                    respect to a qualified zone academy established by an
                    eligible local education agency,
                        ``(B) the bond is issued by a State or local
                    government within the jurisdiction of which such academy
                    is located,
                        ``(C) the issuer--
                              ``(i) designates such bond for purposes of
                          this section,
                              ``(ii) certifies that it has written
                          assurances that the private business contribution
                          requirement of paragraph (2) will be met with
                          respect to such academy, and
                              ``(iii) certifies that it has the written
                          approval of the eligible local education agency
                          for such bond issuance, and

    [[Page 111 STAT. 822]]

                        ``(D) the term of each bond which is part of such
                    issue does not exceed the maximum term permitted under
                    paragraph (3).
                ``(2) Private business contribution requirement.--
                        ``(A) In general.--For purposes of paragraph (1),
                    the private business contribution requirement of this
                    paragraph is met with respect to any issue if the
                    eligible local education agency that established the
                    qualified zone academy has written commitments from
                    private entities to make qualified contributions having
                    a present value (as of the date of issuance of the
                    issue) of not less than 10 percent of the proceeds of
                    the issue.
                        ``(B) Qualified contributions.--For purposes of
                    subparagraph (A), the term `qualified contribution'
                    means any contribution (of a type and quality acceptable
                    to the eligible local education agency) of--
                              ``(i) equipment for use in the qualified zone
                          academy (including state-of-the-art technology and
                          vocational equipment),
                              ``(ii) technical assistance in developing
                          curriculum or in training teachers in order to
                          promote appropriate market driven technology in
                          the classroom,
                              ``(iii) services of employees as volunteer
                          mentors,
                              ``(iv) internships, field trips, or other
                          educational opportunities outside the academy for
                          students, or
                              ``(v) any other property or service specified
                          by the eligible local education agency.
                ``(3) Term requirement.--During each calendar month, the
            Secretary shall determine the maximum term permitted under this
            paragraph for bonds issued during the following calendar month.
            Such maximum term shall be the term which the Secretary
            estimates will result in the present value of the obligation to
            repay the principal on the bond being equal to 50 percent of the
            face amount of the bond. Such present value shall be determined
            using as a discount rate the average annual interest rate of
            tax-exempt obligations having a term of 10 years or more which
            are issued during the month. If the term as so determined is not
            a multiple of a whole year, such term shall be rounded to the
            next highest whole year.
                ``(4) Qualified zone academy.--
                        ``(A) In general.--The term `qualified zone academy'
                    means any public school (or academic program within a
                    public school) which is established by and operated
                    under the supervision of an eligible local education
                    agency to provide education or training below the
                    postsecondary level if--
                              ``(i) such public school or program (as the
                          case may be) is designed in cooperation with
                          business to enhance the academic curriculum,
                          increase graduation and employment rates, and
                          better prepare students for the rigors of college
                          and the increasingly complex workforce,
                              ``(ii) students in such public school or
                          program (as the case may be) will be subject to
                          the same academic standards and assessments as
                          other students educated by the eligible local
                          education agency,

    [[Page 111 STAT. 823]]

                              ``(iii) the comprehensive education plan of
                          such public school or program is approved by the
                          eligible local education agency, and
                              ``(iv)(I) such public school is located in an
                          empowerment zone or enterprise community
                          (including any such zone or community designated
                          after the date of the enactment of this section),
                          or
                              ``(II) there is a reasonable expectation (as
                          of the date of issuance of the bonds) that at
                          least 35 percent of the students attending such
                          school or participating in such program (as the
                          case may be) will be eligible for free or reduced-
                          cost lunches under the school lunch program
                          established under the National School Lunch Act.
                        ``(B) Eligible local education agency.--The term
                    `eligible local education agency' means any local
                    education agency as defined in section 14101 of the
                    Elementary and Secondary Education Act of 1965.
                ``(5) Qualified purpose.--The term `qualified purpose'
            means, with respect to any qualified zone academy--
                        ``(A) rehabilitating or repairing the public school
                    facility in which the academy is established,
                        ``(B) providing equipment for use at such academy,
                        ``(C) developing course materials for education to
                    be provided at such academy, and
                        ``(D) training teachers and other school personnel
                    in such academy.
                ``(6) Eligible taxpayer.--The term `eligible taxpayer'
            means--
                        ``(A) a bank (within the meaning of section 581),
                        ``(B) an insurance company to which subchapter L
                    applies, and
                        ``(C) a corporation actively engaged in the business
                    of lending money.

        ``(e) Limitation on Amount of Bonds Designated.--
                ``(1) National limitation.--There is a national zone academy
            bond limitation for each calendar year. Such limitation is
            $400,000,000 for 1998 and 1999, and, except as provided in
            paragraph (4), zero thereafter.
                ``(2) Allocation of limitation.--The national zone academy
            bond limitation for a calendar year shall be allocated by the
            Secretary among the States on the basis of their respective
            populations of individuals below the poverty line (as defined by
            the Office of Management and Budget). The limitation amount
            allocated to a State under the preceding sentence shall be
            allocated by the State education agency to qualified zone
            academies within such State.
                ``(3) Designation subject to limitation amount.--The maximum
            aggregate face amount of bonds issued during any calendar year
            which may be designated under subsection (d)(1) with respect to
            any qualified zone academy shall not exceed the limitation
            amount allocated to such academy under paragraph (2) for such
            calendar year.
                ``(4) Carryover of unused limitation.--If for any calendar
            year--
                        ``(A) the limitation amount for any State, exceeds

    [[Page 111 STAT. 824]]

                        ``(B) the amount of bonds issued during such year
                    which are designated under subsection (d)(1) with
                    respect to qualified zone academies within such State,
            the limitation amount for such State for the following calendar
            year shall be increased by the amount of such excess.

        ``(f) Other Definitions.--For purposes of this section--
                ``(1) Credit allowance date.--The term `credit allowance
            date' means, with respect to any issue, the last day of the 1-
            year period beginning on the date of issuance of such issue and
            the last day of each successive 1-year period thereafter.
                ``(2) Bond.--The term `bond' includes any obligation.
                ``(3) State.--The term `State' includes the District of
            Columbia and any possession of the United States.

        ``(g) Credit Included in Gross Income.--Gross income includes the
    amount of the credit allowed to the taxpayer under this section.''.
        (b) Conforming Amendments.--
                (1) The table of parts for subchapter U of chapter 1 is
            amended by striking the last item and inserting the following:
                    ``Part IV. Incentives for education zones.
                    ``Part V. Regulations.''.

                (2) The table of sections for part V, as so redesignated, is
            amended to read as follows:
                    ``Sec. 1397F. Regulations.''.

        (c) <<NOTE: 26 USC 1397E note.>>  Effective Date.--The amendments
    made by this section shall apply to obligations issued after December
    31, 1997.

                  TITLE III--SAVINGS AND INVESTMENT INCENTIVES

                         Subtitle A--Retirement Savings

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

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

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

    [[Page 111 STAT. 825]]

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

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

                              ``(iii) In the case of a married individual
                          filing a separate return, zero.''.
                (2) Increase in phase-out range for joint returns.--Clause
            (ii) of section 219(g)(2)(A) is amended by inserting ``($20,000
            in the case of a joint return for a taxable year beginning after
            December 31, 2006)''.

        (b) Limitations for Active Participation Not Based on Spouse's
    Participation.--Section 219(g) (relating to limitation on deduction for
    active participants in certain pension plans) is amended--
                (1) by striking ``or the individual's spouse'' in paragraph
            (1), and
                (2) by adding at the end the following new paragraph:
                ``(7) Special rule for certain spouses.--In the case of an
            individual who is an active participant at no time during any
            plan year ending with or within the taxable year but whose
            spouse is an active participant for any part of any such plan
            year--
                        ``(A) the applicable dollar amount under paragraph
                    (3)(B)(i) with respect to the taxpayer shall be
                    $150,000, and
                        ``(B) the amount applicable under paragraph
                    (2)(A)(ii) shall be $10,000.''.

    <<NOTE: 26 USC 219 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

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

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

    ``SEC. 408A. ROTH IRAS.

        ``(a) General Rule.--Except as provided in this section, a Roth IRA
    shall be treated for purposes of this title in the same manner as an
    individual retirement plan.
        ``(b) Roth IRA.--For purposes of this title, the term `Roth IRA'
    means an individual retirement plan (as defined in section 7701(a)(37))
    which is designated (in such manner as the Secretary may prescribe) at
    the time of establishment of the plan as a Roth IRA. Such designation
    shall be made in such manner as the Secretary may prescribe.
        ``(c) Treatment of Contributions.--
                ``(1) No deduction allowed.--No deduction shall be allowed
            under section 219 for a contribution to a Roth IRA.

    [[Page 111 STAT. 826]]

                ``(2) Contribution limit.--The aggregate amount of
            contributions for any taxable year to all Roth IRAs maintained
            for the benefit of an individual shall not exceed the excess (if
            any) of--
                        ``(A) the maximum amount allowable as a deduction
                    under section 219 with respect to such individual for
                    such taxable year (computed without regard to subsection
                    (d)(1) or (g) of such section), over
                        ``(B) the aggregate amount of contributions for such
                    taxable year to all other individual retirement plans
                    (other than Roth IRAs) maintained for the benefit of the
                    individual.
                ``(3) Limits based on modified adjusted gross income.--
                        ``(A) Dollar limit.--The amount determined under
                    paragraph (2) for any taxable year shall be reduced (but
                    not below zero) by the amount which bears the same ratio
                    to such amount as--
                              ``(i) the excess of--
                                        ``(I) the taxpayer's adjusted gross
                                    income for such taxable year, over
                                        ``(II) the applicable dollar amount,
                                    bears to
                              ``(ii) $15,000 ($10,000 in the case of a joint
                          return).
                    The rules of subparagraphs (B) and (C) of section
                    219(g)(2) shall apply to any reduction under this
                    subparagraph.
                        ``(B) Rollover from ira.--A taxpayer shall not be
                    allowed to make a qualified rollover contribution to a
                    Roth IRA from an individual retirement plan other than a
                    Roth IRA during any taxable year if--
                              ``(i) the taxpayer's adjusted gross income for
                          such taxable year exceeds $100,000, or
                              ``(ii) the taxpayer is a married individual
                          filing a separate return.
                        ``(C) Definitions.--For purposes of this paragraph--
                              ``(i) adjusted gross income shall be
                          determined in the same manner as under section
                          219(g)(3), except that any amount included in
                          gross income under subsection (d)(3) shall not be
                          taken into account and the deduction under section
                          219 shall be taken into account, and
                              ``(ii) the applicable dollar amount is--
                                        ``(I) in the case of a taxpayer
                                    filing a joint return, $150,000,
                                        ``(II) in the case of any other
                                    taxpayer (other than a married
                                    individual filing a separate return),
                                    $95,000, and
                                        ``(III) in the case of a married
                                    individual filing a separate return,
                                    zero.
                        ``(D) Marital status.--Section 219(g)(4) shall apply
                    for purposes of this paragraph.
                ``(4) Contributions permitted after age 70\1/2\.--
            Contributions to a Roth IRA may be made even after the
            individual for whom the account is maintained has attained age
            70\1/2\.
                ``(5) Mandatory distribution rules not to apply before
            death.--Notwithstanding subsections (a)(6) and (b)(3) of section
            408 (relating to required distributions), the following
            provisions shall not apply to any Roth IRA:
                        ``(A) Section 401(a)(9)(A).

    [[Page 111 STAT. 827]]

                        ``(B) The incidental death benefit requirements of
                    section 401(a).
                ``(6) Rollover contributions.--
                        ``(A) In general.--No rollover contribution may be
                    made to a Roth IRA unless it is a qualified rollover
                    contribution.
                        ``(B) Coordination with limit.--A qualified rollover
                    contribution shall not be taken into account for
                    purposes of paragraph (2).
                ``(7) Time when contributions made.--For purposes of this
            section, the rule of section 219(f)(3) shall apply.

        ``(d) Distribution Rules.--For purposes of this title--
                ``(1) General rules.--
                        ``(A) Exclusions from gross income.--Any qualified
                    distribution from a Roth IRA shall not be includible in
                    gross income.
                        ``(B) Nonqualified distributions.--In applying
                    section 72 to any distribution from a Roth IRA which is
                    not a qualified distribution, such distribution shall be
                    treated as made from contributions to the Roth IRA to
                    the extent that such distribution, when added to all
                    previous distributions from the Roth IRA, does not
                    exceed the aggregate amount of contributions to the Roth
                    IRA.
                ``(2) Qualified distribution.--For purposes of this
            subsection--
                        ``(A) In general.--The term `qualified distribution'
                    means any payment or distribution--
                              ``(i) made on or after the date on which the
                          individual attains age 59\1/2\,
                              ``(ii) made to a beneficiary (or to the estate
                          of the individual) on or after the death of the
                          individual,
                              ``(iii) attributable to the individual's being
                          disabled (within the meaning of section 72(m)(7)),
                          or
                              ``(iv) which is a qualified special purpose
                          distribution.
                        ``(B) Certain distributions within 5 years.--A
                    payment or distribution shall not be treated as a
                    qualified distribution under subparagraph (A) if--
                              ``(i) it is made within the 5-taxable year
                          period beginning with the 1st taxable year for
                          which the individual made a contribution to a Roth
                          IRA (or such individual's spouse made a
                          contribution to a Roth IRA) established for such
                          individual, or
                              ``(ii) in the case of a payment or
                          distribution properly allocable (as determined in
                          the manner prescribed by the Secretary) to a
                          qualified rollover contribution from an individual
                          retirement plan other than a Roth IRA (or income
                          allocable thereto), it is made within the 5-
                          taxable year period beginning with the taxable
                          year in which the rollover contribution was made.
                ``(3) Rollovers from an ira other than a Roth IRA.--
                        ``(A) In general.--Notwithstanding section
                    408(d)(3), in the case of any distribution to which this
                    paragraph applies--
                              ``(i) there shall be included in gross income
                          any amount which would be includible were it not
                          part of a qualified rollover contribution,

    [[Page 111 STAT. 828]]

                              ``(ii) section 72(t) shall not apply, and
                              ``(iii) in the case of a distribution before
                          January 1, 1999, any amount required to be
                          included in gross income by reason of this
                          paragraph shall be so included ratably over the 4-
                          taxable year period beginning with the taxable
                          year in which the payment or distribution is made.
                        ``(B) Distributions to which paragraph applies.--
                    This paragraph shall apply to a distribution from an
                    individual retirement plan (other than a Roth IRA)
                    maintained for the benefit of an individual which is
                    contributed to a Roth IRA maintained for the benefit of
                    such individual in a qualified rollover contribution.
                        ``(C) Conversions.--The conversion of an individual
                    retirement plan (other than a Roth IRA) to a Roth IRA
                    shall be treated for purposes of this paragraph as a
                    distribution to which this paragraph applies.
                        ``(D) Conversion of excess contributions.--If, no
                    later than the due date for filing the return of tax for
                    any taxable year (without regard to extensions), an
                    individual transfers, from an individual retirement plan
                    (other than a Roth IRA), contributions for such taxable
                    year (and any earnings allocable thereto) to a Roth IRA,
                    no such amount shall be includible in gross income to
                    the extent no deduction was allowed with respect to such
                    amount.
                        ``(E) Additional reporting requirements.--Trustees
                    of Roth IRAs, trustees of individual retirement plans,
                    or both, whichever is appropriate, shall include such
                    additional information in reports required under section
                    408(i) as the Secretary may require to ensure that
                    amounts required to be included in gross income under
                    subparagraph (A) are so included.
                ``(4) Coordination with individual retirement accounts.--
            Section 408(d)(2) shall be applied separately with respect to
            Roth IRAs and other individual retirement plans.
                ``(5) Qualified special purpose distribution.--For purposes
            of this section, the term `qualified special purpose
            distribution' means any distribution to which subparagraph (F)
            of section 72(t)(2) applies.

        ``(e) Qualified Rollover Contribution.--For purposes of this
    section, the term `qualified rollover contribution' means a rollover
    contribution to a Roth IRA from another such account, or from an
    individual retirement plan, but only if such rollover contribution meets
    the requirements of section 408(d)(3). For purposes of section
    408(d)(3)(B), there shall be disregarded any qualified rollover
    contribution from an individual retirement plan (other than a Roth IRA)
    to a Roth IRA.''.
        (b) Excess Contributions.--Section 4973(b), as amended by title II,
    is amended by adding at the end the following new subsection:
        ``(f) Excess Contributions to Roth IRAs.--For purposes of this
    section, in the case of contributions to a Roth IRA (within the meaning
    of section 408A(b)), the term `excess contributions' means the sum of--
                ``(1) the excess (if any) of--

    [[Page 111 STAT. 829]]

                        ``(A) the amount contributed for the taxable year to
                    such accounts (other than a qualified rollover
                    contribution described in section 408A(e)), over
                        ``(B) the amount allowable as a contribution under
                    sections 408A (c)(2) and (c)(3), and
                ``(2) the amount determined under this subsection for the
            preceding taxable year, reduced by the sum of--
                        ``(A) the distributions out of the accounts for the
                    taxable year, and
                        ``(B) the excess (if any) of the maximum amount
                    allowable as a contribution under sections 408A (c)(2)
                    and (c)(3) for the taxable year over the amount
                    contributed to the accounts for the taxable year.

    For purposes of this subsection, any contribution which is distributed
    from a Roth IRA in a distribution described in section 408(d)(4) shall
    be treated as an amount not contributed.''.
        (c) Spousal IRA.--Clause (ii) of section 219(c)(1)(B) is amended to
    read as follows:
                              ``(ii) the compensation includible in the
                          gross income of such individual's spouse for the
                          taxable year reduced by--
                                        ``(I) the amount allowed as a
                                    deduction under subsection (a) to such
                                    spouse for such taxable year, and
                                        ``(II) the amount of any
                                    contribution on behalf of such spouse to
                                    a Roth IRA under section 408A for such
                                    taxable year.''.

        (d) Authority To Prescribe Necessary Reporting.--Section 408(i) is
    amended--
                (1) by striking ``under regulations'', and
                (2) by striking ``in such regulations'' each place it
            appears.

        (e) Conforming Amendment.--The table of sections for subpart A of
    part I of subchapter D of chapter 1 is amended by inserting after the
    item relating to section 408 the following new item:
                    ``Sec. 408A. Roth IRAs.''.

        (f) <<NOTE: 26 USC 219 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

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

        (a) In General.--Paragraph (2) of section 72(t) (relating to
    exceptions to 10-percent additional tax on early distributions from
    qualified retirement plans), as amended by section 203, is amended by
    adding at the end the following new subparagraph:
                        ``(F) Distributions from certain plans for first
                    home purchases.--Distributions to an individual from an
                    individual retirement plan which are qualified first-
                    time homebuyer distributions (as defined in paragraph
                    (8)). Distributions shall not be taken into account
                    under the preceding sentence if such distributions are
                    described in subparagraph (A), (C), (D), or (E) or to
                    the extent paragraph (1) does not apply to such
                    distributions by reason of subparagraph (B).''.

        (b) Definitions.--Section 72(t), as amended by section 203, is
    amended by adding at the end the following new paragraphs:
                ``(8) Qualified first-time homebuyer distributions.--For
            purposes of paragraph (2)(F)--

    [[Page 111 STAT. 830]]

                        ``(A) In general.--The term `qualified first-time
                    homebuyer distribution' means any payment or
                    distribution received by an individual to the extent
                    such payment or distribution is used by the individual
                    before the close of the 120th day after the day on which
                    such payment or distribution is received to pay
                    qualified acquisition costs with respect to a principal
                    residence of a first-time homebuyer who is such
                    individual, the spouse of such individual, or any child,
                    grandchild, or ancestor of such individual or the
                    individual's spouse.
                        ``(B) Lifetime dollar limitation.--The aggregate
                    amount of payments or distributions received by an
                    individual which may be treated as qualified first-time
                    homebuyer distributions for any taxable year shall not
                    exceed the excess (if any) of--
                              ``(i) $10,000, over
                              ``(ii) the aggregate amounts treated as
                          qualified first-time homebuyer distributions with
                          respect to such individual for all prior taxable
                          years.
                        ``(C) Qualified acquisition costs.--For purposes of
                    this paragraph, the term `qualified acquisition costs'
                    means the costs of acquiring, constructing, or
                    reconstructing a residence. Such term includes any usual
                    or reasonable settlement, financing, or other closing
                    costs.
                        ``(D) First-time homebuyer; other definitions.--For
                    purposes of this paragraph--
                              ``(i) First-time homebuyer.--The term `first-
                          time homebuyer' means any individual if--
                                        ``(I) such individual (and if
                                    married, such individual's spouse) had
                                    no present ownership interest in a
                                    principal residence during the 2-year
                                    period ending on the date of acquisition
                                    of the principal residence to which this
                                    paragraph applies, and
                                        ``(II) subsection (h) or (k) of
                                    section 1034 (as in effect on the day
                                    before the date of the enactment of this
                                    paragraph) did not suspend the running
                                    of any period of time specified in
                                    section 1034 (as so in effect) with
                                    respect to such individual on the day
                                    before the date the distribution is
                                    applied pursuant to subparagraph (A).
                              ``(ii) Principal residence.--The term
                          `principal residence' has the same meaning as when
                          used in section 121.
                              ``(iii) Date of acquisition.--The term `date
                          of acquisition' means the date--
                                        ``(I) on which a binding contract to
                                    acquire the principal residence to which
                                    subparagraph (A) applies is entered
                                    into, or
                                        ``(II) on which construction or
                                    reconstruction of such a principal
                                    residence is commenced.
                        ``(E) Special rule where delay in acquisition.--If
                    any distribution from any individual retirement plan
                    fails to meet the requirements of subparagraph (A)
                    solely by reason of a delay or cancellation of the
                    purchase or construction of the residence, the amount of
                    the distribution may be contributed to an individual
                    retirement plan as

    [[Page 111 STAT. 831]]

                    provided in section 408(d)(3)(A)(i) (determined by
                    substituting `120 days' for `60 days' in such section),
                    except that--
                              ``(i) section 408(d)(3)(B) shall not be
                          applied to such contribution, and
                              ``(ii) such amount shall not be taken into
                          account in determining whether section
                          408(d)(3)(B) applies to any other amount.''.

        (c) <<NOTE: 26 USC 72 note.>>  Effective Date.--The amendments made
    by this section shall apply to payments and distributions in taxable
    years beginning after December 31, 1997.

    SEC. 304. CERTAIN BULLION NOT TREATED AS COLLECTIBLES.

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

        (b) <<NOTE: 26 USC 408 note.>>  Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1997.

                            Subtitle B--Capital Gains

    SEC. 311. MAXIMUM CAPITAL GAINS RATES FOR INDIVIDUALS.

        (a) In General.--Subsection (h) of section 1 (relating to maximum
    capital gains rate) is amended to read as follows:
        ``(h) Maximum Capital Gains Rate.--
                ``(1) In general.--If a taxpayer has a net capital gain for
            any taxable year, the tax imposed by this section for such
            taxable year shall not exceed the sum of--
                        ``(A) a tax computed at the rates and in the same
                    manner as if this subsection had not been enacted on the
                    greater of--
                              ``(i) taxable income reduced by the net
                          capital gain, or
                              ``(ii) the lesser of--
                                        ``(I) the amount of taxable income
                                    taxed at a rate below 28 percent, or
                                        ``(II) taxable income reduced by the
                                    adjusted net capital gain, plus

    [[Page 111 STAT. 832]]

                        ``(B) 25 percent of the excess (if any) of--
                              ``(i) the unrecaptured section 1250 gain (or,
                          if less, the net capital gain), over
                              ``(ii) the excess (if any) of--
                                        ``(I) the sum of the amount on which
                                    tax is determined under subparagraph (A)
                                    plus the net capital gain, over
                                        ``(II) taxable income, plus
                        ``(C) 28 percent of the amount of taxable income in
                    excess of the sum of--
                              ``(i) the adjusted net capital gain, plus
                              ``(ii) the sum of the amounts on which tax is
                          determined under subparagraphs (A) and (B), plus
                        ``(D) 10 percent of so much of the taxpayer's
                    adjusted net capital gain (or, if less, taxable income)
                    as does not exceed the excess (if any) of--
                              ``(i) the amount of taxable income which would
                          (without regard to this paragraph) be taxed at a
                          rate below 28 percent, over
                              ``(ii) the taxable income reduced by the
                          adjusted net capital gain, plus
                        ``(E) 20 percent of the taxpayer's adjusted net
                    capital gain (or, if less, taxable income) in excess of
                    the amount on which a tax is determined under
                    subparagraph (D).
                ``(2) Reduced capital gain rates for qualified 5-year
            gain.--
                        ``(A) Reduction in 10-percent rate.--In the case of
                    any taxable year beginning after December 31, 2000, the
                    rate under paragraph (1)(D) shall be 8 percent with
                    respect to so much of the amount to which the 10-percent
                    rate would otherwise apply as does not exceed qualified
                    5-year gain, and 10 percent with respect to the
                    remainder of such amount.
                        ``(B) Reduction in 20-percent rate.--The rate under
                    paragraph (1)(E) shall be 18 percent with respect to so
                    much of the amount to which the 20-percent rate would
                    otherwise apply as does not exceed the lesser of--
                              ``(i) the excess of qualified 5-year gain over
                          the amount of such gain taken into account under
                          subparagraph (A) of this paragraph, or
                              ``(ii) the amount of qualified 5-year gain
                          (determined by taking into account only property
                          the holding period for which begins after December
                          31, 2000),
                    and 20 percent with respect to the remainder of such
                    amount. For purposes of determining under the preceding
                    sentence whether the holding period of property begins
                    after December 31, 2000, the holding period of property
                    acquired pursuant to the exercise of an option (or other
                    right or obligation to acquire property) shall include
                    the period such option (or other right or obligation)
                    was held.
                ``(3) Net capital gain taken into account as investment
            income.--For purposes of this subsection, the net capital gain
            for any taxable year shall be reduced (but not below zero) by
            the amount which the taxpayer takes into account as investment
            income under section 163(d)(4)(B)(iii).

    [[Page 111 STAT. 833]]

                ``(4) Adjusted net capital gain.--For purposes of this
            subsection, the term `adjusted net capital gain' means net
            capital gain determined without regard to--
                        ``(A) collectibles gain,
                        ``(B) unrecaptured section 1250 gain,
                        ``(C) section 1202 gain, and
                        ``(D) mid-term gain.
                ``(5) Collectibles gain.--For purposes of this subsection--
                        ``(A) In general.--The term `collectibles gain'
                    means gain from the sale or exchange of a collectible
                    (as defined in section 408(m) without regard to
                    paragraph (3) thereof) which is a capital asset held for
                    more than 1 year but only to the extent such gain is
                    taken into account in computing gross income.
                        ``(B) Partnerships, etc.--For purposes of
                    subparagraph (A), any gain from the sale of an interest
                    in a partnership, S corporation, or trust which is
                    attributable to unrealized appreciation in the value of
                    collectibles shall be treated as gain from the sale or
                    exchange of a collectible. Rules similar to the rules of
                    section 751 shall apply for purposes of the preceding
                    sentence.
                ``(6) Unrecaptured section 1250 gain.--For purposes of this
            subsection--
                        ``(A) In general.--The term `unrecaptured section
                    1250 gain' means the amount of long-term capital gain
                    which would be treated as ordinary income if--
                              ``(i) section 1250(b)(1) included all
                          depreciation and the applicable percentage under
                          section 1250(a) were 100 percent, and
                              ``(ii) in the case of gain properly taken into
                          account after July 28, 1997, only gain from
                          section 1250 property held for more than 18 months
                          were taken into account.
                        ``(B) Limitation with respect to section 1231
                    property.--The amount of unrecaptured section 1250 gain
                    from sales, exchanges, and conversions described in
                    section 1231(a)(3)(A) for any taxable year shall not
                    exceed the excess of the net section 1231 gain (as
                    defined in section 1231(c)(3)) for such year over the
                    amount treated as ordinary income under section
                    1231(c)(1) for such year.
                        ``(C) Pre-may 7, 1997, gain.--In the case of a
                    taxable year which includes May 7, 1997, subparagraph
                    (A) shall be applied by taking into account only the
                    gain properly taken into account for the portion of the
                    taxable year after May 6, 1997.
                ``(7) Section 1202 gain.--For purposes of this subsection,
            the term `section 1202 gain' means an amount equal to the gain
            excluded from gross income under section 1202(a).
                ``(8) Mid-term gain.--For purposes of this subsection, the
            term `mid-term gain' means the amount which would be adjusted
            net capital gain for the taxable year if--
                        ``(A) adjusted net capital gain were determined by
                    taking into account only the gain or loss properly taken
                    into account after July 28, 1997, from property held for
                    more than 1 year but not more than 18 months, and
                        ``(B) paragraph (3) and section 1212 did not apply.

    [[Page 111 STAT. 834]]

                ``(9) Qualified 5-year gain.--For purposes of this
            subsection, the term `qualified 5-year gain' means the amount of
            long-term capital gain which would be computed for the taxable
            year if only gains from the sale or exchange of property held by
            the taxpayer for more than 5 years were taken into account. The
            determination under the preceding sentence shall be made without
            regard to collectibles gain, unrecaptured section 1250 gain
            (determined without regard to subparagraph (B) of paragraph
            (6)), section 1202 gain, or mid-term gain.
                ``(10) Pre-effective date gain.--
                        ``(A) In general.--In the case of a taxable year
                    which includes May 7, 1997, gains and losses properly
                    taken into account for the portion of the taxable year
                    before May 7, 1997, shall be taken into account in
                    determining mid-term gain as if such gains and losses
                    were described in paragraph (8)(A).
                        ``(B) Special rules for pass-thru entities.--In
                    applying subparagraph (A) with respect to any pass-thru
                    entity, the determination of when gains and loss are
                    properly taken into account shall be made at the entity
                    level.
                        ``(C) Pass-thru entity defined.--For purposes of
                    subparagraph (B), the term `pass-thru entity' means--
                              ``(i) a regulated investment company,
                              ``(ii) a real estate investment trust,
                              ``(iii) an S corporation,
                              ``(iv) a partnership,
                              ``(v) an estate or trust, and
                              ``(vi) a common trust fund.
                ``(11) Treatment of pass-thru entities.--The Secretary may
            prescribe such regulations as are appropriate (including
            regulations requiring reporting) to apply this subsection in the
            case of sales and exchanges by pass-thru entities (as defined in
            paragraph (10)(C)) and of interests in such entities.''.

        (b) Minimum Tax.--
                (1) In general.--Subsection (b) of section 55 is amended by
            adding at the end the following new paragraph:
                ``(3) Maximum rate of tax on net capital gain of
            noncorporate taxpayers.--The amount determined under the first
            sentence of paragraph (1)(A)(i) shall not exceed the sum of--
                        ``(A) the amount determined under such first
                    sentence computed at the rates and in the same manner as
                    if this paragraph had not been enacted on the taxable
                    excess reduced by the lesser of--
                              ``(i) the net capital gain, or
                              ``(ii) the sum of--
                                        ``(I) the adjusted net capital gain,
                                    plus
                                        ``(II) the unrecaptured section 1250
                                    gain, plus
                        ``(B) 25 percent of the lesser of--
                              ``(i) the unrecaptured section 1250 gain, or
                              ``(ii) the amount of taxable excess in excess
                          of the sum of--
                                        ``(I) the adjusted net capital gain,
                                    plus
                                        ``(II) the amount on which a tax is
                                    determined under subparagraph (A), plus
                        ``(C) 10 percent of so much of the taxpayer's
                    adjusted net capital gain (or, if less, taxable excess)
                    as does not

    [[Page 111 STAT. 835]]

                    exceed the amount on which a tax is determined under
                    section 1(h)(1)(D), plus
                        ``(D) 20 percent of the taxpayer's adjusted net
                    capital gain (or, if less, taxable excess) in excess of
                    the amount on which tax is determined under subparagraph
                    (C).
            In the case of taxable years beginning after December 31, 2000,
            rules similar to the rules of section 1(h)(2) shall apply for
            purposes of subparagraphs (C) and (D). Terms used in this
            paragraph which are also used in section 1(h) shall have the
            respective meanings given such terms by section 1(h).''.
                (2) Conforming amendments.--
                        (A) Clause (ii) of section 55(b)(1)(A) is amended by
                    striking ``clause (i)'' and inserting ``this
                    subsection''.
                        (B) Paragraph (7) of section 57(a) is amended by
                    striking ``one-half'' and inserting ``42 percent''.

        (c) Other Conforming Amendments.--
                (1) Paragraph (1) of section 1445(e) is amended by striking
            ``28 percent'' and inserting ``20 percent''.
                (2) The second sentence of section 7518(g)(6)(A), and the
            second sentence of section 607(h)(6)(A) of the Merchant Marine
            Act, 1936, <<NOTE: 46 USC app. 1177.>>  are each amended by
            striking ``28 percent'' and inserting ``20 percent''.
                (3) Paragraph (2) of section 904(b) is amended by adding at
            the end the following new subparagraph:
                        ``(C) Coordination with capital gains rates.--The
                    Secretary may by regulations modify the application of
                    this paragraph and paragraph (3) to the extent necessary
                    to properly reflect any capital gain rate differential
                    under section 1(h) or 1201(a) and the computation of net
                    capital gain.''.

        (d) <<NOTE: 26 USC 1 note.>>  Effective Dates.--
                (1) In general.--Except as provided in paragraph (2), the
            amendments made by this section shall apply to taxable years
            ending after May 6, 1997.
                (2) Withholding.--The amendment made by subsection (c)(1)
            shall apply only to amounts paid after the date of the enactment
            of this Act.

        (e) <<NOTE: 26 USC 1 note.>>  Election To Recognize Gain on Assets
    Held on January 1, 2001.--For purposes of the Internal Revenue Code of
    1986--
                (1) In general.--A taxpayer other than a corporation may
            elect to treat--
                        (A) any readily tradable stock (which is a capital
                    asset) held by such taxpayer on January 1, 2001, and not
                    sold before the next business day after such date, as
                    having been sold on such next business day for an amount
                    equal to its closing market price on such next business
                    day (and as having been reacquired on such next business
                    day for an amount equal to such closing market price),
                    and
                        (B) any other capital asset or property used in the
                    trade or business (as defined in section 1231(b) of the
                    Internal Revenue Code of 1986) held by the taxpayer on
                    January 1, 2001, as having been sold on such date for an
                    amount equal to its fair market value on such date (and
                    as having been reacquired on such date for an amount
                    equal to such fair market value).
                (2) Treatment of gain or loss.--

    [[Page 111 STAT. 836]]

                        (A) Any gain resulting from an election under
                    paragraph (1) shall be treated as received or accrued on
                    the date the asset is treated as sold under paragraph
                    (1) and shall be recognized notwithstanding any
                    provision of the Internal Revenue Code of 1986.
                        (B) Any loss resulting from an election under
                    paragraph (1) shall not be allowed for any taxable year.
                (3) Election.--An election under paragraph (1) shall be made
            in such manner as the Secretary of the Treasury or his delegate
            may prescribe and shall specify the assets for which such
            election is made. Such an election, once made with respect to
            any asset, shall be irrevocable.
                (4) Readily tradable stock.--For purposes of this
            subsection, the term ``readily tradable stock'' means any stock
            which, as of January 1, 2001, is readily tradable on an
            established securities market or otherwise.

    SEC. 312. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL RESIDENCE.

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

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

        ``(a) Exclusion.--Gross income shall not include gain from the sale
    or exchange of property if, during the 5-year period ending on the date
    of the sale or exchange, such property has been owned and used by the
    taxpayer as the taxpayer's principal residence for periods aggregating 2
    years or more.
        ``(b) Limitations.--
                ``(1) In general.--The amount of gain excluded from gross
            income under subsection (a) with respect to any sale or exchange
            shall not exceed $250,000.
                ``(2) $500,000 limitation for certain joint returns.--
            Paragraph (1) shall be applied by substituting `$500,000' for
            `$250,000' if--
                        ``(A) a husband and wife make a joint return for the
                    taxable year of the sale or exchange of the property,
                        ``(B) either spouse meets the ownership requirements
                    of subsection (a) with respect to such property,
                        ``(C) both spouses meet the use requirements of
                    subsection (a) with respect to such property, and
                        ``(D) neither spouse is ineligible for the benefits
                    of subsection (a) with respect to such property by
                    reason of paragraph (3).
                ``(3) Application to only 1 sale or exchange every 2
            years.--
                        ``(A) In general.--Subsection (a) shall not apply to
                    any sale or exchange by the taxpayer if, during the 2-
                    year period ending on the date of such sale or exchange,
                    there was any other sale or exchange by the taxpayer to
                    which subsection (a) applied.
                        ``(B) Pre-may 7, 1997, sales not taken into
                    account.--Subparagraph (A) shall be applied without
                    regard to any sale or exchange before May 7, 1997.

        ``(c) Exclusion for Taxpayers Failing To Meet Certain
    Requirements.--

    [[Page 111 STAT. 837]]

                ``(1) In general.--In the case of a sale or exchange to
            which this subsection applies, the ownership and use
            requirements of subsection (a) shall not apply and subsection
            (b)(3) shall not apply; but the amount of gain excluded from
            gross income under subsection (a) with respect to such sale or
            exchange shall not exceed--
                        ``(A) the amount which bears the same ratio to the
                    amount which would be so excluded under this section if
                    such requirements had been met, as
                        ``(B) the shorter of--
                              ``(i) the aggregate periods, during the 5-year
                          period ending on the date of such sale or
                          exchange, such property has been owned and used by
                          the taxpayer as the taxpayer's principal
                          residence, or
                              ``(ii) the period after the date of the most
                          recent prior sale or exchange by the taxpayer to
                          which subsection (a) applied and before the date
                          of such sale or exchange,
                    bears to 2 years.
                ``(2) Sales and exchanges to which subsection applies.--This
            subsection shall apply to any sale or exchange if--
                        ``(A) subsection (a) would not (but for this
                    subsection) apply to such sale or exchange by reason
                    of--
                              ``(i) a failure to meet the ownership and use
                          requirements of subsection (a), or
                              ``(ii) subsection (b)(3), and
                        ``(B) such sale or exchange is by reason of a change
                    in place of employment, health, or, to the extent
                    provided in regulations, unforeseen circumstances.

        ``(d) Special Rules.--
                ``(1) Joint returns.--If a husband and wife make a joint
            return for the taxable year of the sale or exchange of the
            property, subsections (a) and (c) shall apply if either spouse
            meets the ownership and use requirements of subsection (a) with
            respect to such property.
                ``(2) Property of deceased spouse.--For purposes of this
            section, in the case of an unmarried individual whose spouse is
            deceased on the date of the sale or exchange of property, the
            period such unmarried individual owned and used such property
            shall include the period such deceased spouse owned and used
            such property before death.
                ``(3) Property owned by spouse or former spouse.--For
            purposes of this section--
                        ``(A) Property transferred to individual from spouse
                    or former spouse.--In the case of an individual holding
                    property transferred to such individual in a transaction
                    described in section 1041(a), the period such individual
                    owns such property shall include the period the
                    transferor owned the property.
                        ``(B) Property used by former spouse pursuant to
                    divorce decree, etc.--Solely for purposes of this
                    section, an individual shall be treated as using
                    property as such individual's principal residence during
                    any period of ownership while such individual's spouse
                    or former spouse is granted use of the property under a
                    divorce or separation instrument (as defined in section
                    71(b)(2)).

    [[Page 111 STAT. 838]]

                ``(4) Tenant-stockholder in cooperative housing
            corporation.--For purposes of this section, if the taxpayer
            holds stock as a tenant-stockholder (as defined in section 216)
            in a cooperative housing corporation (as defined in such
            section), then--
                        ``(A) the holding requirements of subsection (a)
                    shall be applied to the holding of such stock, and
                        ``(B) the use requirements of subsection (a) shall
                    be applied to the house or apartment which the taxpayer
                    was entitled to occupy as such stockholder.
                ``(5) Involuntary conversions.--
                        ``(A) In general.--For purposes of this section, the
                    destruction, theft, seizure, requisition, or
                    condemnation of property shall be treated as the sale of
                    such property.
                        ``(B) Application of section 1033.--In applying
                    section 1033 (relating to involuntary conversions), the
                    amount realized from the sale or exchange of property
                    shall be treated as being the amount determined without
                    regard to this section, reduced by the amount of gain
                    not included in gross income pursuant to this section.
                        ``(C) Property acquired after involuntary
                    conversion.--If the basis of the property sold or
                    exchanged is determined (in whole or in part) under
                    section 1033(b) (relating to basis of property acquired
                    through involuntary conversion), then the holding and
                    use by the taxpayer of the converted property shall be
                    treated as holding and use by the taxpayer of the
                    property sold or exchanged.
                ``(6) Recognition of gain attributable to depreciation.--
            Subsection (a) shall not apply to so much of the gain from the
            sale of any property as does not exceed the portion of the
            depreciation adjustments (as defined in section 1250(b)(3))
            attributable to periods after May 6, 1997, in respect of such
            property.
                ``(7) Determination of use during periods of out-of-
            residence care.--In the case of a taxpayer who--
                        ``(A) becomes physically or mentally incapable of
                    self-care, and
                        ``(B) owns property and uses such property as the
                    taxpayer's principal residence during the 5-year period
                    described in subsection (a) for periods aggregating at
                    least 1 year,
            then the taxpayer shall be treated as using such property as the
            taxpayer's principal residence during any time during such 5-
            year period in which the taxpayer owns the property and resides
            in any facility (including a nursing home) licensed by a State
            or political subdivision to care for an individual in the
            taxpayer's condition.
                ``(8) Sales of remainder interests.--For purposes of this
            section--
                        ``(A) In general.--At the election of the taxpayer,
                    this section shall not fail to apply to the sale or
                    exchange of an interest in a principal residence by
                    reason of such interest being a remainder interest in
                    such residence, but this section shall not apply to any
                    other interest in such residence which is sold or
                    exchanged separately.
                        ``(B) Exception for sales to related parties.--
                    Subparagraph (A) shall not apply to any sale to, or

    [[Page 111 STAT. 839]]

                    exchange with, any person who bears a relationship to
                    the taxpayer which is described in section 267(b) or
                    707(b).

        ``(e) Denial of Exclusion for Expatriates.--This section shall not
    apply to any sale or exchange by an individual if the treatment provided
    by section 877(a)(1) applies to such individual.
        ``(f) Election To Have Section Not Apply.--This section shall not
    apply to any sale or exchange with respect to which the taxpayer elects
    not to have this section apply.
        ``(g) Residences Acquired in Rollovers Under Section 1034.--For
    purposes of this section, in the case of property the acquisition of
    which by the taxpayer resulted under section 1034 (as in effect on the
    day before the date of the enactment of this section) in the
    nonrecognition of any part of the gain realized on the sale or exchange
    of another residence, in determining the period for which the taxpayer
    has owned and used such property as the taxpayer's principal residence,
    there shall be included the aggregate periods for which such other
    residence (and each prior residence taken into account under section
    1223(7) in determining the holding period of such property) had been so
    owned and used.''.
        (b) Repeal of Nonrecognition of Gain on Rollover of Principal
    Residence.--Section 1034 (relating to rollover of gain on sale of
    principal residence) is hereby repealed.
        (c) Exception From Reporting.--Subsection (e) of section 6045
    (relating to return required in the case of real estate transactions) is
    amended by adding at the end the following new paragraph:
                ``(5) Exception for sales or exchanges of certain principal
            residences.--
                        ``(A) In general.--Paragraph (1) shall not apply to
                    any sale or exchange of a residence for $250,000 or less
                    if the person referred to in paragraph (2) receives
                    written assurance in a form acceptable to the Secretary
                    from the seller that--
                              ``(i) such residence is the principal
                          residence (within the meaning of section 121) of
                          the seller,
                              ``(ii) if the Secretary requires the inclusion
                          on the return under subsection (a) of information
                          as to whether there is federally subsidized
                          mortgage financing assistance with respect to the
                          mortgage on residences, that there is no such
                          assistance with respect to the mortgage on such
                          residence, and
                              ``(iii) the full amount of the gain on such
                          sale or exchange is excludable from gross income
                          under section 121.
                    If such assurance includes an assurance that the seller
                    is married, the preceding sentence shall be applied by
                    substituting `$500,000' for `$250,000'.
            The Secretary may by regulation increase the dollar amounts
            under this subparagraph if the Secretary determines that such an
            increase will not materially reduce revenues to the Treasury.
                        ``(B) Seller.--For purposes of this paragraph, the
                    term `seller' includes the person relinquishing the
                    residence in an exchange.''.

        (d) Conforming Amendments.--
                (1) The following provisions of the Internal Revenue Code of
            1986 are each amended by striking ``section 1034'' and inserting
            ``section 121'': sections 25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i),

    [[Page 111 STAT. 840]]

            143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A),
            464(f)(3)(B)(i), 1033(h)(4), 1274(c)(3)(B), 6334(a)(13), and
            7872(f)(11)(A).
                (2) Paragraph (4) of section 32(c) is amended by striking
            ``(as defined in section 1034(h)(3))'' and by adding at the end
            the following new sentence: ``For purposes of the preceding
            sentence, the term `extended active duty' means any period of
            active duty pursuant to a call or order to such duty for a
            period in excess of 90 days or for an indefinite period.''.
                (3) Subparagraph (A) of 143(m)(6) is amended by inserting
            ``(as in effect on the day before the date of the enactment of
            the Taxpayer Relief Act of 1997)'' after ``1034(e)''.
                (4) Subsection (e) of section 216 is amended by striking
            ``such exchange qualifies for nonrecognition of gain under
            section 1034(f)'' and inserting ``such dwelling unit is used as
            his principal residence (within the meaning of section 121)''.
                (5) Section 512(a)(3)(D) is amended by inserting ``(as in
            effect on the day before the date of the enactment of the
            Taxpayer Relief Act of 1997)'' after ``1034''.
                (6) Paragraph (7) of section 1016(a) is amended by inserting
            ``(as in effect on the day before the date of the enactment of
            the Taxpayer Relief Act of 1997)'' after ``1034'' and by
            inserting ``(as so in effect)'' after ``1034(e)''.
                (7) Paragraph (3) of section 1033(k) is amended to read as
            follows:
                ``(3) For exclusion from gross income of gain from
            involuntary conversion of principal residence, see section
            121.''.
                (8) Subsection (e) of section 1038 is amended to read as
            follows:

        ``(e) Principal Residences.--If--
                ``(1) subsection (a) applies to a reacquisition of real
            property with respect to the sale of which gain was not
            recognized under section 121 (relating to gain on sale of
            principal residence); and
                ``(2) within 1 year after the date of the reacquisition of
            such property by the seller, such property is resold by him,

    then, under regulations prescribed by the Secretary, subsections (b),
    (c), and (d) of this section shall not apply to the reacquisition of
    such property and, for purposes of applying section 121, the resale of
    such property shall be treated as a part of the transaction constituting
    the original sale of such property.''.
                (9) Paragraph (7) of section 1223 is amended by inserting
            ``(as in effect on the day before the date of the enactment of
            the Taxpayer Relief Act of 1997)'' after ``1034''.
                (10)(A) Subsection (d) of section 1250 is amended by
            striking paragraph (7) and by redesignating paragraphs (9) and
            (10) as paragraphs (7) and (8), respectively.
                (B) Subsection (e) of section 1250 is amended by striking
            paragraph (3).
                (11) Subsection (c) of section 6012 is amended by striking
            ``(relating to one-time exclusion of gain from sale of principal
            residence by individual who has attained age 55)'' and inserting
            ``(relating to gain from sale of principal residence)''.
                (12) Paragraph (2) of section 6212(c) is amended by striking
            subparagraph (C) and by redesignating the succeeding
            subparagraphs accordingly.
                (13) Section 6504 is amended by striking paragraph (4) and
            by redesignating the succeeding paragraphs accordingly.

    [[Page 111 STAT. 841]]

                (14) The item relating to section 121 in the table of
            sections for part III of subchapter B of chapter 1 is amended to
            read as follows:
                    ``Sec. 121. Exclusion of gain from sale of principal
                                    residence.''.

                (15) The table of sections for part III of subchapter O of
            chapter 1 is amended by striking the item relating to section
            1034.

        (d) <<NOTE: 26 USC 121 note.>>  Effective Date.--
                (1) In general.--The amendments made by this section shall
            apply to sales and exchanges after May 6, 1997.
                (2) Sales before date of enactment.--At the election of the
            taxpayer, the amendments made by this section shall not apply to
            any sale or exchange before the date of the enactment of this
            Act.
                (3) Certain sales within 2 years after date of enactment.--
            Section 121 of the Internal Revenue Code of 1986 (as amended by
            this section) shall be applied without regard to subsection
            (c)(2)(B) thereof in the case of any sale or exchange of
            property during the 2-year period beginning on the date of the
            enactment of this Act if the taxpayer held such property on the
            date of the enactment of this Act and fails to meet the
            ownership and use requirements of subsection (a) thereof with
            respect to such property.
                (4) Binding contracts.--At the election of the taxpayer, the
            amendments made by this section shall not apply to a sale or
            exchange after the date of the enactment of this Act, if--
                        (A) such sale or exchange is pursuant to a contract
                    which was binding on such date, or
                        (B) without regard to such amendments, gain would
                    not be recognized under section 1034 of the Internal
                    Revenue Code of 1986 (as in effect on the day before the
                    date of the enactment of this Act) on such sale or
                    exchange by reason of a new residence acquired on or
                    before such date or with respect to the acquisition of
                    which by the taxpayer a binding contract was in effect
                    on such date.
            This paragraph shall not apply to any sale or exchange by an
            individual if the treatment provided by section 877(a)(1) of the
            Internal Revenue Code of 1986 applies to such individual.

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

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

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

        ``(a) Nonrecognition of Gain.--In the case of any sale of qualified
    small business stock held by an individual for more than 6 months and
    with respect to which such individual elects the application of this
    section, gain from such sale shall be recognized only to the extent that
    the amount realized on such sale exceeds--
                ``(1) the cost of any qualified small business stock
            purchased by the taxpayer during the 60-day period beginning on
            the date of such sale, reduced by
                ``(2) any portion of such cost previously taken into account
            under this section.

    [[Page 111 STAT. 842]]

    This section shall not apply to any gain which is treated as ordinary
    income for purposes of this title.
        ``(b) Definitions and Special Rules.--For purposes of this section--
                ``(1) Qualified small business stock.--The term `qualified
            small business stock' has the meaning given such term by section
            1202(c).
                ``(2) Purchase.--A taxpayer shall be treated as having
            purchased any property if, but for paragraph (3), the unadjusted
            basis of such property in the hands of the taxpayer would be its
            cost (within the meaning of section 1012).
                ``(3) Basis adjustments.--If gain from any sale is not
            recognized by reason of subsection (a), such gain shall be
            applied to reduce (in the order acquired) the basis for
            determining gain or loss of any qualified small business stock
            which is purchased by the taxpayer during the 60-day period
            described in subsection (a).
                ``(4) Holding period.--For purposes of determining whether
            the nonrecognition of gain under subsection (a) applies to stock
            which is sold--
                        ``(A) the taxpayer's holding period for such stock
                    and the stock referred to in subsection (a)(1) shall be
                    determined without regard to section 1223, and
                        ``(B) only the first 6 months of the taxpayer's
                    holding period for the stock referred to in subsection
                    (a)(1) shall be taken into account for purposes of
                    applying section 1202(c)(2).''.

        (b) Conforming Amendments.--
                (1) Section 1016(a)(23) is amended--
                        (A) by striking ``or 1044'' and inserting ``, 1044,
                    or 1045'', and
                        (B) by striking ``or 1044(d)'' and inserting ``,
                    1044(d), or 1045(b)(4)''.
                (2) Section 1223 is amended by redesignating paragraph (15)
            as paragraph (16) and by inserting after paragraph (14) the
            following new paragraph:
                ``(15) In determining the period for which the taxpayer has
            held property the acquisition of which resulted under section
            1045 in the nonrecognition of any part of the gain realized on
            the sale of other property, there shall be included the period
            for which such other property has been held as of the date of
            such sale.''.
                (3) The table of sections for part III of subchapter O of
            chapter 1 is amended by adding at the end the following new
            item:
                    ``Sec. 1045. Rollover of gain from qualified small
                                    business stock to another qualified
                                    small business stock.''.

        (c) <<NOTE: 26 USC 1016 note.>>  Effective Date.--The amendments
    made by this section shall apply to sales after the date of enactment of
    this Act.

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

        (a) In General.--Paragraph (2) of section 1201(a) is amended by
    inserting before the period ``(or, if less, taxable income)''.

    [[Page 111 STAT. 843]]

        (b) <<NOTE: 26 USC 1201 note.>>  Effective Date.--The amendment made
    by this section shall apply to taxable years ending after December 31,
    1997.

                    TITLE IV--ALTERNATIVE MINIMUM TAX REFORM

    SEC. 401. EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL CORPORATIONS.

        (a) In General.--Section 55 (relating to alternative minimum tax
    imposed) is amended by adding at the end the following new subsection:
        ``(e) Exemption for Small Corporations.--
                ``(1) In general.--The tentative minimum tax of a
            corporation shall be zero for any taxable year if--
                        ``(A) such corporation met the $5,000,000 gross
                    receipts test of section 448(c) for its first taxable
                    year beginning after December 31, 1996, and
                        ``(B) such corporation would meet such test for the
                    taxable year and all prior taxable years beginning after
                    such first taxable year if such test were applied by
                    substituting `$7,500,000' for `$5,000,000'.
                ``(2) Prospective application of minimum tax if small
            corporation ceases to be small.--In the case of a corporation
            whose tentative minimum tax is zero for any prior taxable year
            by reason of paragraph (1), the application of this part for
            taxable years beginning with the first taxable year such
            corporation ceases to be described in paragraph (1) shall be
            determined with the following modifications:
                        ``(A) Section 56(a)(1) (relating to depreciation)
                    and section 56(a)(5) (relating to pollution control
                    facilities) shall apply only to property placed in
                    service on or after the change date.
                        ``(B) Section 56(a)(2) (relating to mining
                    exploration and development costs) shall apply only to
                    costs paid or incurred on or after the change date.
                        ``(C) Section 56(a)(3) (relating to treatment of
                    long-term contracts) shall apply only to contracts
                    entered into on or after the change date.
                        ``(D) Section 56(a)(4) (relating to alternative net
                    operating loss deduction) shall apply in the same manner
                    as if, in section 56(d)(2), the change date were
                    substituted for `January 1, 1987' and the day before the
                    change date were substituted for `December 31, 1986'
                    each place it appears.
                        ``(E) Section 56(g)(2)(B) (relating to limitation on
                    allowance of negative adjustments based on adjusted
                    current earnings) shall apply only to prior taxable
                    years beginning on or after the change date.
                        ``(F) Section 56(g)(4)(A) (relating to adjustment
                    for depreciation to adjusted current earnings) shall not
                    apply.
                        ``(G) Subparagraphs (D) and (F) of section 56(g)(4)
                    (relating to other earnings and profits adjustments and
                    depletion) shall apply in the same manner as if the day
                    before the change date were substituted for `December
                    31, 1989' each place it appears therein.

    [[Page 111 STAT. 844]]

                ``(3) Exception.--The modifications in paragraph (2) shall
            not apply to--
                        ``(A) any item acquired by the corporation in a
                    transaction to which section 381 applies, and
                        ``(B) any property the basis of which in the hands
                    of the corporation is determined by reference to the
                    basis of the property in the hands of the transferor,
            if such item or property was subject to any provision referred
            to in paragraph (2) while held by the transferor.
                ``(4) Change date.--For purposes of paragraph (2), the
            change date is the first day of the first taxable year for which
            the taxpayer ceases to be described in paragraph (1).
                ``(5) Limitation on use of credit for prior year minimum tax
            liability.--In the case of a taxpayer whose tentative minimum
            tax for any taxable year is zero by reason of paragraph (1),
            section 53(c) shall be applied for such year by reducing the
            amount otherwise taken into account under section 53(c)(1) by 25
            percent of so much of such amount as exceeds $25,000. Rules
            similar to the rules of section 38(c)(3)(B) shall apply for
            purposes of the preceding sentence.''.

        (b) <<NOTE: 26 USC 55 note.>>  Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    SEC. 402. REPEAL OF SEPARATE DEPRECIATION LIVES FOR MINIMUM TAX
                PURPOSES.

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

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

        (a) In General.--Subsection (a) of section 56 is amended by striking
    paragraph (6) (relating to treatment of installment sales) and by
    redesignating paragraphs (7) and (8) as paragraphs (6) and (7),
    respectively.
        (b) <<NOTE: 26 USC 56 note.>>  Effective Dates.--
                (1) In general.--The amendment made by this section shall
            apply to dispositions in taxable years beginning after December
            31, 1987.
                (2) Special rule for 1987.--In the case of taxable years
            beginning in 1987, the last sentence of section 56(a)(6) of the
            Internal Revenue Code of 1986 (as in effect for such taxable
            years) shall be applied by inserting ``or in the case of a
            taxpayer using the cash receipts and disbursements method of
            accounting, any disposition described in section
            453C(e)(1)(B)(ii)'' after ``section 453C(e)(4)''.

    [[Page 111 STAT. 845]]

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

                   Subtitle A--Estate and Gift Tax Provisions

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

        (a) Increase in Unified Estate and Gift Tax Credit.--
                (1) Estate tax credit.--
                        (A) In general.--Subsection (a) of section 2010
                    (relating to unified credit against estate tax) is
                    amended by striking ``$192,800'' and inserting ``the
                    applicable credit amount''.
                        (B) Applicable credit amount.--Section 2010 is
                    amended by redesignating subsection (c) as subsection
                    (d) and by inserting after subsection (b) the following
                    new subsection:

        ``(c) Applicable Credit Amount.--For purposes of this section, the
    applicable credit amount is the amount of the tentative tax which would
    be determined under the rate schedule set forth in section 2001(c) if
    the amount with respect to which such tentative tax is to be computed
    were the applicable exclusion amount determined in accordance with the
    following table:

            ``In the case of estates of decedents             The applicable
              dying, and gifts made, during:            exclusion amount is:
                      1998........................................ $625,000
                      1999........................................ $650,000
                      2000 and 2001............................... $675,000
                      2002 and 2003............................... $700,000
                      2004........................................ $850,000
                      2005........................................ $950,000
                      2006 or thereafter......................$1,000,000.''.

                        (C) Estate tax returns.--Paragraph (1) of section
                    6018(a) is amended by striking ``$600,000'' and
                    inserting ``the applicable exclusion amount in effect
                    under section 2010(c) for the calendar year which
                    includes the date of death''.
                        (D) Phaseout of graduated rates and unified
                    credit.--Paragraph (2) of section 2001(c) is amended by
                    striking ``$21,040,000'' and inserting ``the amount at
                    which the average tax rate under this section is 55
                    percent''.
                        (E) Estates of nonresidents not citizens.--
                    Subparagraph (A) of section 2102(c)(3) is amended by
                    striking ``$192,800'' and inserting ``the applicable
                    credit amount in effect under section 2010(c) for the
                    calendar year which includes the date of death''.
                (2) Unified gift tax credit.--Paragraph (1) of section
            2505(a) is amended by striking ``$192,800'' and inserting ``the
            applicable credit amount in effect under section 2010(c) for
            such calendar year''.

        (b) Alternate Valuation of Certain Farm, Etc., Real Property.--
    Subsection (a) of section 2032A is amended by adding at the end the
    following new paragraph:
                ``(3) Inflation adjustment.--In the case of estates of
            decedents dying in a calendar year after 1998, the $750,000

    [[Page 111 STAT. 846]]

            amount contained in paragraph (2) shall be increased by an
            amount equal to--
                        ``(A) $750,000, multiplied by
                        ``(B) the cost-of-living adjustment determined under
                    section 1(f)(3) for such calendar year by substituting
                    `calendar year 1997' for `calendar year 1992' in
                    subparagraph (B) thereof.
            If any amount as adjusted under the preceding sentence is not a
            multiple of $10,000, such amount shall be rounded to the next
            lowest multiple of $10,000.''.

        (c) Annual Gift Tax Exclusion.--Subsection (b) of section 2503 is
    amended--
                (1) by striking the subsection heading and inserting the
            following:

        ``(b) Exclusions From Gifts.--
                ``(1) In general.--'',
                (2) by moving the text 2 ems to the right, and
                (3) by adding at the end the following new paragraph:
                ``(2) Inflation adjustment.--In the case of gifts made in a
            calendar year after 1998, the $10,000 amount contained in
            paragraph (1) shall be increased by an amount equal to--
                        ``(A) $10,000, multiplied by
                        ``(B) the cost-of-living adjustment determined under
                    section 1(f)(3) for such calendar year by substituting
                    `calendar year 1997' for `calendar year 1992' in
                    subparagraph (B) thereof.
            If any amount as adjusted under the preceding sentence is not a
            multiple of $1,000, such amount shall be rounded to the next
            lowest multiple of $1,000.''.

        (d) Exemption From Generation-Skipping Tax.--Section 2631 (relating
    to GST exemption) is amended by adding at the end the following new
    subsection:
        ``(c) Inflation Adjustment.--In the case of an individual who dies
    in any calendar year after 1998, the $1,000,000 amount contained in
    subsection (a) shall be increased by an amount equal to--
                ``(1) $1,000,000, multiplied by
                ``(2) the cost-of-living adjustment determined under section
            1(f)(3) for such calendar year by substituting `calendar year
            1997' for `calendar year 1992' in subparagraph (B) thereof.

    If any amount as adjusted under the preceding sentence is not a multiple
    of $10,000, such amount shall be rounded to the next lowest multiple of
    $10,000.''.
        (e) Amount Subject to Reduced Rate Where Extension of Time for
    Payment of Estate Tax on Closely Held Business.--Subsection (j) of
    section 6601 is amended by redesignating paragraph (3) as paragraph (4)
    and by inserting after paragraph (2) the following new paragraph:
                ``(3) Inflation adjustment.--In the case of estates of
            decedents dying in a calendar year after 1998, the $1,000,000
            amount contained in paragraph (2)(A) shall be increased by an
            amount equal to--
                        ``(A) $1,000,000, multiplied by
                        ``(B) the cost-of-living adjustment determined under
                    section 1(f)(3) for such calendar year by substituting
                    `calendar year 1997' for `calendar year 1992' in
                    subparagraph (B) thereof.

    [[Page 111 STAT. 847]]

            If any amount as adjusted under the preceding sentence is not a
            multiple of $10,000, such amount shall be rounded to the next
            lowest multiple of $10,000.''.

        (f) Effective date.--The amendments made by this section shall apply
    to the estates of decedents dying, and gifts made, after December 31,
    1997.

    SEC. 502. FAMILY-OWNED BUSINESS EXCLUSION.

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

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

        ``(a) In General.--In the case of an estate of a decedent to which
    this section applies, the value of the gross estate shall not include
    the lesser of--
                ``(1) the adjusted value of the qualified family-owned
            business interests of the decedent otherwise includible in the
            estate, or
                ``(2) the excess of $1,300,000 over the applicable exclusion
            amount under section 2010(c) with respect to such estate.

        ``(b) Estates to Which Section Applies.--
                ``(1) In general.--This section shall apply to an estate
            if--
                        ``(A) the decedent was (at the date of the
                    decedent's death) a citizen or resident of the United
                    States,
                        ``(B) the executor elects the application of this
                    section and files the agreement referred to in
                    subsection (h),
                        ``(C) the sum of--
                              ``(i) the adjusted value of the qualified
                          family-owned business interests described in
                          paragraph (2), plus
                              ``(ii) the amount of the gifts of such
                          interests determined under paragraph (3),
                    exceeds 50 percent of the adjusted gross estate, and
                        ``(D) during the 8-year period ending on the date of
                    the decedent's death there have been periods aggregating
                    5 years or more during which--
                              ``(i) such interests were owned by the
                          decedent or a member of the decedent's family, and
                              ``(ii) there was material participation
                          (within the meaning of section 2032A(e)(6)) by the
                          decedent or a member of the decedent's family in
                          the operation of the business to which such
                          interests relate.
                ``(2) Includible qualified family-owned business
            interests.--The qualified family-owned business interests
            described in this paragraph are the interests which--
                        ``(A) are included in determining the value of the
                    gross estate (without regard to this section), and
                        ``(B) are acquired by any qualified heir from, or
                    passed to any qualified heir from, the decedent (within
                    the meaning of section 2032A(e)(9)).
                ``(3) Includible gifts of interests.--The amount of the
            gifts of qualified family-owned business interests determined
            under this paragraph is the excess of--
                        ``(A) the sum of--

    [[Page 111 STAT. 848]]

                              ``(i) the amount of such gifts from the
                          decedent to members of the decedent's family taken
                          into account under subsection 2001(b)(1)(B), plus
                              ``(ii) the amount of such gifts otherwise
                          excluded under section 2503(b),
                    to the extent such interests are continuously held by
                    members of such family (other than the decedent's
                    spouse) between the date of the gift and the date of the
                    decedent's death, over
                        ``(B) the amount of such gifts from the decedent to
                    members of the decedent's family otherwise included in
                    the gross estate.

        ``(c) Adjusted Gross Estate.--For purposes of this section, the term
    `adjusted gross estate' means the value of the gross estate (determined
    without regard to this section)--
                ``(1) reduced by any amount deductible under paragraph (3)
            or (4) of section 2053(a), and
                ``(2) increased by the excess of--
                        ``(A) the sum of--
                              ``(i) the amount of gifts determined under
                          subsection (b)(3), plus
                              ``(ii) the amount (if more than de minimis) of
                          other transfers from the decedent to the
                          decedent's spouse (at the time of the transfer)
                          within 10 years of the date of the decedent's
                          death, plus
                              ``(iii) the amount of other gifts (not
                          included under clause (i) or (ii)) from the
                          decedent within 3 years of such date, other than
                          gifts to members of the decedent's family
                          otherwise excluded under section 2503(b), over
                        ``(B) the sum of the amounts described in clauses
                    (i), (ii), and (iii) of subparagraph (A) which are
                    otherwise includible in the gross estate.

    For purposes of the preceding sentence, the Secretary may provide that
    de minimis gifts to persons other than members of the decedent's family
    shall not be taken into account.
        ``(d) Adjusted Value of the Qualified Family-Owned Business
    Interests.--For purposes of this section, the adjusted value of any
    qualified family-owned business interest is the value of such interest
    for purposes of this chapter (determined without regard to this
    section), reduced by the excess of--
                ``(1) any amount deductible under paragraph (3) or (4) of
            section 2053(a), over
                ``(2) the sum of--
                        ``(A) any indebtedness on any qualified residence of
                    the decedent the interest on which is deductible under
                    section 163(h)(3), plus
                        ``(B) any indebtedness to the extent the taxpayer
                    establishes that the proceeds of such indebtedness were
                    used for the payment of educational and medical expenses
                    of the decedent, the decedent's spouse, or the
                    decedent's dependents (within the meaning of section
                    152), plus
                        ``(C) any indebtedness not described in subparagraph
                    (A) or (B), to the extent such indebtedness does not
                    exceed $10,000.

        ``(e) Qualified Family-Owned Business Interest.--

    [[Page 111 STAT. 849]]

                ``(1) In general.--For purposes of this section, the term
            `qualified family-owned business interest' means--
                        ``(A) an interest as a proprietor in a trade or
                    business carried on as a proprietorship, or
                        ``(B) an interest in an entity carrying on a trade
                    or business, if--
                              ``(i) at least--
                                        ``(I) 50 percent of such entity is
                                    owned (directly or indirectly) by the
                                    decedent and members of the decedent's
                                    family,
                                        ``(II) 70 percent of such entity is
                                    so owned by members of 2 families, or
                                        ``(III) 90 percent of such entity is
                                    so owned by members of 3 families, and
                              ``(ii) for purposes of subclause (II) or (III)
                          of clause (i), at least 30 percent of such entity
                          is so owned by the decedent and members of the
                          decedent's family.
                ``(2) Limitation.--Such term shall not include--
                        ``(A) any interest in a trade or business the
                    principal place of business of which is not located in
                    the United States,
                        ``(B) any interest in an entity, if the stock or
                    debt of such entity or a controlled group (as defined in
                    section 267(f)(1)) of which such entity was a member was
                    readily tradable on an established securities market or
                    secondary market (as defined by the Secretary) at any
                    time within 3 years of the date of the decedent's death,
                        ``(C) any interest in a trade or business not
                    described in section 542(c)(2), if more than 35 percent
                    of the adjusted ordinary gross income of such trade or
                    business for the taxable year which includes the date of
                    the decedent's death would qualify as personal holding
                    company income (as defined in section 543(a)),
                        ``(D) that portion of an interest in a trade or
                    business that is attributable to--
                              ``(i) cash or marketable securities, or both,
                          in excess of the reasonably expected day-to-day
                          working capital needs of such trade or business,
                          and
                              ``(ii) any other assets of the trade or
                          business (other than assets used in the active
                          conduct of a trade or business described in
                          section 542(c)(2)), which produce, or are held for
                          the production of, income of which is described in
                          section 543(a) or in section 954(c)(1) (determined
                          without regard to subparagraph (A) thereof and by
                          substituting `trade or business' for `controlled
                          foreign corporation').
                ``(3) Rules regarding ownership.--
                        ``(A) Ownership of entities.--For purposes of
                    paragraph (1)(B)--
                              ``(i) Corporations.--Ownership of a
                          corporation shall be determined by the holding of
                          stock possessing the appropriate percentage of the
                          total combined voting power of all classes of
                          stock entitled to vote and the appropriate
                          percentage of the total value of shares of all
                          classes of stock.

    [[Page 111 STAT. 850]]

                              ``(ii) Partnerships.--Ownership of a
                          partnership shall be determined by the owning of
                          the appropriate percentage of the capital interest
                          in such partnership.
                        ``(B) Ownership of tiered entities.--For purposes of
                    this section, if by reason of holding an interest in a
                    trade or business, a decedent, any member of the
                    decedent's family, any qualified heir, or any member of
                    any qualified heir's family is treated as holding an
                    interest in any other trade or business--
                              ``(i) such ownership interest in the other
                          trade or business shall be disregarded in
                          determining if the ownership interest in the first
                          trade or business is a qualified family-owned
                          business interest, and
                              ``(ii) this section shall be applied
                          separately in determining if such interest in any
                          other trade or business is a qualified family-
                          owned business interest.
                        ``(C) Individual ownership rules.--For purposes of
                    this section, an interest owned, directly or indirectly,
                    by or for an entity described in paragraph (1)(B) shall
                    be considered as being owned proportionately by or for
                    the entity's shareholders, partners, or beneficiaries. A
                    person shall be treated as a beneficiary of any trust
                    only if such person has a present interest in such
                    trust.

        ``(f) Tax Treatment of Failure To Materially Participate in Business
    or Dispositions of Interests.--
                ``(1) In general.--There is imposed an additional estate tax
            if, within 10 years after the date of the decedent's death and
            before the date of the qualified heir's death--
                        ``(A) the material participation requirements
                    described in section 2032A(c)(6)(B) are not met with
                    respect to the qualified family-owned business interest
                    which was acquired (or passed) from the decedent,
                        ``(B) the qualified heir disposes of any portion of
                    a qualified family-owned business interest (other than
                    by a disposition to a member of the qualified heir's
                    family or through a qualified conservation contribution
                    under section 170(h)),
                        ``(C) the qualified heir loses United States
                    citizenship (within the meaning of section 877) or with
                    respect to whom an event described in subparagraph (A)
                    or (B) of section 877(e)(1) occurs, and such heir does
                    not comply with the requirements of subsection (g), or
                        ``(D) the principal place of business of a trade or
                    business of the qualified family-owned business interest
                    ceases to be located in the United States.
                ``(2) Additional estate tax.--
                        ``(A) In general.--The amount of the additional
                    estate tax imposed by paragraph (1) shall be equal to--
                              ``(i) the applicable percentage of the
                          adjusted tax difference attributable to the
                          qualified family-owned business interest (as
                          determined under rules similar to the rules of
                          section 2032A(c)(2)(B)), plus
                              ``(ii) interest on the amount determined under
                          clause (i) at the underpayment rate established
                          under section 6621 for the period beginning on the
                          date the estate tax liability was due under this
                          chapter and ending on the date such additional
                          estate tax is due.

    [[Page 111 STAT. 851]]

                        ``(B) Applicable percentage.--For purposes of this
                    paragraph, the applicable percentage shall be determined
                    under the following table:

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

        ``(g) Security Requirements for Noncitizen Qualified Heirs.--
                ``(1) In general.--Except upon the application of
            subparagraph (F) or (M) of subsection (i)(3), if a qualified
            heir is not a citizen of the United States, any interest under
            this section passing to or acquired by such heir (including any
            interest held by such heir at a time described in subsection
            (f)(1)(C)) shall be treated as a qualified family-owned business
            interest only if the interest passes or is acquired (or is held)
            in a qualified trust.
                ``(2) Qualified trust.--The term `qualified trust' means a
            trust--
                        ``(A) which is organized under, and governed by, the
                    laws of the United States or a State, and
                        ``(B) except as otherwise provided in regulations,
                    with respect to which the trust instrument requires that
                    at least 1 trustee of the trust be an individual citizen
                    of the United States or a domestic corporation.

        ``(h) Agreement.--The agreement referred to in this subsection is a
    written agreement signed by each person in being who has an interest
    (whether or not in possession) in any property designated in such
    agreement consenting to the application of subsection (f) with respect
    to such property.
        ``(i) Other Definitions and Applicable Rules.--For purposes of this
    section--
                ``(1) Qualified heir.--The term `qualified heir'--
                        ``(A) has the meaning given to such term by section
                    2032A(e)(1), and
                        ``(B) includes any active employee of the trade or
                    business to which the qualified family-owned business
                    interest relates if such employee has been employed by
                    such trade or business for a period of at least 10 years
                    before the date of the decedent's death.
                ``(2) Member of the family.--The term `member of the family'
            has the meaning given to such term by section 2032A(e)(2).
                ``(3) Applicable rules.--Rules similar to the following
            rules shall apply:
                        ``(A) Section 2032A(b)(4) (relating to decedents who
                    are retired or disabled).
                        ``(B) Section 2032A(b)(5) (relating to special rules
                    for surviving spouses).
                        ``(C) Section 2032A(c)(2)(D) (relating to partial
                    dispositions).
                        ``(D) Section 2032A(c)(3) (relating to only 1
                    additional tax imposed with respect to any 1 portion).

    [[Page 111 STAT. 852]]

                        ``(E) Section 2032A(c)(4) (relating to due date).
                        ``(F) Section 2032A(c)(5) (relating to liability for
                    tax; furnishing of bond).
                        ``(G) Section 2032A(c)(7) (relating to no tax if use
                    begins within 2 years; active management by eligible
                    qualified heir treated as material participation).
                        ``(H) Paragraphs (1) and (3) of section 2032A(d)
                    (relating to election; agreement).
                        ``(I) Section 2032A(e)(10) (relating to community
                    property).
                        ``(J) Section 2032A(e)(14) (relating to treatment of
                    replacement property acquired in section 1031 or 1033
                    transactions).
                        ``(K) Section 2032A(f) (relating to statute of
                    limitations).
                        ``(L) Section 6166(b)(3) (relating to farmhouses and
                    certain other structures taken into account).
                        ``(M) Subparagraphs (B), (C), and (D) of section
                    6166(g)(1) (relating to acceleration of payment).
                        ``(N) Section 6324B (relating to special lien for
                    additional estate tax).''.

        (b) Clerical Amendment.--The table of sections for part III of
    subchapter A of chapter 11 is amended by inserting after the item
    relating to section 2033 the following new item:
                    ``Sec. 2033A. Family-owned business exclusion.''.

        (c) <<NOTE: 26 USC 2033A note.>>  Effective Date.--The amendments
    made by this section shall apply to estates of decedents dying after
    December 31, 1997.

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

        (a) In General.--Paragraphs (1) and (2) of section 6601(j) (relating
    to 4-percent rate on certain portion of estate tax extended under
    section 6166) are amended to read as follows:
                ``(1) In general.--If the time for payment of an amount of
            tax imposed by chapter 11 is extended as provided in section
            6166, then in lieu of the annual rate provided by subsection
            (a)--
                        ``(A) interest on the 2-percent portion of such
                    amount shall be paid at the rate of 2 percent, and
                        ``(B) interest on so much of such amount as exceeds
                    the 2-percent portion shall be paid at a rate equal to
                    45 percent of the annual rate provided by subsection
                    (a).
            For purposes of this subsection, the amount of any deficiency
            which is prorated to installments payable under section 6166
            shall be treated as an amount of tax payable in installments
            under such section.
                ``(2) 2-percent portion.--For purposes of this subsection,
            the term `2-percent portion' means the lesser of--
                        ``(A)(i) the amount of the tentative tax which would
                    be determined under the rate schedule set forth in
                    section 2001(c) if the amount with respect to which such
                    tentative tax is to be computed were the sum of
                    $1,000,000 and the applicable exclusion amount in effect
                    under section 2010(c), reduced by
                        ``(ii) the applicable credit amount in effect under
                    section 2010(c), or
                        ``(B) the amount of the tax imposed by chapter 11
                    which is extended as provided in section 6166.''.

    [[Page 111 STAT. 853]]

        (b) Disallowance of Interest Deduction.--
                (1) Estate tax.--Paragraph (1) of section 2053(c) is amended
            by adding at the end the following new subparagraph:
                        ``(D) Section 6166 interest.--No deduction shall be
                    allowed under this section for any interest payable
                    under section 6601 on any unpaid portion of the tax
                    imposed by section 2001 for the period during which an
                    extension of time for payment of such tax is in effect
                    under section 6166.''.
                (2) Income tax.--
                        (A) Section 163 is amended by redesignating
                    subsection (k) as subsection (l) and by inserting after
                    subsection (j) the following new subsection:

        ``(k) Section 6166 Interest.--No deduction shall be allowed under
    this section for any interest payable under section 6601 on any unpaid
    portion of the tax imposed by section 2001 for the period during which
    an extension of time for payment of such tax is in effect under section
    6166.''.
                        (B) Subparagraph (E) of section 163(h)(2) is amended
                    by striking ``or 6166'' and all that follows and
                    inserting a period.

        (c) Conforming Amendments.--
                (1) Paragraphs (7)(A)(iii) and (8)(A)(iii) of section
            6166(b) are amended by striking ``4-percent'' each place it
            appears (including the heading) and inserting ``2-percent''.
                (2) Paragraph (4) of section 6601(j), as redesignated by
            section 501(e), is amended by striking ``4-percent'' each place
            it appears and inserting ``2-percent''.
                (3) The subsection heading for section 6601(j) is amended by
            striking ``4-Percent'' and inserting ``2-Percent''.

        (d) <<NOTE: 26 USC 163 note.>>  Effective Date.--
                (1) In general.--The amendments made by this section shall
            apply to estates of decedents dying after December 31, 1997.
                (2) Election.--In the case of the estate of any decedent
            dying before January 1, 1998, with respect to which there is an
            election under section 6166 of the Internal Revenue Code of
            1986, the executor of the estate may elect to have the
            amendments made by this section apply with respect to
            installments due after the effective date of the election;
            except that the 2-percent portion of such installments shall be
            equal to the amount which would be the 4-percent portion of such
            installments without regard to such election. Such an election
            shall be made before January 1, 1999 in the manner prescribed by
            the Secretary of the Treasury and, once made, is irrevocable.

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

        (a) General Rule.--Paragraph (7) of section 2032A(c) (relating to
    special rules for tax treatment of dispositions and failures to use for
    qualified use) is amended by adding at the end the following new
    subparagraph:
                        ``(E) Certain rents treated as qualified use.--For
                    purposes of this subsection, a surviving spouse or
                    lineal descendant of the decedent shall not be treated
                    as failing to use qualified real property in a qualified
                    use solely because such spouse or descendant rents such
                    property

    [[Page 111 STAT. 854]]

                    to a member of the family of such spouse or descendant
                    on a net cash basis. For purposes of the preceding
                    sentence, a legally adopted child of an individual shall
                    be treated as the child of such individual by blood.''.

        (b) Conforming Amendment.--Section 2032A(b)(5)(A) is amended by
    striking the last sentence.
        (c) <<NOTE: 26 USC 2032A note.>>  Effective Date.--The amendments
    made by this section shall apply with respect to leases entered into
    after December 31, 1976.

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

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

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

        ``(a) Creation of remedy.--In a case of actual controversy involving
    a determination by the Secretary of (or a failure by the Secretary to
    make a determination with respect to)--
                ``(1) whether an election may be made under section 6166
            (relating to extension of time for payment of estate tax where
            estate consists largely of interest in closely held business)
            with respect to an estate, or
                ``(2) whether the extension of time for payment of tax
            provided in section 6166(a) has ceased to apply with respect to
            an estate,

    upon the filing of an appropriate pleading, the Tax Court may make a
    declaration with respect to whether such election may be made or whether
    such extension has ceased to apply. Any such declaration shall have the
    force and effect of a decision of the Tax Court and shall be reviewable
    as such.
        ``(b) Limitations.--
                ``(1) Petitioner.--A pleading may be filed under this
            section, with respect to any estate, only--
                        ``(A) by the executor of such estate, or
                        ``(B) by any person who has assumed an obligation to
                    make payments under section 6166 with respect to such
                    estate (but only if each other such person is joined as
                    a party).
                ``(2) Exhaustion of administrative remedies.--The court
            shall not issue a declaratory judgment or decree under this
            section in any proceeding unless it determines that the
            petitioner has exhausted all available administrative remedies
            within the Internal Revenue Service. A petitioner shall be
            deemed to have exhausted its administrative remedies with
            respect to a failure of the Secretary to make a determination at
            the expiration of 180 days after the date on which the request
            for such determination was made if the petitioner has taken, in
            a timely manner, all reasonable steps to secure such
            determination.
                ``(3) Time for bringing action.--If the Secretary sends by
            certified or registered mail notice of his determination as
            described in subsection (a) to the petitioner, no proceeding may
            be initiated under this section unless the pleading is filed
            before the 91st day after the date of such mailing.''.

    [[Page 111 STAT. 855]]

        (b) Clerical Amendment.--The table of sections for part IV of
    subchapter C of chapter 76 of such Code is amended by adding at the end
    the following new item:
                    ``Sec. 7479. Declaratory judgments relating to
                                    eligibility of estate with respect to
                                    installment payments under section
                                    6166.''.

        (c) <<NOTE: 26 USC 7479 note.>>  Effective Date.--The amendments
    made by this section shall apply to the estates of decedents dying after
    the date of the enactment of this Act.

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

        (a) In General.--Section 2001 (relating to imposition and rate of
    estate tax) is amended by adding at the end the following new
    subsection:
        ``(f) Valuation of Gifts.--If--
                ``(1) the time has expired within which a tax may be
            assessed under chapter 12 (or under corresponding provisions of
            prior laws) on the transfer of property by gift made during a
            preceding calendar period (as defined in section 2502(b)), and
                ``(2) the value of such gift is shown on the return for such
            preceding calendar period or is disclosed in such return, or in
            a statement attached to the return, in a manner adequate to
            apprise the Secretary of the nature of such gift,

    the value of such gift shall, for purposes of computing the tax under
    this chapter, be the value of such gift as finally determined for
    purposes of chapter 12.''.
        (b) Modification of Application of Statute of Limitations.--
    Paragraph (9) of section 6501(c) is amended to read as follows:
                ``(9) Gift tax on certain gifts not shown on return.--If any
            gift of property the value of which (or any increase in taxable
            gifts required under section 2701(d) which) is required to be
            shown on a return of tax imposed by chapter 12 (without regard
            to section 2503(b)), and is not shown on such return, any tax
            imposed by chapter 12 on such gift may be assessed, or a
            proceeding in court for the collection of such tax may be begun
            without assessment, at any time. The preceding sentence shall
            not apply to any item which is disclosed in such return, or in a
            statement attached to the return, in a manner adequate to
            apprise the Secretary of the nature of such item. The value of
            any item which is so disclosed may not be redetermined by the
            Secretary after the expiration of the period under subsection
            (a).''.

        (c) Declaratory Judgment Procedure for Determining Value of Gift.--
                (1) In general.--Part IV of subchapter C of chapter 76 is
            amended by inserting after section 7476 the following new
            section:

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

        ``(a) Creation of Remedy.--In a case of an actual controversy
    involving a determination by the Secretary of the value of any gift
    shown on the return of tax imposed by chapter 12 or disclosed on such
    return or in any statement attached to such return, upon the filing of
    an appropriate pleading, the Tax Court may make

    [[Page 111 STAT. 856]]

    a declaration of the value of such gift. Any such declaration shall have
    the force and effect of a decision of the Tax Court and shall be
    reviewable as such.
        ``(b) Limitations.--
                ``(1) Petitioner.--A pleading may be filed under this
            section only by the donor.
                ``(2) Exhaustion of administrative remedies.--The court
            shall not issue a declaratory judgment or decree under this
            section in any proceeding unless it determines that the
            petitioner has exhausted all available administrative remedies
            within the Internal Revenue Service.
                ``(3) Time for bringing action.--If the Secretary sends by
            certified or registered mail notice of his determination as
            described in subsection (a) to the petitioner, no proceeding may
            be initiated under this section unless the pleading is filed
            before the 91st day after the date of such mailing.''.
                (2) Clerical amendment.--The table of sections for such part
            IV is amended by inserting after the item relating to section
            7476 the following new item:
                    ``Sec. 7477. Declaratory judgments relating to value of
                                    certain gifts.''.

        (d) Conforming Amendment.--Subsection (c) of section 2504 is amended
    by striking ``, and if a tax under this chapter or under corresponding
    provisions of prior laws has been assessed or paid for such preceding
    calendar period''.
        (e) Effective Dates.--
                (1) <<NOTE: 26 USC 2001 note.>>  In general.--The amendments
            made by subsections (a) and (c) shall apply to gifts made after
            the date of the enactment of this Act.
                (2) <<NOTE: 26 USC 6501 note.>>  Subsection (b)--The
            amendment made by subsection (b) shall apply to gifts made in
            calendar years ending after the date of the enactment of this
            Act.

    SEC. 507. REPEAL OF THROWBACK RULES APPLICABLE TO CERTAIN DOMESTIC
                TRUSTS.

        (a) Accumulation Distributions.--
                (1) In general.--Section 665 is amended by inserting after
            subsection (b) the following new subsection:

        ``(c) Exception for Accumulation Distributions From Certain Domestic
    Trusts.--For purposes of this subpart--
                ``(1) In general.--In the case of a qualified trust, any
            distribution in any taxable year beginning after the date of the
            enactment of this subsection shall be computed without regard to
            any undistributed net income.
                ``(2) Qualified trust.--For purposes of this subsection, the
            term `qualified trust' means any trust other than--
                        ``(A) a foreign trust (or, except as provided in
                    regulations, a domestic trust which at any time was a
                    foreign trust), or
                        ``(B) a trust created before March 1, 1984, unless
                    it is established that the trust would not be aggregated
                    with other trusts under section 643(f) if such section
                    applied to such trust.''.
                (2) Conforming amendments.--Subsection (b) of section 665 is
            amended by inserting ``except as provided in subsection (c),''
            after ``subpart,''.

        (b) Repeal of Tax on Transfers to Trusts at Less Than Fair Market
    Value.--

    [[Page 111 STAT. 857]]

                (1) Subpart A of part I of subchapter J of chapter 1 is
            amended by striking section 644 and by redesignating section 645
            as section 644.
                (2) Paragraph (5) of section 706(b) is amended by striking
            ``section 645'' and inserting ``section 644''.
                (3) The table of sections for such subpart is amended by
            striking the last 2 items and inserting the following new item:
                    ``Sec. 644. Taxable year of trusts.''.

        (c) Effective Dates.--
                (1) <<NOTE: 26 USC 665 note.>>  Accumulation
            distributions.--The amendments made by subsection (a) shall
            apply to distributions in taxable years beginning after the date
            of the enactment of this Act.
                (2) <<NOTE: 26 USC 644 note.>>  Transferred property.--The
            amendments made by subsection (b) shall apply to sales or
            exchanges after the date of the enactment of this Act.

    SEC. 508. TREATMENT OF LAND SUBJECT TO A QUALIFIED CONSERVATION
                EASEMENT.

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

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

                ``(4) Treatment of certain indebtedness.--
                        ``(A) In general.--The exclusion provided in
                    paragraph (1) shall not apply to the extent that the
                    land is debt-financed property.
                        ``(B) Definitions.--For purposes of this paragraph--

    [[Page 111 STAT. 858]]

                              ``(i) Debt-financed property.--The term `debt-
                          financed property' means any property with respect
                          to which there is an acquisition indebtedness (as
                          defined in clause (ii)) on the date of the
                          decedent's death.
                              ``(ii) Acquisition indebtedness.--The term
                          `acquisition indebtedness' means, with respect to
                          debt-financed property, the unpaid amount of--
                                        ``(I) the indebtedness incurred by
                                    the donor in acquiring such property,
                                        ``(II) the indebtedness incurred
                                    before the acquisition of such property
                                    if such indebtedness would not have been
                                    incurred but for such acquisition,
                                        ``(III) the indebtedness incurred
                                    after the acquisition of such property
                                    if such indebtedness would not have been
                                    incurred but for such acquisition and
                                    the incurrence of such indebtedness was
                                    reasonably foreseeable at the time of
                                    such acquisition, and
                                        ``(IV) the extension, renewal, or
                                    refinancing of an acquisition
                                    indebtedness.
                ``(5) Treatment of retained development right.--
                        ``(A) In general.--Paragraph (1) shall not apply to
                    the value of any development right retained by the donor
                    in the conveyance of a qualified conservation easement.
                        ``(B) Termination of retained development right.--If
                    every person in being who has an interest (whether or
                    not in possession) in the land executes an agreement to
                    extinguish permanently some or all of any development
                    rights (as defined in subparagraph (D)) retained by the
                    donor on or before the date for filing the return of the
                    tax imposed by section 2001, then any tax imposed by
                    section 2001 shall be reduced accordingly. Such
                    agreement shall be filed with the return of the tax
                    imposed by section 2001. The agreement shall be in such
                    form as the Secretary shall prescribe.
                        ``(C) Additional tax.--Any failure to implement the
                    agreement described in subparagraph (B) not later than
                    the earlier of--
                              ``(i) the date which is 2 years after the date
                          of the decedent's death, or
                              ``(ii) the date of the sale of such land
                          subject to the qualified conservation easement,
                    shall result in the imposition of an additional tax in
                    the amount of the tax which would have been due on the
                    retained development rights subject to such agreement.
                    Such additional tax shall be due and payable on the last
                    day of the 6th month following such date.
                        ``(D) Development right defined.--For purposes of
                    this paragraph, the term `development right' means any
                    right to use the land subject to the qualified
                    conservation easement in which such right is retained
                    for any commercial purpose which is not subordinate to
                    and directly supportive of the use of such land as a
                    farm for farming purposes (within the meaning of section
                    2032A(e)(5)).

    [[Page 111 STAT. 859]]

                ``(6) Election.--The election under this subsection shall be
            made on the return of the tax imposed by section 2001. Such an
            election, once made, shall be irrevocable.
                ``(7) Calculation of estate tax due.--An executor making the
            election described in paragraph (6) shall, for purposes of
            calculating the amount of tax imposed by section 2001, include
            the value of any development right (as defined in paragraph (5))
            retained by the donor in the conveyance of such qualified
            conservation easement. The computation of tax on any retained
            development right prescribed in this paragraph shall be done in
            such manner and on such forms as the Secretary shall prescribe.
                ``(8) Definitions.--For purposes of this subsection--
                        ``(A) Land subject to a qualified conservation
                    easement.--The term `land subject to a qualified
                    conservation easement' means land--
                              ``(i) which is located--
                                        ``(I) in or within 25 miles of an
                                    area which, on the date of the
                                    decedent's death, is a metropolitan area
                                    (as defined by the Office of Management
                                    and Budget),
                                        ``(II) in or within 25 miles of an
                                    area which, on the date of the
                                    decedent's death, is a national park or
                                    wilderness area designated as part of
                                    the National Wilderness Preservation
                                    System (unless it is determined by the
                                    Secretary that land in or within 25
                                    miles of such a park or wilderness area
                                    is not under significant development
                                    pressure), or
                                        ``(III) in or within 10 miles of an
                                    area which, on the date of the
                                    decedent's death, is an Urban National
                                    Forest (as designated by the Forest
                                    Service),
                              ``(ii) which was owned by the decedent or a
                          member of the decedent's family at all times
                          during the 3-year period ending on the date of the
                          decedent's death, and
                              ``(iii) with respect to which a qualified
                          conservation easement has been made by an
                          individual described in subparagraph (C), as of
                          the date of the election described in paragraph
                          (6).
                        ``(B) Qualified conservation easement.--The term
                    `qualified conservation easement' means a qualified
                    conservation contribution (as defined in section
                    170(h)(1)) of a qualified real property interest (as
                    defined in section 170(h)(2)(C)), except that clause
                    (iv) of section 170(h)(4)(A) shall not apply, and the
                    restriction on the use of such interest described in
                    section 170(h)(2)(C) shall include a prohibition on more
                    than a de minimis use for a commercial recreational
                    activity.
                        ``(C) Individual described.--An individual is
                    described in this subparagraph if such individual is--
                              ``(i) the decedent,
                              ``(ii) a member of the decedent's family,
                              ``(iii) the executor of the decedent's estate,
                          or

    [[Page 111 STAT. 860]]

                              ``(iv) the trustee of a trust the corpus of
                          which includes the land to be subject to the
                          qualified conservation easement.
                        ``(D) Member of family.--The term `member of the
                    decedent's family' means any member of the family (as
                    defined in section 2032A(e)(2)) of the decedent.
                ``(9) Application of this section to interests in
            partnerships, corporations, and trusts.--This section shall
            apply to an interest in a partnership, corporation, or trust if
            at least 30 percent of the entity is owned (directly or
            indirectly) by the decedent, as determined under the rules
            described in section 2033A(e)(3).''.

        (b) Carryover Basis.--Section 1014(a) (relating to basis of property
    acquired from a decedent) is amended by striking ``or'' at the end of
    paragraphs (1) and (2), by striking the period at the end of paragraph
    (3) and inserting ``, or'' and by adding at the end the following new
    paragraph:
                ``(4) to the extent of the applicability of the exclusion
            described in section 2031(c), the basis in the hands of the
            decedent.''.

        (c) Qualified Conservation Contribution Is Not a Disposition.--
    Subsection (c) of section 2032A (relating to alternative valuation
    method) is amended by adding at the end the following new paragraph:
                ``(8) Qualified conservation contribution is not a
            disposition.--A qualified conservation contribution (as defined
            in section 170(h)) by gift or otherwise shall not be deemed a
            disposition under subsection (c)(1)(A).''.

        (d) Qualified Conservation Contribution Where Surface and Mineral
    Rights are Separated.--Section 170(h)(5)(B)(ii) (relating to special
    rule) is amended to read as follows:
                ``(ii) Special rule.--With respect to any contribution of
            property in which the ownership of the surface estate and
            mineral interests has been and remains separated, subparagraph
            (A) shall be treated as met if the probability of surface mining
            occurring on such property is so remote as to be negligible.''.

        (e) Effective Dates.--
                (1) <<NOTE: 26 USC 1014 note.>>  Exclusion.--The amendments
            made by subsections (a) and (b) shall apply to estates of
            decedents dying after December 31, 1997.
                (2) <<NOTE: 26 USC 170 note.>>  Easements.--The amendments
            made by subsections (c) and (d) shall apply to easements granted
            after December 31, 1997.

                  Subtitle B--Generation-Skipping Tax Provision

    SEC. 511. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING TRANSFER TAX
                FOR TRANSFERS TO INDIVIDUALS WITH DECEASED PARENTS.

        (a) In General.--Section 2651 (relating to generation assignment) is
    amended by redesignating subsection (e) as subsection (f) and by
    inserting after subsection (d) the following new subsection:
        ``(e) Special Rule for Persons With a Deceased Parent.--

    [[Page 111 STAT. 861]]

                ``(1) In general.--For purposes of determining whether any
            transfer is a generation-skipping transfer, if--
                        ``(A) an individual is a descendant of a parent of
                    the transferor (or the transferor's spouse or former
                    spouse), and
                        ``(B) such individual's parent who is a lineal
                    descendant of the parent of the transferor (or the
                    transferor's spouse or former spouse) is dead at the
                    time the transfer (from which an interest of such
                    individual is established or derived) is subject to a
                    tax imposed by chapter 11 or 12 upon the transferor (and
                    if there shall be more than 1 such time, then at the
                    earliest such time),
            such individual shall be treated as if such individual were a
            member of the generation which is 1 generation below the lower
            of the transferor's generation or the generation assignment of
            the youngest living ancestor of such individual who is also a
            descendant of the parent of the transferor (or the transferor's
            spouse or former spouse), and the generation assignment of any
            descendant of such individual shall be adjusted accordingly.
                ``(2) Limited application of subsection to collateral
            heirs.--This subsection shall not apply with respect to a
            transfer to any individual who is not a lineal descendant of the
            transferor (or the transferor's spouse or former spouse) if, at
            the time of the transfer, such transferor has any living lineal
            descendant.''.

        (b) Conforming Amendments.--
                (1) Section 2612(c) (defining direct skip) is amended by
            striking paragraph (2) and by redesignating paragraph (3) as
            paragraph (2).
                (2) Section 2612(c)(2) (as so redesignated) is amended by
            striking ``section 2651(e)(2)'' and inserting ``section
            2651(f)(2)''.

        (c) <<NOTE: 26 USC 2612 note.>>  Effective Date.--The amendments
    made by this section shall apply to terminations, distributions, and
    transfers occurring after December 31, 1997.

                              TITLE VI--EXTENSIONS

    SEC. 601. RESEARCH TAX CREDIT.

        (a) In General.--Paragraph (1) of section 41(h) (relating to
    termination) is amended--
                (1) by striking ``May 31, 1997'' and inserting ``June 30,
            1998'', and
                (2) by striking in the last sentence ``during the first 11
            months of such taxable year.'' and inserting ``during the 24-
            month period beginning with the first month of such year. The 24
            months referred to in the preceding sentence shall be reduced by
            the number of full months after June 1996 (and before the first
            month of such first taxable year) during which the taxpayer paid
            or incurred any amount which is taken into account in
            determining the credit under this section.''.

        (b) Technical Amendments.--
                (1) Subparagraph (B) of section 41(c)(4) is amended to read
            as follows:

    [[Page 111 STAT. 862]]

                        ``(B) Election.--An election under this paragraph
                    shall apply to the taxable year for which made and all
                    succeeding taxable years unless revoked with the consent
                    of the Secretary.''.
                (2) Paragraph (1) of section 45C(b) is amended by striking
            ``May 31, 1997'' and inserting ``June 30, 1998''.

        (c) <<NOTE: 26 USC 41 note.>>  Effective Date.--The amendments made
    by this section shall apply to amounts paid or incurred after May 31,
    1997.

    SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.

        (a) In General.--Clause (ii) of section 170(e)(5)(D) (relating to
    termination) is amended by striking ``May 31, 1997'' and inserting
    ``June 30, 1998''.
        (b) <<NOTE: 26 USC 170 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to contributions made after May 31, 1997.

    SEC. 603. WORK OPPORTUNITY TAX CREDIT.

        (a) Extension.--Subparagraph (B) of section 51(c)(4) (relating to
    termination) is amended by striking ``September 30, 1997'' and inserting
    ``June 30, 1998''.
        (b) Modification of Eligibility Requirement Based on Period on
    Welfare.--
                (1) In general.--Subparagraph (A) of section 51(d)(2)
            (defining qualified IV-A recipient) is amended by striking all
            that follows ``a IV-A program'' and inserting ``for any 9 months
            during the 18-month period ending on the hiring date.''.
                (2) Conforming amendment.--Subparagraph (A) of section
            51(d)(3) is amended to read as follows:
                        ``(A) In general.--The term `qualified veteran'
                    means any veteran who is certified by the designated
                    local agency as being a member of a family receiving
                    assistance under a food stamp program under the Food
                    Stamp Act of 1977 for at least a 3-month period ending
                    during the 12-month period ending on the hiring date.''.

        (c) Qualified SSI Recipients Treated as Members of Targeted
    Groups.--
                (1) In general.--Section 51(d)(1) (relating to members of
            targeted groups) is amended by striking ``or'' at the end of
            subparagraph (F), by striking the period at the end of
            subparagraph (G) and inserting ``, or'', and by adding at the
            end the following new subparagraph:
                        ``(H) a qualified SSI recipient.''.
                (2) Qualified ssi recipients.--Section 51(d) is amended by
            redesignating paragraphs (9), (10), and (11) as paragraphs (10),
            (11), and (12), respectively, and by inserting after paragraph
            (8) the following new paragraph:
                ``(9) Qualified ssi recipient.--The term `qualified SSI
            recipient' means any individual who is certified by the
            designated local agency as receiving supplemental security
            income benefits under title XVI of the Social Security Act
            (including supplemental security income benefits of the type
            described in section 1616 of such Act or section 212 of Public
            Law 93-66) for any month ending within the 60-day period ending
            on the hiring date.''.

        (d) Percentage of Wages Allowed as Credit.--
                (1) In general.--Subsection (a) of section 51 (relating to
            determination of amount) is amended by striking ``35 percent''
            and inserting ``40 percent''.

    [[Page 111 STAT. 863]]

                (2) Application of credit for individuals performing fewer
            than 400 hours of services.--Paragraph (3) of section 51(i) is
            amended to read as follows:
                ``(3) Individuals not meeting minimum employment periods.--
                        ``(A) Reduction of credit for individuals performing
                    fewer than 400 hours of service.--In the case of an
                    individual who has performed at least 120 hours, but
                    less than 400 hours, of service for the employer,
                    subsection (a) shall be applied by substituting `25
                    percent' for `40 percent'.
                        ``(B) Denial of credit for individuals performing
                    fewer than 120 hours of service.--No wages shall be
                    taken into account under subsection (a) with respect to
                    any individual unless such individual has performed at
                    least 120 hours of service for the employer.''.

        (e) <<NOTE: 26 USC 51 note.>>  Effective date.--The amendments made
    by this section shall apply to individuals who begin work for the
    employer after September 30, 1997.

    SEC. 604. ORPHAN DRUG TAX CREDIT.

        (a) In General.--Section 45C (relating to clinical testing expenses
    for certain drugs for rare diseases or conditions) is amended by
    striking subsection (e).
        (b) <<NOTE: 26 USC 45C note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to amounts paid or incurred after May 31,
    1997.

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

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

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

              ``Subchapter W--District of Columbia Enterprise Zone

                    ``Sec. 1400.  Establishment of DC Zone.
                    ``Sec. 1400A. Tax-exempt economic development bonds.
                    ``Sec. 1400B. Zero percent capital gains rate.
                    ``Sec. 1400C. First-time homebuyer credit for District
                                    of Columbia.

    ``SEC. 1400. ESTABLISHMENT OF DC ZONE.

        ``(a) In General.--For purposes of this title--
                ``(1) the applicable DC area is hereby designated as the
            District of Columbia Enterprise Zone, and
                ``(2) except as otherwise provided in this subchapter, the
            District of Columbia Enterprise Zone shall be treated as an
            empowerment zone designated under subchapter U.

        ``(b) Applicable DC Area.--For purposes of subsection (a), the term
    `applicable DC area' means the area consisting of--
                ``(1) the census tracts located in the District of Columbia
            which are part of an enterprise community designated under
            subchapter U before the date of the enactment of this
            subchapter, and

    [[Page 111 STAT. 864]]

                ``(2) all other census tracts--
                        ``(A) which are located in the District of Columbia,
                    and
                        ``(B) for which the poverty rate is not less than
                    than 20 percent.

        ``(c) District of Columbia Enterprise Zone.--For purposes of this
    subchapter, the terms `District of Columbia Enterprise Zone' and `DC
    Zone' mean the District of Columbia Enterprise Zone designated by
    subsection (a).
        ``(d) Special Rules for Application of Employment Credit.--
                ``(1) Employees whose principal place of abode is in
            district of columbia.--With respect to the DC Zone, section
            1396(d)(1)(B) (relating to empowerment zone employment credit)
            shall be applied by substituting `the District of Columbia' for
            `such empowerment zone'.
                ``(2) No decrease of percentage in 2002.--In the case of the
            DC Zone, section 1396 (relating to empowerment zone employment
            credit) shall be applied by substituting ``20'' for ``15'' in
            the table contained in section 1396(b). The preceding sentence
            shall apply only with respect to qualified zone employees, as
            defined in section 1396(d), determined by treating no area other
            than the DC Zone as an empowerment zone or enterprise community.

        ``(e) Special Rule for Application of Enterprise Zone Business
    Definition.--For purposes of this subchapter and for purposes of
    applying subchapter U with respect to the DC Zone, section 1397B shall
    be applied without regard to subsections (b)(6) and (c)(5) thereof.
        ``(f) Time For Which Designation Applicable.--
                ``(1) In general.--The designation made by subsection (a)
            shall apply for the period beginning on January 1, 1998, and
            ending on December 31, 2002.
                ``(2) Coordination with dc enterprise community designated
            under subchapter u.--The designation under subchapter U of the
            census tracts referred to in subsection (b)(1) as an enterprise
            community shall terminate on December 31, 2002.

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

        ``(a) In General.--In the case of the District of Columbia
    Enterprise Zone, subparagraph (A) of section 1394(c)(1) (relating to
    limitation on amount of bonds) shall be applied by substituting
    `$15,000,000' for `$3,000,000'.
        ``(b) Period of Applicability.--This section shall apply to bonds
    issued during the period beginning on January 1, 1998, and ending on
    December 31, 2002.

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

          ``(a) Exclusion.--Gross income shall not include qualified capital
    gain from the sale or exchange of any DC Zone asset held for more than 5
    years.
        ``(b) DC Zone Asset.--For purposes of this section--
                ``(1) In general.--The term `DC Zone asset' means--
                        ``(A) any DC Zone business stock,
                        ``(B) any DC Zone partnership interest, and
                        ``(C) any DC Zone business property.
                ``(2) DC zone business stock.--

    [[Page 111 STAT. 865]]

                        ``(A) In general.--The term `DC Zone business stock'
                    means any stock in a domestic corporation which is
                    originally issued after December 31, 1997, if--
                              ``(i) such stock is acquired by the taxpayer,
                          before January 1, 2003, at its original issue
                          (directly or through an underwriter) solely in
                          exchange for cash,
                              ``(ii) as of the time such stock was issued,
                          such corporation was a DC Zone business (or, in
                          the case of a new corporation, such corporation
                          was being organized for purposes of being a DC
                          Zone business), and
                              ``(iii) during substantially all of the
                          taxpayer's holding period for such stock, such
                          corporation qualified as a DC Zone business.
                        ``(B) Redemptions.--A rule similar to the rule of
                    section 1202(c)(3) shall apply for purposes of this
                    paragraph.
                ``(3) DC zone partnership interest.--The term `DC Zone
            partnership interest' means any capital or profits interest in a
            domestic partnership which is originally issued after December
            31, 1997, if--
                        ``(A) such interest is acquired by the taxpayer,
                    before January 1, 2003, from the partnership solely in
                    exchange for cash,
                        ``(B) as of the time such interest was acquired,
                    such partnership was a DC Zone business (or, in the case
                    of a new partnership, such partnership was being
                    organized for purposes of being a DC Zone business), and
                        ``(C) during substantially all of the taxpayer's
                    holding period for such interest, such partnership
                    qualified as a DC Zone business.
            A rule similar to the rule of paragraph (2)(B) shall apply for
            purposes of this paragraph.
                ``(4) DC zone business property.--
                        ``(A) In general.--The term `DC Zone business
                    property' means tangible property if--
                              ``(i) such property was acquired by the
                          taxpayer by purchase (as defined in section
                          179(d)(2)) after December 31, 1997, and before
                          January 1, 2003,
                              ``(ii) the original use of such property in
                          the DC Zone commences with the taxpayer, and
                              ``(iii) during substantially all of the
                          taxpayer's holding period for such property,
                          substantially all of the use of such property was
                          in a DC Zone business of the taxpayer.
                        ``(B) Special rule for buildings which are
                    substantially improved.--
                              ``(i) In general.--The requirements of clauses
                          (i) and (ii) of subparagraph (A) shall be treated
                          as met with respect to--
                                        ``(I) property which is
                                    substantially improved by the taxpayer
                                    before January 1, 2003, and
                                        ``(II) any land on which such
                                    property is located.
                              ``(ii) Substantial improvement.--For purposes
                          of clause (i), property shall be treated as
                          substantially improved by the taxpayer only if,
                          during any 24-month period beginning after
                          December 31, 1997, additions

    [[Page 111 STAT. 866]]

                          to basis with respect to such property in the
                          hands of the taxpayer exceed the greater of--
                                        ``(I) an amount equal to the
                                    adjusted basis of such property at the
                                    beginning of such 24-month period in the
                                    hands of the taxpayer, or
                                        ``(II) $5,000.
                ``(6) Treatment of subsequent purchasers, etc.--The term `DC
            Zone asset' includes any property which would be a DC Zone asset
            but for paragraph (2)(A)(i), (3)(A), or (4)(A)(ii) in the hands
            of the taxpayer if such property was a DC Zone asset in the
            hands of a prior holder.
                ``(7) 5-year safe harbor.--If any property ceases to be a DC
            Zone asset by reason of paragraph (2)(A)(iii), (3)(C), or
            (4)(A)(iii) after the 5-year period beginning on the date the
            taxpayer acquired such property, such property shall continue to
            be treated as meeting the requirements of such paragraph; except
            that the amount of gain to which subsection (a) applies on any
            sale or exchange of such property shall not exceed the amount
            which would be qualified capital gain had such property been
            sold on the date of such cessation.

        ``(c) DC Zone Business.--For purposes of this section, the term `DC
    Zone business' means any entity which is an enterprise zone business (as
    defined in section 1397B), determined--
                ``(1) after the application of section 1400(e),
                ``(2) by substituting ``80 percent'' for ``50 percent'' in
            subsections (b)(2) and (c)(1) of section 1397B, and
                ``(3) by treating no area other than the DC Zone as an
            empowerment zone or enterprise community.

        ``(d) Treatment of Zone as Including Census Tracts With 10 Percent
    Poverty Rate.--For purposes of applying this section (and for purposes
    of applying this subchapter and subchapter U with respect to this
    section), the DC Zone shall be treated as including all census tracts--
                ``(1) which are located in the District of Columbia, and
                ``(2) for which the poverty rate is not less than 10
            percent.

        ``(e) Other Definitions and Special Rules.--For purposes of this
    section--
                ``(1) Qualified capital gain.--Except as otherwise provided
            in this subsection, the term `qualified capital gain' means any
            gain recognized on the sale or exchange of--
                        ``(A) a capital asset, or
                        ``(B) property used in the trade or business (as
                    defined in section 1231(b)).
                ``(2) Gain before 1998 or after 2007 not qualified.--The
            term `qualified capital gain' shall not include any gain
            attributable to periods before January 1, 1998, or after
            December 31, 2007.
                ``(3) Certain gain not qualified.--The term `qualified
            capital gain' shall not include any gain which would be treated
            as ordinary income under section 1245 or under section 1250 if
            section 1250 applied to all depreciation rather than the
            additional depreciation.
                ``(4) Intangibles and land not integral part of dc zone
            business.--The term `qualified capital gain' shall not include
            any gain which is attributable to real property, or an
            intangible asset, which is not an integral part of a DC Zone
            business.

    [[Page 111 STAT. 867]]

                ``(5) Related party transactions.--The term `qualified
            capital gain' shall not include any gain attributable, directly
            or indirectly, in whole or in part, to a transaction with a
            related person. For purposes of this paragraph, persons are
            related to each other if such persons are described in section
            267(b) or 707(b)(1).

        ``(f) Certain Other Rules To Apply.--Rules similar to the rules of
    subsections (g), (h), (i)(2), and (j) of section 1202 shall apply for
    purposes of this section.
        ``(g) Sales and Exchanges of Interests in Partnerships and S
    Corporations Which Are DC Zone Businesses.--In the case of the sale or
    exchange of an interest in a partnership, or of stock in an S
    corporation, which was a DC Zone business during substantially all of
    the period the taxpayer held such interest or stock, the amount of
    qualified capital gain shall be determined without regard to--
                ``(1) any gain which is attributable to real property, or an
            intangible asset, which is not an integral part of a DC Zone
            business, and
                ``(2) any gain attributable to periods before January 1,
            1998, or after December 31, 2007.

    ``SEC. 1400C. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF COLUMBIA.

        ``(a) Allowance of Credit.--In the case of an individual who is a
    first-time homebuyer of a principal residence in the District of
    Columbia during any taxable year, there shall be allowed as a credit
    against the tax imposed by this chapter for the taxable year an amount
    equal to so much of the purchase price of the residence as does not
    exceed $5,000.
        ``(b) Limitation Based on Modified Adjusted Gross Income.--
                ``(1) In general.--The amount allowable as a credit under
            subsection (a) (determined without regard to this subsection)
            for the taxable year shall be reduced (but not below zero) by
            the amount which bears the same ratio to the credit so allowable
            as--
                        ``(A) the excess (if any) of--
                              ``(i) the taxpayer's modified adjusted gross
                          income for such taxable year, over
                              ``(ii) $70,000 ($110,000 in the case of a
                          joint return), bears to
                        ``(B) $20,000.
                ``(2) Modified adjusted gross income.--For purposes of
            paragraph (1), the term `modified adjusted gross income' means
            the adjusted gross income of the taxpayer for the taxable year
            increased by any amount excluded from gross income under section
            911, 931, or 933.

        ``(c) First-Time Homebuyer.--For purposes of this section--
                ``(1) In general.--The term `first-time homebuyer' has the
            same meaning as when used in section 72(t)(8)(D)(i), except that
            `principal residence in the District of Columbia during the 1-
            year period' shall be substituted for `principal residence
            during the 2-year period' in subclause (I) thereof.
                ``(2) One-time only.--If an individual is treated as a
            first-time homebuyer with respect to any principal residence,
            such

    [[Page 111 STAT. 868]]

            individual may not be treated as a first-time homebuyer with
            respect to any other principal residence.
                ``(3) Principal residence.--The term `principal residence'
            has the same meaning as when used in section 121.

        ``(d) Carryover of Credit.--If the credit allowable under subsection
    (a) exceeds the limitation imposed by section 26(a) for such taxable
    year reduced by the sum of the credits allowable under subpart A of part
    IV of subchapter A (other than this section), such excess shall be
    carried to the succeeding taxable year and added to the credit allowable
    under subsection (a) for such taxable year.
        ``(e) Special Rules.--For purposes of this section--
                ``(1) Allocation of dollar limitation.--
                        ``(A) Married individuals filing separately.--In the
                    case of a married individual filing a separate return,
                    subsection (a) shall be applied by substituting `$2,500'
                    for `$5,000'.
                        ``(B) Other taxpayers.--If 2 or more individuals who
                    are not married purchase a principal residence, the
                    amount of the credit allowed under subsection (a) shall
                    be allocated among such individuals in such manner as
                    the Secretary may prescribe, except that the total
                    amount of the credits allowed to all such individuals
                    shall not exceed $5,000.
                ``(2) Purchase.--
                        ``(A) In general.--The term `purchase' means any
                    acquisition, but only if--
                              ``(i) the property is not acquired from a
                          person whose relationship to the person acquiring
                          it would result in the disallowance of losses
                          under section 267 or 707(b) (but, in applying
                          section 267 (b) and (c) for purposes of this
                          section, paragraph (4) of section 267(c) shall be
                          treated as providing that the family of an
                          individual shall include only his spouse,
                          ancestors, and lineal descendants), and
                              ``(ii) the basis of the property in the hands
                          of the person acquiring it is not determined--
                                        ``(I) in whole or in part by
                                    reference to the adjusted basis of such
                                    property in the hands of the person from
                                    whom acquired, or
                                        ``(II) under section 1014(a)
                                    (relating to property acquired from a
                                    decedent).
                        ``(B) Construction.--A residence which is
                    constructed by the taxpayer shall be treated as
                    purchased by the taxpayer.
                ``(3) Purchase price.--The term `purchase price' means the
            adjusted basis of the principal residence on the date of
            acquisition (within the meaning of section 72(t)(8)(D)(iii)).

        ``(f) Reporting.--If the Secretary requires information reporting
    under section 6045 by a person described in subsection (e)(2) thereof to
    verify the eligibility of taxpayers for the credit allowable by this
    section, the exception provided by section 6045(e)(5) shall not apply.
        ``(g) Credit Treated as Nonrefundable Personal Credit.--For purposes
    of this title, the credit allowed by this section shall be treated as a
    credit allowable under subpart A of part IV of subchapter A of this
    chapter.

    [[Page 111 STAT. 869]]

        ``(h) Basis Adjustment.--For purposes of this subtitle, if a credit
    is allowed under this section with respect to the purchase of any
    residence, the basis of such residence shall be reduced by the amount of
    the credit so allowed.
        ``(i) Termination.--This section shall not apply to any property
    purchased after December 31, 2000.''.
        (b) Conforming Amendments.--
                (1) Subsection (d) of section 39 is amended by adding at the
            end the following new paragraph:
                ``(8) No carryback of dc zone credits before effective
            date.--No portion of the unused business credit for any taxable
            year which is attributable to the credits allowable under
            subchapter U by reason of section 1400 may be carried back to a
            taxable year ending before the date of the enactment of section
            1400.''.
                (2) Subsection (a) of section 1016 is amended by striking
            ``and'' at the end of paragraph (25), by striking the period at
            the end of paragraph (26) and inserting ``, and'', and by adding
            at the end thereof the following new paragraph:
                ``(27) in the case of a residence with respect to which a
            credit was allowed under section 1400C, to the extent provided
            in section 1400C(h).''.

        (c) Clerical Amendment.--The table of subchapters for chapter 1 is
    amended by adding at the end the following new item:
                    ``Subchapter W. District of Columbia Enterprise Zone.''.

        (d) <<NOTE: 26 USC 39 note.>>  Effective Date.--Except as provided
    in subsection (c), the amendments made by this section shall take effect
    on the date of the enactment of this Act.

                     TITLE VIII--WELFARE-TO-WORK INCENTIVES

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

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

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

        ``(a) Determination of Amount.--For purposes of section 38, the
    amount of the welfare-to-work credit determined under this section for
    the taxable year shall be equal to--
                ``(1) 35 percent of the qualified first-year wages for such
            year, and
                ``(2) 50 percent of the qualified second-year wages for such
            year.

        ``(b) Qualified Wages Defined.--For purposes of this section--
                ``(1) In general.--The term `qualified wages' means the
            wages paid or incurred by the employer during the taxable year
            to individuals who are long-term family assistance recipients.
                ``(2) Qualified first-year wages.--The term `qualified
            first-year wages' means, with respect to any individual,
            qualified wages attributable to service rendered during the 1-
            year

    [[Page 111 STAT. 870]]

            period beginning with the day the individual begins work for the
            employer.
                ``(3) Qualified second-year wages.--The term `qualified
            second-year wages' means, with respect to any individual,
            qualified wages attributable to service rendered during the 1-
            year period beginning on the day after the last day of the 1-
            year period with respect to such individual determined under
            paragraph (2).
                ``(4) Only first $10,000 of wages per year taken into
            account.--The amount of the qualified first-year wages, and the
            amount of qualified second-year wages, which may be taken into
            account with respect to any individual shall not exceed $10,000
            per year.
                ``(5) Wages.--
                        ``(A) In general.--The term `wages' has the meaning
                    given such term by section 51(c), without regard to
                    paragraph (4) thereof.
                        ``(B) Certain amounts treated as wages.--The term
                    `wages' includes amounts paid or incurred by the
                    employer which are excludable from such recipient's
                    gross income under--
                              ``(i) section 105 (relating to amounts
                          received under accident and health plans),
                              ``(ii) section 106 (relating to contributions
                          by employer to accident and health plans),
                              ``(iii) section 127 (relating to educational
                          assistance programs) or would be so excludable but
                          for section 127(d), but only to the extent paid or
                          incurred to a person not related to the employer,
                          or
                              ``(iv) section 129 (relating to dependent care
                          assistance programs).
                    The amount treated as wages by clause (i) or (ii) for
                    any period shall be based on the reasonable cost of
                    coverage for the period, but shall not exceed the
                    applicable premium for the period under section
                    4980B(f)(4).
                        ``(C) Special rules for agricultural and railway
                    labor.--If such recipient is an employee to whom
                    subparagraph (A) or (B) of section 51(h)(1) applies,
                    rules similar to the rules of such subparagraphs shall
                    apply except that--
                              ``(i) such subparagraph (A) shall be applied
                          by substituting `$10,000' for `$6,000', and
                              ``(ii) such subparagraph (B) shall be applied
                          by substituting `$833.33' for `$500'.

        ``(c) Long-Term Family Assistance Recipients.--For purposes of this
    section--
                ``(1) In general.--The term `long-term family assistance
            recipient' means any individual who is certified by the
            designated local agency (as defined in section 51(d)(10))--
                        ``(A) as being a member of a family receiving
                    assistance under a IV-A program (as defined in section
                    51(d)(2)(B)) for at least the 18-month period ending on
                    the hiring date,
                        ``(B)(i) as being a member of a family receiving
                    such assistance for 18 months beginning after the date
                    of the enactment of this section, and

    [[Page 111 STAT. 871]]

                        ``(ii) as having a hiring date which is not more
                    than 2 years after the end of the earliest such 18-month
                    period, or
                        ``(C)(i) as being a member of a family which ceased
                    to be eligible after the date of the enactment of this
                    section for such assistance by reason of any limitation
                    imposed by Federal or State law on the maximum period
                    such assistance is payable to a family, and
                        ``(ii) as having a hiring date which is not more
                    than 2 years after the date of such cessation.
                ``(2) Hiring date.--The term `hiring date' has the meaning
            given such term by section 51(d).

        ``(d) Certain Rules To Apply.--
                ``(1) In general.--Rules similar to the rules of section 52,
            and subsections (d)(11), (f), (g), (i) (as in effect on the day
            before the date of the enactment of the Taxpayer Relief Act of
            1997), (j), and (k) of section 51, shall apply for purposes of
            this section.
                ``(2) Credit to be part of general business credit, etc.--
            References to section 51 in section 38(b), 280C(a), and
            1396(c)(3) shall be treated as including references to this
            section.

        ``(e) Coordination With Work Opportunity Credit.--If a credit is
    allowed under this section to an employer with respect to an individual
    for any taxable year, then for purposes of applying section 51 to such
    employer, such individual shall not be treated as a member of a targeted
    group for such taxable year.
        ``(f) Termination.--This section shall not apply to individuals who
    begin work for the employer after April 30, 1999.''.
        (b) Clerical Amendment.--The table of sections for subpart F of part
    IV of subchapter A of chapter 1 is amended by inserting after the item
    relating to section 51 the following new item:
                    ``Sec. 51A. Temporary incentives for employing long-term
                                    family assistance recipients.''.

        (c) <<NOTE: 26 USC 51A note.>>  Effective Date.--The amendments made
    by this section shall apply to individuals who begin work for the
    employer after December 31, 1997.

                       TITLE IX--MISCELLANEOUS PROVISIONS

                 Subtitle A--Provisions Relating to Excise Taxes

    SEC. 901. GENERAL REVENUE PORTION OF HIGHWAY MOTOR FUELS TAXES DEPOSITED
                INTO HIGHWAY TRUST FUND.

        (a) In General.--Paragraph (4) of section 9503(b) (relating to
    certain additional taxes not transferred to Highway Trust Fund) is
    amended to read as follows:
                ``(4) Certain taxes not transferred to highway trust fund.--
            For purposes of paragraphs (1) and (2), there shall not be taken
            into account the taxes imposed by--
                        ``(A) section 4041(d),

    [[Page 111 STAT. 872]]

                        ``(B) section 4081 to the extent attributable to the
                    rate specified in section 4081(a)(2)(B),
                        ``(C) section 4041 or 4081 to the extent
                    attributable to fuel used in a train,
                        ``(D) in the case of fuels used as described in
                    paragraph (4)(D), (5)(B), or (6)(D) of subsection (c),
                    section 4041 or 4081--
                              ``(i) with respect to so much of the rate of
                          tax on gasoline or special motor fuels as exceeds
                          11.5 cents per gallon, and
                              ``(ii) with respect to so much of the rate of
                          tax on diesel fuel or kerosene as exceeds 17.5
                          cents per gallon,
                        ``(E) in the case of fuels described in section
                    4041(b)(2)(A), 4041(k), or 4081(c), section 4041 or 4081
                    before October 1, 1999, with respect to a rate equal to
                    2.5 cents per gallon, or
                        ``(F) in the case of fuels described in section
                    4081(c)(2), such section before October 1, 1999, with
                    respect to a rate equal to 2.8 cents per gallon.''.

        (b) Mass Transit Portion.--Section 9503(e)(2) (relating to transfers
    to Mass Transit Account) is amended by striking ``2 cents'' and
    inserting ``2.85 cents''.
        (c) Limitation on Expenditures.--Subsection (c) of section 9503 is
    amended by adding at the end the following new paragraph:
                ``(7) Limitation on expenditures.--Notwithstanding any other
            provision of law, in calculating amounts under section 157(a) of
            title 23, United States Code, and sections 1013(c), 1015(a), and
            1015(b) of the Intermodal Surface Transportation Efficiency Act
            of 1991 (Public Law 102-240; 105 Stat. 1914), deposits in the
            Highway Trust Fund resulting from the amendments made by the
            Taxpayer Relief Act of 1997 shall not be taken into account.''.

        (d) Technical Amendments.--
                (1) Section 9503 is amended by striking subsection (f).
                (2) The last sentence of subparagraph (A) of section
            9503(c)(2) is amended by striking ``by taking into account only
            the Highway Trust Fund financing rate applicable to any fuel''
            and inserting ``by taking into account only the portion of the
            taxes which are deposited into the Highway Trust Fund''.
                (3) Paragraphs (4)(D), (5)(B), and (6)(D) of section 9503(c)
            are each amended by striking ``attributable to the Highway Trust
            Fund financing rate'' and inserting ``deposited into the Highway
            Trust Fund''.

        (e) <<NOTE: 26 USC 6302 note.>>  Delayed Deposits of Highway Motor
    Fuel Tax Revenues.--Notwithstanding section 6302 of the Internal Revenue
    Code of 1986, in the case of deposits of taxes imposed by sections 4041
    and 4081 (other than subsection (a)(2)(A)(ii)) of the Internal Revenue
    Code of 1986, the due date for any deposit which would (but for this
    subsection) be required to be made after July 31, 1998, and before
    October 1, 1998, shall be October 5, 1998.

        (f) <<NOTE: 26 USC 9503 note.>>  Effective Date.--The amendments
    made by this section shall apply to taxes received in the Treasury after
    September 30, 1997.

    [[Page 111 STAT. 873]]

    SEC. 902. REPEAL OF TAX ON DIESEL FUEL USED IN RECREATIONAL BOATS.

        (a) In General.--Subparagraph (B) of section 6421(e)(2) (defining
    off-highway business use) is amended by striking clauses (iii) and (iv).
        (b) Conforming Amendments.--
                (1) Subparagraph (A) of section 4041(a)(1) is amended--
                        (A) by striking ``, a diesel-powered train, or a
                    diesel-powered boat'' each place it appears and
                    inserting ``or a diesel-powered train'', and
                        (B) by striking ``vehicle, train, or boat'' and
                    inserting ``vehicle or train''.
                (2) Paragraph (1) of section 4041(a) is amended by striking
            subparagraph (D).
                (3) Paragraph (3) of section 4083(a) is amended by striking
            ``, a diesel-powered train, or a diesel-powered boat'' and
            inserting ``or a diesel-powered train''.

        (c) <<NOTE: 26 USC 4041 note.>>  Effective Date.--The amendments
    made by this section shall take effect on January 1, 1998.

    SEC. 903. CONTINUED APPLICATION OF TAX ON IMPORTED RECYCLED HALON-1211.

        (a) In General.--Paragraph (1) of section 4682(d) is amended by
    striking ``recycled halon'' and inserting ``recycled Halon-1301 or
    recycled Halon-2402''.
        (b) <<NOTE: 26 USC 4682 note.>>  Effective Date.--The amendment made
    by subsection (a) shall take effect on the date of the enactment of this
    Act.

    SEC. 904. UNIFORM RATE OF TAX ON VACCINES.

        (a) In General.--Subsection (b) of section 4131 is amended to read
    as follows:
        ``(b) Amount of Tax.--
                ``(1) In general.--The amount of the tax imposed by
            subsection (a) shall be 75 cents per dose of any taxable
            vaccine.
                ``(2) Combinations of vaccines.--If any taxable vaccine is
            described in more than 1 subparagraph of section 4132(a)(1), the
            amount of the tax imposed by subsection (a) on such vaccine
            shall be the sum of the amounts for the vaccines which are so
            included.''.

        (b) Taxable Vaccines.--Paragraph (1) of section 4132(a) is amended
    to read as follows:
                ``(1) Taxable vaccine.--The term `taxable vaccine' means any
            of the following vaccines which are manufactured or produced in
            the United States or entered into the United States for
            consumption, use, or warehousing:
                        ``(A) Any vaccine containing diphtheria toxoid.
                        ``(B) Any vaccine containing tetanus toxoid.
                        ``(C) Any vaccine containing pertussis bacteria,
                    extracted or partial cell bacteria, or specific
                    pertussis antigens.
                        ``(D) Any vaccine against measles.
                        ``(E) Any vaccine against mumps.
                        ``(F) Any vaccine against rubella.
                        ``(G) Any vaccine containing polio virus.
                        ``(H) Any HIB vaccine.
                        ``(I) Any vaccine against hepatitis B.
                        ``(J) Any vaccine against chicken pox.''.

    [[Page 111 STAT. 874]]

        (c) Conforming Amendment.--Subsection (a) of section 4132 is amended
    by striking paragraphs (2), (3), (4), and (5) and by redesignating
    paragraphs (6) through (8) as paragraphs (2) through (4), respectively.
        (d) <<NOTE: 26 USC 4131 note.>>  Effective Date.--The amendments
    made by this section shall take effect on the day after the date of the
    enactment of this Act.

        (e) <<NOTE: 26 USC 4132 note.>>  Limitation on Certain Credits or
    Refunds.--For purposes of applying section 4132(b) of the Internal
    Revenue Code of 1986 with respect to any claim for credit or refund
    filed before January 1, 1999, the amount of tax taken into account shall
    not exceed the tax computed under the rate in effect on the day after
    the date of the enactment of this Act.

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

        (a) In General.--Subparagraph (B) of section 6416(a)(4) (defining
    wholesale distributor) is amended by adding at the end the following new
    sentence: ``Such term includes any person who makes retail sales of
    gasoline at 10 or more retail motor fuel outlets.''.
        (b) <<NOTE: 26 USC 6416 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to sales after the date of the enactment
    of this Act.

    SEC. 906. EXEMPTION OF ELECTRIC AND OTHER CLEAN-FUEL MOTOR VEHICLES FROM
                LUXURY AUTOMOBILE CLASSIFICATION.

        (a) In General.--Subsection (a) of section 4001 (relating to
    imposition of tax) is amended to read as follows:
        ``(a) Imposition of Tax.--
                ``(1) In general.--There is hereby imposed on the 1st retail
            sale of any passenger vehicle a tax equal to 10 percent of the
            price for which so sold to the extent such price exceeds the
            applicable amount.
                ``(2) Applicable amount.--
                        ``(A) In general.--Except as provided in
                    subparagraphs (B) and (C), the applicable amount is
                    $30,000.
                        ``(B) Qualified clean-fuel vehicle property.--In the
                    case of a passenger vehicle which is propelled by a fuel
                    which is not a clean-burning fuel and to which is
                    installed qualified clean-fuel vehicle property (as
                    defined in section 179A(c)(1)(A)) for purposes of
                    permitting such vehicle to be propelled by a clean-
                    burning fuel, the applicable amount is equal to the sum
                    of--
                              ``(i) the dollar amount in effect under
                          subparagraph (A), plus
                              ``(ii) the increase in the price for which the
                          passenger vehicle was sold (within the meaning of
                          section 4002) due to the installation of such
                          property.
                        ``(C) Purpose built passenger vehicle.--
                              ``(i) In general.--In the case of a purpose
                          built passenger vehicle, the applicable amount is
                          equal to 150 percent of the dollar amount in
                          effect under subparagraph (A).
                              ``(ii) Purpose built passenger vehicle.--For
                          purposes of clause (i), the term `purpose built
                          passenger vehicle' means a passenger vehicle
                          produced by an original equipment manufacturer and
                          designed so that the vehicle may be propelled
                          primarily by electricity.''.

    [[Page 111 STAT. 875]]

        (b) Conforming Amendments.--
                (1) Subsection (e) of section 4001 (relating to inflation
            adjustment) is amended by striking ``and section 4003(a)''.
                (2) Subsection (f) of section 4001 (relating to phasedown)
            is amended by striking ``subsection (a)'' and inserting
            ``subsection (a)(1)''.
                (3) Subparagraph (A) of section 4003(a)(1) is amended by
            inserting ``(other than property described in section
            4001(a)(2)(B))'' after ``part or accessory''.
                (4) Subparagraph (B) of section 4003(a)(2) is amended to
            read as follows:
                        ``(B) the appropriate applicable amount as
                    determined under section 4001(a)(2).''.

        (c) <<NOTE: 26 USC 4001 note.>>  Effective Date.--The amendments
    made by this section shall apply to sales and installations occurring
    after the date of the enactment of this Act.

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

        (a) Special Motor Fuels.--
                (1) In general.--Paragraph (2) of section 4041(a) (relating
            to special motor fuels) is amended to read as follows:
                ``(2) Special motor fuels.--
                        ``(A) In general.--There is hereby imposed a tax on
                    any liquid (other than kerosene, gas oil, fuel oil, or
                    any product taxable under section 4081)--
                              ``(i) sold by any person to an owner, lessee,
                          or other operator of a motor vehicle or motorboat
                          for use as a fuel in such motor vehicle or
                          motorboat, or
                              ``(ii) used by any person as a fuel in a motor
                          vehicle or motorboat unless there was a taxable
                          sale of such liquid under clause (i).
                        ``(B) Rate of tax.--The rate of the tax imposed by
                    this paragraph shall be--
                              ``(i) except as otherwise provided in this
                          subparagraph, the rate of tax specified in section
                          4081(a)(2)(A)(i) which is in effect at the time of
                          such sale or use,
                              ``(ii) 13.6 cents per gallon in the case of
                          liquefied petroleum gas, and
                              ``(iii) 11.9 cents per gallon in the case of
                          liquefied natural gas.
                    In the case of any sale or use after September 30, 1999,
                    clause (ii) shall be applied by substituting `3.2 cents'
                    for `13.6 cents', and clause (iii) shall be applied by
                    substituting `2.8 cents' for `11.9 cents'.''.
                (2) Conforming amendment.--Paragraph (1) of section 4041(d)
            is amended by inserting ``and other than liquefied natural gas''
            after ``liquefied petroleum gas''.

        (b) Methanol Fuel Produced From Natural Gas.--Subparagraph (A) of
    section 4041(m)(1) is amended to read as follows:
                        ``(A) the rate of the tax imposed by subsection
                    (a)(2) shall be--
                              ``(i) after September 30, 1997, and before
                          October 1, 1999--

    [[Page 111 STAT. 876]]

                                        ``(I) in the case of fuel none of
                                    the alcohol in which consists of
                                    ethanol, 9.15 cents per gallon, and
                                        ``(II) in any other case, 11.3 cents
                                    per gallon, and
                              ``(ii) after September 30, 1999--
                                        ``(I) in the case of fuel none of
                                    the alcohol in which consists of
                                    ethanol, 2.15 cents per gallon, and
                                        ``(II) in any other case, 4.3 cents
                                    per gallon, and''.

        (c) <<NOTE: 26 USC 4041 note.>>  Effective Date.--The amendments
    made by this section shall take effect on October 1, 1997.

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

        (a) Hard Cider Containing Less Than 7 Percent Alcohol Taxed as
    Wine.--Subsection (b) of section 5041 (relating to imposition and rate
    of tax) is amended by striking ``and'' at the end of paragraph (4), by
    striking the period at the end of paragraph (5) and inserting ``; and'',
    and by adding at the end the following new paragraph:
                ``(6) On hard cider derived primarily from apples or apple
            concentrate and water, containing no other fruit product, and
            containing at least one-half of 1 percent and less than 7
            percent alcohol by volume, 22.6 cents per wine gallon.''.

        (b) Application of Small Producer Credit.--Paragraph (1) of section
    5041(c) (relating to credit for small domestic producers) is amended by
    adding at the end the following new sentence: ``In the case of wine
    described in subsection (b)(6), the preceding sentence shall be applied
    by substituting `5.6 cents' for `90 cents'.''.
        (c) <<NOTE: 26 USC 5041 note.>>  Effective Date.--The amendments
    made by this section shall take effect on October 1, 1997.

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

        (a) In General.--The Secretary of the Treasury or his delegate shall
    conduct a study of options for changing the event on which the tax
    imposed by section 5001 of the Internal Revenue Code of 1986 is
    determined. One such option which shall be studied is determining such
    tax on removal from registered wholesale warehouses. In studying each
    such option, such Secretary shall focus on administrative issues
    including--
                (1) tax compliance,
                (2) the number of taxpayers required to pay the tax,
                (3) the types of financial responsibility requirements that
            might be required, and
                (4) special requirements regarding segregation of non-tax-
            paid distilled spirits from other products.

    Such study shall review the effects of each such option on the
    Department of the Treasury (including staffing and other demands on
    budgetary resources) and the change in the period between the time such
    tax is currently paid and the time such tax would be paid under each
    such option.
        (b) Report.--The report of such study shall be submitted to the
    Committee on Finance of the Senate and the Committee on Ways and Means
    of the House of Representatives not later than March 31, 1998.

    [[Page 111 STAT. 877]]

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

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

        (b) <<NOTE: 26 USC 5388 note.>>  Effective Date.--The amendment made
    by this section shall take effect on the date of the enactment of this
    Act.

                   Subtitle B--Revisions Relating to Disasters

    SEC. 911. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES BY REASON
                OF PRESIDENTIALLY DECLARED DISASTER.

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

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

        ``(a) In General.--In the case of a taxpayer determined by the
    Secretary to be affected by a Presidentially declared disaster (as
    defined by section 1033(h)(3)), the Secretary may prescribe regulations
    under which a period of up to 90 days may be disregarded in determining,
    under the internal revenue laws, in respect of any tax liability
    (including any penalty, additional amount, or addition to the tax) of
    such taxpayer--
                ``(1) whether any of the acts described in paragraph (1) of
            section 7508(a) were performed within the time prescribed
            therefor, and
                ``(2) the amount of any credit or refund.

        ``(b) Interest on Overpayments and Underpayments.--Subsection (a)
    shall not apply for the purpose of determining interest on any
    overpayment or underpayment.''.

    [[Page 111 STAT. 878]]

        (b) Clerical Amendment.--The table of sections for chapter 77 is
    amended by inserting after the item relating to section 7508 the
    following new item:
                    ``Sec. 7508A. Authority to postpone certain tax-related
                                    deadlines by reason of presidentially
                                    declared disaster.''.

        (c) <<NOTE: 26 USC 7508A note.>>  Effective Date.--The amendments
    made by this section shall apply with respect to any period for
    performing an act that has not expired before the date of the enactment
    of this Act.

    SEC. 912. USE OF CERTAIN APPRAISALS TO ESTABLISH AMOUNT OF DISASTER
                LOSS.

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

        (b) <<NOTE: 26 USC 165 note.>>  Effective Date.--The amendment made
    by subsection (a) shall take effect on the date of the enactment of this
    Act.

    SEC. 913. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT OF WEATHER-RELATED
                CONDITIONS.

        (a) Deferral of Income Inclusion.--Subsection (e) of section 451
    (relating to special rules for proceeds from livestock sold on account
    of drought) is amended--
                (1) by striking ``drought conditions, and that these drought
            conditions'' in paragraph (1) and inserting ``drought, flood, or
            other weather-related conditions, and that such conditions'';
            and
                (2) by inserting ``, Flood, or Other Weather-Related
            Conditions'' after ``Drought'' in the subsection heading.

        (b) Involuntary Conversions.--Subsection (e) of section 1033
    (relating to livestock sold on account of drought) is amended--
                (1) by inserting ``, flood, or other weather-related
            conditions'' before the period at the end thereof; and
                (2) by inserting ``, Flood, or Other Weather-Related
            Conditions'' after ``Drought'' in the subsection heading.

        (c) <<NOTE: 26 USC 451 note.>>  Effective Date.--The amendments made
    by this section shall apply to sales and exchanges after December 31,
    1996.

    SEC. 914. MORTGAGE FINANCING FOR RESIDENCES LOCATED IN DISASTER AREAS.

        Subsection (k) of section 143 (relating to mortgage revenue bonds;
    qualified mortgage bond and qualified veteran's mortgage bond) is
    amended by adding at the end the following new paragraph:
                ``(11) Special rules for residences located in disaster
            areas.--In the case of a residence located in an area determined
            by the President to warrant assistance from the Federal
            Government under the Robert T. Stafford Disaster Relief and
            Emergency Assistance Act (as in effect on the date of the
            enactment of the Taxpayer Relief Act of 1997), this section
            shall be applied with the following modifications to financing
            provided with respect to such residence within 2 years after the
            date of the disaster declaration:

    [[Page 111 STAT. 879]]

                        ``(A) Subsection (d) (relating to 3-year
                    requirement) shall not apply.
                        ``(B) Subsections (e) and (f) (relating to purchase
                    price requirement and income requirement) shall be
                    applied as if such residence were a targeted area
                    residence.
            The preceding sentence <<NOTE: Effective date.>>  shall apply
            only with respect to bonds issued after December 31, 1996, and
            before January 1, 1999.''.

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

        (a) <<NOTE: 26 USC 7508A note.>>  In General.--If the Secretary of
    the Treasury extends for any period the time for filing income tax
    returns under section 6081 of the Internal Revenue Code of 1986 and the
    time for paying income tax with respect to such returns under section
    6161 of such Code (and waives any penalties relating to the failure to
    so file or so pay) for any individual located in a Presidentially
    declared disaster area, the Secretary shall, notwithstanding section
    7508A(b) of such Code, abate for such period the assessment of any
    interest prescribed under section 6601 of such Code on such income tax.

        (b) Presidentially Declared Disaster Area.--For purposes of
    subsection (a), the term ``Presidentially declared disaster area''
    means, with respect to any individual, any area which the President has
    determined during 1997 warrants assistance by the Federal Government
    under the Robert T. Stafford Disaster Relief and Emergency Assistance
    Act.
        (c) Individual.--For purposes of this section, the term
    ``individual'' shall not include any estate or trust.
        (d) Effective Date.--This section shall apply to disasters declared
    after December 31, 1996.

               Subtitle C--Provisions Relating to Employment Taxes

    SEC. 921. <<NOTE: 26 USC 3121 note.>>  CLARIFICATION OF STANDARD TO BE
                USED IN DETERMINING EMPLOYMENT TAX STATUS OF SECURITIES
                BROKERS.

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

    SEC. 922. CLARIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT TAX FOR
                CERTAIN TERMINATION PAYMENTS RECEIVED BY FORMER INSURANCE
                SALESMEN.

        (a) Internal Revenue Code.--Section 1402 (relating to definitions)
    is amended by adding at the end the following new subsection:
        ``(k) Codification of Treatment of Certain Termination Payments
    Received by Former Insurance Salesmen.--Nothing in subsection (a) shall
    be construed as including in the net earnings

    [[Page 111 STAT. 880]]

    from self-employment of an individual any amount received during the
    taxable year from an insurance company on account of services performed
    by such individual as an insurance salesman for such company if--
                ``(1) such amount is received after termination of such
            individual's agreement to perform such services for such
            company,
                ``(2) such individual performs no services for such company
            after such termination and before the close of such taxable
            year,
                ``(3) such individual enters into a covenant not to compete
            against such company which applies to at least the 1-year period
            beginning on the date of such termination, and
                ``(4) the amount of such payment--
                        ``(A) depends primarily on policies sold by or
                    credited to the account of such individual during the
                    last year of such agreement or the extent to which such
                    policies remain in force for some period after such
                    termination, or both, and
                        ``(B) does not depend to any extent on length of
                    service or overall earnings from services performed for
                    such company (without regard to whether eligibility for
                    payment depends on length of service).''.

        (b) Social Security Act.--Section 211 of the Social Security
    Act <<NOTE: 42 USC 411.>> is amended by adding at the end the following
    new subsection:

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

        ``(j) Nothing in subsection (a) shall be construed as including in
    the net earnings from self-employment of an individual any amount
    received during the taxable year from an insurance company on account of
    services performed by such individual as an insurance salesman for such
    company if--
                ``(1) such amount is received after termination of such
            individual's agreement to perform such services for such
            company,
                ``(2) such individual performs no services for such company
            after such termination and before the close of such taxable
            year,
                ``(3) such individual enters into a covenant not to compete
            against such company which applies to at least the 1-year period
            beginning on the date of such termination, and
                ``(4) the amount of such payment--
                        ``(A) depends primarily on policies sold by or
                    credited to the account of such individual during the
                    last year of such agreement or the extent to which such
                    policies remain in force for some period after such
                    termination, or both, and
                        ``(B) does not depend to any extent on length of
                    service or overall earnings from services performed for
                    such company (without regard to whether eligibility for
                    payment depends on length of service).''.

        (c) <<NOTE: 26 USC 1402 note.>>  Effective Date.--The amendments
    made by this section shall apply to payments after December 31, 1997.

    [[Page 111 STAT. 881]]

               Subtitle D--Provisions Relating to Small Businesses

    SEC. 931. WAIVER OF PENALTY THROUGH JUNE 30, 1998, ON SMALL BUSINESSES
                FAILING TO MAKE ELECTRONIC FUND TRANSFERS OF TAXES.

        No <<NOTE: 26 USC 6302 note.>>  penalty shall be imposed under the
    Internal Revenue Code of 1986 solely by reason of a failure by a person
    to use the electronic fund transfer system established under section
    6302(h) of such Code if--
                (1) such person is a member of a class of taxpayers first
            required to use such system on or after July 1, 1997, and
                (2) such failure occurs before July 1, 1998.

    SEC. 932. CLARIFICATION OF TREATMENT OF HOME OFFICE USE FOR
                ADMINISTRATIVE AND MANAGEMENT ACTIVITIES.

        (a) In General.--Paragraph (1) of section 280A(c) is amended by
    adding at the end the following new sentence: ``For purposes of
    subparagraph (A), the term `principal place of business' includes a
    place of business which is used by the taxpayer for the administrative
    or management activities of any trade or business of the taxpayer if
    there is no other fixed location of such trade or business where the
    taxpayer conducts substantial administrative or management activities of
    such trade or business.''.
        (b) <<NOTE: 26 USC 280A note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to taxable years beginning after December
    31, 1998.

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

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

                           ``PART I--INCOME AVERAGING

                    ``Sec. 1301. Averaging of farm income.

    ``SEC. 1301. AVERAGING OF FARM INCOME.

        ``(a) In General.--At the election of an individual engaged in a
    farming business, the tax imposed by section 1 for such taxable year
    shall be equal to the sum of--
                ``(1) a tax computed under such section on taxable income
            reduced by elected farm income, plus
                ``(2) the increase in tax imposed by section 1 which would
            result if taxable income for each of the 3 prior taxable years
            were increased by an amount equal to one-third of the elected
            farm income.

    Any adjustment under this section for any taxable year shall be taken
    into account in applying this section for any subsequent taxable year.
        ``(b) Definitions.--In this section--
                ``(1) Elected farm income.--
                        ``(A) In general.--The term `elected farm income'
                    means so much of the taxable income for the taxable
                    year--
                              ``(i) which is attributable to any farming
                          business; and

    [[Page 111 STAT. 882]]

                              ``(ii) which is specified in the election
                          under subsection (a).
                        ``(B) Treatment of gains.--For purposes of
                    subparagraph (A), gain from the sale or other
                    disposition of property (other than land) regularly used
                    by the taxpayer in such a farming business for a
                    substantial period shall be treated as attributable to
                    such a farming business.
                ``(2) Individual.--The term `individual' shall not include
            any estate or trust.
                ``(3) Farming business.--The term `farming business' has the
            meaning given such term by section 263A(e)(4).

        ``(c) Regulations.--The Secretary shall prescribe such regulations
    as may be appropriate to carry out the purposes of this section,
    including regulations regarding--
                ``(1) the order and manner in which items of income, gain,
            deduction, or loss, or limitations on tax, shall be taken into
            account in computing the tax imposed by this chapter on the
            income of any taxpayer to whom this section applies for any
            taxable year, and
                ``(2) the treatment of any short taxable year.''.

        (b) Clerical Amendment.--The table of parts for such subchapter Q is
    amended by inserting before the item relating to part II the following
    new item:
                    ``Part I. Income averaging.''.

        (c) <<NOTE: 26 USC 1301 note.>>  Effective Date.--The amendments
    made by this section shall apply to taxable years beginning after
    December 31, 1997, and before January 1, 2001.

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

        (a) In General.--The table contained in section 162(l)(1)(B) is
    amended to read as follows:
    ``For taxable years beginnThe applicable percentage is--
      calendar year--
    1997                                                                 40
    1998 and 1999                                                        45
    2000 and 2001                                                        50
    2002                                                                 60
    2003 through 2005                                                    80
    2006                                                                 90
    2007 and thereafter                                              100.''.

    <<NOTE: 26 USC 162 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1996.

    SEC. 935. MORATORIUM ON CERTAIN REGULATIONS.

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

                             Subtitle E--Brownfields

    SEC. 941. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

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

    [[Page 111 STAT. 883]]

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

        ``(a) In General.--A taxpayer may elect to treat any qualified
    environmental remediation expenditure which is paid or incurred by the
    taxpayer as an expense which is not chargeable to capital account. Any
    expenditure which is so treated shall be allowed as a deduction for the
    taxable year in which it is paid or incurred.
        ``(b) Qualified Environmental Remediation Expenditure.--For purposes
    of this section--
                ``(1) In general.--The term `qualified environmental
            remediation expenditure' means any expenditure--
                        ``(A) which is otherwise chargeable to capital
                    account, and
                        ``(B) which is paid or incurred in connection with
                    the abatement or control of hazardous substances at a
                    qualified contaminated site.
                ``(2) Special rule for expenditures for depreciable
            property.--Such term shall not include any expenditure for the
            acquisition of property of a character subject to the allowance
            for depreciation which is used in connection with the abatement
            or control of hazardous substances at a qualified contaminated
            site; except that the portion of the allowance under section 167
            for such property which is otherwise allocated to such site
            shall be treated as a qualified environmental remediation
            expenditure.

        ``(c) Qualified Contaminated Site.--For purposes of this section--
                ``(1) Qualified contaminated site.--
                        ``(A) In general.--The term `qualified contaminated
                    site' means any area--
                              ``(i) which is held by the taxpayer for use in
                          a trade or business or for the production of
                          income, or which is property described in section
                          1221(1) in the hands of the taxpayer,
                              ``(ii) which is within a targeted area, and
                              ``(iii) at or on which there has been a
                          release (or threat of release) or disposal of any
                          hazardous substance.
                        ``(B) Taxpayer must receive statement from state
                    environmental agency.--An area shall be treated as a
                    qualified contaminated site with respect to expenditures
                    paid or incurred during any taxable year only if the
                    taxpayer receives a statement from the appropriate
                    agency of the State in which such area is located that
                    such area meets the requirements of clauses (ii) and
                    (iii) of subparagraph (A).
                        ``(C) Appropriate state agency.--For purposes of
                    subparagraph (B), the chief executive officer of each
                    State may, in consultation with the Administrator of the
                    Environmental Protection Agency, designate the
                    appropriate State environmental agency within 60 days of
                    the date of the enactment of this section. If the chief
                    executive officer of a State has not designated an
                    appropriate State environmental agency within such 60-
                    day period, the appropriate environmental agency for
                    such State shall be designated by the Administrator of
                    the Environmental Protection Agency.
                ``(2) Targeted area.--

    [[Page 111 STAT. 884]]

                        ``(A) In general.--The term `targeted area' means--
                              ``(i) any population census tract with a
                          poverty rate of not less than 20 percent,
                              ``(ii) a population census tract with a
                          population of less than 2,000 if--
                                        ``(I) more than 75 percent of such
                                    tract is zoned for commercial or
                                    industrial use, and
                                        ``(II) such tract is contiguous to 1
                                    or more other population census tracts
                                    which meet the requirement of clause (i)
                                    without regard to this clause,
                              ``(iii) any empowerment zone or enterprise
                          community (and any supplemental zone designated on
                          December 21, 1994), and
                              ``(iv) any site announced before February 1,
                          1997, as being included as a brownfields pilot
                          project of the Environmental Protection Agency.
                        ``(B) National priorities listed sites not
                    included.--Such term shall not include any site which is
                    on, or proposed for, the national priorities list under
                    section 105(a)(8)(B) of the Comprehensive Environmental
                    Response, Compensation, and Liability Act of 1980 (as in
                    effect on the date of the enactment of this section).
                        ``(C) Certain rules to apply.--For purposes of this
                    paragraph the rules of sections 1392(b)(4) and
                    1393(a)(9) shall apply.

        ``(d) Hazardous Substance.--For purposes of this section--
                ``(1) In general.--The term `hazardous substance' means--
                        ``(A) any substance which is a hazardous substance
                    as defined in section 101(14) of the Comprehensive
                    Environmental Response, Compensation, and Liability Act
                    of 1980, and
                        ``(B) any substance which is designated as a
                    hazardous substance under section 102 of such Act.
                ``(2) Exception.--Such term shall not include any substance
            with respect to which a removal or remedial action is not
            permitted under section 104 of such Act by reason of subsection
            (a)(3) thereof.

        ``(e) Deduction Recaptured as Ordinary Income on Sale, Etc.--Solely
    for purposes of section 1245, in the case of property to which a
    qualified environmental remediation expenditure would have been
    capitalized but for this section--
                ``(1) the deduction allowed by this section for such
            expenditure shall be treated as a deduction for depreciation,
            and
                ``(2) such property (if not otherwise section 1245 property)
            shall be treated as section 1245 property solely for purposes of
            applying section 1245 to such deduction.

        ``(f) Coordination With Other Provisions.--Sections 280B and 468
    shall not apply to amounts which are treated as expenses under this
    section.
        ``(g) Regulations.--The Secretary shall prescribe such regulations
    as may be necessary or appropriate to carry out the purposes of this
    section.
        ``(h) Termination.--This section shall not apply to expenditures
    paid or incurred after December 31, 2000.''.

    [[Page 111 STAT. 885]]

        (b) Clerical Amendment.--The table of sections for part VI of
    subchapter B of chapter 1 is amended by adding at the end the following
    new item:
                    ``Sec. 198. Expensing of environmental remediation
                                    costs.''.

        (c) <<NOTE: 26 USC 198 note.>>  Effective Date.--The amendments made
    by this section shall apply to expenditures paid or incurred after the
    date of the enactment of this Act, in taxable years ending after such
    date.

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

                     CHAPTER 1--ADDITIONAL EMPOWERMENT ZONES

    SEC. 951. ADDITIONAL EMPOWERMENT ZONES.

        (a) In General.--Paragraph (2) of section 1391(b) (relating to
    designations of empowerment zones and enterprise communities) is
    amended--
                (1) by striking ``9'' and inserting ``11'',
                (2) by striking ``6'' and inserting ``8'', and
                (3) by striking ``750,000'' and inserting ``1,000,000''.

        (b) Special Rules for Application of Employment Credit.--Subsection
    (b) of section 1396 (relating to empowerment zone employment credit) is
    amended--
                (1) by striking so much of the subsection as precedes the
            table and inserting the following:

        ``(b) Applicable Percentage.--For purposes of this section--
                ``(1) In general.--Except as provided in paragraph (2), the
            term `applicable percentage' means the percentage determined in
            accordance with the following table:'', and
                (2) by adding at the end the following new paragraph:
                ``(2) Special Rule.--With respect to each empowerment zone
            designated pursuant to the amendments made by the Taxpayer
            Relief Act of 1997 to section 1391(b)(2), the following table
            shall apply in lieu of the table in paragraph (1):

                                  The.......................................
                                  applicable................................
    ``In the case of wages paid orpercentage................................
      incurred during calendar yeais--......................................
    2000 through 2004                                                    20
    2005                                                                 15
    2006                                                                 10
    2007                                                               5.''.

    <<NOTE: 26 USC 1391 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on the date of the enactment of this
    Act, except that designations of new empowerment zones made pursuant to
    such amendments shall be made during the 180-day period beginning on the
    date of the enactment of this Act. No designation pursuant to such
    amendments shall take effect before January 1, 2000.

    [[Page 111 STAT. 886]]

                        CHAPTER 2--NEW EMPOWERMENT ZONES

    SEC. 952. DESIGNATION OF NEW EMPOWERMENT ZONES.

        (a) In General.--Section 1391 (relating to designation procedure for
    empowerment zones and enterprise communities) is amended by adding at
    the end the following new subsection:
        ``(g) Additional Designations Permitted.--
                ``(1) In general.--In addition to the areas designated under
            subsection (a), the appropriate Secretaries may designate in the
            aggregate an additional 20 nominated areas as empowerment zones
            under this section, subject to the availability of eligible
            nominated areas. Of that number, not more than 15 may be
            designated in urban areas and not more than 5 may be designated
            in rural areas.
                ``(2) Period designations may be made and take effect.--A
            designation may be made under this subsection after the date of
            the enactment of this subsection and before January 1, 1999.
                ``(3) Modifications to eligibility criteria, etc.--
                        ``(A) Poverty rate requirement.--
                              ``(i) In general.--A nominated area shall be
                          eligible for designation under this subsection
                          only if the poverty rate for each population
                          census tract within the nominated area is not less
                          than 20 percent and the poverty rate for at least
                          90 percent of the population census tracts within
                          the nominated area is not less than 25 percent.
                              ``(ii) Treatment of census tracts with small
                          populations.--A population census tract with a
                          population of less than 2,000 shall be treated as
                          having a poverty rate of not less than 25 percent
                          if--
                                        ``(I) more than 75 percent of such
                                    tract is zoned for commercial or
                                    industrial use, and
                                        ``(II) such tract is contiguous to 1
                                    or more other population census tracts
                                    which have a poverty rate of not less
                                    than 25 percent (determined without
                                    regard to this clause).
                              ``(iii) Exception for developable sites.--
                          Clause (i) shall not apply to up to 3
                          noncontiguous parcels in a nominated area which
                          may be developed for commercial or industrial
                          purposes. The aggregate area of noncontiguous
                          parcels to which the preceding sentence applies
                          with respect to any nominated area shall not
                          exceed 2,000 acres.
                              ``(iv) Certain provisions not to apply.--
                          Section 1392(a)(4) (and so much of paragraphs (1)
                          and (2) of section 1392(b) as relate to section
                          1392(a)(4)) shall not apply to an area nominated
                          for designation under this subsection.
                              ``(v) Special rule for rural empowerment
                          zone.--The Secretary of Agriculture may designate
                          not more than 1 empowerment zone in a rural area
                          without regard to clause (i) if such area
                          satisfies emigration criteria specified by the
                          Secretary of Agriculture.
                        ``(B) Size limitation.--
                              ``(i) In general.--The parcels described in
                          subparagraph (A)(iii) shall not be taken into
                          account

    [[Page 111 STAT. 887]]

                          in determining whether the requirement of
                          subparagraph (A) or (B) of section 1392(a)(3) is
                          met.
                              ``(ii) Special rule for rural areas.--If a
                          population census tract (or equivalent division
                          under section 1392(b)(4)) in a rural area exceeds
                          1,000 square miles or includes a substantial
                          amount of land owned by the Federal, State, or
                          local government, the nominated area may exclude
                          such excess square mileage or governmentally owned
                          land and the exclusion of that area will not be
                          treated as violating the continuous boundary
                          requirement of section 1392(a)(3)(B).
                        ``(C) Aggregate population limitation.--The
                    aggregate population limitation under the last sentence
                    of subsection (b)(2) shall not apply to a designation
                    under paragraph (1)(B).
                        ``(D) Previously designated enterprise communities
                    may be included.--Subsection (e)(5) shall not apply to
                    any enterprise community designated under subsection (a)
                    that is also nominated for designation under this
                    subsection.
                        ``(E) Indian reservations may be nominated.--
                              ``(i) In general.--Section 1393(a)(4) shall
                          not apply to an area nominated for designation
                          under this subsection.
                              ``(ii) Special rule.--An area in an Indian
                          reservation shall be treated as nominated by a
                          State and a local government if it is nominated by
                          the reservation governing body (as determined by
                          the Secretary of Interior).''.

        (b) Employment Credit Not To Apply to New Empowerment Zones.--
    Section 1396 (relating to empowerment zone employment credit) is amended
    by adding at the end the following new subsection:
        ``(e) Credit Not To Apply to Empowerment Zones Designated Under
    Section 1391(g).--This section shall be applied without regard to any
    empowerment zone designated under section 1391(g).''.
        (c) Increased Expensing Under Section 179 Not To Apply in
    Developable Sites.--Section 1397A (relating to increase in expensing
    under section 179) is amended by adding at the end the following new
    subsection:
        ``(c) Limitation.--For purposes of this section, qualified zone
    property shall not include any property substantially all of the use of
    which is in any parcel described in section 1391(g)(3)(A)(iii).''.
        (d) Conforming Amendments.--
                (1) Subsections (e) and (f) of section 1391 are each amended
            by striking ``subsection (a)'' and inserting ``this section''.
                (2) Section 1391(c) is amended by striking ``this section''
            and inserting ``subsection (a)''.

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

        (a) In General.--Section 1394 (relating to tax-exempt enterprise
    zone facility bonds) is amended by adding at the end the following new
    subsection:
        ``(f) Bonds for Empowerment Zones Designated Under Section
    1391(g).--

    [[Page 111 STAT. 888]]

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

        (b) <<NOTE: 26 USC 1394 note.>>  Effective Date.--The amendment made
    by this section shall apply to obligations issued after the date of the
    enactment of this Act.

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

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

    [[Page 111 STAT. 889]]

    which is 50 percent or less of the statewide median family income (as
    determined under section 143).''.

      CHAPTER 3--TREATMENT OF EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES

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

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

    [[Page 111 STAT. 890]]

                              ``(ii) Testing period.--The term `testing
                          period' means the first 3 taxable years beginning
                          after the startup period.
                        ``(D) Portions of business may be enterprise zone
                    business.--The term `enterprise zone business' includes
                    any trades or businesses which would qualify as an
                    enterprise zone business (determined after the
                    modifications of subparagraph (B)) if such trades or
                    businesses were separately incorporated.''.

        (b) Modifications Relating to Qualified Zone Property.--Paragraph
    (2) of section 1394(b) (defining qualified zone property) is amended to
    read as follows:
                ``(2) Qualified zone property.--The term `qualified zone
            property' has the meaning given such term by section 1397C;
            except that--
                        ``(A) the references to empowerment zones shall be
                    treated as including references to enterprise
                    communities, and
                        ``(B) section 1397C(a)(2) shall be applied by
                    substituting `an amount equal to 15 percent of the
                    adjusted basis' for `an amount equal to the adjusted
                    basis'.''.

        (c) <<NOTE: 26 USC 1394 note.>>  Effective Date.--The amendments
    made by this section shall apply to obligations issued after the date of
    the enactment of this Act.

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

        (a) In General.--Section 1397B (defining enterprise zone business)
    is amended--
                (1) by striking ``80 percent'' in subsections (b)(2) and
            (c)(1) and inserting ``50 percent'',
                (2) by striking ``substantially all'' each place it appears
            in subsections (b) and (c) and inserting ``a substantial
            portion'',
                (3) by striking ``, and exclusively related to,'' in
            subsections (b)(4) and (c)(3),
                (4) by adding at the end of subsection (d)(2) the following
            new flush sentence:
            ``For purposes of subparagraph (B), the lessor of the property
            may rely on a lessee's certification that such lessee is an
            enterprise zone business.'',
                (5) by striking ``substantially all'' in subsection (d)(3)
            and inserting ``at least 50 percent'', and
                (6) by adding at the end the following new subsection:

        ``(f) Treatment of Businesses Straddling Census Tract Lines.--For
    purposes of this section, if--
                ``(1) a business entity or proprietorship uses real property
            located within an empowerment zone,
                ``(2) the business entity or proprietorship also uses real
            property located outside the empowerment zone,
                ``(3) the amount of real property described in paragraph (1)
            is substantial compared to the amount of real property described
            in paragraph (2), and
                ``(4) the real property described in paragraph (2) is
            contiguous to part or all of the real property described in
            paragraph (1),

    [[Page 111 STAT. 891]]

    then all the services performed by employees, all business activities,
    all tangible property, and all intangible property of the business
    entity or proprietorship that occur in or is located on the real
    property described in paragraphs (1) and (2) shall be treated as
    occurring or situated in an empowerment zone.''.
        (b) <<NOTE: 26 USC 1397B note.>>  Effective Dates.--
                (1) In general.--The amendments made by this section shall
            apply to taxable years beginning on or after the date of the
            enactment of this Act.
                (2) Special rule for enterprise zone facility bonds.--For
            purposes of section 1394(b) of the Internal Revenue Code of
            1986, the amendments made by this section shall apply to
            obligations issued after the date of the enactment of this Act.

                          Subtitle G--Other Provisions

    SEC. 961. USE OF ESTIMATES OF SHRINKAGE FOR INVENTORY ACCOUNTING.

        (a) In General.--Section 471 (relating to general rule for
    inventories) is amended by redesignating subsection (b) as subsection
    (c) and by inserting after subsection (a) the following new subsection:
        ``(b) Estimates of Inventory Shrinkage Permitted.--A method of
    determining inventories shall not be treated as failing to clearly
    reflect income solely because it utilizes estimates of inventory
    shrinkage that are confirmed by a physical count only after the last day
    of the taxable year if--
                ``(1) the taxpayer normally does a physical count of
            inventories at each location on a regular and consistent basis,
            and
                ``(2) the taxpayer makes proper adjustments to such
            inventories and to its estimating methods to the extent such
            estimates are greater than or less than the actual shrinkage.''.

        (b) <<NOTE: 26 USC 471 note.>>  Effective Date.--
                (1) In general.--The amendment made by this section shall
            apply to taxable years ending after the date of the enactment of
            this Act.
                (2) Coordination with section 481.--In the case of any
            taxpayer permitted by this section to change its method of
            accounting to a permissible method for any taxable year--
                        (A) such changes shall be treated as initiated by
                    the taxpayer,
                        (B) such changes shall be treated as made with the
                    consent of the Secretary of the Treasury, and
                        (C) the period for taking into account the
                    adjustments under section 481 by reason of such change
                    shall be 4 years.

    SEC. 962. ASSIGNMENT OF WORKMEN'S COMPENSATION LIABILITY ELIGIBLE FOR
                EXCLUSION RELATING TO PERSONAL INJURY LIABILITY ASSIGNMENTS.

        (a) In General.--Subsection (c) of section 130 (relating to certain
    personal injury liability assignments) is amended--
                (1) by inserting ``, or as compensation under any workmen's
            compensation act,'' after ``(whether by suit or agreement)'' in
            the material preceding paragraph (1),

    [[Page 111 STAT. 892]]

                (2) by inserting ``or the workmen's compensation claim,''
            after ``agreement,'' in paragraph (1), and
                (3) by striking ``section 104(a)(2)'' in paragraph (2)(D)
            and inserting ``paragraph (1) or (2) of section 104(a)''.

        (b) <<NOTE: 26 USC 130 note.>>  Effective Date.--The amendments made
    by subsection (a) shall apply to claims under workmen's compensation
    acts filed after the date of the enactment of this Act.

    SEC. 963. TAX-EXEMPT STATUS FOR CERTAIN STATE WORKER'S COMPENSATION ACT
                COMPANIES.

        (a) In General.--Section 501(c)(27) (relating to membership
    organizations under workmen's compensation acts) is amended by adding at
    the end the following:
                ``(B) Any organization (including a mutual insurance
            company) if--
                        ``(i) such organization is created by State law and
                    is organized and operated under State law exclusively
                    to--
                              ``(I) provide workmen's compensation insurance
                          which is required by State law or with respect to
                          which State law provides significant disincentives
                          if such insurance is not purchased by an employer,
                          and
                              ``(II) provide related coverage which is
                          incidental to workmen's compensation insurance,
                        ``(ii) such organization must provide workmen's
                    compensation insurance to any employer in the State (for
                    employees in the State or temporarily assigned out-of-
                    State) which seeks such insurance and meets other
                    reasonable requirements relating thereto,
                        ``(iii)(I) the State makes a financial commitment
                    with respect to such organization either by extending
                    the full faith and credit of the State to the initial
                    debt of such organization or by providing the initial
                    operating capital of such organization, and (II) in the
                    case of periods after the date of enactment of this
                    subparagraph, the assets of such organization revert to
                    the State upon dissolution or State law does not permit
                    the dissolution of such organization, and
                        ``(iv) the majority of the board of directors or
                    oversight body of such organization are appointed by the
                    chief executive officer or other executive branch
                    official of the State, by the State legislature, or by
                    both.''.

        (b) Conforming Amendments.--Section 501(c)(27) is amended by
    inserting ``(A)'' after ``(27)'', by redesignating subparagraphs (A),
    (B), and (C) as clauses (i), (ii), and (iii), respectively, and by
    redesignating clauses (i) and (ii) of subparagraphs (B) and (C) (before
    redesignation) as subclauses (I) and (II), respectively.
        (c) <<NOTE: 26 USC 501 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    SEC. 964. ELECTION FOR 1987 PARTNERSHIPS TO CONTINUE EXCEPTION FROM
                TREATMENT OF PUBLICLY TRADED PARTNERSHIPS AS CORPORATIONS.

        (a) In General.--Section 7704 is amended by adding at the end the
    following new subsection:
        ``(g) Exception for Electing 1987 Partnerships.--
                ``(1) In general.--Subsection (a) shall not apply to an
            electing 1987 partnership.

    [[Page 111 STAT. 893]]

                ``(2) Electing 1987 partnership.--For purposes of this
            subsection, the term `electing 1987 partnership' means any
            publicly traded partnership if--
                        ``(A) such partnership is an existing partnership
                    (as defined in section 10211(c)(2) of the Revenue
                    Reconciliation Act of 1987),
                        ``(B) subsection (a) has not applied (and without
                    regard to subsection (c)(1) would not have applied) to
                    such partnership for all prior taxable years beginning
                    after December 31, 1987, and before January 1, 1998, and
                        ``(C) such partnership elects the application of
                    this subsection, and consents to the application of the
                    tax imposed by paragraph (3), for its first taxable year
                    beginning after December 31, 1997.
            A partnership which, but for this sentence, would be treated as
            an electing 1987 partnership shall cease to be so treated (and
            the election under subparagraph (C) shall cease to be in effect)
            as of the 1st day after December 31, 1997, on which there has
            been an addition of a substantial new line of business with
            respect to such partnership.
                ``(3) Additional tax on electing partnerships.--
                        ``(A) Imposition of tax.--There is hereby imposed
                    for each taxable year on the income of each electing
                    1987 partnership a tax equal to 3.5 percent of such
                    partnership's gross income for the taxable year from the
                    active conduct of trades and businesses by the
                    partnership.
                        ``(B) Adjustments in the case of tiered
                    partnerships.--For purposes of this paragraph, in the
                    case of a partnership which is a partner in another
                    partnership, the gross income referred to in
                    subparagraph (A) shall include the partnership's
                    distributive share of the gross income of such other
                    partnership from the active conduct of trades and
                    businesses of such other partnership. A similar rule
                    shall apply in the case of lower-tiered partnerships.
                        ``(C) Treatment of tax.--For purposes of this title,
                    the tax imposed by this paragraph shall be treated as
                    imposed by chapter 1 other than for purposes of
                    determining the amount of any credit allowable under
                    chapter 1.
                ``(4) Election.--An election and consent under this
            subsection shall apply to the taxable year for which made and
            all subsequent taxable years unless revoked by the partnership.
            Such revocation may be made without the consent of the
            Secretary, but, once so revoked, may not be reinstated.''.

        (b) <<NOTE: 26 USC 7704 note.>>  Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    SEC. 965. EXCLUSION FROM UNRELATED BUSINESS TAXABLE INCOME FOR CERTAIN
                SPONSORSHIP PAYMENTS.

        (a) In General.--Section 513 (relating to unrelated trade or
    business income) is amended by adding at the end the following new
    subsection:
        ``(i) Treatment of Certain Sponsorship Payments.--
                ``(1) In general.--The term `unrelated trade or business'
            does not include the activity of soliciting and receiving
            qualified sponsorship payments.
                ``(2) Qualified sponsorship payments.--For purposes of this
            subsection--

    [[Page 111 STAT. 894]]

                        ``(A) In general.--The term `qualified sponsorship
                    payment' means any payment made by any person engaged in
                    a trade or business with respect to which there is no
                    arrangement or expectation that such person will receive
                    any substantial return benefit other than the use or
                    acknowledgement of the name or logo (or product lines)
                    of such person's trade or business in connection with
                    the activities of the organization that receives such
                    payment. Such a use or acknowledgement does not include
                    advertising such person's products or services
                    (including messages containing qualitative or
                    comparative language, price information, or other
                    indications of savings or value, an endorsement, or an
                    inducement to purchase, sell, or use such products or
                    services).
                        ``(B) Limitations.--
                              ``(i) Contingent payments.--The term
                          `qualified sponsorship payment' does not include
                          any payment if the amount of such payment is
                          contingent upon the level of attendance at one or
                          more events, broadcast ratings, or other factors
                          indicating the degree of public exposure to one or
                          more events.
                              ``(ii) Safe harbor does not apply to
                          periodicals and qualified convention and trade
                          show activities.--The term `qualified sponsorship
                          payment' does not include--
                                        ``(I) any payment which entitles the
                                    payor to the use or acknowledgement of
                                    the name or logo (or product lines) of
                                    the payor's trade or business in
                                    regularly scheduled and printed material
                                    published by or on behalf of the payee
                                    organization that is not related to and
                                    primarily distributed in connection with
                                    a specific event conducted by the payee
                                    organization, or
                                        ``(II) any payment made in
                                    connection with any qualified convention
                                    or trade show activity (as defined in
                                    subsection (d)(3)(B)).
                ``(3) Allocation of portions of single payment.--For
            purposes of this subsection, to the extent that a portion of a
            payment would (if made as a separate payment) be a qualified
            sponsorship payment, such portion of such payment and the other
            portion of such payment shall be treated as separate
            payments.''.

        (b) <<NOTE: 26 USC 513 note.>>  Effective Date.--The amendment made
    by this section shall apply to payments solicited or received after
    December 31, 1997.

    SEC. 966. ASSOCIATIONS OF HOLDERS OF TIMESHARE INTERESTS TO BE TAXED
                LIKE OTHER HOMEOWNERS ASSOCIATIONS.

        (a) Timeshare Associations Included as Homeowner Associations.--
                (1) In general.--Paragraph (1) of section 528(c) (defining
            homeowners association) is amended--
                        (A) by striking ``or a residential real estate
                    management association'' and inserting ``, a residential
                    real estate management association, or a timeshare
                    association'' in the material preceding subparagraph
                    (A),

    [[Page 111 STAT. 895]]

                        (B) by striking ``or'' at the end of clause (i) of
                    subparagraph (B), by striking the period at the end of
                    clause (ii) of subparagraph (B) and inserting ``, or'',
                    and by adding at the end of subparagraph (B) the
                    following new clause:
                              ``(iii) owners of timeshare rights to use, or
                          timeshare ownership interests in, association
                          property in the case of a timeshare
                          association,'', and
                        (C) by inserting ``and, in the case of a timeshare
                    association, for activities provided to or on behalf of
                    members of the association'' before the comma at the end
                    of subparagraph (C).
                (2) Timeshare association defined.--Subsection (c) of
            section 528 is amended by redesignating paragraph (4) as
            paragraph (5) and by inserting after paragraph (3) the following
            new paragraph:
                ``(4) Timeshare association.--The term `timeshare
            association' means any organization (other than a condominium
            management association) meeting the requirement of subparagraph
            (A) of paragraph (1) if any member thereof holds a timeshare
            right to use, or a timeshare ownership interest in, real
            property constituting association property.''.

        (b) Exempt Function Income.--Paragraph (3) of section 528(d) is
    amended by striking ``or'' at the end of subparagraph (A), by striking
    the period at the end of subparagraph (B) and inserting ``, or'', and by
    adding at the end the following new subparagraph:
                        ``(C) owners of timeshare rights to use, or
                    timeshare ownership interests in, real property in the
                    case of a timeshare association.''.

        (c) Association Property.--Paragraph (5) of section 528(c), as
    redesignated by subsection (a)(2), is amended by adding at the end the
    following new flush sentence:
            ``In the case of a timeshare association, such term includes
            property in which the timeshare association, or members of the
            association, have rights arising out of recorded easements,
            covenants, or other recorded instruments to use property related
            to the timeshare project.''.

        (d) Rate of Tax.--Subsection (b) of section 528 (relating to certain
    homeowners associations) is amended by inserting before the period ``(32
    percent of such income in the case of a timeshare association)''.
        (e) <<NOTE: 26 USC 528 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1996.

    SEC. 967. ADDITIONAL ADVANCE REFUNDING OF CERTAIN VIRGIN ISLAND BONDS.

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

    SEC. 968. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN FARMERS'
                COOPERATIVES.

        (a) In General.--Section 1042 (relating to sales of stock to
    employee stock ownership plans or certain cooperatives) is amended by
    adding at the end the following new subsection:

    [[Page 111 STAT. 896]]

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

        (b) <<NOTE: 26 USC 1042 note.>>  Effective Date.--The amendment made
    by this section shall apply to sales after December 31, 1997.

    SEC. 969. INCREASED DEDUCTIBILITY OF BUSINESS MEAL EXPENSES FOR
                INDIVIDUALS SUBJECT TO FEDERAL HOURS OF SERVICE.

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

    [[Page 111 STAT. 897]]

                        ``(B) Applicable percentage.--For purposes of this
                    paragraph, the term `applicable percentage' means the
                    percentage determined under the following table:

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

    <<NOTE: 26 USC 274 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply to taxable years beginning after December
    31, 1997.

    SEC. 970. CLARIFICATION OF DE MINIMIS FRINGE BENEFIT RULES TO NO-CHARGE
                EMPLOYEE MEALS.

        (a) In General.--Paragraph (2) of section 132(e) (defining de
    minimis fringe) is amended by adding at the end the following new
    sentence: ``For purposes of subparagraph (B), an employee entitled under
    section 119 to exclude the value of a meal provided at such facility
    shall be treated as having paid an amount for such meal equal to the
    direct operating costs of the facility attributable to such meal.''.
    <<NOTE: 26 USC 132 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    SEC. 971. EXEMPTION OF THE INCREMENTAL COST OF A CLEAN FUEL VEHICLE FROM
                THE LIMITS ON DEPRECIATION FOR VEHICLES.

        (a) In General.--Section 280F(a)(1) (relating to limiting
    depreciation on luxury automobiles) is amended by adding at the end the
    following new subparagraph:
                        ``(C) Special rule for certain clean-fuel passenger
                    automobiles.--
                              ``(i) Modified automobiles.--In the case of a
                          passenger automobile which is propelled by a fuel
                          which is not a clean-burning fuel and to which is
                          installed qualified clean-fuel vehicle property
                          (as defined in section 179A(c)(1)(A)) for purposes
                          of permitting such vehicle to be propelled by a
                          clean burning fuel (as defined in section
                          179A(e)(1)), subparagraph (A) shall not apply to
                          the cost of the installed qualified clean burning
                          vehicle property.
                              ``(ii) Purpose built passenger vehicles.--In
                          the case of a purpose built passenger vehicle (as
                          defined in section 4001(a)(2)(C)(ii)), each of the
                          annual limitations specified in subparagraph (A)
                          shall be tripled.''.

    <<NOTE: 26 USC 280F note.>>     (b) Effective Date.--The amendments made
    by this section shall apply to property placed in service after the date
    of enactment of this Act and before January 1, 2005.

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

        (a) In General.--Paragraph (6) of section 613A(c) is amended by
    adding at the end the following new subparagraph:

    [[Page 111 STAT. 898]]

                        ``(H) Temporary suspension of taxable income limit
                    with respect to marginal production.--The second
                    sentence of subsection (a) of section 613 shall not
                    apply to so much of the allowance for depletion as is
                    determined under subparagraph (A) for any taxable year
                    beginning after December 31, 1997, and before January 1,
                    2000.''.

        (b) <<NOTE: 26 USC 613A note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to taxable years beginning after December
    31, 1997.

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

        (a) In General.--Section 170(i) (relating to standard mileage rate
    for use of passenger automobile) is amended to read as follows:
        ``(i) Standard Mileage Rate for Use of Passenger Automobile.--For
    purposes of computing the deduction under this section for use of a
    passenger automobile, the standard mileage rate shall be 14 cents per
    mile.''.
        (b) <<NOTE: 26 USC 170 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to taxable years beginning after December
    31, 1997.

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

        (a) In General.--Subparagraph (A) of section 501(e)(1) is amended by
    inserting ``(including the purchase of patron accounts receivable on a
    recourse basis)'' after ``billing and collection''.
        (b) <<NOTE: 26 USC 501 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to taxable years beginning after December
    31, 1996.

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

        (a) In General.--Paragraph (2) of section 62(a) (defining adjusted
    gross income) is amended by adding at the end the following new
    subparagraph:
                        ``(C) Certain expenses of officials.--The deductions
                    allowed by section 162 which consist of expenses paid or
                    incurred with respect to services performed by an
                    official as an employee of a State or a political
                    subdivision thereof in a position compensated in whole
                    or in part on a fee basis.''.

        (b) <<NOTE: 26 USC 62 note.>>  Effective Date.--The amendment made
    by this section shall apply to expenses paid or incurred in taxable
    years beginning after December 31, 1986.

    SEC. 976. COMBINED EMPLOYMENT TAX REPORTING DEMONSTRATION PROJECT.

        (a) <<NOTE: 26 USC 6103 note.>>  In General.--The Secretary of the
    Treasury shall provide for a demonstration project to assess the
    feasibility and desirability of expanding combined Federal and State tax
    reporting.

        (b) <<NOTE: 26 USC 6103 note.>>  Description of Demonstration
    Project.--The demonstration project under subsection (a) shall be--
                (1) carried out between the Internal Revenue
            Service <<NOTE: Montana.>>  and the State of Montana for a
            period ending with the date which is 5 years after the date of
            the enactment of this Act,
                (2) limited to the reporting of employment taxes, and

    [[Page 111 STAT. 899]]

                (3) limited to the disclosure of the taxpayer identity (as
            defined in section 6103(b)(6) of such Code) and the signature of
            the taxpayer.

        (c) Conforming Amendment.--Section 6103(d) is amended by adding at
    the end the following new paragraph:
                ``(5) Disclosure for certain combined reporting project.--
            The Secretary shall disclose taxpayer identities and signatures
            for purposes of the demonstration project described in section
            967 of the Taxpayer Relief Act of 1997.''.

    SEC. 977. <<NOTE: 26 USC 172 note.>>  ELECTIVE CARRYBACK OF EXISTING
                CARRYOVERS OF NATIONAL RAILROAD PASSENGER CORPORATION.

        (a) Elective Carryback.--
                (1) In general.--If the National Railroad Passenger
            Corporation (in this section referred to as the
            ``Corporation'')--
                        (A) makes an election under this section for its
                    first taxable year ending after September 30, 1997, and
                        (B) agrees to the conditions specified in paragraph
                    (2),
            then the Corporation shall be treated as having made a payment
            of the tax imposed by chapter 1 of the Internal Revenue Code of
            1986 for such first taxable year and the succeeding taxable year
            in an amount (for each such taxable year) equal to 50 percent of
            the amount determined under paragraph (3). Each such payment
            shall be treated as having been made by the Corporation on the
            last day prescribed by law (without regard to extensions) for
            filing its return of tax under chapter 1 of such Code for the
            taxable year to which such payment relates.
                (2) Conditions.--
                        (A) In general.--This section shall only apply to
                    the Corporation if it agrees (in such manner as the
                    Secretary of the Treasury or his delegate may prescribe)
                    to--
                              (i) except as provided in clause (ii), use any
                          refund of the payment described in paragraph (1)
                          (and any interest thereon) solely to finance
                          qualified expenses of the Corporation, and
                              (ii) make the payments to non-Amtrak States as
                          described in subsection (c).
                        (B) Repayment.--
                              (i) In general.--The Corporation shall repay
                          to the United States any amount not used in
                          accordance with this paragraph and any amount
                          remaining unused as of January 1, 2010.
                              (ii) Special rules.--For purposes of clause
                          (i)--
                                        (I) no amount shall be treated as
                                    remaining unused as of January 1, 2010,
                                    if it is obligated as of such date for a
                                    qualified expense, and
                                        (II) the Corporation shall not be
                                    treated as failing to meet the
                                    requirements of clause (i) by reason of
                                    investing any amount for a temporary
                                    period.
                (3) Amount.--For purposes of paragraph (1)--
                        (A) In general.--The amount determined under this
                    paragraph shall be the lesser of--
                              (i) 35 percent of the Corporation's existing
                          qualified carryovers, or

    [[Page 111 STAT. 900]]

                              (ii) the Corporation's net tax liability for
                          the carryback period.
                        (B) Dollar limit.--Such amount shall not exceed
                    $2,323,000,000.

        (b) Existing Qualified Carryovers; Net Tax Liability.--For purposes
    of this section--
                (1) Existing qualified carryovers.--The term ``existing
            qualified carryovers'' means the aggregate of the amounts which
            are net operating loss carryovers under section 172(b) of the
            Internal Revenue Code of 1986 to the Corporation's first taxable
            year ending after September 30, 1997.
                (2) Net tax liability for carryback period.--
                        (A) In general.--The Corporation's net tax liability
                    for the carryback period is the aggregate of the net tax
                    liability of the Corporation's railroad predecessors for
                    taxable years in the carryback period.
                        (B) Net tax liability.--The term ``net tax
                    liability'' means, with respect to any taxable year, the
                    amount of the tax imposed by chapter 1 of the Internal
                    Revenue Code of 1986 (or any corresponding provision of
                    prior law) for such taxable year, reduced by the sum of
                    the credits allowable against such tax under such Code
                    (or any corresponding provision of prior law).
                        (C) Carryback period.--The term ``carryback period''
                    means the period--
                              (i) which begins with the first taxable year
                          of any railroad predecessor beginning before
                          January 1, 1971, for which there is a net tax
                          liability, and
                              (ii) which ends with the last taxable year of
                          any railroad predecessor beginning before January
                          1, 1971.
                (3) Railroad predecessor.--
                        (A) In general.--The term ``railroad predecessor''
                    means--
                              (i) any railroad which entered into a contract
                          under section 401 or 404(a) of the Rail Passenger
                          Service Act of 1970 relieving the railroad of its
                          entire responsibility for the provision of
                          intercity rail passenger service, and
                              (ii) any predecessor thereof.
                        (B) Consolidated returns.--If any railroad described
                    in subparagraph (A) was a member of an affiliated group
                    which filed a consolidated return for any taxable year
                    in the carryback period, each member of such group shall
                    be treated as a railroad predecessor for such year.

        (c) Payments to Non-Amtrak States.--
                (1) In general.--Within 30 days after receipt of any refund
            of any payment described in subsection (a)(1), the Corporation
            shall pay to each non-Amtrak State an amount equal to 1 percent
            of the amount of such refund.
                (2) Use of payment.--Each non-Amtrak State shall use the
            payment described in paragraph (1) (and any interest thereon)
            solely to finance qualified expenses of the State.
                (3) Repayment.--A non-Amtrak State shall pay to the United
            States--
                        (A) any portion of the payment received by the State
                    under paragraph (1) (and any interest thereon) which is
                    used for a purpose other than to finance qualified
                    expenses

    [[Page 111 STAT. 901]]

                    of the State or which remains unused as of January 1,
                    2010, or
                        (B) if such State ceases to be a non-Amtrak State,
                    the portion of such payment (and any interest thereon)
                    remaining as of the date of the cessation.
            Rules similar to the rules of subsection (a)(2)(B) shall apply
            for purposes of this paragraph.

        (d) Tax Consequences.--
                (1) Reduction in carryovers.--If the Corporation elects the
            application of this section, the Corporation's existing
            qualified carryovers shall be reduced by an amount equal to the
            amount determined under subsection (a)(3) divided by 0.35.
                (2) Reduction in tax paid by railroad predecessors.--
                        (A) In general.--The Secretary of the Treasury or
                    his delegate shall appropriately adjust the tax account
                    of each railroad predecessor to reduce the net tax
                    liability of such predecessor for taxable years
                    beginning in the carryback period which is offset by
                    reason of the application of this section.
                        (B) FIFO ordering rule.--The Secretary shall make
                    the adjustments under subparagraph (A) first for the
                    earliest year in the carryback period and then for each
                    subsequent year in such period.
                        (C) No effect on other taxpayers.--In no event shall
                    any taxpayer other than the Corporation be allowed a
                    refund or credit by reason of this section.
                        (D) Waiver of limitations.--If the adjustment under
                    subparagraph (A) is barred by the operation of any law
                    or rule of law, such law or rule of law shall be waived
                    solely for purposes of making such adjustment.
                (3) Tax treatment of expenditures.--With respect to any
            payment by the Corporation of qualified expenses described in
            subsection (e)(1)(A) during any taxable year from the amount of
            any refund of the payment described in subsection (a)(1)--
                        (A) no deduction shall be allowed to the Corporation
                    with respect to any amount paid or incurred which is
                    attributable to such amount, and
                        (B) the basis of any property shall be reduced by
                    the portion of the cost of such property which is
                    attributable to such amount.
                (4) Payments to a non-amtrak state.--No deduction shall be
            allowed to the Corporation under chapter 1 of the Internal
            Revenue Code of 1986 for any payment to a non-Amtrak State
            required under subsection (a)(2)(A)(ii).

        (e) Definitions.--For purposes of this section--
                (1) Qualified expenses.--The term ``qualified expenses''
            means expenses incurred for--
                        (A) in the case of the Corporation--
                              (i) the acquisition of equipment, rolling
                          stock, and other capital improvements, the
                          upgrading of maintenance facilities, and the
                          maintenance of existing equipment, in intercity
                          passenger rail service, and
                              (ii) the payment of interest and principal on
                          obligations incurred for such acquisition,
                          upgrading, and maintenance, and
                        (B) in the case of a non-Amtrak State--

    [[Page 111 STAT. 902]]

                              (i) the acquisition of equipment, rolling
                          stock, and other capital improvements, the
                          upgrading of maintenance facilities, and the
                          maintenance of existing equipment, in intercity
                          passenger rail service,
                              (ii) the acquisition of equipment, rolling
                          stock, and other capital improvements, the
                          upgrading of maintenance facilities, and the
                          maintenance of existing equipment, in intercity
                          bus service,
                              (iii) the purchase of intercity passenger rail
                          services from the Corporation, and
                              (iv) the payment of interest and principal on
                          obligations incurred for such acquisition,
                          upgrading, maintenance, and purchase.
            In the case of a non-Amtrak State which provides its own
            intercity passenger rail service on the date of the enactment of
            this paragraph, subparagraph (B) shall be applied by only taking
            into account clauses (i) and (iv).
                (2) Non-amtrak state.--The term ``non-Amtrak State'' means,
            with respect to any payment, any State which does not receive
            intercity passenger rail service from the Corporation at any
            time during the period beginning on the date of the enactment of
            this Act and ending on the date of the payment.

        (f) Authorizing Reform Required.--
                (1) In general.--The Secretary of the Treasury shall not
            make payment of any refund of any payment described in
            subsection (a)(1) earlier than the date of the enactment of
            Federal legislation, other than legislation included in this
            section, which is enacted after July 29, 1997, and which
            authorizes reforms of the National Railroad Passenger
            Corporation.
                (2) No interest.--Notwithstanding any other provision of
            law, if the payment of any refund is delayed by reason of
            paragraph (1), no interest shall accrue with respect to such
            payment prior to the 45th day following the date of the
            enactment of Federal legislation described in paragraph (1).
                (3) Estimate of revenue.--For purposes of estimating
            revenues under budget reconciliation, the impact of this section
            on Federal revenues shall be determined without regard to this
            subsection.

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

    SEC. 981. GENERALIZED SYSTEM OF PREFERENCES.

        (a) Extension of Duty-Free Treatment Under System.--Section 505 of
    the Trade Act of 1974 (19 U.S.C. 2465) is amended by striking ``May 31,
    1997'' and inserting ``June 30, 1998''.
        (b) <<NOTE: 19 USC 465 note.>>  Retroactive Application for Certain
    Liquidations and Reliquidations.--
                (1) In general.--Notwithstanding section 514 of the Tariff
            Act of 1930 or any other provision of law and subject to
            paragraph (2), the entry--
                        (A) of any article to which duty-free treatment
                    under title V of the Trade Act of 1974 would have
                    applied if the entry had been made on May 31, 1997, and

    [[Page 111 STAT. 903]]

                        (B) that was made after May 31, 1997, and before the
                    date of the enactment of this Act,
            shall be liquidated or reliquidated as free of duty, and the
            Secretary of the Treasury shall refund any duty paid with
            respect to such entry. As used in this subsection, the term
            ``entry'' includes a withdrawal from warehouse for consumption.
                (2) Requests.--Liquidation or reliquidation may be made
            under paragraph (1) with respect to an entry only if a request
            therefor is filed with the Customs Service, within 180 days
            after the date of the enactment of this Act, that contains
            sufficient information to enable the Customs Service--
                        (A) to locate the entry; or
                        (B) to reconstruct the entry if it cannot be
                    located.

                                TITLE X--REVENUES

                         Subtitle A--Financial Products

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

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

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

        ``(a) In General.--If there is a constructive sale of an appreciated
    financial position--
                ``(1) the taxpayer shall recognize gain as if such position
            were sold, assigned, or otherwise terminated at its fair market
            value on the date of such constructive sale (and any gain shall
            be taken into account for the taxable year which includes such
            date), and
                ``(2) for purposes of applying this title for periods after
            the constructive sale--
                        ``(A) proper adjustment shall be made in the amount
                    of any gain or loss subsequently realized with respect
                    to such position for any gain taken into account by
                    reason of paragraph (1), and
                        ``(B) the holding period of such position shall be
                    determined as if such position were originally acquired
                    on the date of such constructive sale.

        ``(b) Appreciated Financial Position.--For purposes of this
    section--
                ``(1) In general.--Except as provided in paragraph (2), the
            term `appreciated financial position' means any position with
            respect to any stock, debt instrument, or partnership interest
            if there would be gain were such position sold, assigned, or
            otherwise terminated at its fair market value.
                ``(2) Exceptions.--The term `appreciated financial position'
            shall not include--
                        ``(A) any position with respect to debt if--
                              ``(i) the debt unconditionally entitles the
                          holder to receive a specified principal amount,
                              ``(ii) the interest payments (or other similar
                          amounts) with respect to such debt meet the
                          requirements of clause (i) of section
                          860G(a)(1)(B), and

    [[Page 111 STAT. 904]]

                              ``(iii) such debt is not convertible (directly
                          or indirectly) into stock of the issuer or any
                          related person, and
                        ``(B) any position which is marked to market under
                    any provision of this title or the regulations
                    thereunder.
                ``(3) Position.--The term `position' means an interest,
            including a futures or forward contract, short sale, or option.

        ``(c) Constructive Sale.--For purposes of this section--
                ``(1) In general.--A taxpayer shall be treated as having
            made a constructive sale of an appreciated financial position if
            the taxpayer (or a related person)--
                        ``(A) enters into a short sale of the same or
                    substantially identical property,
                        ``(B) enters into an offsetting notional principal
                    contract with respect to the same or substantially
                    identical property,
                        ``(C) enters into a futures or forward contract to
                    deliver the same or substantially identical property,
                        ``(D) in the case of an appreciated financial
                    position that is a short sale or a contract described in
                    subparagraph (B) or (C) with respect to any property,
                    acquires the same or substantially identical property,
                    or
                        ``(E) to the extent prescribed by the Secretary in
                    regulations, enters into 1 or more other transactions
                    (or acquires 1 or more positions) that have
                    substantially the same effect as a transaction described
                    in any of the preceding subparagraphs.
                ``(2) Exception for sales of nonpublicly traded property.--
            The term `constructive sale' shall not include any contract for
            sale of any stock, debt instrument, or partnership interest
            which is not a marketable security (as defined in section
            453(f)) if the contract settles within 1 year after the date
            such contract is entered into.
                ``(3) Exception for certain closed transactions.--
                        ``(A) In general.--In applying this section, there
                    shall be disregarded any transaction (which would
                    otherwise be treated as a constructive sale) during the
                    taxable year if--
                              ``(i) such transaction is closed before the
                          end of the 30th day after the close of such
                          taxable year,
                              ``(ii) the taxpayer holds the appreciated
                          financial position throughout the 60-day period
                          beginning on the date such transaction is closed,
                          and
                              ``(iii) at no time during such 60-day period
                          is the taxpayer's risk of loss with respect to
                          such position reduced by reason of a circumstance
                          which would be described in section 246(c)(4) if
                          references to stock included references to such
                          position.
                        ``(B) Treatment of positions which are
                    reestablished.--If--
                              ``(i) a transaction, which would otherwise be
                          treated as a constructive sale of an appreciated
                          financial position, is closed during the taxable
                          year or during the 30 days thereafter, and
                              ``(ii) another substantially similar
                          transaction is entered into during the 60-day
                          period beginning on the date the transaction
                          referred to in clause (i) is closed--

    [[Page 111 STAT. 905]]

                                        ``(I) which also would otherwise be
                                    treated as a constructive sale of such
                                    position,
                                        ``(II) which is closed before the
                                    30th day after the close of the taxable
                                    year in which the transaction referred
                                    to in clause (i) occurs, and
                                        ``(III) which meets the requirements
                                    of clauses (ii) and (iii) of
                                    subparagraph (A),
                    the transaction referred to in clause (ii) shall be
                    disregarded for purposes of determining whether the
                    requirements of subparagraph (A)(iii) are met with
                    respect to the transaction described in clause (i).
                ``(4) Related person.--A person is related to another person
            with respect to a transaction if--
                        ``(A) the relationship is described in section
                    267(b) or 707(b), and
                        ``(B) such transaction is entered into with a view
                    toward avoiding the purposes of this section.

        ``(d) Other Definitions.--For purposes of this section--
                ``(1) Forward contract.--The term `forward contract' means a
            contract to deliver a substantially fixed amount of property for
            a substantially fixed price.
                ``(2) Offsetting notional principal contract.--The term
            `offsetting notional principal contract' means, with respect to
            any property, an agreement which includes--
                        ``(A) a requirement to pay (or provide credit for)
                    all or substantially all of the investment yield
                    (including appreciation) on such property for a
                    specified period, and
                        ``(B) a right to be reimbursed for (or receive
                    credit for) all or substantially all of any decline in
                    the value of such property.

        ``(e) Special Rules.--
                ``(1) Treatment of subsequent sale of position which was
            deemed sold.--If--
                        ``(A) there is a constructive sale of any
                    appreciated financial position,
                        ``(B) such position is subsequently disposed of, and
                        ``(C) at the time of such disposition, the
                    transaction resulting in the constructive sale of such
                    position is open with respect to the taxpayer or any
                    related person,
            solely for purposes of determining whether the taxpayer has
            entered into a constructive sale of any other appreciated
            financial position held by the taxpayer, the taxpayer shall be
            treated as entering into such transaction immediately after such
            disposition. For purposes of the preceding sentence, an
            assignment or other termination shall be treated as a
            disposition.
                ``(2) Certain trust instruments treated as stock.--For
            purposes of this section, an interest in a trust which is
            actively traded (within the meaning of section 1092(d)(1)) shall
            be treated as stock unless substantially all (by value) of the
            property held by the trust is debt described in subsection
            (b)(2)(A).
                ``(3) Multiple positions in property.--If a taxpayer holds
            multiple positions in property, the determination of whether a
            specific transaction is a constructive sale and, if so, which
            appreciated financial position is deemed sold shall be made in
            the same manner as actual sales.

    [[Page 111 STAT. 906]]

        ``(f) Regulations.--The Secretary shall prescribe such regulations
    as may be necessary or appropriate to carry out the purposes of this
    section.''.
        (b) Election of Mark to Market for Dealers in Commodities and for
    Traders in Securities or Commodities.--Section 475 (relating to mark to
    market accounting method for dealers in securities) is amended by
    redesignating subsection (e) as subsection (g) and by inserting after
    subsection (d) the following new subsections:
        ``(e) Election of Mark to Market For Dealers in Commodities.--
                ``(1) In general.--In the case of a dealer in commodities
            who elects the application of this subsection, this section
            shall apply to commodities held by such dealer in the same
            manner as this section applies to securities held by a dealer in
            securities.
                ``(2) Commodity.--For purposes of this subsection and
            subsection (f), the term `commodity' means--
                        ``(A) any commodity which is actively traded (within
                    the meaning of section 1092(d)(1));
                        ``(B) any notional principal contract with respect
                    to any commodity described in subparagraph (A);
                        ``(C) any evidence of an interest in, or a
                    derivative instrument in, any commodity described in
                    subparagraph (A) or (B), including any option, forward
                    contract, futures contract, short position, and any
                    similar instrument in such a commodity; and
                        ``(D) any position which--
                              ``(i) is not a commodity described in
                          subparagraph (A), (B), or (C),
                              ``(ii) is a hedge with respect to such a
                          commodity, and
                              ``(iii) is clearly identified in the
                          taxpayer's records as being described in this
                          subparagraph before the close of the day on which
                          it was acquired or entered into (or such other
                          time as the Secretary may by regulations
                          prescribe).
                ``(3) Election.--An election under this subsection may be
            made without the consent of the Secretary. Such an election,
            once made, shall apply to the taxable year for which made and
            all subsequent taxable years unless revoked with the consent of
            the Secretary.

        ``(f) Election of Mark to Market For Traders in Securities or
    Commodities.--
                ``(1) Traders in securities.--
                        ``(A) In general.--In the case of a person who is
                    engaged in a trade or business as a trader in securities
                    and who elects to have this paragraph apply to such
                    trade or business--
                              ``(i) such person shall recognize gain or loss
                          on any security held in connection with such trade
                          or business at the close of any taxable year as if
                          such security were sold for its fair market value
                          on the last business day of such taxable year, and
                              ``(ii) any gain or loss shall be taken into
                          account for such taxable year.

    [[Page 111 STAT. 907]]

                    Proper adjustment shall be made in the amount of any
                    gain or loss subsequently realized for gain or loss
                    taken into account under the preceding sentence. The
                    Secretary may provide by regulations for the application
                    of this subparagraph at times other than the times
                    provided in this subparagraph.
                        ``(B) Exception.--Subparagraph (A) shall not apply
                    to any security--
                              ``(i) which is established to the satisfaction
                          of the Secretary as having no connection to the
                          activities of such person as a trader, and
                              ``(ii) which is clearly identified in such
                          person's records as being described in clause (i)
                          before the close of the day on which it was
                          acquired, originated, or entered into (or such
                          other time as the Secretary may by regulations
                          prescribe).
                    If a security ceases to be described in clause (i) at
                    any time after it was identified as such under clause
                    (ii), subparagraph (A) shall apply to any changes in
                    value of the security occurring after the cessation.
                        ``(C) Coordination with section 1259.--Any security
                    to which subparagraph (A) applies and which was acquired
                    in the normal course of the taxpayer's activities as a
                    trader in securities shall not be taken into account in
                    applying section 1259 to any position to which
                    subparagraph (A) does not apply.
                        ``(D) Other rules to apply.--Rules similar to the
                    rules of subsections (b)(4) and (d) shall apply to
                    securities held by a person in any trade or business
                    with respect to which an election under this paragraph
                    is in effect.
                ``(2) Traders in commodities.--In the case of a person who
            is engaged in a trade or business as a trader in commodities and
            who elects to have this paragraph apply to such trade or
            business, paragraph (1) shall apply to commodities held by such
            trader in connection with such trade or business in the same
            manner as paragraph (1) applies to securities held by a trader
            in securities.
                ``(3) Election.--The elections under paragraphs (1) and (2)
            may be made separately for each trade or business and without
            the consent of the Secretary. Such an election, once made, shall
            apply to the taxable year for which made and all subsequent
            taxable years unless revoked with the consent of the
            Secretary.''.

        (c) Clerical Amendment.--The table of sections for part IV of
    subchapter P of chapter 1 is amended by adding at the end the following
    new item:
                    ``Sec. 1259. Constructive sales treatment for
                                    appreciated financial positions.''.

        (d) <<NOTE: 26 USC 475 note.>>  Effective Dates.--
                (1) In general.--Except as otherwise provided in this
            subsection, the amendments made by this section shall apply to
            any constructive sale after June 8, 1997.
                (2) Exception for sales of positions, etc. held before june
            9, 1997.--If--
                        (A) before June 9, 1997, the taxpayer entered into
                    any transaction which is a constructive sale of any
                    appreciated financial position, and

    [[Page 111 STAT. 908]]

                        (B) before the close of the 30-day period beginning
                    on the date of the enactment of this Act or before such
                    later date as may be specified by the Secretary of the
                    Treasury, such transaction and position are clearly
                    identified in the taxpayer's records as offsetting,
            such transaction and position shall not be taken into account in
            determining whether any other constructive sale after June 8,
            1997, has occurred. The preceding sentence shall cease to apply
            as of the date such transaction is closed or the taxpayer ceases
            to hold such position.
                (3) Special rule.--In the case of a decedent dying after
            June 8, 1997, if--
                        (A) there was a constructive sale on or before such
                    date of any appreciated financial position,
                        (B) the transaction resulting in such constructive
                    sale of such position remains open (with respect to the
                    decedent or any related person)--
                              (i) for not less than 2 years after the date
                          of such transaction (whether such period is before
                          or after June 8, 1997), and
                              (ii) at any time during the 3-year period
                          ending on the date of the decedent's death, and
                        (C) such transaction is not closed within the 30-day
                    period beginning on the date of the enactment of this
                    Act,
            then, for purposes of such Code, such position (and the
            transaction resulting in such constructive sale) shall be
            treated as property constituting rights to receive an item of
            income in respect of a decedent under section 691 of such Code.
            Section 1014(c) of such Code shall not apply to so much of such
            position's or property's value (as included in the decedent's
            estate for purposes of chapter 11 of such Code) as exceeds its
            fair market value as of the date such transaction is closed.
                (4) Election of mark to market by securities traders and
            traders and dealers in commodities.--
                        (A) In general.--The amendments made by subsection
                    (b) shall apply to taxable years ending after the date
                    of the enactment of this Act.
                        (B) 4-year spread of adjustments.--In the case of a
                    taxpayer who elects under subsection (e) or (f) of
                    section 475 of the Internal Revenue Code of 1986 (as
                    added by this section) to change its method of
                    accounting for the taxable year which includes the date
                    of the enactment of this Act--
                              (i) any identification required under such
                          subsection with respect to securities and
                          commodities held on the date of the enactment of
                          this Act shall be treated as timely made if made
                          on or before the 30th day after such date of
                          enactment, and
                              (ii) the net amount of the adjustments
                          required to be taken into account by the taxpayer
                          under section 481 of such Code shall be taken into
                          account ratably over the 4-taxable year period
                          beginning with such first taxable year.

    [[Page 111 STAT. 909]]

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

        (a) In General.--Paragraph (1) of section 351(e) (relating to
    exceptions) is amended by adding at the end the following: ``For
    purposes of the preceding sentence, the determination of whether a
    company is an investment company shall be made--
                        ``(A) by taking into account all stock and
                    securities held by the company, and
                        ``(B) by treating as stock and securities--
                              ``(i) money,
                              ``(ii) stocks and other equity interests in a
                          corporation, evidences of indebtedness, options,
                          forward or futures contracts, notional principal
                          contracts and derivatives,
                              ``(iii) any foreign currency,
                              ``(iv) any interest in a real estate
                          investment trust, a common trust fund, a regulated
                          investment company, a publicly-traded partnership
                          (as defined in section 7704(b)) or any other
                          equity interest (other than in a corporation)
                          which pursuant to its terms or any other
                          arrangement is readily convertible into, or
                          exchangeable for, any asset described in any
                          preceding clause, this clause or clause (v) or
                          (viii),
                              ``(v) except to the extent provided in
                          regulations prescribed by the Secretary, any
                          interest in a precious metal, unless such metal is
                          used or held in the active conduct of a trade or
                          business after the contribution,
                              ``(vi) except as otherwise provided in
                          regulations prescribed by the Secretary, interests
                          in any entity if substantially all of the assets
                          of such entity consist (directly or indirectly) of
                          any assets described in any preceding clause or
                          clause (viii),
                              ``(vii) to the extent provided in regulations
                          prescribed by the Secretary, any interest in any
                          entity not described in clause (vi), but only to
                          the extent of the value of such interest that is
                          attributable to assets listed in clauses (i)
                          through (v) or clause (viii), or
                              ``(viii) any other asset specified in
                          regulations prescribed by the Secretary.
            The Secretary may prescribe regulations that, under appropriate
            circumstances, treat any asset described in clauses (i) through
            (v) as not so listed.''.

        (b) <<NOTE: 26 USC 351 note.>>  Effective Date.--
                (1) In general.--The amendment made by subsection (a) shall
            apply to transfers after June 8, 1997, in taxable years ending
            after such date.
                (2) Binding contracts.--The amendment made by subsection (a)
            shall not apply to any transfer pursuant to a written binding
            contract in effect on June 8, 1997, and at all times thereafter
            before such transfer if such contract provides for the transfer
            of a fixed amount of property.

    SEC. 1003. GAINS AND LOSSES FROM CERTAIN TERMINATIONS WITH RESPECT TO
                PROPERTY.

        (a) Application of Capital Treatment to Property Other Than Personal
    Property.--

    [[Page 111 STAT. 910]]

                (1) In general.--Paragraph (1) of section 1234A (relating to
            gains and losses from certain terminations) is amended by
            striking ``personal property (as defined in section
            1092(d)(1))'' and inserting ``property''.
                (2) <<NOTE: 26 USC 1234A note.>>  Effective date.--The
            amendment made by paragraph (1) shall apply to terminations more
            than 30 days after the date of the enactment of this Act.

        (b) Treatment of Short Sales of Property Which Becomes Substantially
    Worthless.--
                (1) In general.--Section 1233 is amended by adding at the
            end the following new subsection:

        ``(h) Short Sales of Property Which Becomes Substantially
    Worthless.--
                ``(1) In general.--If--
                        ``(A) the taxpayer enters into a short sale of
                    property, and
                        ``(B) such property becomes substantially worthless,
            the taxpayer shall recognize gain in the same manner as if the
            short sale were closed when the property becomes substantially
            worthless. To the extent provided in regulations prescribed by
            the Secretary, the preceding sentence also shall apply with
            respect to any option with respect to property, any offsetting
            notional principal contract with respect to property, any
            futures or forward contract to deliver any property, and any
            other similar transaction.
                ``(2) Statute of limitations.--If property becomes
            substantially worthless during a taxable year and any short sale
            of such property remains open at the time such property becomes
            substantially worthless, then--
                        ``(A) the statutory period for the assessment of any
                    deficiency attributable to any part of the gain on such
                    transaction shall not expire before the earlier of--
                              ``(i) the date which is 3 years after the date
                          the Secretary is notified by the taxpayer (in such
                          manner as the Secretary may by regulations
                          prescribe) of the substantial worthlessness of
                          such property, or
                              ``(ii) the date which is 6 years after the
                          date the return for such taxable year is filed,
                          and
                        ``(B) such deficiency may be assessed before the
                    date applicable under subparagraph (A) notwithstanding
                    the provisions of any other law or rule of law which
                    would otherwise prevent such assessment.''.
                (2) <<NOTE: 26 USC 1233 note.>>  Effective date.--The
            amendment made by paragraph (1) shall apply to property which
            becomes substantially worthless after the date of the enactment
            of this Act.

        (c) Application of Capital Treatment, Etc. to Obligations Issued by
    Natural Persons.--
                (1) In general.--Section 1271(b) is amended to read as
            follows:

        ``(b) Exception for Certain Obligations.--
                ``(1) In general.--This section shall not apply to--
                        ``(A) any obligation issued by a natural person
                    before June 9, 1997, and
                        ``(B) any obligation issued before July 2, 1982, by
                    an issuer which is not a corporation and is not a
                    government or political subdivision thereof.

    [[Page 111 STAT. 911]]

                ``(2) Termination.--Paragraph (1) shall not apply to any
            obligation purchased (within the meaning of section 1272(d)(1))
            after June 8, 1997.''.
                (2) <<NOTE: 26 USC 1271 note.>>  Effective date.--The
            amendment made by paragraph (1) shall apply to sales, exchanges,
            and retirements after the date of enactment of this Act.

    SEC. 1004. DETERMINATION OF ORIGINAL ISSUE DISCOUNT WHERE POOLED DEBT
                OBLIGATIONS SUBJECT TO ACCELERATION.

        (a) In General.--Subparagraph (C) of section 1272(a)(6) (relating to
    debt instruments to which the paragraph applies) is amended by striking
    ``or'' at the end of clause (i), by striking the period at the end of
    clause (ii) and inserting ``, or'', and by inserting after clause (ii)
    the following:
                              ``(iii) any pool of debt instruments the yield
                          on which may be affected by reason of prepayments
                          (or to the extent provided in regulations, by
                          reason of other events).
                    To the extent provided in regulations prescribed by the
                    Secretary, in the case of a small business engaged in
                    the trade or business of selling tangible personal
                    property at retail, clause (iii) shall not apply to debt
                    instruments incurred in the ordinary course of such
                    trade or business while held by such business.''.

        (b) <<NOTE: 26 USC 1272 note.>>  Effective Dates.--
                (1) In general.--The amendment made by this section shall
            apply to taxable years beginning after the date of the enactment
            of this Act.
                (2) Change in method of accounting.--In the case of any
            taxpayer required by this section to change its method of
            accounting for its first taxable year beginning after the date
            of the enactment of this Act--
                        (A) such change shall be treated as initiated by the
                    taxpayer,
                        (B) such change shall be treated as made with the
                    consent of the Secretary of the Treasury, and
                        (C) the net amount of the adjustments required to be
                    taken into account by the taxpayer under section 481 of
                    the Internal Revenue Code of 1986 shall be taken into
                    account ratably over the 4-taxable year period beginning
                    with such first taxable year.

    SEC. 1005. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT INSTRUMENTS.

        (a) In General.--Section 163 (relating to deduction for interest),
    as amended by title V, is amended by redesignating subsection (l) as
    subsection (m) and by inserting after subsection (k) the following new
    subsection:
        ``(l) Disallowance of Deduction on Certain Debt Instruments of
    Corporations.--
                ``(1) In general.--No deduction shall be allowed under this
            chapter for any interest paid or accrued on a disqualified debt
            instrument.
                ``(2) Disqualified debt instrument.--For purposes of this
            subsection, the term `disqualified debt instrument' means any
            indebtedness of a corporation which is payable in equity of the
            issuer or a related party.

    [[Page 111 STAT. 912]]

                ``(3) Special rules for amounts payable in equity.--For
            purposes of paragraph (2), indebtedness shall be treated as
            payable in equity of the issuer or a related party only if--
                        ``(A) a substantial amount of the principal or
                    interest is required to be paid or converted, or at the
                    option of the issuer or a related party is payable in,
                    or convertible into, such equity,
                        ``(B) a substantial amount of the principal or
                    interest is required to be determined, or at the option
                    of the issuer or a related party is determined, by
                    reference to the value of such equity, or
                        ``(C) the indebtedness is part of an arrangement
                    which is reasonably expected to result in a transaction
                    described in subparagraph (A) or (B).
            For purposes of this paragraph, principal or interest shall be
            treated as required to be so paid, converted, or determined if
            it may be required at the option of the holder or a related
            party and there is a substantial certainty the option will be
            exercised.
                ``(4) Related party.--For purposes of this subsection, a
            person is a related party with respect to another person if such
            person bears a relationship to such other person described in
            section 267(b) or 707(b).
                ``(5) Regulations.--The Secretary shall prescribe such
            regulations as may be necessary or appropriate to carry out the
            purposes of this subsection, including regulations preventing
            avoidance of this subsection through the use of an issuer other
            than a corporation.''.

        (b) <<NOTE: 26 USC 163 note.>>  Effective Date.--
                (1) In general.--The amendment made by this section shall
            apply to disqualified debt instruments issued after June 8,
            1997.
                (2) Transition rule.--The amendment made by this section
            shall not apply to any instrument issued after June 8, 1997, if
            such instrument is--
                        (A) issued pursuant to a written agreement which was
                    binding on such date and at all times thereafter,
                        (B) described in a ruling request submitted to the
                    Internal Revenue Service on or before such date, or
                        (C) described on or before such date in a public
                    announcement or in a filing with the Securities and
                    Exchange Commission required solely by reason of the
                    issuance.

             Subtitle B--Corporate Organizations and Reorganizations

    SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY DIVIDENDS.

        (a) Treatment of Extraordinary Dividends in Excess of Basis.--
    Paragraph (2) of section 1059(a) (relating to corporate shareholder's
    recognition of gain attributable to nontaxed portion of extraordinary
    dividends) is amended to read as follows:
                ``(2) Amounts in excess of basis.--If the nontaxed portion
            of such dividends exceeds such basis, such excess shall be
            treated as gain from the sale or exchange of such stock for

    [[Page 111 STAT. 913]]

            the taxable year in which the extraordinary dividend is
            received.''.

        (b) Treatment of Redemptions Where Options Involved.--Paragraph (1)
    of section 1059(e) (relating to treatment of partial liquidations and
    non-pro rata redemptions) is amended to read as follows:
                ``(1) Treatment of partial liquidations and certain
            redemptions.--Except as otherwise provided in regulations--
                        ``(A) Redemptions.--In the case of any redemption of
                    stock--
                              ``(i) which is part of a partial liquidation
                          (within the meaning of section 302(e)) of the
                          redeeming corporation,
                              ``(ii) which is not pro rata as to all
                          shareholders, or
                              ``(iii) which would not have been treated (in
                          whole or in part) as a dividend if any options had
                          not been taken into account under section
                          318(a)(4),
                    any amount treated as a dividend with respect to such
                    redemption shall be treated as an extraordinary dividend
                    to which paragraphs (1) and (2) of subsection (a) apply
                    without regard to the period the taxpayer held such
                    stock. In the case of a redemption described in clause
                    (iii), only the basis in the stock redeemed shall be
                    taken into account under subsection (a).
                        ``(B) Reorganizations, etc.--An exchange described
                    in section 356 which is treated as a dividend shall be
                    treated as a redemption of stock for purposes of
                    applying subparagraph (A).''.

        (c) Time for Reduction.--Paragraph (1) of section 1059(d) is amended
    to read as follows:
                ``(1) Time for reduction.--Any reduction in basis under
            subsection (a)(1) shall be treated as occurring at the beginning
            of the ex-dividend date of the extraordinary dividend to which
            the reduction relates.''.

        (d) <<NOTE: 26 USC 1059 note.>>  Effective Dates.--
                (1) In general.--The amendments made by this section shall
            apply to distributions after May 3, 1995.
                (2) Transition rule.--The amendments made by this section
            shall not apply to any distribution made pursuant to the terms
            of--
                        (A) a written binding contract in effect on May 3,
                    1995, and at all times thereafter before such
                    distribution, or
                        (B) a tender offer outstanding on May 3, 1995.
                (3) Certain dividends not pursuant to certain redemptions.--
            In determining whether the amendment made by subsection (a)
            applies to any extraordinary dividend other than a dividend
            treated as an extraordinary dividend under section 1059(e)(1) of
            the Internal Revenue Code of 1986 (as amended by this Act),
            paragraphs (1) and (2) shall be applied by substituting
            ``September 13, 1995'' for ``May 3, 1995''.

    [[Page 111 STAT. 914]]

    SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBUTIONS IN CONNECTION
                WITH ACQUISITIONS AND TO INTRAGROUP TRANSACTIONS.

        (a) Distributions In Connection With Acquisitions.--Section 355
    (relating to distributions of stock and securities of a controlled
    corporation) is amended by adding at the end the following new
    subsection:
        ``(e) Recognition of Gain on Certain Distributions of Stock or
    Securities In Connection With Acquisitions.--
                ``(1) General rule.--If there is a distribution to which
            this subsection applies, any stock or securities in the
            controlled corporation shall not be treated as qualified
            property for purposes of subsection (c)(2) of this section or
            section 361(c)(2).
                ``(2) Distributions to which subsection applies.--
                        ``(A) In general.--This subsection shall apply to
                    any distribution--
                              ``(i) to which this section (or so much of
                          section 356 as relates to this section) applies,
                          and
                              ``(ii) which is part of a plan (or series of
                          related transactions) pursuant to which 1 or more
                          persons acquire directly or indirectly stock
                          representing a 50-percent or greater interest in
                          the distributing corporation or any controlled
                          corporation.
                        ``(B) Plan presumed to exist in certain cases.--If 1
                    or more persons acquire directly or indirectly stock
                    representing a 50-percent or greater interest in the
                    distributing corporation or any controlled corporation
                    during the 4-year period beginning on the date which is
                    2 years before the date of the distribution, such
                    acquisition shall be treated as pursuant to a plan
                    described in subparagraph (A)(ii) unless it is
                    established that the distribution and the acquisition
                    are not pursuant to a plan or series of related
                    transactions.
                        ``(C) Certain plans disregarded.--A plan (or series
                    of related transactions) shall not be treated as
                    described in subparagraph (A)(ii) if, immediately after
                    the completion of such plan or transactions, the
                    distributing corporation and all controlled corporations
                    are members of a single affiliated group (as defined in
                    section 1504 without regard to subsection (b) thereof).
                        ``(D) Coordination with subsection (d).--This
                    subsection shall not apply to any distribution to which
                    subsection (d) applies.
                ``(3) Special rules relating to acquisitions.--
                        ``(A) Certain acquisitions not taken into account.--
                    Except as provided in regulations, the following
                    acquisitions shall not be treated as described in
                    paragraph (2)(A)(ii):
                              ``(i) The acquisition of stock in any
                          controlled corporation by the distributing
                          corporation.
                              ``(ii) The acquisition by a person of stock in
                          any controlled corporation by reason of holding
                          stock or securities in the distributing
                          corporation.
                              ``(iii) The acquisition by a person of stock
                          in any successor corporation of the distributing
                          corporation or any controlled corporation by
                          reason of holding stock

    [[Page 111 STAT. 915]]

                          or securities in such distributing or controlled
                          corporation.
                              ``(iv) The acquisition of stock in a
                          corporation if shareholders owning directly or
                          indirectly stock possessing--
                                        ``(I) more than 50 percent of the
                                    total combined voting power of all
                                    classes of stock entitled to vote, and
                                        ``(II) more than 50 percent of the
                                    total value of shares of all classes of
                                    stock,
                          in the distributing corporation or any controlled
                          corporation before such acquisition own directly
                          or indirectly stock possessing such vote and value
                          in such distributing or controlled corporation
                          after such acquisition.
                    This subparagraph shall not apply to any acquisition if
                    the stock held before the acquisition was acquired
                    pursuant to a plan (or series of related transactions)
                    described in paragraph (2)(A)(ii).
                        ``(B) Asset acquisitions.--Except as provided in
                    regulations, for purposes of this subsection, if the
                    assets of the distributing corporation or any controlled
                    corporation are acquired by a successor corporation in a
                    transaction described in subparagraph (A), (C), or (D)
                    of section 368(a)(1) or any other transaction specified
                    in regulations by the Secretary, the shareholders
                    (immediately before the acquisition) of the corporation
                    acquiring such assets shall be treated as acquiring
                    stock in the corporation from which the assets were
                    acquired.
                ``(4) Definition and special rules.--For purposes of this
            subsection--
                        ``(A) 50-percent or greater interest.--The term `50-
                    percent or greater interest' has the meaning given such
                    term by subsection (d)(4).
                        ``(B) Distributions in title 11 or similar case.--
                    Paragraph (1) shall not apply to any distribution made
                    in a title 11 or similar case (as defined in section
                    368(a)(3)).
                        ``(C) Aggregation and attribution rules.--
                              ``(i) Aggregation.--The rules of paragraph
                          (7)(A) of subsection (d) shall apply.
                              ``(ii) Attribution.--Section 318(a)(2) shall
                          apply in determining whether a person holds stock
                          or securities in any corporation. Except as
                          provided in regulations, section 318(a)(2)(C)
                          shall be applied without regard to the phrase `50
                          percent or more in value' for purposes of the
                          preceding sentence.
                        ``(D) Successors and predecessors.--For purposes of
                    this subsection, any reference to a controlled
                    corporation or a distributing corporation shall include
                    a reference to any predecessor or successor of such
                    corporation.
                        ``(E) Statute of limitations.--If there is a
                    distribution to which paragraph (1) applies--
                              ``(i) the statutory period for the assessment
                          of any deficiency attributable to any part of the
                          gain recognized under this subsection by reason of
                          such distribution shall not expire before the
                          expiration of 3 years from the date the Secretary
                          is notified by the taxpayer

    [[Page 111 STAT. 916]]

                          (in such manner as the Secretary may by
                          regulations prescribe) that such distribution
                          occurred, and
                              ``(ii) such deficiency may be assessed before
                          the expiration of such 3-year period
                          notwithstanding the provisions of any other law or
                          rule of law which would otherwise prevent such
                          assessment.
                ``(5) Regulations.--The Secretary shall prescribe such
            regulations as may be necessary to carry out the purposes of
            this subsection, including regulations--
                        ``(A) providing for the application of this
                    subsection where there is more than 1 controlled
                    corporation,
                        ``(B) treating 2 or more distributions as 1
                    distribution where necessary to prevent the avoidance of
                    such purposes, and
                        ``(C) providing for the application of rules similar
                    to the rules of subsection (d)(6) where appropriate for
                    purposes of paragraph (2)(B).''.

        (b) Special Rules for Certain Intragroup Transactions.--
                (1) Section 355 not to apply.--Section 355, as amended by
            subsection (a), is amended by adding at the end the following
            new subsection:

        ``(f) Section Not To Apply to Certain Intragroup Distributions.--
    Except as provided in regulations, this section (or so much of section
    356 as relates to this section) shall not apply to the distribution of
    stock from 1 member of an affiliated group (as defined in section
    1504(a)) to another member of such group if such distribution is part of
    a plan (or series of related transactions) described in subsection
    (e)(2)(A)(ii) (determined after the application of subsection (e)).''.
                (2) Adjustments to basis.--Section 358 (relating to basis to
            distributees) is amended by adding at the end the following new
            subsection:

        ``(g) Adjustments in Intragroup Transactions Involving Section
    355.--In the case of a distribution to which section 355 (or so much of
    section 356 as relates to section 355) applies and which involves the
    distribution of stock from 1 member of an affiliated group (as defined
    in section 1504(a) without regard to subsection (b) thereof) to another
    member of such group, the Secretary may, notwithstanding any other
    provision of this section, provide adjustments to the adjusted basis of
    any stock which--
                ``(1) is in a corporation which is a member of such group,
            and
                ``(2) is held by another member of such group,

    to appropriately reflect the proper treatment of such distribution.''.
        (c) Determination of Control in Certain Divisive Transactions.--
                (1) Section 351 transactions.--Section 351(c) (relating to
            special rule) is amended to read as follows:

        ``(c) Special Rules Where Distribution to Shareholders.--In
    determining control for purposes of this section--
                ``(1) the fact that any corporate transferor distributes
            part or all of the stock in the corporation which it receives in
            the exchange to its shareholders shall not be taken into
            account, and
                ``(2) if the requirements of section 355 are met with
            respect to such distribution, the shareholders shall be treated
            as in control of such corporation immediately after the exchange

    [[Page 111 STAT. 917]]

            if the shareholders own (immediately after the distribution)
            stock possessing--
                        ``(A) more than 50 percent of the total combined
                    voting power of all classes of stock of such corporation
                    entitled to vote, and
                        ``(B) more than 50 percent of the total value of
                    shares of all classes of stock of such corporation.''.
                (2) D reorganizations.--Section 368(a)(2)(H) (relating to
            special rule for determining whether certain transactions are
            qualified under paragraph (1)(D)) is amended to read as follows:
                        ``(H) Special rules for determining whether certain
                    transactions are qualified under paragraph (1)(d).--For
                    purposes of determining whether a transaction qualifies
                    under paragraph (1)(D)--
                              ``(i) in the case of a transaction with
                          respect to which the requirements of subparagraphs
                          (A) and (B) of section 354(b)(1) are met, the term
                          `control' has the meaning given such term by
                          section 304(c), and
                              ``(ii) in the case of a transaction with
                          respect to which the requirements of section 355
                          are met, the shareholders described in paragraph
                          (1)(D) shall be treated as having control of the
                          corporation to which the assets are transferred if
                          such shareholders own (immediately after the
                          distribution) stock possessing--
                                        ``(I) more than 50 percent of the
                                    total combined voting power of all
                                    classes of stock of such corporation
                                    entitled to vote, and
                                        ``(II) more than 50 percent of the
                                    total value of shares of all classes of
                                    stock of such corporation.''.

        (d) <<NOTE: 26 USC 351 note.>>  Effective Dates.--
                (1) Section 355 rules.--The amendments made by subsections
            (a) and (b) shall apply to distributions after April 16, 1997,
            pursuant to a plan (or series of related transactions) which
            involves an acquisition described in section 355(e)(2)(A)(ii) of
            the Internal Revenue Code of 1986 occurring after such date.
                (2) Divisive transactions.--The amendments made by
            subsection (c) shall apply to transfers after the date of the
            enactment of this Act.
                (3) Transition rule.--The amendments made by this section
            shall not apply to any distribution pursuant to a plan (or
            series of related transactions) which involves an acquisition
            described in section 355(e)(2)(A)(ii) of the Internal Revenue
            Code of 1986 (or, in the case of the amendments made by
            subsection (c), any transfer) occurring after April 16, 1997, if
            such acquisition or transfer is--
                        (A) made pursuant to an agreement which was binding
                    on such date and at all times thereafter,
                        (B) described in a ruling request submitted to the
                    Internal Revenue Service on or before such date, or
                        (C) described on or before such date in a public
                    announcement or in a filing with the Securities and
                    Exchange Commission required solely by reason of the
                    acquisition or transfer.
            This paragraph shall not apply to any agreement, ruling request,
            or public announcement or filing unless it identifies

    [[Page 111 STAT. 918]]

            the acquirer of the distributing corporation or any controlled
            corporation, or the transferee, whichever is applicable.

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

        (a) Stock Purchases by Related Corporations.--The last sentence of
    section 304(a)(1) (relating to acquisition by related corporation other
    than subsidiary) is amended to read as follows: ``To the extent that
    such distribution is treated as a distribution to which section 301
    applies, the transferor and the acquiring corporation shall be treated
    in the same manner as if the transferor had transferred the stock so
    acquired to the acquiring corporation in exchange for stock of the
    acquiring corporation in a transaction to which section 351(a) applies,
    and then the acquiring corporation had redeemed the stock it was treated
    as issuing in such transaction.''.
        (b) Coordination With Section 1059.--Clause (iii) of section
    1059(e)(1)(A), as amended by this title, is amended to read as follows:
                              ``(iii) which would not have been treated (in
                          whole or in part) as a dividend if--
                                        ``(I) any options had not been taken
                                    into account under section 318(a)(4), or
                                        ``(II) section 304(a) had not
                                    applied,''.

        (c) Special Rule for Acquisitions by Foreign Corporations.--Section
    304(b) (relating to special rules for application of subsection (a)) is
    amended by adding at the end the following new paragraph:
                ``(5) Acquisitions by foreign corporations.--
                        ``(A) In general.--In the case of any acquisition to
                    which subsection (a) applies in which the acquiring
                    corporation is a foreign corporation, the only earnings
                    and profits taken into account under paragraph (2)(A)
                    shall be those earnings and profits--
                              ``(i) which are attributable (under
                          regulations prescribed by the Secretary) to stock
                          of the acquiring corporation owned (within the
                          meaning of section 958(a)) by a corporation or
                          individual which is--
                                        ``(I) a United States shareholder
                                    (within the meaning of section 951(b))
                                    of the acquiring corporation, and
                                        ``(II) the transferor or a person
                                    who bears a relationship to the
                                    transferor described in section 267(b)
                                    or 707(b), and
                              ``(ii) which were accumulated during the
                          period or periods such stock was owned by such
                          person while the acquiring corporation was a
                          controlled foreign corporation.
                        ``(B) Application of section 1248.--For purposes of
                    subparagraph (A), the rules of section 1248(d) shall
                    apply except to the extent otherwise provided by the
                    Secretary.
                        ``(C) Regulations.--The Secretary shall prescribe
                    such regulations as are appropriate to carry out the
                    purposes of this paragraph.''.

        (d) <<NOTE: 26 USC 304 note.>>  Effective Date.--
                (1) In general.--The amendments made by this section shall
            apply to distributions and acquisitions after June 8, 1997.

    [[Page 111 STAT. 919]]

                (2) Transition rule.--The amendments made by this section
            shall not apply to any distribution or acquisition after June 8,
            1997, if such distribution or acquisition is--
                        (A) made pursuant to a written agreement which was
                    binding on such date and at all times thereafter,
                        (B) described in a ruling request submitted to the
                    Internal Revenue Service on or before such date, or
                        (C) described in a public announcement or filing
                    with the Securities and Exchange Commission on or before
                    such date.

    SEC. 1014. CERTAIN PREFERRED STOCK TREATED AS BOOT.

        (a) Section 351.--Section 351 (relating to transfer to corporation
    controlled by transferor) is amended by redesignating subsection (g) as
    subsection (h) and by inserting after subsection (f) the following new
    subsection:
        ``(g) Nonqualified Preferred Stock Not Treated as Stock.--
                ``(1) In general.--In the case of a person who transfers
            property to a corporation and receives nonqualified preferred
            stock--
                        ``(A) subsection (a) shall not apply to such
                    transferor,
                        ``(B) subsection (b) shall apply to such transferor,
                    and
                        ``(C) such nonqualified preferred stock shall be
                    treated as other property for purposes of applying
                    subsection (b).
                ``(2) Nonqualified preferred stock.--For purposes of
            paragraph (1)--
                        ``(A) In general.--The term `nonqualified preferred
                    stock' means preferred stock if--
                              ``(i) the holder of such stock has the right
                          to require the issuer or a related person to
                          redeem or purchase the stock,
                              ``(ii) the issuer or a related person is
                          required to redeem or purchase such stock,
                              ``(iii) the issuer or a related person has the
                          right to redeem or purchase the stock and, as of
                          the issue date, it is more likely than not that
                          such right will be exercised, or
                              ``(iv) the dividend rate on such stock varies
                          in whole or in part (directly or indirectly) with
                          reference to interest rates, commodity prices, or
                          other similar indices.
                        ``(B) Limitations.--Clauses (i), (ii), and (iii) of
                    subparagraph (A) shall apply only if the right or
                    obligation referred to therein may be exercised within
                    the 20-year period beginning on the issue date of such
                    stock and such right or obligation is not subject to a
                    contingency which, as of the issue date, makes remote
                    the likelihood of the redemption or purchase.
                        ``(C) Exceptions for certain rights or
                    obligations.--
                              ``(i) In general.--A right or obligation shall
                          not be treated as described in clause (i), (ii),
                          or (iii) of subparagraph (A) if--
                                        ``(I) it may be exercised only upon
                                    the death, disability, or mental
                                    incompetency of the holder, or

    [[Page 111 STAT. 920]]

                                        ``(II) in the case of a right or
                                    obligation to redeem or purchase stock
                                    transferred in connection with the
                                    performance of services for the issuer
                                    or a related person (and which
                                    represents reasonable compensation), it
                                    may be exercised only upon the holder's
                                    separation from service from the issuer
                                    or a related person.
                              ``(ii) Exception.--Clause (i)(I) shall not
                          apply if the stock relinquished in the exchange,
                          or the stock acquired in the exchange is in--
                                        ``(I) a corporation if any class of
                                    stock in such corporation or a related
                                    party is readily tradable on an
                                    established securities market or
                                    otherwise, or
                                        ``(II) any other corporation if such
                                    exchange is part of a transaction or
                                    series of transactions in which such
                                    corporation is to become a corporation
                                    described in subclause (I).
                ``(3) Definitions.--For purposes of this subsection--
                        ``(A) Preferred stock.--The term `preferred stock'
                    means stock which is limited and preferred as to
                    dividends and does not participate in corporate growth
                    to any significant extent.
                        ``(B) Related person.--A person shall be treated as
                    related to another person if they bear a relationship to
                    such other person described in section 267(b) or 707(b).
                ``(4) Regulations.--The Secretary may prescribe such
            regulations as may be necessary or appropriate to carry out the
            purposes of this subsection and sections 354(a)(2)(C),
            355(a)(3)(D), and 356(e). The Secretary may also prescribe
            regulations, consistent with the treatment under this subsection
            and such sections, for the treatment of nonqualified preferred
            stock under other provisions of this title.''.

        (b) Section 354.--Paragraph (2) of section 354(a) (relating to
    exchanges of stock and securities in certain reorganizations) is amended
    by adding at the end the following new subparagraph:
                        ``(C) Nonqualified preferred stock.--
                              ``(i) In general.--Nonqualified preferred
                          stock (as defined in section 351(g)(2)) received
                          in exchange for stock other than nonqualified
                          preferred stock (as so defined) shall not be
                          treated as stock or securities.
                              ``(ii) Recapitalizations of family-owned
                          corporations.--
                                        ``(I) In general.--Clause (i) shall
                                    not apply in the case of a
                                    recapitalization under section
                                    368(a)(1)(E) of a family-owned
                                    corporation.
                                        ``(II) Family-owned corporation.--
                                    For purposes of this clause, except as
                                    provided in regulations, the term
                                    `family-owned corporation' means any
                                    corporation which is described in clause
                                    (i) of section 447(d)(2)(C) throughout
                                    the 8-year period beginning on the date
                                    which is 5 years before the date of the
                                    recapitalization. For purposes of the
                                    preceding sentence, stock shall not be
                                    treated as owned by a family member
                                    during any period described in section
                                    355(d)(6)(B).''.

    [[Page 111 STAT. 921]]

        (c) Section 355.--Paragraph (3) of section 355(a) is amended by
    adding at the end the following new subparagraph:
                        ``(D) Nonqualified preferred stock.--Nonqualified
                    preferred stock (as defined in section 351(g)(2))
                    received in a distribution with respect to stock other
                    than nonqualified preferred stock (as so defined) shall
                    not be treated as stock or securities.''.

        (d) Section 356.--Section 356 is amended by redesignating
    subsections (e) and (f) as subsections (f) and (g), respectively, and by
    inserting after subsection (d) the following new subsection:
        ``(e) Nonqualified Preferred Stock Treated as Other Property.--For
    purposes of this section--
                ``(1) In general.--Except as provided in paragraph (2), the
            term `other property' includes nonqualified preferred stock (as
            defined in section 351(g)(2)).
                ``(2) Exception.--The term `other property' does not include
            nonqualified preferred stock (as so defined) to the extent that,
            under section 354 or 355, such preferred stock would be
            permitted to be received without the recognition of gain.''.

        (e) Conforming Amendments.--
                (1) Subparagraph (B) of section 354(a)(2) and subparagraph
            (C) of section 355(a)(3)(C) are each amended by inserting
            ``(including nonqualified preferred stock, as defined in section
            351(g)(2))'' after ``stock''.
                (2) Subparagraph (A) of section 354(a)(3) and subparagraph
            (A) of section 355(a)(4) are each amended by inserting
            ``nonqualified preferred stock and'' after ``including''.
                (3) Section 1036 is amended by redesignating subsection (b)
            as subsection (c) and by inserting after subsection (a) the
            following new subsection:

        ``(b) Nonqualified Preferred Stock Not Treated as Stock.--For
    purposes of this section, nonqualified preferred stock (as defined in
    section 351(g)(2)) shall be treated as property other than stock.''.
        (f) <<NOTE: 26 USC 351 note.>>  Effective Date.--
                (1) In general.--The amendments made by this section shall
            apply to transactions after June 8, 1997.
                (2) Transition rule.--The amendments made by this section
            shall not apply to any transaction after June 8, 1997, if such
            transaction is--
                        (A) made pursuant to a written agreement which was
                    binding on such date and at all times thereafter,
                        (B) described in a ruling request submitted to the
                    Internal Revenue Service on or before such date, or
                        (C) described on or before such date in a public
                    announcement or in a filing with the Securities and
                    Exchange Commission required solely by reason of the
                    transaction.

    SEC. 1015. MODIFICATION OF HOLDING PERIOD APPLICABLE TO DIVIDENDS
                RECEIVED DEDUCTION.

        (a) In General.--Subparagraph (A) of section 246(c)(1) is amended to
    read as follows:
                        ``(A) which is held by the taxpayer for 45 days or
                    less during the 90-day period beginning on the date
                    which is 45 days before the date on which such share
                    becomes ex-dividend with respect to such dividend, or''.

    [[Page 111 STAT. 922]]

        (b) Conforming Amendments.--
                (1) Paragraph (2) of section 246(c) is amended to read as
            follows:
                ``(2) 90-day rule in the case of certain preference
            dividends.--In the case of stock having preference in dividends,
            if the taxpayer receives dividends with respect to such stock
            which are attributable to a period or periods aggregating in
            excess of 366 days, paragraph (1)(A) shall be applied--
                        ``(A) by substituting `90 days' for `45 days' each
                    place it appears, and
                        ``(B) by substituting `180-day period' for `90-day
                    period'.''.
                (2) Paragraph (3) of section 246(c) is amended by adding
            ``and'' at the end of subparagraph (A), by striking subparagraph
            (B), and by redesignating subparagraph (C) as subparagraph (B).

        (c) <<NOTE: 26 USC 246 note.>>  Effective Date.--
                (1) In general.--The amendments made by this section shall
            apply to dividends received or accrued after the 30th day after
            the date of the enactment of this Act.
                (2) Transitional rule.--The amendments made by this section
            shall not apply to dividends received or accrued during the 2-
            year period beginning on the date of the enactment of this Act
            if--
                        (A) the dividend is paid with respect to stock held
                    by the taxpayer on June 8, 1997, and all times
                    thereafter until the dividend is received,
                        (B) such stock is continuously subject to a position
                    described in section 246(c)(4) of the Internal Revenue
                    Code of 1986 on June 8, 1997, and all times thereafter
                    until the dividend is received, and
                        (C) such stock and position are clearly identified
                    in the taxpayer's records within 30 days after the date
                    of the enactment of this Act.
            Stock shall not be treated as meeting the requirement of
            subparagraph (B) if the position is sold, closed, or otherwise
            terminated and reestablished.

                      Subtitle C--Administrative Provisions

    SEC. 1021. REPORTING OF CERTAIN PAYMENTS MADE TO ATTORNEYS.

        (a) In General.--Section 6045 (relating to returns of brokers) is
    amended by adding at the end the following new subsection:
        ``(f) Return Required in the Case of Payments to Attorneys.--
                ``(1) In general.--Any person engaged in a trade or business
            and making a payment (in the course of such trade or business)
            to which this subsection applies shall file a return under
            subsection (a) and a statement under subsection (b) with respect
            to such payment.
                ``(2) Application of subsection.--
                        ``(A) In general.--This subsection shall apply to
                    any payment to an attorney in connection with legal
                    services (whether or not such services are performed for
                    the payor).
                        ``(B) Exception.--This subsection shall not apply to
                    the portion of any payment which is required to be
                    reported

    [[Page 111 STAT. 923]]

                    under section 6041(a) (or would be so required but for
                    the dollar limitation contained therein) or section
                    6051.''.

        (b) Reporting of Attorneys' Fees Payable to Corporations.--The
    regulations providing an exception under section 6041 of the Internal
    Revenue Code of 1986 for payments made to corporations shall not apply
    to payments of attorneys' fees.
        (c) <<NOTE: 26 USC 6045 note.>>  Effective Date.--The amendment made
    by this section shall apply to payments made after December 31, 1997.

    SEC. 1022. DECREASE OF THRESHOLD FOR REPORTING PAYMENTS TO CORPORATIONS
                PERFORMING SERVICES FOR FEDERAL AGENCIES.

        (a) In General.--Subsection (d) of section 6041A (relating to
    returns regarding payments of remuneration for services and direct
    sales) is amended by adding at the end the following new paragraph:
                ``(3) Payments to corporations by federal executive
            agencies.--
                        ``(A) In general.--Notwithstanding any regulation
                    prescribed by the Secretary before the date of the
                    enactment of this paragraph, subsection (a) shall apply
                    to remuneration paid to a corporation by any Federal
                    executive agency (as defined in section 6050M(b)).
                        ``(B) Exception.--Subparagraph (A) shall not apply
                    to--
                              ``(i) services under contracts described in
                          section 6050M(e)(3) with respect to which the
                          requirements of section 6050M(e)(2) are met, and
                              ``(ii) such other services as the Secretary
                          may specify in regulations prescribed after the
                          date of the enactment of this paragraph.''.

        (b) <<NOTE: 26 USC 6041A note.>>  Effective Date.--The amendment
    made by this section shall apply to returns the due date for which
    (determined without regard to any extension) is more than 90 days after
    the date of the enactment of this Act.

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

        (a) General Rule.--Clause (viii) of section 6103(l)(7)(D) (relating
    to disclosure of return information to Federal, State, and local
    agencies administering certain programs) is amended by striking ``1998''
    and inserting ``2003''.
        (b) <<NOTE: 26 USC 6103 note.>>  Effective Date.--The amendment made
    by subsection (a) shall take effect on the date of the enactment of this
    Act.

    SEC. 1024. CONTINUOUS LEVY ON CERTAIN PAYMENTS.

        (a) In General.--Section 6331 (relating to levy and distraint) is
    amended--
                (1) by redesignating subsection (h) as subsection (i), and
                (2) by inserting after subsection (g) the following new
            subsection:

        ``(h) Continuing Levy on Certain Payments.--
                ``(1) In general.--The effect of a levy on specified
            payments to or received by a taxpayer shall be continuous from
            the date such levy is first made until such levy is released.
            Notwithstanding section 6334, such continuous levy shall attach
            to up to 15 percent of any specified payment due to the
            taxpayer.
                ``(2) Specified payment.--For the purposes of paragraph (1),
            the term `specified payment' means--

    [[Page 111 STAT. 924]]

                        ``(A) any Federal payment other than a payment for
                    which eligibility is based on the income or assets (or
                    both) of a payee,
                        ``(B) any payment described in paragraph (4), (7),
                    (9), or (11) of section 6334(a), and
                        ``(C) any annuity or pension payment under the
                    Railroad Retirement Act or benefit under the Railroad
                    Unemployment Insurance Act.''.

        (b) <<NOTE: 26 USC 6331 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to levies issued after the date of the
    enactment of this Act.

    SEC. 1025. MODIFICATION OF LEVY EXEMPTION.

        (a) In General.--Section 6334 (relating to property exempt from
    levy) is amended by redesignating subsection (f) as subsection (g) and
    by inserting after subsection (e) the following new subsection:
        ``(f) Levy Allowed on Certain Specified Payments.--Any payment
    described in subparagraph (B) or (C) of section 6331(h)(2) shall not be
    exempt from levy if the Secretary approves the levy thereon under
    section 6331(h).''.
        (b) <<NOTE: 26 USC 6334 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to levies issued after the date of the
    enactment of this Act.

    SEC. 1026. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN
                INFORMATION.

        (a) In General.--Subsection (k) of section 6103 is amended by adding
    at the end the following new paragraph:
                ``(8) Levies on certain government payments.--
                        ``(A) Disclosure of return information in levies on
                    financial management service.--In serving a notice of
                    levy, or release of such levy, with respect to any
                    applicable government payment, the Secretary may
                    disclose to officers and employees of the Financial
                    Management Service--
                              ``(i) return information, including taxpayer
                          identity information,
                              ``(ii) the amount of any unpaid liability
                          under this title (including penalties and
                          interest), and
                              ``(iii) the type of tax and tax period to
                          which such unpaid liability relates.
                        ``(B) Restriction on use of disclosed information.--
                    Return information disclosed under subparagraph (A) may
                    be used by officers and employees of the Financial
                    Management Service only for the purpose of, and to the
                    extent necessary in, transferring levied funds in
                    satisfaction of the levy, maintaining appropriate agency
                    records in regard to such levy or the release thereof,
                    notifying the taxpayer and the agency certifying such
                    payment that the levy has been honored, or in the
                    defense of any litigation ensuing from the honor of such
                    levy.
                        ``(C) Applicable government payment.--For purposes
                    of this paragraph, the term `applicable government
                    payment' means--
                              ``(i) any Federal payment (other than a
                          payment for which eligibility is based on the
                          income or assets

    [[Page 111 STAT. 925]]

                          (or both) of a payee) certified to the Financial
                          Management Service for disbursement, and
                              ``(ii) any other payment which is certified to
                          the Financial Management Service for disbursement
                          and which the Secretary designates by published
                          notice.''.

        (b) Conforming Amendments.--
                (1) Section 6103(p) is amended--
                        (A) in paragraph (3)(A), by striking ``(2), or (6)''
                    and inserting ``(2), (6), or (8)'', and
                        (B) in paragraph (4), by inserting ``(k)(8),'' after
                    ``(j) (1) or (2),'' each place it appears.
                (2) Section 552a(a)(8)(B) of title 5, United States Code, is
            amended by striking ``or'' at the end of clause (v), by adding
            ``or'' at the end of clause (vi), and by adding at the end the
            following new clause:
                              ``(vii) matches performed incident to a levy
                          described in section 6103(k)(8) of the Internal
                          Revenue Code of 1986;''.

        (c) <<NOTE: 26 USC 6103 note.>>  Effective Date.--The amendments
    made by this section shall apply to levies issued after the date of the
    enactment of this Act.

    SEC. 1027. RETURNS OF BENEFICIARIES OF ESTATES AND TRUSTS REQUIRED TO
                FILE RETURNS CONSISTENT WITH ESTATE OR TRUST RETURN OR TO
                NOTIFY SECRETARY OF INCONSISTENCY.

        (a) Domestic Estates and Trusts.--Section 6034A (relating to
    information to beneficiaries of estates and trusts) is amended by adding
    at the end the following new subsection:
        ``(c) Beneficiary's Return Must be Consistent with Estate or Trust
    Return or Secretary Notified of Inconsistency.--
                ``(1) In general.--A beneficiary of any estate or trust to
            which subsection (a) applies shall, on such beneficiary's
            return, treat any reported item in a manner which is consistent
            with the treatment of such item on the applicable entity's
            return.
                ``(2) Notification of inconsistent treatment.--
                        ``(A) In general.--In the case of any reported item,
                    if--
                              ``(i)(I) the applicable entity has filed a
                          return but the beneficiary's treatment on such
                          beneficiary's return is (or may be) inconsistent
                          with the treatment of the item on the applicable
                          entity's return, or
                              ``(II) the applicable entity has not filed a
                          return, and
                              ``(ii) the beneficiary files with the
                          Secretary a statement identifying the
                          inconsistency,
                    paragraph (1) shall not apply to such item.
                        ``(B) Beneficiary receiving incorrect information.--
                    A beneficiary shall be treated as having complied with
                    clause (ii) of subparagraph (A) with respect to a
                    reported item if the beneficiary--
                              ``(i) demonstrates to the satisfaction of the
                          Secretary that the treatment of the reported item
                          on the beneficiary's return is consistent with the
                          treatment of the item on the statement furnished
                          under subsection (a) to the beneficiary by the
                          applicable entity, and

    [[Page 111 STAT. 926]]

                              ``(ii) elects to have this paragraph apply
                          with respect to that item.
                ``(3) Effect of failure to notify.--In any case--
                        ``(A) described in subparagraph (A)(i)(I) of
                    paragraph (2), and
                        ``(B) in which the beneficiary does not comply with
                    subparagraph (A)(ii) of paragraph (2),
            any adjustment required to make the treatment of the items by
            such beneficiary consistent with the treatment of the items on
            the applicable entity's return shall be treated as arising out
            of mathematical or clerical errors and assessed according to
            section 6213(b)(1). Paragraph (2) of section 6213(b) shall not
            apply to any assessment referred to in the preceding sentence.
                ``(4) Definitions.--For purposes of this subsection--
                        ``(A) Reported item.--The term `reported item' means
                    any item for which information is required to be
                    furnished under subsection (a).
                        ``(B) Applicable entity.--The term `applicable
                    entity' means the estate or trust of which the taxpayer
                    is the beneficiary.
                ``(5) Addition to tax for failure to comply with section.--
            For addition to tax in the case of a beneficiary's negligence in
            connection with, or disregard of, the requirements of this
            section, see part II of subchapter A of chapter 68.''.

        (b) Foreign Trusts.--Subsection (d) of section 6048 (relating to
    information with respect to certain foreign trusts) is amended by adding
    at the end the following new paragraph:
                ``(5) United states person's return must be consistent with
            trust return or secretary notified of inconsistency.--Rules
            similar to the rules of section 6034A(c) shall apply to items
            reported by a trust under subsection (b)(1)(B) and to United
            States persons referred to in such subsection.''.

        (c) <<NOTE: 26 USC 6034A note.>>  Effective Date.--The amendments
    made by this section shall apply to returns of beneficiaries and owners
    filed after the date of the enactment of this Act.

    SEC. 1028. REGISTRATION AND OTHER PROVISIONS RELATING TO CONFIDENTIAL
                CORPORATE TAX SHELTERS.

        (a) In General.--Section 6111 (relating to registration of tax
    shelters) is amended by redesignating subsections (d) and (e) as
    subsections (e) and (f), respectively, and by inserting after subsection
    (c) the following new subsection:
        ``(d) Certain Confidential Arrangements Treated as Tax Shelters.--
                ``(1) In general.--For purposes of this section, the term
            `tax shelter' includes any entity, plan, arrangement, or
            transaction--
                        ``(A) a significant purpose of the structure of
                    which is the avoidance or evasion of Federal income tax
                    for a direct or indirect participant which is a
                    corporation,
                        ``(B) which is offered to any potential participant
                    under conditions of confidentiality, and
                        ``(C) for which the tax shelter promoters may
                    receive fees in excess of $100,000 in the aggregate.

    [[Page 111 STAT. 927]]

                ``(2) Conditions of confidentiality.--For purposes of
            paragraph (1)(B), an offer is under conditions of
            confidentiality if--
                        ``(A) the potential participant to whom the offer is
                    made (or any other person acting on behalf of such
                    participant) has an understanding or agreement with or
                    for the benefit of any promoter of the tax shelter that
                    such participant (or such other person) will limit
                    disclosure of the tax shelter or any significant tax
                    features of the tax shelter, or
                        ``(B) any promoter of the tax shelter--
                              ``(i) claims, knows, or has reason to know,
                              ``(ii) knows or has reason to know that any
                          other person (other than the potential
                          participant) claims, or
                              ``(iii) causes another person to claim,
                    that the tax shelter (or any aspect thereof) is
                    proprietary to any person other than the potential
                    participant or is otherwise protected from disclosure to
                    or use by others.
            For purposes of this subsection, the term `promoter' means any
            person or any related person (within the meaning of section 267
            or 707) who participates in the organization, management, or
            sale of the tax shelter.
                ``(3) Persons other than promoter required to register in
            certain cases.--
                        ``(A) In general.--If--
                              ``(i) the requirements of subsection (a) are
                          not met with respect to any tax shelter (as
                          defined in paragraph (1)) by any tax shelter
                          promoter, and
                              ``(ii) no tax shelter promoter is a United
                          States person,
                    then each United States person who discussed
                    participation in such shelter shall register such
                    shelter under subsection (a).
                        ``(B) Exception.--Subparagraph (A) shall not apply
                    to a United States person who discussed participation in
                    a tax shelter if--
                              ``(i) such person notified the promoter in
                          writing (not later than the close of the 90th day
                          after the day on which such discussions began)
                          that such person would not participate in such
                          shelter, and
                              ``(ii) such person does not participate in
                          such shelter.
                ``(4) Offer to participate treated as offer for sale.--For
            purposes of subsections (a) and (b), an offer to participate in
            a tax shelter (as defined in paragraph (1)) shall be treated as
            an offer for sale.''.

        (b) Penalty.--Subsection (a) of section 6707 (relating to failure to
    furnish information regarding tax shelters) is amended by adding at the
    end the following new paragraph:
                ``(3) Confidential arrangements.--
                        ``(A) In general.--In the case of a tax shelter (as
                    defined in section 6111(d)), the penalty imposed under
                    paragraph (1) shall be an amount equal to the greater
                    of--
                              ``(i) 50 percent of the fees paid to all
                          promoters of the tax shelter with respect to
                          offerings made before

    [[Page 111 STAT. 928]]

                          the date such shelter is registered under section
                          6111, or
                              ``(ii) $10,000.
                    Clause (i) shall be applied by substituting `75 percent'
                    for `50 percent' in the case of an intentional failure
                    or act described in paragraph (1).
                        ``(B) Special rule for participants required to
                    register shelter.--In the case of a person required to
                    register such a tax shelter by reason of section
                    6111(d)(3)--
                              ``(i) such person shall be required to pay the
                          penalty under paragraph (1) only if such person
                          actually participated in such shelter,
                              ``(ii) the amount of such penalty shall be
                          determined by taking into account under
                          subparagraph (A)(i) only the fees paid by such
                          person, and
                              ``(iii) such penalty shall be in addition to
                          the penalty imposed on any other person for
                          failing to register such shelter.''.

        (c) Modifications to Substantial Understatement Penalty.--
                (1) Restriction on reasonable basis for corporate
            understatement of income tax.--Subparagraph (B) of section
            6662(d)(2) is amended by adding at the end the following new
            flush sentence:
                    ``For purposes of clause (ii)(II), in no event shall a
                    corporation be treated as having a reasonable basis for
                    its tax treatment of an item attributable to a multiple-
                    party financing transaction if such treatment does not
                    clearly reflect the income of the corporation.''.
                (2) Modification to definition of tax shelter.--Clause (iii)
            of section 6662(d)(2)(C) is amended by striking ``the principal
            purpose'' and inserting ``a significant purpose''.

        (d) Conforming Amendments.--
                (1) Paragraph (2) of section 6707(a) is amended by striking
            ``The penalty'' and inserting ``Except as provided in paragraph
            (3), the penalty''.
                (2) Subparagraph (A) of section 6707(a)(1) is amended by
            striking ``paragraph (2)'' and inserting ``paragraph (2) or (3),
            as the case may be''.

        (e) <<NOTE: 26 USC 6111 note.>>  Effective Date.--
                (1) In general.--Except as provided in paragraph (2), the
            amendments made by this section shall apply to any tax shelter
            (as defined in section 6111(d) of the Internal Revenue Code of
            1986, as amended by this section) interests in which are offered
            to potential participants after the Secretary of the Treasury
            prescribes guidance with respect to meeting requirements added
            by such amendments.
                (2) Modifications to substantial understatement penalty.--
            The amendments made by subsection (c) shall apply to items with
            respect to transactions entered into after the date of the
            enactment of this Act.

    [[Page 111 STAT. 929]]

                Subtitle D--Excise and Employment Tax Provisions

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

        (a) Fuel Taxes.--
                (1) Aviation fuel.--Clause (ii) of section 4091(b)(3)(A) is
            amended by striking ``September 30, 1997'' and inserting
            ``September 30, 2007''.
                (2) Aviation gasoline.--Subparagraph (B) of section
            4081(d)(2) is amended by striking ``September 30, 1997'' and
            inserting ``September 30, 2007''.
                (3) Noncommercial aviation.--Subparagraph (B) of section
            4041(c)(3) is amended by striking ``September 30, 1997'' and
            inserting ``September 30, 2007''.

        (b) Ticket Taxes.--
                (1) Persons.--Clause (ii) of section 4261(g)(1)(A) is
            amended by striking ``September 30, 1997'' and inserting
            ``September 30, 2007''.
                (2) Property.--Clause (ii) of section 4271(d)(1)(A) is
            amended by striking ``September 30, 1997'' and inserting
            ``September 30, 2007''.

        (c) Modifications to Tax on Transportation of Persons by Air.--
                (1) In general.--Section 4261 (relating to imposition of
            tax) is amended by striking subsections (a), (b), and (c) and
            inserting the following new subsections:

        ``(a) In General.--There is hereby imposed on the amount paid for
    taxable transportation of any person a tax equal to 7.5 percent of the
    amount so paid.
        ``(b) Domestic Segments of Taxable Transportation.--
                ``(1) In general.--There is hereby imposed on the amount
            paid for each domestic segment of taxable transportation by air
            a tax in the amount determined in accordance with the following
            table for the period in which the segment begins:

    In the case of segments
      beginning:                                                 The tax is:

    After September 30, 1997, and before                              $1.00
        October 1, 1998
    After September 30, 1998, and before                              $2.00
        October 1, 1999
    After September 30, 1999, and before                              $2.25
        January 1, 2000
    During 2000                                                       $2.50
    During 2001                                                       $2.75
    During 2002 or thereafter                                         $3.00.

                ``(2) Domestic segment.--For purposes of this section, the
            term `domestic segment' means any segment consisting of 1
            takeoff and 1 landing and which is taxable transportation
            described in section 4262(a)(1).
                ``(3) Changes in segments by reason of rerouting.--If--
                        ``(A) transportation is purchased between 2
                    locations on specified flights, and
                        ``(B) there is a change in the route taken between
                    such 2 locations which changes the number of domestic
                    segments, but there is no change in the amount charged
                    for such transportation,

    [[Page 111 STAT. 930]]

            the tax imposed by paragraph (1) shall be determined without
            regard to such change in route.

        ``(c) Use of International Travel Facilities.--
                ``(1) In general.--There is hereby imposed a tax of $12.00
            on any amount paid (whether within or without the United States)
            for any transportation of any person by air, if such
            transportation begins or ends in the United States.
                ``(2) Exception for transportation entirely taxable under
            subsection (a).--This subsection shall not apply to any
            transportation all of which is taxable under subsection (a)
            (determined without regard to sections 4281 and 4282).
                ``(3) Special rule for alaska and hawaii.--In any case in
            which the tax imposed by paragraph (1) applies to a domestic
            segment beginning or ending in Alaska or Hawaii, such tax shall
            apply only to departures and shall be at the rate of $6.''.
                (2) Special rules.--Section 4261 is amended by redesignating
            subsections (e), (f), and (g) as subsections (f), (g), and (h),
            respectively, and by inserting after subsection (d) the
            following new subsection:

        ``(e) Special Rules.--
                ``(1) Segments to and from rural airports.--
                        ``(A) Exception from segment tax.--The tax imposed
                    by subsection (b)(1) shall not apply to any domestic
                    segment beginning or ending at an airport which is a
                    rural airport for the calendar year in which such
                    segment begins or ends (as the case may be).
                        ``(B) Rural airport.--For purposes of this
                    paragraph, the term `rural airport' means, with respect
                    to any calendar year, any airport if--
                              ``(i) there were fewer than 100,000 commercial
                          passengers departing by air during the second
                          preceding calendar year from such airport, and
                              ``(ii) such airport--
                                        ``(I) is not located within 75 miles
                                    of another airport which is not
                                    described in clause (i), or
                                        ``(II) is receiving essential air
                                    service subsidies as of the date of the
                                    enactment of this paragraph.
                        ``(C) No phasein of reduced ticket tax.--In the case
                    of transportation beginning before October 1, 1999--
                              ``(i) In general.--Paragraph (5) shall not
                          apply to any domestic segment beginning or ending
                          at an airport which is a rural airport for the
                          calendar year in which such segment begins or ends
                          (as the case may be).
                              ``(ii) Transportation involving multiple
                          segments.--In the case of transportation involving
                          more than 1 domestic segment at least 1 of which
                          does not begin or end at a rural airport, the 7.5
                          percent rate applicable by reason of clause (i)
                          shall be applied by taking into account only an
                          amount which bears the same ratio to the amount
                          paid for such transportation as the number of
                          specified miles in domestic segments which begin
                          or end at a rural airport bears to the total
                          number of specified miles in such transportation.

    [[Page 111 STAT. 931]]

                ``(2) Amounts paid outside the united states.--In the case
            of amounts paid outside the United States for taxable
            transportation, the taxes imposed by subsections (a) and (b)
            shall apply only if such transportation begins and ends in the
            United States.
                ``(3) Amounts paid for right to award free or reduced rate
            air transportation.--
                        ``(A) In general.--Any amount paid (and the value of
                    any other benefit provided) to an air carrier (or any
                    related person) for the right to provide mileage awards
                    for (or other reductions in the cost of) any
                    transportation of persons by air shall be treated for
                    purposes of subsection (a) as an amount paid for taxable
                    transportation, and such amount shall be taxable under
                    subsection (a) without regard to any other provision of
                    this subchapter.
                        ``(B) Controlled group.--For purposes of
                    subparagraph (A), a corporation and all wholly owned
                    subsidiaries of such corporation shall be treated as 1
                    corporation.
                        ``(C) Regulations.--The Secretary shall prescribe
                    rules which reallocate items of income, deduction,
                    credit, exclusion, or other allowance to the extent
                    necessary to prevent the avoidance of tax imposed by
                    reason of this paragraph. The Secretary may prescribe
                    rules which exclude from the tax imposed by subsection
                    (a) amounts attributable to mileage awards which are
                    used other than for transportation of persons by air.
                ``(4) Inflation adjustment of dollar rates of tax.--
                        ``(A) In general.--In the case of taxable events in
                    a calendar year after the last nonindexed year, the
                    $3.00 amount contained in subsection (b) and each dollar
                    amount contained in subsection (c) shall be increased by
                    an amount equal to--
                              ``(i) such dollar amount, multiplied by
                              ``(ii) the cost-of-living adjustment
                          determined under section 1(f)(3) for such calendar
                          year by substituting the year before the last
                          nonindexed year for `calendar year 1992' in
                          subparagraph (B) thereof.
                    If any increase determined under the preceding sentence
                    is not a multiple of 10 cents, such increase shall be
                    rounded to the nearest multiple of 10 cents.
                        ``(B) Last nonindexed year.--For purposes of
                    subparagraph (A), the last nonindexed year is--
                              ``(i) 2002 in the case of the $3.00 amount
                          contained in subsection (b), and
                              ``(ii) 1998 in the case of the dollar amounts
                          contained in subsection (c).
                        ``(C) Taxable event.--For purposes of subparagraph
                    (A), in the case of the tax imposed subsection (b), the
                    beginning of the domestic segment shall be treated as
                    the taxable event.
                ``(5) Rates of ticket tax for transportation beginning
            before october 1, 1999.--Subsection (a) shall be applied by
            substituting for `7.5 percent'--
                        ``(A) `9 percent' in the case of transportation
                    beginning after September 30, 1997, and before October
                    1, 1998, and

    [[Page 111 STAT. 932]]

                        ``(B) `8 percent' in the case of transportation
                    beginning after September 30, 1998, and before October
                    1, 1999.''.
                (3) Secondary liability of carrier for unpaid tax.--
            Subsection (c) of section 4263 is amended by striking
            ``subchapter--'' and all that follows and inserting
            ``subchapter, such tax shall be paid by the carrier providing
            the initial segment of such transportation which begins or ends
            in the United States.''.

        (d) Increased Airport and Airway Trust Fund Deposits.--
                (1) Paragraph (1) of section 9502(b) is amended--
                        (A) by striking ``(to the extent that the rate of
                    the tax on such gasoline exceeds 4.3 cents per gallon)''
                    in subparagraph (C),
                        (B) by striking ``to the extent attributable to the
                    Airport and Airway Trust Fund financing rate'' in
                    subparagraph (D), and
                        (C) by adding at the end the following flush
                    sentence:

    ``There shall not be taken into account under paragraph (1) so much of
    the taxes imposed by sections 4081 and 4091 as are determined at the
    rates specified in section 4081(a)(2)(B) or 4091(b)(2).''.
                (2) Section 9502 is amended by striking subsection (f).

        (e) Effective Dates.--
                (1) <<NOTE: 26 USC 4041 note.>>  Fuel taxes.--The amendments
            made by subsection (a) shall apply take effect on October 1,
            1997.
                (2) <<NOTE: 26 USC 4261 note.>>  Ticket taxes.--
                        (A) In general.--Except as otherwise provided in
                    this paragraph, the amendments made by subsections (b)
                    and (c) shall apply to transportation beginning on or
                    after October 1, 1997.
                        (B) Treatment of amounts paid for tickets purchased
                    before october 1, 1997.--The amendments made by
                    subsection (c) shall not apply to amounts paid before
                    October 1, 1997; except that--
                              (i) the amendment made to section 4261(c) of
                          the Internal Revenue Code of 1986 shall apply to
                          amounts paid more than 7 days after the date of
                          the enactment of this Act for transportation
                          beginning on or after October 1, 1997, and
                              (ii) the amendment made to section 4263(c) of
                          such Code shall apply to the extent related to
                          taxes imposed under the amendment made to such
                          section 4261(c) on the amounts described in clause
                          (i).
                        (C) Amounts paid for right to award mileage
                    awards.--
                              (i) In general.--Paragraph (3) of section
                          4261(e) of the Internal Revenue Code of 1986 (as
                          added by the amendment made by subsection (c))
                          shall apply to amounts paid (and other benefits
                          provided) after September 30, 1997.
                              (ii) Payments within controlled group.--For
                          purposes of clause (i), any amount paid after June
                          11, 1997, and before October 1, 1997, by 1 member
                          of a controlled group for a right which is
                          described in such section 4261(e)(3) and is
                          furnished by another member of such group after
                          September 30, 1997, shall

    [[Page 111 STAT. 933]]

                          be treated as paid after September 30, 1997. For
                          purposes of the preceding sentence, all persons
                          treated as a single employer under subsection (a)
                          or (b) of section 52 of such Code shall be treated
                          as members of a controlled group.
                (3) <<NOTE: 26 USC 9502 note.>>  Increased deposits into
            airport and airway trust fund.--The amendments made by
            subsection (d) shall apply with respect to taxes received in the
            Treasury on and after October 1, 1997.

        (g) <<NOTE: 26 USC 6302 note.>>  Delayed Deposits of Airport Trust
    Fund Tax Revenues.--Notwithstanding section 6302 of the Internal Revenue
    Code of 1986--
                (1) in the case of deposits of taxes imposed by section 4261
            of such Code, the due date for any such deposit which would (but
            for this subsection) be required to be made after August 14,
            1997, and before October 1, 1997, shall be October 10, 1997,
                (2) in the case of deposits of taxes imposed by section 4261
            of such Code, the due date for any such deposit which would (but
            for this subsection) be required to be made after August 14,
            1998, and before October 1, 1998, shall be October 5, 1998, and
                (3) in the case of deposits of taxes imposed by sections
            4081(a)(2)(A)(ii), 4091, and 4271 of such Code, the due date for
            any such deposit which would (but for this subsection) be
            required to be made after July 31, 1998, and before October 1,
            1998, shall be October 5, 1998.

    SEC. 1032. KEROSENE TAXED AS DIESEL FUEL.

        (a) In General.--Subsection (a) of section 4083 (defining taxable
    fuel) is amended by striking ``and'' at the end of subparagraph (A), by
    striking the period at the end of subparagraph (B) and inserting ``,
    and'', and by adding at the end the following new subparagraph:
                        ``(C) kerosene.''.

        (b) Rate of Tax.--Clause (iii) of section 4081(a)(2)(A) is amended
    by inserting ``or kerosene'' after ``diesel fuel''.
        (c) Exemptions From Tax; Refunds to Vendors.--
                (1) In general.--Section 4082 (relating to exemptions for
            diesel fuel) is amended by striking ``diesel fuel'' each place
            it appears in subsections (a), (c), and (d) and inserting
            ``diesel fuel and kerosene''.
                (2) Certain kerosene exempt from dyeing requirement.--
            Section 4082 is amended by redesignating subsections (d) and (e)
            as subsections (e) and (f), respectively, and by inserting after
            subsection (c) the following new subsection:

        ``(d) Additional Exceptions to Dyeing Requirements for Kerosene.--
                ``(1) Aviation-grade kerosene.--Subsection
            (a)(2) <<NOTE: Regulations.>>  shall not apply to a removal,
            entry, or sale of aviation-grade kerosene (as determined under
            regulations prescribed by the Secretary) if the person receiving
            the kerosene is registered under section 4101 with respect to
            the tax imposed by section 4091.
                ``(2) Use for non-fuel feedstock purposes.--Subsection
            (a)(2) shall not apply to kerosene--
                        ``(A) received by pipeline or vessel for use by the
                    person receiving the kerosene in the manufacture or
                    production

    [[Page 111 STAT. 934]]

                    of any substance (other than gasoline, diesel fuel, or
                    special fuels referred to in section 4041), or
                        ``(B) to the extent provided in regulations, removed
                    or entered--
                              ``(i) for such a use by the person removing or
                          entering the kerosene, or
                              ``(ii) for resale by such person for such a
                          use by the purchaser,
            but only if the person receiving, removing, or entering the
            kerosene and such purchaser (if any) are registered under
            section 4101 with respect to the tax imposed by section 4081.
                ``(3) Wholesale distributors.--To the extent provided in
            regulations, subsection (a)(2) shall not apply to a removal,
            entry, or sale of kerosene to a wholesale distributor of
            kerosene if such distributor--
                        ``(A) is registered under section 4101 with respect
                    to the tax imposed by section 4081 on kerosene, and
                        ``(B) sells kerosene exclusively to ultimate vendors
                    described in section 6427(l)(5)(B) with respect to
                    kerosene.''.
                (3) Refunds.--
                        (A) Subsection (l) of section 6427 is amended by
                    inserting ``or kerosene'' after ``diesel fuel'' each
                    place it appears in paragraphs (1), (2), and (5)
                    (including the heading for paragraph (5)).
                        (B) Paragraph (5) of section 6427(l) is amended by
                    redesignating subparagraph (B) as subparagraph (C) and
                    by inserting after subparagraph (A) the following new
                    subparagraph:
                        ``(B) Sales of kerosene not for use in motor fuel.--
                    Paragraph (1)(A) shall not apply to kerosene sold by a
                    vendor--
                              ``(i) for any use if such sale is from a pump
                          which (as determined under regulations prescribed
                          by the Secretary) is not suitable for use in
                          fueling any diesel-powered highway vehicle or
                          train, or
                              ``(ii) to the extent provided by the
                          Secretary, for blending with heating oil to be
                          used during periods of extreme or unseasonable
                          cold.''.
                        (C) Subparagraph (C) of section 6427(l)(5), as
                    redesignated by subparagraph (B) of this paragraph, is
                    amended by striking ``subparagraph (A)'' and inserting
                    ``subparagraph (A) or (B)''.
                        (D) The heading for subsection (l) of section 6427
                    is amended by inserting ``, Kerosene,'' after ``Diesel
                    Fuel''.
                        (E) Clause (i) of section 6427(i)(5)(A) is amended
                    by inserting ``($100 or more in the case of kerosene)''
                    after ``$200 or more''.

        (d) Certain Approved Terminals of Registered Persons Required To
    Offer Dyed Diesel Fuel and Kerosene for Nontaxable Purposes.--Section
    4101 is amended by adding at the end the following new subsection:
        ``(e) Certain Approved Terminals of Registered Persons Required To
    Offer Dyed Diesel Fuel and Kerosene for Nontaxable Purposes.--
                ``(1) In general.--A terminal for kerosene or diesel fuel
            may not be an approved facility for storage of non-tax-paid
            diesel fuel or kerosene under this section unless the operator

    [[Page 111 STAT. 935]]

            of such terminal offers dyed diesel fuel and kerosene for
            removal for nontaxable use in accordance with section 4082(a).
                ``(2) Exception.--Paragraph (1) shall not apply to any
            terminal exclusively providing aviation-grade kerosene by
            pipeline to an airport.''.

        (e) Conforming Amendments.--
                (1) Paragraph (2) of section 4041(a), as amended by title
            IX, is amended by striking ``kerosene,''.
                (2) Paragraph (1) of section 4041(c) is amended by striking
            ``any liquid'' and inserting ``kerosene and any other liquid''.
                (3)(A) The heading for section 4082 is amended by inserting
            ``and kerosene'' after ``diesel fuel''.
                (B) The table of sections for subpart A of part III of
            subchapter A of chapter 32 is amended by inserting ``and
            kerosene'' after ``diesel fuel'' in the item relating to section
            4082.
                (4) Subsection (b) of section 4083 is amended by striking
            ``gasoline, diesel fuel,'' and inserting ``taxable fuels''.
                (5) Subsection (a) of section 4093 is amended by striking
            ``any liquid'' and inserting ``kerosene and any other liquid''.
                (6) The material following subparagraph (F) of section
            6416(b)(2) is amended by inserting ``or kerosene'' after
            ``diesel fuel''.
                (7) Paragraphs (1) and (3) of section 6427(f), and the
            heading for section 6427(f), are each amended by inserting
            ``kerosene,'' after ``diesel fuel,''.
                (8) Paragraph (2) of section 6427(f) is amended by striking
            ``or diesel fuel'' each place it appears and inserting ``,
            diesel fuel, or kerosene''.
                (9) Subparagraph (A) of section 6427(i)(3) is amended by
            striking ``or diesel fuel'' and inserting ``, diesel fuel, or
            kerosene''.
                (10) The heading for paragraph (4) of section 6427(i) is
            amended to read as follows:
                ``(4) Special rule for refunds under subsection
            (l).--''.
                (11) Paragraph (1) of section 6715(c) is amended by
            inserting ``or kerosene'' after ``diesel fuel''.
                (12)(A) The text of section 7232 is amended by striking
            ``gasoline, lubricating oil, diesel fuel'' and inserting ``any
            taxable fuel (as defined in section 4083)''.
                (B) The section heading for section 7232 is amended to read
            as follows:

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

                (C) The table of sections for part II of subchapter A of
            chapter 75 is amended by striking the item relating to section
            7232 and inserting the following:
                    ``Sec. 7232. Failure to register under section 4101,
                                    false representations of registration
                                    status, etc.''.

                (13) Sections 9503(b)(1)(E) and 9508(b)(2) are each amended
            by striking ``and diesel fuel'' and inserting ``, diesel fuel,
            and kerosene''.
                (14) Subparagraph (B) of section 9503(b)(5) is amended by
            striking ``or diesel fuel'' and inserting ``, diesel fuel, or
            kerosene''.

        (f) <<NOTE: 26 USC 4041 note.>>  Effective Date.--The amendments
    made by this section shall take effect on July 1, 1998.

    [[Page 111 STAT. 936]]

    <<NOTE: 26 USC 4081 note.>>     (g) Floor Stock Taxes.--
                (1) Imposition of tax.--In the case of kerosene which is
            held on July 1, 1998, by any person, there is hereby imposed a
            floor stocks tax of 24.4 cents per gallon.
                (2) Liability for tax and method of payment.--
                        (A) Liability for tax.--A person holding kerosene on
                    July 1, 1998, to which the tax imposed by paragraph (1)
                    applies shall be liable for such tax.
                        (B) Method of payment.--The tax imposed by paragraph
                    (1) shall be paid in such manner as the Secretary shall
                    prescribe.
                        (C) Time for payment.--The tax imposed by paragraph
                    (1) shall be paid on or before August 31, 1998.
                (3) Definitions.--For purposes of this subsection--
                        (A) Held by a person.--Kerosene shall be considered
                    as ``held by a person'' if title thereto has passed to
                    such person (whether or not delivery to the person has
                    been made).
                        (B) Secretary.--The term ``Secretary'' means the
                    Secretary of the Treasury or his delegate.
                (4) Exception for exempt uses.--The tax imposed by paragraph
            (1) shall not apply to kerosene held by any person exclusively
            for any use to the extent a credit or refund of the tax imposed
            by section 4081 of the Internal Revenue Code of 1986 is
            allowable for such use.
                (5) Exception for fuel held in vehicle tank.--No tax shall
            be imposed by paragraph (1) on kerosene held in the tank of a
            motor vehicle or motorboat.
                (6) Exception for certain amounts of fuel.--
                        (A) In general.--No tax shall be imposed by
                    paragraph (1) on kerosene held on July 1, 1998, by any
                    person if the aggregate amount of kerosene held by such
                    person on such date does not exceed 2,000 gallons. The
                    preceding sentence shall apply only if such person
                    submits to the Secretary (at the time and in the manner
                    required by the Secretary) such information as the
                    Secretary shall require for purposes of this paragraph.
                        (B) Exempt fuel.--For purposes of subparagraph (A),
                    there shall not be taken into account fuel held by any
                    person which is exempt from the tax imposed by paragraph
                    (1) by reason of paragraph (4) or (5).
                        (C) Controlled groups.--For purposes of this
                    paragraph--
                              (i) Corporations.--
                                        (I) In general.--All persons treated
                                    as a controlled group shall be treated
                                    as 1 person.
                                        (II) Controlled group.--The term
                                    ``controlled group'' has the meaning
                                    given to such term by subsection (a) of
                                    section 1563 of such Code; except that
                                    for such purposes the phrase ``more than
                                    50 percent'' shall be substituted for
                                    the phrase ``at least 80 percent'' each
                                    place it appears in such subsection.
                              (ii) Nonincorporated persons under common
                          control.--Under regulations prescribed by the
                          Secretary, principles similar to the principles of
                          clause (i) shall apply to a group of persons under
                          common

    [[Page 111 STAT. 937]]

                          control where 1 or more of such persons is not a
                          corporation.
                (7) Coordination with section 4081.--No tax shall be imposed
            by paragraph (1) on kerosene to the extent that tax has been (or
            will be) imposed on such kerosene under section 4081 or 4091 of
            such Code.
                (8) Other laws applicable.--All provisions of law, including
            penalties, applicable with respect to the taxes imposed by
            section 4081 of such Code shall, insofar as applicable and not
            inconsistent with the provisions of this subsection, apply with
            respect to the floor stock taxes imposed by paragraph (1) to the
            same extent as if such taxes were imposed by such section 4081.

    SEC. 1033. RESTORATION OF LEAKING UNDERGROUND STORAGE TANK TRUST FUND
                TAXES.

        Paragraph (3) of section 4081(d) is amended by striking ``shall not
    apply after December 31, 1995'' and inserting ``shall apply after
    September 30, 1997, and before April 1, 2005''.

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

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

        (b) <<NOTE: 26 USC 4251 note.>>  Effective Date.--The amendments
    made by this section shall apply to amounts paid in calendar months
    beginning more than 60 days after the date of the enactment of this Act.

    SEC. 1035. EXTENSION OF TEMPORARY UNEMPLOYMENT TAX.

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

    [[Page 111 STAT. 938]]

             Subtitle E--Provisions Relating to Tax-Exempt Entities

    SEC. 1041. EXPANSION OF LOOK-THRU RULE FOR INTEREST, ANNUITIES,
                ROYALTIES, AND RENTS DERIVED BY SUBSIDIARIES OF TAX-EXEMPT
                ORGANIZATIONS.

        (a) In General.--Paragraph (13) of section 512(b) is amended to read
    as follows:
                ``(13) Special rules for certain amounts received from
            controlled entities.--
                        ``(A) In general.--If an organization (in this
                    paragraph referred to as the `controlling organization')
                    receives (directly or indirectly) a specified payment
                    from another entity which it controls (in this paragraph
                    referred to as the `controlled entity'), notwithstanding
                    paragraphs (1), (2), and (3), the controlling
                    organization shall include such payment as an item of
                    gross income derived from an unrelated trade or business
                    to the extent such payment reduces the net unrelated
                    income of the controlled entity (or increases any net
                    unrelated loss of the controlled entity). There shall be
                    allowed all deductions of the controlling organization
                    directly connected with amounts treated as derived from
                    an unrelated trade or business under the preceding
                    sentence.
                        ``(B) Net unrelated income or loss.--For purposes of
                    this paragraph--
                              ``(i) Net unrelated income.--The term `net
                          unrelated income' means--
                                        ``(I) in the case of a controlled
                                    entity which is not exempt from tax
                                    under section 501(a), the portion of
                                    such entity's taxable income which would
                                    be unrelated business taxable income if
                                    such entity were exempt from tax under
                                    section 501(a) and had the same exempt
                                    purposes (as defined in section
                                    513A(a)(5)(A)) as the controlling
                                    organization, or
                                        ``(II) in the case of a controlled
                                    entity which is exempt from tax under
                                    section 501(a), the amount of the
                                    unrelated business taxable income of the
                                    controlled entity.
                              ``(ii) Net unrelated loss.--The term `net
                          unrelated loss' means the net operating loss
                          adjusted under rules similar to the rules of
                          clause (i).
                        ``(C) Specified payment.--For purposes of this
                    paragraph, the term `specified payment' means any
                    interest, annuity, royalty, or rent.
                        ``(D) Definition of control.--For purposes of this
                    paragraph--
                              ``(i) Control.--The term `control' means--
                                        ``(I) in the case of a corporation,
                                    ownership (by vote or value) of more
                                    than 50 percent of the stock in such
                                    corporation,
                                        ``(II) in the case of a partnership,
                                    ownership of more than 50 percent of the
                                    profits interests or capital interests
                                    in such partnership, or

    [[Page 111 STAT. 939]]

                                        ``(III) in any other case, ownership
                                    of more than 50 percent of the
                                    beneficial interests in the entity.
                              ``(ii) <<NOTE: Applicability.>>  Constructive
                          ownership.--Section 318 (relating to constructive
                          ownership of stock) shall apply for purposes of
                          determining ownership of stock in a corporation.
                          Similar principles shall apply for purposes of
                          determining ownership of interests in any other
                          entity.
                        ``(E) Related persons.--The Secretary shall
                    prescribe such rules as may be necessary or appropriate
                    to prevent avoidance of the purposes of this paragraph
                    through the use of related persons.''.

        (b) <<NOTE: 26 USC 512 note.>>  Effective Date.--
                (1) In general.--Except as provided in paragraph (2), the
            amendments made by this section shall apply to taxable years
            beginning after the date of the enactment of this Act.
                (2) Binding contracts.--The amendments made by this section
            shall not apply to any payment made during the first 2 taxable
            years beginning on or after the date of the enactment of this
            Act if such payment is made pursuant to a written binding
            contract in effect on June 8, 1997, and at all times thereafter
            before such payment.

    SEC. 1042. <<NOTE: 26 USC 833 note.>>  TERMINATION OF CERTAIN EXCEPTIONS
                FROM RULES RELATING TO EXEMPT ORGANIZATIONS WHICH PROVIDE
                COMMERCIAL-TYPE INSURANCE.

        (a) In General.--Subparagraphs (A) and (B) of section 1012(c)(4) of
    the Tax Reform Act of 1986 shall not apply to any taxable year beginning
    after December 31, 1997.
        (b) Special Rules.--In the case of an organization to which section
    501(m) of the Internal Revenue Code of 1986 applies solely by reason of
    the amendment made by subsection (a)--
                (1) no adjustment shall be made under section 481 (or any
            other provision) of such Code on account of a change in its
            method of accounting for its first taxable year beginning after
            December 31, 1997, and
                (2) for purposes of determining gain or loss, the adjusted
            basis of any asset held on the 1st day of such taxable year
            shall be treated as equal to its fair market value as of such
            day.

        (c) Reserve Weakening After June 8, 1997.--Any reserve weakening
    after June 8, 1997, by an organization described in subsection (b) shall
    be treated as occurring in such organization's 1st taxable year
    beginning after December 31, 1997.
        (d) Regulations.--The Secretary of the Treasury or his delegate may
    prescribe rules for providing proper adjustments for organizations
    described in subsection (b) with respect to short taxable years which
    begin during 1998 by reason of section 843 of the Internal Revenue Code
    of 1986.

    [[Page 111 STAT. 940]]

                         Subtitle F--Foreign Provisions

    SEC. 1051. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY INCOME.

        (a) Income From Notional Principal Contracts and Payments in Lieu of
    Dividends.--
                (1) In general.--Paragraph (1) of section 954(c) (defining
            foreign personal holding company income) is amended by adding at
            the end the following new subparagraphs:
                        ``(F) Income from notional principal contracts.--Net
                    income from notional principal contracts. Any item of
                    income, gain, deduction, or loss from a notional
                    principal contract entered into for purposes of hedging
                    any item described in any preceding subparagraph shall
                    not be taken into account for purposes of this
                    subparagraph but shall be taken into account under such
                    other subparagraph.
                        ``(G) Payments in lieu of dividends.--Payments in
                    lieu of dividends which are made pursuant to an
                    agreement to which section 1058 applies.''.
                (2) Conforming amendment.--Subparagraph (B) of section
            954(c)(1) is amended--
                        (A) by striking the second sentence, and
                        (B) by striking ``also'' in the last sentence.

        (b) Exception for Dealers.--Paragraph (2) of section 954(c) is
    amended by adding at the end the following new subparagraph:
                        ``(C) Exception for dealers.--Except as provided in
                    subparagraph (A), (E), or (G) of paragraph (1) or by
                    regulations, in the case of a regular dealer in property
                    (within the meaning of paragraph (1)(B)), forward
                    contracts, option contracts, or similar financial
                    instruments (including notional principal contracts and
                    all instruments referenced to commodities), there shall
                    not be taken into account in computing foreign personal
                    holding income any item of income, gain, deduction, or
                    loss from any transaction (including hedging
                    transactions) entered into in the ordinary course of
                    such dealer's trade or business as such a dealer.''.

        (c) <<NOTE: 26 USC 954 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after the date of
    the enactment of this Act.

    SEC. 1052. PERSONAL PROPERTY USED PREDOMINANTLY IN THE UNITED STATES
                TREATED AS NOT PROPERTY OF A LIKE KIND WITH RESPECT TO
                PROPERTY USED PREDOMINANTLY OUTSIDE THE UNITED STATES.

        (a) In General.--Subsection (h) of section 1031 (relating to
    exchange of property held for productive use or investment) is amended
    to read as follows:
        ``(h) Special Rules for Foreign Real and Personal Property.--For
    purposes of this section--
                ``(1) Real property.--Real property located in the United
            States and real property located outside the United States are
            not property of a like kind.
                ``(2) Personal property.--
                        ``(A) In general.--Personal property used
                    predominantly within the United States and personal
                    property

    [[Page 111 STAT. 941]]

                    used predominantly outside the United States are not
                    property of a like kind.
                        ``(B) Predominant use.--Except as provided in
                    subparagraph (C) and (D), the predominant use of any
                    property shall be determined based on--
                              ``(i) in the case of the property relinquished
                          in the exchange, the 2-year period ending on the
                          date of such relinquishment, and
                              ``(ii) in the case of the property acquired in
                          the exchange, the 2-year period beginning on the
                          date of such acquisition.
                        ``(C) Property held for less than 2 years.--Except
                    in the case of an exchange which is part of a
                    transaction (or series of transactions) structured to
                    avoid the purposes of this subsection--
                              ``(i) only the periods the property was held
                          by the person relinquishing the property (or any
                          related person) shall be taken into account under
                          subparagraph (B)(i), and
                              ``(ii) only the periods the property was held
                          by the person acquiring the property (or any
                          related person) shall be taken into account under
                          subparagraph (B)(ii).
                        ``(D) Special rule for certain property.--Property
                    described in any subparagraph of section 168(g)(4) shall
                    be treated as used predominantly in the United
                    States.''.

        (b) <<NOTE: 26 USC 1031 note.>>  Effective Date.--
                (1) In general.--The amendment made by this section shall
            apply to transfers after June 8, 1997, in taxable years ending
            after such date.
                (2) Binding contracts.--The amendment made by this section
            shall not apply to any transfer pursuant to a written binding
            contract in effect on June 8, 1997, and at all times thereafter
            before the disposition of property. A contract shall not fail to
            meet the requirements of the preceding sentence solely because--
                        (A) it provides for a sale in lieu of an exchange,
                    or
                        (B) the property to be acquired as replacement
                    property was not identified under such contract before
                    June 9, 1997.

    SEC. 1053. HOLDING PERIOD REQUIREMENT FOR CERTAIN FOREIGN TAXES.

        (a) In General.--Section 901 is amended by redesignating subsection
    (k) as subsection (l) and by inserting after subsection (j) the
    following new subsection:
        ``(k) Minimum Holding Period for Certain Taxes.--
                ``(1) Withholding taxes.--
                        ``(A) In general.--In no event shall a credit be
                    allowed under subsection (a) for any withholding tax on
                    a dividend with respect to stock in a corporation if--
                              ``(i) such stock is held by the recipient of
                          the dividend for 15 days or less during the 30-day
                          period beginning on the date which is 15 days
                          before the date on which such share becomes ex-
                          dividend with respect to such dividend, or
                              ``(ii) to the extent that the recipient of the
                          dividend is under an obligation (whether pursuant
                          to a short

    [[Page 111 STAT. 942]]

                          sale or otherwise) to make related payments with
                          respect to positions in substantially similar or
                          related property.
                        ``(B) Withholding tax.--For purposes of this
                    paragraph, the term `withholding tax' includes any tax
                    determined on a gross basis; but does not include any
                    tax which is in the nature of a prepayment of a tax
                    imposed on a net basis.
                ``(2) Deemed paid taxes.--In the case of income, war
            profits, or excess profits taxes deemed paid under section 853,
            902, or 960 through a chain of ownership of stock in 1 or more
            corporations, no credit shall be allowed under subsection (a)
            for such taxes if--
                        ``(A) any stock of any corporation in such chain
                    (the ownership of which is required to obtain credit
                    under subsection (a) for such taxes) is held for less
                    than the period described in paragraph (1)(A)(i), or
                        ``(B) the corporation holding the stock is under an
                    obligation referred to in paragraph (1)(A)(ii).
                ``(3) 45-day rule in the case of certain preference
            dividends.--In the case of stock having preference in dividends
            and dividends with respect to such stock which are attributable
            to a period or periods aggregating in excess of 366 days,
            paragraph (1)(A)(i) shall be applied--
                        ``(A) by substituting `45 days' for `15 days' each
                    place it appears, and
                        ``(B) by substituting `90-day period' for `30-day
                    period'.
                ``(4) Exception for certain taxes paid by securities
            dealers.--
                        ``(A) In general.--Paragraphs (1) and (2) shall not
                    apply to any qualified tax with respect to any security
                    held in the active conduct in a foreign country of a
                    securities business of any person--
                              ``(i) who is registered as a securities broker
                          or dealer under section 15(a) of the Securities
                          Exchange Act of 1934,
                              ``(ii) who is registered as a Government
                          securities broker or dealer under section 15C(a)
                          of such Act, or
                              ``(iii) who is licensed or authorized in such
                          foreign country to conduct securities activities
                          in such country and is subject to bona fide
                          regulation by a securities regulating authority of
                          such country.
                        ``(B) Qualified tax.--For purposes of subparagraph
                    (A), the term `qualified tax' means a tax paid to a
                    foreign country (other than the foreign country referred
                    to in subparagraph (A)) if--
                              ``(i) the dividend to which such tax is
                          attributable is subject to taxation on a net basis
                          by the country referred to in subparagraph (A),
                          and
                              ``(ii) such country allows a credit against
                          its net basis tax for the full amount of the tax
                          paid to such other foreign country.
                        ``(C) Regulations.--The Secretary may prescribe such
                    regulations as may be appropriate to carry out this
                    paragraph, including regulations to prevent the abuse of
                    the

    [[Page 111 STAT. 943]]

                    exception provided by this paragraph and to treat other
                    taxes as qualified taxes.
                ``(5) Certain rules to apply.--For purposes of this
            subsection, the rules of paragraphs (3) and (4) of section
            246(c) shall apply.
                ``(6) Treatment of bona fide sales.--If a person's holding
            period is reduced by reason of the application of the rules of
            section 246(c)(4) to any contract for the bona fide sale of
            stock, the determination of whether such person's holding period
            meets the requirements of paragraph (2) with respect to taxes
            deemed paid under section 902 or 960 shall be made as of the
            date such contract is entered into.
                ``(7) Taxes allowed as deduction, etc.--Sections 275 and 78
            shall not apply to any tax which is not allowable as a credit
            under subsection (a) by reason of this subsection.''.

        (b) Notice of Withholding Taxes Paid by Regulated Investment
    Company.--Subsection (c) of section 853 (relating to foreign tax credit
    allowed to shareholders) is amended by adding at the end the following
    new sentence: ``Such notice shall also include the amount of such taxes
    which (without regard to the election under this section) would not be
    allowable as a credit under section 901(a) to the regulated investment
    company by reason of section 901(k).''.
        (c) <<NOTE: 26 USC 853 note.>>  Effective Date.--The amendments made
    by this section shall apply to dividends paid or accrued more than 30
    days after the date of the enactment of this Act.

    SEC. 1054. DENIAL OF TREATY BENEFITS FOR CERTAIN PAYMENTS THROUGH HYBRID
                ENTITIES.

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

    [[Page 111 STAT. 944]]

            States) that is treated as a partnership or is otherwise treated
            as fiscally transparent for purposes of this title (including a
            common investment trust under section 584, a grantor trust, or
            an entity that is disregarded for purposes of this title) and is
            treated as fiscally nontransparent for purposes of the tax laws
            of the jurisdiction of residence of the taxpayer.''.

        (b) <<NOTE: 26 USC 894 note.>>  Effective Date.--The amendments made
    by this section shall apply upon the date of enactment of this Act.

    SEC. 1055. INTEREST ON UNDERPAYMENTS NOT REDUCED BY FOREIGN TAX CREDIT
                CARRYBACKS.

        (a) In General.--Subsection (d) of section 6601 is amended by
    redesignating paragraphs (2) and (3) as paragraphs (3) and (4),
    respectively, and by inserting after paragraph (1) the following new
    paragraph:
                ``(2) Foreign tax credit carrybacks.--If any credit allowed
            for any taxable year is increased by reason of a carryback of
            tax paid or accrued to foreign countries or possessions of the
            United States, such increase shall not affect the computation of
            interest under this section for the period ending with the
            filing date for the taxable year in which such taxes were in
            fact paid or accrued, or, with respect to any portion of such
            credit carryback from a taxable year attributable to a net
            operating loss carryback or a capital loss carryback from a
            subsequent taxable year, such increase shall not affect the
            computation of interest under this section for the period ending
            with the filing date for such subsequent taxable year.''.

        (b) Conforming Amendment to Refunds Attributable to Foreign Tax
    Credit Carrybacks.--
                (1) In general.--Subsection (f) of section 6611 is amended
            by redesignating paragraphs (2) and (3) as paragraphs (3) and
            (4), respectively, and by inserting after paragraph (1) the
            following new paragraph:
                ``(2) Foreign tax credit carrybacks.--For purposes of
            subsection (a), if any overpayment of tax imposed by subtitle A
            results from a carryback of tax paid or accrued to foreign
            countries or possessions of the United States, such overpayment
            shall be deemed not to have been made before the filing date for
            the taxable year in which such taxes were in fact paid or
            accrued, or, with respect to any portion of such credit
            carryback from a taxable year attributable to a net operating
            loss carryback or a capital loss carryback from a subsequent
            taxable year, such overpayment shall be deemed not to have been
            made before the filing date for such subsequent taxable year.''.
                (2) Conforming amendments.--
                        (A) Paragraph (4) of section 6611(f) (as so
                    redesignated) is amended--
                              (i) by striking ``paragraphs (1) and (2)'' and
                          inserting ``paragraphs (1), (2), and (3)'', and
                              (ii) by striking ``paragraph (1) or (2)'' each
                          place it appears and inserting ``paragraph (1),
                          (2), or (3)''.
                        (B) Clause (ii) of section 6611(f)(4)(B) (as so
                    redesignated) is amended by striking ``and'' at the end
                    of subclause (I), by redesignating subclause (II) as
                    subclause (III), and by inserting after subclause (I)
                    the following new subclause:

    [[Page 111 STAT. 945]]

                                        ``(II) in the case of a carryback of
                                    taxes paid or accrued to foreign
                                    countries or possessions of the United
                                    States, the taxable year in which such
                                    taxes were in fact paid or accrued (or,
                                    with respect to any portion of such
                                    carryback from a taxable year
                                    attributable to a net operating loss
                                    carryback or a capital loss carryback
                                    from a subsequent taxable year, such
                                    subsequent taxable year), and''.
                        (C) Subclause (III) of section 6611(f)(4)(B)(ii) (as
                    so redesignated) is amended by inserting ``(as defined
                    in paragraph (3)(B))'' after ``credit carryback'' the
                    first place it appears.
                        (D) Section 6611 is amended by striking subsection
                    (g) and by redesignating subsections (h) and (i) as
                    subsections (g) and (h), respectively.

        (c) <<NOTE: 26 USC 6601 note.>>  Effective Date.--The amendments
    made by this section shall apply to foreign tax credit carrybacks
    arising in taxable years beginning after the date of the enactment of
    this Act.

    SEC. 1056. CLARIFICATION OF PERIOD OF LIMITATIONS ON CLAIM FOR CREDIT OR
                REFUND ATTRIBUTABLE TO FOREIGN TAX CREDIT CARRYFORWARD.

        (a) In General.--Subparagraph (A) of section 6511(d)(3) is amended
    by striking ``for the year with respect to which the claim is made'' and
    inserting ``for the year in which such taxes were actually paid or
    accrued''.
        (b) <<NOTE: 26 USC 6511 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to taxes paid or accrued in taxable years
    beginning after the date of the enactment of this Act.

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

        (a) In General.--Section 59(a)(2) (relating to limitation to 90
    percent of tax) is amended by striking subparagraph (C).
        (b) <<NOTE: 26 USC 59 note.>>  Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after the date of
    the enactment of this Act.

                       Subtitle G--Partnership Provisions

    SEC. 1061. ALLOCATION OF BASIS AMONG PROPERTIES DISTRIBUTED BY
                PARTNERSHIP.

        (a) In General.--Subsection (c) of section 732 is amended to read as
    follows:
        ``(c) Allocation of Basis.--
                ``(1) In general.--The basis of distributed properties to
            which subsection (a)(2) or (b) is applicable shall be
            allocated--
                        ``(A)(i) first to any unrealized receivables (as
                    defined in section 751(c)) and inventory items (as
                    defined in section 751(d)(2)) in an amount equal to the
                    adjusted basis of each such property to the partnership,
                    and
                        ``(ii) if the basis to be allocated is less than the
                    sum of the adjusted bases of such properties to the
                    partnership, then, to the extent any decrease is
                    required in order to have the adjusted bases of such
                    properties equal the basis to be allocated, in the
                    manner provided in paragraph (3), and

    [[Page 111 STAT. 946]]

                        ``(B) to the extent of any basis remaining after the
                    allocation under subparagraph (A), to other distributed
                    properties--
                              ``(i) first by assigning to each such other
                          property such other property's adjusted basis to
                          the partnership, and
                              ``(ii) then, to the extent any increase or
                          decrease in basis is required in order to have the
                          adjusted bases of such other distributed
                          properties equal such remaining basis, in the
                          manner provided in paragraph (2) or (3), whichever
                          is appropriate.
                ``(2) Method of allocating increase.--Any increase required
            under paragraph (1)(B) shall be allocated among the properties--
                        ``(A) first to properties with unrealized
                    appreciation in proportion to their respective amounts
                    of unrealized appreciation before such increase (but
                    only to the extent of each property's unrealized
                    appreciation), and
                        ``(B) then, to the extent such increase is not
                    allocated under subparagraph (A), in proportion to their
                    respective fair market values.
                ``(3) Method of allocating decrease.--Any decrease required
            under paragraph (1)(A) or (1)(B) shall be allocated--
                        ``(A) first to properties with unrealized
                    depreciation in proportion to their respective amounts
                    of unrealized depreciation before such decrease (but
                    only to the extent of each property's unrealized
                    depreciation), and
                        ``(B) then, to the extent such decrease is not
                    allocated under subparagraph (A), in proportion to their
                    respective adjusted bases (as adjusted under
                    subparagraph (A)).''.

        (b) <<NOTE: 26 USC 732 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to distributions after the date of the
    enactment of this Act.

    SEC. 1062. REPEAL OF REQUIREMENT THAT INVENTORY BE SUBSTANTIALLY
                APPRECIATED WITH RESPECT TO SALE OR EXCHANGE OF PARTNERSHIP
                INTEREST.

        (a) In General.--Paragraph (2) of section 751(a) is amended to read
    as follows:
                ``(2) inventory items of the partnership,''.

        (b) Conforming Amendments.--
                (1)(A) Paragraph (1) of section 751(b) is amended by
            striking subparagraphs (A) and (B) and inserting the following
            new subparagraphs:
                        ``(A) partnership property which is--
                              ``(i) unrealized receivables, or
                              ``(ii) inventory items which have appreciated
                          substantially in value,
                    in exchange for all or a part of his interest in other
                    partnership property (including money), or
                        ``(B) partnership property (including money) other
                    than property described in subparagraph (A)(i) or (ii)
                    in exchange for all or a part of his interest in
                    partnership property described in subparagraph (A)(i) or
                    (ii),''.
                (B) Subsection (b) of section 751 is amended by adding at
            the end the following new paragraph:

    [[Page 111 STAT. 947]]

                ``(3) Substantial appreciation.--For purposes of paragraph
            (1)--
                        ``(A) In general.--Inventory items of the
                    partnership shall be considered to have appreciated
                    substantially in value if their fair market value
                    exceeds 120 percent of the adjusted basis to the
                    partnership of such property.
                        ``(B) Certain property excluded.--For purposes of
                    subparagraph (A), there shall be excluded any inventory
                    property if a principal purpose for acquiring such
                    property was to avoid the provisions of this subsection
                    relating to inventory items.''.
                (2) Subsection (d) of section 751 is amended to read as
            follows:

        ``(d) Inventory Items.--For purposes of this subchapter, the term
    `inventory items' means--
                ``(1) property of the partnership of the kind described in
            section 1221(1),
                ``(2) any other property of the partnership which, on sale
            or exchange by the partnership, would be considered property
            other than a capital asset and other than property described in
            section 1231,
                ``(3) any other property of the partnership which, if sold
            or exchanged by the partnership, would result in a gain taxable
            under subsection (a) of section 1246 (relating to gain on
            foreign investment company stock), and
                ``(4) any other property held by the partnership which, if
            held by the selling or distributee partner, would be considered
            property of the type described in paragraph (1), (2), or (3).''.
                (3) Sections 724(d)(2), 731(a)(2)(B), 731(c)(6),
            732(c)(1)(A) (as amended by the preceding section), 735(a)(2),
            and 735(c)(1) are each amended by striking ``section 751(d)(2)''
            and inserting ``section 751(d)''.

        (c) <<NOTE: 26 USC 724 note.>>  Effective Date.--
                (1) In general.--The amendments made by this section shall
            apply to sales, exchanges, and distributions after the date of
            the enactment of this Act.
                (2) Binding contracts.--The amendments made by this section
            shall not apply to any sale or exchange pursuant to a written
            binding contract in effect on June 8, 1997, and at all times
            thereafter before such sale or exchange.

    SEC. 1063. EXTENSION OF TIME FOR TAXING PRECONTRIBUTION GAIN.

        (a) In General.--Sections 704(c)(1)(B) and 737(b)(1) are each
    amended by striking ``5 years'' and inserting ``7 years''.
        (b) <<NOTE: 26 USC 704 note.>>  Effective Date.--
                (1) In general.--The amendment made by subsection (a) shall
            apply to property contributed to a partnership after June 8,
            1997.
                (2) Binding contracts.--The amendment made by subsection (a)
            shall not apply to any property contributed pursuant to a
            written binding contract in effect on June 8, 1997, and at all
            times thereafter before such contribution if such contract
            provides for the contribution of a fixed amount of property.

    [[Page 111 STAT. 948]]

                         Subtitle H--Pension Provisions

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

        (a) Amendment to 1986 Code.--
                (1) In general.--Subparagraph (A) of section 411(a)(11)
            (relating to restrictions on certain mandatory distributions) is
            amended by striking ``$3,500'' and inserting ``$5,000''.
                (2) Conforming amendments.--
                        (A) Section 411(a)(7)(B), paragraphs (1) and (2) of
                    section 417(e), and section 457(e)(9) are each amended
                    by striking ``$3,500'' each place it appears (other than
                    the headings) and inserting ``the dollar limit under
                    section 411(a)(11)(A)''.
                        (B) The headings for paragraphs (1) and (2) of
                    section 417(e) and subparagraph (A) of section 457(e)(9)
                    are each amended by striking ``$3,500'' and inserting
                    ``dollar limit''.

        (b) Amendments to ERISA.--
                (1) In general.--Section 203(e)(1) of the Employee
            Retirement Income Security Act of 1974 (29 U.S.C. 1053(e)(1)) is
            amended by striking ``$3,500'' and inserting ``$5,000''.
                (2) Conforming amendments.--Sections 204(d)(1) and 205(g)
            (1) and (2) (29 U.S.C. 1054(d)(1) and 1055(g) (1) and (2)) are
            each amended by striking ``$3,500'' and inserting ``the dollar
            limit under section 203(e)(1)''.

        (c) <<NOTE: 26 USC 411 note.>>  Effective Date.--The amendments made
    by this section shall apply to plan years beginning after the date of
    the enactment of this Act.

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

        (a) In General.--Section 132(f)(4) (relating to benefits not in lieu
    of compensation) is amended by adding at the end the following new
    sentence: ``This paragraph shall not apply to any qualified parking
    provided in lieu of compensation which otherwise would have been
    includible in gross income of the employee, and no amount shall be
    included in the gross income of the employee solely because the employee
    may choose between the qualified parking and compensation.''.
        (b) <<NOTE: 26 USC 132 note.>>  Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1997.

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

        (a) Repeal of Excess Distribution and Excess Retirement Accumulation
    Tax.--Section 4980A (relating to excess distributions from qualified
    retirement plans) is repealed.
        (b) Conforming Amendments.--
                (1) Section 691(c)(1) is amended by striking subparagraph
            (C).
                (2) Section 2013 is amended by striking subsection (g).
                (3) Section 2053(c)(1)(B) is amended by striking the last
            sentence.
                (4) Section 6018(a) is amended by striking paragraph (4).

    <<NOTE: 42 USC 4980A note.>>     (c) Effective Dates.--

    [[Page 111 STAT. 949]]

                (1) <<NOTE: Applicability.>>  Excess distribution tax
            repeal.--Except as provided in paragraph (2), the repeal made by
            subsection (a) shall apply to excess distributions received
            after December 31, 1996.
                (2) Excess retirement accumulation tax repeal.--The repeal
            made by subsection (a) with respect to section 4980A(d) of the
            Internal Revenue Code of 1986 and the amendments made by
            subsection (b) shall apply to estates of decedents dying after
            December 31, 1996.

    SEC. 1074. INCREASE IN TAX ON PROHIBITED TRANSACTIONS.

        (a) In General.--Section 4975(a) is amended by striking ``10
    percent'' and inserting ``15 percent''.
        (b) <<NOTE: 26 USC 4975 note.>>  Effective Date.--The amendment made
    by this section shall apply to prohibited transactions occurring after
    the date of the enactment of this Act.

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

        (a) In General.--Section 72(d)(1)(B) is amended by adding at the end
    the following new clause:
                              ``(iv) Number of anticipated payments where
                          more than one life.--If the annuity is payable
                          over the lives of more than 1 individual, the
                          number of anticipated payments shall be determined
                          as follows:
    ``If the combined ages of annu-
    itants are:                           The number is:
    Not more than 110                                                   410
    More than 110 but not more than 120                                 360
    More than 120 but not more than 130                                 310
    More than 130 but not more than 140                                 260
    More than 140                                                    210.''.

        (b) Conforming Amendment.--Section 72(d)(1)(B)(iii) is amended--
                (1) by inserting ``If the annuity is payable over the life
            of a single individual, the number of anticipated payments shall
            be determined as follows:'' after the heading and before the
            table, and
                (2) by striking ``primary'' in the table.

        (c) <<NOTE: 26 USC 72 note.>>  Effective Date.--The amendments made
    by this section shall apply with respect to annuity starting dates
    beginning after December 31, 1997.

                      Subtitle I--Other Revenue Provisions

    SEC. 1081. TERMINATION OF SUSPENSE ACCOUNTS FOR FAMILY CORPORATIONS
                REQUIRED TO USE ACCRUAL METHOD OF ACCOUNTING.

        (a) In General.--Subsection (i) of section 447 (relating to method
    of accounting for corporations engaged in farming) is amended by
    striking paragraphs (3) and (4), by redesignating paragraphs (5) and (6)
    as paragraphs (3) and (4), respectively, and by adding at the end the
    following new paragraph:
                ``(5) Termination.--
                        ``(A) In general.--No suspense account may be
                    established under this subsection by any corporation
                    required by this section to change its method of
                    accounting for any taxable year ending after June 8,
                    1997.

    [[Page 111 STAT. 950]]

                        ``(B) Phaseout of existing suspense accounts.--
                              ``(i) In general.--Each suspense account under
                          this subsection shall be reduced (but not below
                          zero) for each taxable year beginning after June
                          8, 1997, by an amount equal to the lesser of--
                                        ``(I) the applicable portion of such
                                    account, or
                                        ``(II) 50 percent of the taxable
                                    income of the corporation for the
                                    taxable year, or, if the corporation has
                                    no taxable income for such year, the
                                    amount of any net operating loss (as
                                    defined in section 172(c)) for such
                                    taxable year.
                          For purposes of the preceding sentence, the amount
                          of taxable income and net operating loss shall be
                          determined without regard to this paragraph.
                              ``(ii) Coordination with other reductions.--
                          The amount of the applicable portion for any
                          taxable year shall be reduced (but not below zero)
                          by the amount of any reduction required for such
                          taxable year under any other provision of this
                          subsection.
                              ``(iv) Inclusion in income.--Any reduction in
                          a suspense account under this paragraph shall be
                          included in gross income for the taxable year of
                          the reduction.
                        ``(C) Applicable portion.--For purposes of
                    subparagraph (B), the term `applicable portion' means,
                    for any taxable year, the amount which would ratably
                    reduce the amount in the account (after taking into
                    account prior reductions) to zero over the period
                    consisting of such taxable year and the remaining
                    taxable years in such first 20 taxable years.
                        ``(D) Amounts after 20th year.--Any amount in the
                    account as of the close of the 20th year referred to in
                    subparagraph (C) shall be treated as the applicable
                    portion for each succeeding year thereafter to the
                    extent not reduced under this paragraph for any prior
                    taxable year after such 20th year.''.

        (b) <<NOTE: 26 USC 447 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years ending after June 8, 1997.

    SEC. 1082. MODIFICATION OF TAXABLE YEARS TO WHICH NET OPERATING LOSSES
                MAY BE CARRIED.

        (a) In General.--Subparagraph (A) of section 172(b)(1) (relating to
    years to which loss may be carried) is amended--
                (1) by striking ``3'' in clause (i) and inserting ``2'', and
                (2) by striking ``15'' in clause (ii) and inserting ``20''.

        (b) Retention of 3-Year Carryback for Certain Losses.--Paragraph (1)
    of section 172(b) is amended by adding at the end the following new
    subparagraph:
                        ``(F) Retention of 3-year carryback in certain
                    cases.--
                              ``(i) In general.--Subparagraph (A)(i) shall
                          be applied by substituting `3 years' for `2 years'
                          with respect to the portion of the net operating
                          loss for the taxable year which is an eligible
                          loss with respect to the taxpayer.
                              ``(ii) Eligible loss.--For purposes of clause
                          (i), the term `eligible loss' means--

    [[Page 111 STAT. 951]]

                                        ``(I) in the case of an individual,
                                    losses of property arising from fire,
                                    storm, shipwreck, or other casualty, or
                                    from theft,
                                        ``(II) in the case of a taxpayer
                                    which is a small business, net operating
                                    losses attributable to Presidentially
                                    declared disasters (as defined in
                                    section 1033(h)(3)), and
                                        ``(III) in the case of a taxpayer
                                    engaged in the trade or business of
                                    farming (as defined in section
                                    263A(e)(4)), net operating losses
                                    attributable to such Presidentially
                                    declared disasters.
                              ``(iii) Small business.--For purposes of this
                          subparagraph, the term `small business' means a
                          corporation or partnership which meets the gross
                          receipts test of section 448(c) for the taxable
                          year in which the loss arose (or, in the case of a
                          sole proprietorship, which would meet such test if
                          such proprietorship were a corporation).''.

        (c) <<NOTE: 26 USC 172 note.>>  Effective Date.--The amendments made
    by this section shall apply to net operating losses for taxable years
    beginning after the date of the enactment of this Act.

    SEC. 1083. MODIFICATIONS TO TAXABLE YEARS TO WHICH UNUSED CREDITS MAY BE
                CARRIED.

        (a) In General.--Section 39(a) (relating to unused credits) is
    amended--
                (1) in paragraph (1), by striking ``3'' each place it
            appears and inserting ``1'' and by striking ``15'' each place it
            appears and inserting ``20''; and
                (2) in paragraph (2), by striking ``18'' each place it
            appears and inserting ``22'' and by striking ``17'' each place
            it appears and inserting ``21''.

        (b) <<NOTE: 26 USC 39 note.>>  Effective Date.--The amendments made
    by this section shall apply to credits arising in taxable years
    beginning after December 31, 1997.

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

        (a) Denial of Deduction for Premiums.--
                (1) In general.--Paragraph (1) of section 264(a) is amended
            to read as follows:
                ``(1) Premiums on any life insurance policy, or endowment or
            annuity contract, if the taxpayer is directly or indirectly a
            beneficiary under the policy or contract.''.
                (2) Exceptions.--Section 264 is amended by redesignating
            subsections (b), (c), and (d) as subsections (c), (d), and (e),
            respectively, and by inserting after subsection (a) the
            following new subsection:

        ``(b) Exceptions to Subsection (a)(1).--Subsection (a)(1) shall not
    apply to--
                ``(1) any annuity contract described in section 72(s)(5),
            and
                ``(2) any annuity contract to which section 72(u)
            applies.''.

        (b) Interest on Policy Loans.--
                (1) In general.--Paragraph (4) of section 264(a) is amended
            by striking ``individual, who'' and all that follows and
            inserting ``individual.''.

    [[Page 111 STAT. 952]]

                (2) Coordination with transfers for value.--Paragraph (2) of
            section 101(a) is amended by adding at the end the following new
            flush sentence:
            ``The term `other amounts' in the first sentence of this
            paragraph includes interest paid or accrued by the transferee on
            indebtedness with respect to such contract or any interest
            therein if such interest paid or accrued is not allowable as a
            deduction by reason of section 264(a)(4).''.

        (c) Pro Rata Allocation of Interest Expense to Policy Cash Values.--
    Section 264 is amended by adding at the end the following new
    subsection:
        ``(f) Pro Rata Allocation of Interest Expense to Policy Cash
    Values.--
                ``(1) In general.--No deduction shall be allowed for that
            portion of the taxpayer's interest expense which is allocable to
            unborrowed policy cash values.
                ``(2)  Allocation.--For purposes of paragraph (1), the
            portion of the taxpayer's interest expense which is allocable to
            unborrowed policy cash values is an amount which bears the same
            ratio to such interest expense as--
                        ``(A) the taxpayer's average unborrowed policy cash
                    values of life insurance policies, and annuity and
                    endowment contracts, issued after June 8, 1997, bears to
                        ``(B) the sum of--
                              ``(i) in the case of assets of the taxpayer
                          which are life insurance policies or annuity or
                          endowment contracts, the average unborrowed policy
                          cash values of such policies and contracts, and
                              ``(ii) in the case of assets of the taxpayer
                          not described in clause (i), the average adjusted
                          bases (within the meaning of section 1016) of such
                          assets.
                ``(3) Unborrowed policy cash value.--For purposes of this
            subsection, the term `unborrowed policy cash value' means, with
            respect to any life insurance policy or annuity or endowment
            contract, the excess of--
                        ``(A) the cash surrender value of such policy or
                    contract determined without regard to any surrender
                    charge, over
                        ``(B) the amount of any loan with respect to such
                    policy or contract.
                ``(4) Exception for certain policies and contracts.--
                        ``(A) Policies and contracts covering 20-percent
                    owners, officers, directors, and employees.--Paragraph
                    (1) shall not apply to any policy or contract owned by
                    an entity engaged in a trade or business if such policy
                    or contract covers only 1 individual and if such
                    individual is (at the time first covered by the policy
                    or contract)--
                              ``(i) a 20-percent owner of such entity, or
                              ``(ii) an individual (not described in clause
                          (i)) who is an officer, director, or employee of
                          such trade or business.
                    A policy or contract covering a 20-percent owner of such
                    entity shall not be treated as failing to meet the
                    requirements of the preceding sentence by reason of
                    covering the joint lives of such owner and such owner's
                    spouse.
                        ``(B) Contracts subject to current income
                    inclusion.--Paragraph (1) shall not apply to any annuity
                    contract to which section 72(u) applies.

    [[Page 111 STAT. 953]]

                        ``(C) Coordination with paragraph (2).--Any policy
                    or contract to which paragraph (1) does not apply by
                    reason of this paragraph shall not be taken into account
                    under paragraph (2).
                        ``(D) 20-percent owner.--For purposes of
                    subparagraph (A), the term `20-percent owner' has the
                    meaning given such term by subsection (e)(4).
                ``(5) Exception for policies and contracts held by natural
            persons; treatment of partnerships and s corporations.--
                        ``(A) Policies and contracts held by natural
                    persons.--
                              ``(i) In general.--This subsection shall not
                          apply to any policy or contract held by a natural
                          person.
                              ``(ii) Exception where business is
                          beneficiary.--If a trade or business is directly
                          or indirectly the beneficiary under any policy or
                          contract, such policy or contract shall be treated
                          as held by such trade or business and not by a
                          natural person.
                              ``(iii) Special rules.--
                                        ``(I) Certain trades or businesses
                                    not taken into account.--Clause (ii)
                                    shall not apply to any trade or business
                                    carried on as a sole proprietorship and
                                    to any trade or business performing
                                    services as an employee.
                                        ``(II) Limitation on unborrowed cash
                                    value.--The amount of the unborrowed
                                    cash value of any policy or contract
                                    which is taken into account by reason of
                                    clause (ii) shall not exceed the benefit
                                    to which the trade or business is
                                    directly or indirectly entitled under
                                    the policy or contract.
                              ``(iv) Reporting.--The Secretary shall require
                          such reporting from policyholders and issuers as
                          is necessary to carry out clause (ii). Any report
                          required under the preceding sentence shall be
                          treated as a statement referred to in section
                          6724(d)(1).
                        ``(B) Treatment of partnerships and s
                    corporations.--In the case of a partnership or S
                    corporation, this subsection shall be applied at the
                    partnership and corporate levels.
                ``(6) Special rules.--
                        ``(A) Coordination with subsection (a) and section
                    265.--If interest on any indebtedness is disallowed
                    under subsection (a) or section 265--
                              ``(i) such disallowed interest shall not be
                          taken into account for purposes of applying this
                          subsection, and
                              ``(ii) the amount otherwise taken into account
                          under paragraph (2)(B) shall be reduced (but not
                          below zero) by the amount of such indebtedness.
                        ``(B) Coordination with section 263a.--This
                    subsection shall be applied before the application of
                    section 263A (relating to capitalization of certain
                    expenses where taxpayer produces property).
                ``(7) Interest expense.--The term `interest expense' means
            the aggregate amount allowable to the taxpayer as a deduction

    [[Page 111 STAT. 954]]

            for interest (within the meaning of section 265(b)(4)) for the
            taxable year (determined without regard to this subsection,
            section 265(b), and section 291).
                ``(8) Aggregation rules.--
                        ``(A) In general.--All members of a controlled group
                    (within the meaning of subsection (d)(5)(B)) shall be
                    treated as 1 taxpayer for purposes of this subsection.
                        ``(B) Treatment of insurance companies.--This
                    subsection shall not apply to an insurance company
                    subject to tax under subchapter L, and subparagraph (A)
                    shall be applied without regard to any member of an
                    affiliated group which is an insurance company.''.

        (b) Treatment of Insurance Companies.--
                (1)(A) Clause (ii) of section 805(a)(4)(C) is amended by
            inserting ``, or out of the increase for the taxable year in
            policy cash values (within the meaning of subparagraph (F)) of
            life insurance policies and annuity and endowment contracts to
            which section 264(f) applies,'' after ``tax-exempt interest''.
                (B) Clause (iii) of section 805(a)(4)(D) is amended by
            striking ``and'' and inserting ``, the increase for the taxable
            year in policy cash values (within the meaning of subparagraph
            (F)) of life insurance policies and annuity and endowment
            contracts to which section 264(f) applies, and''.
                (C) Paragraph (4) of section 805(a) is amended by adding at
            the end the following new subparagraph:
                        ``(F) Increase in policy cash values.--For purposes
                    of subparagraphs (C) and (D)--
                              ``(i) In general.--The increase in the policy
                          cash value for any taxable year with respect to
                          policy or contract is the amount of the increase
                          in the adjusted cash value during such taxable
                          year determined without regard to--
                                        ``(I) gross premiums paid during
                                    such taxable year, and
                                        ``(II) distributions (other than
                                    amounts includible in the policyholder's
                                    gross income) during such taxable year
                                    to which section 72(e) applies.
                              ``(ii) Adjusted cash value.--For purposes of
                          clause (i), the term `adjusted cash value' means
                          the cash surrender value of the policy or contract
                          increased by the sum of--
                                        ``(I) commissions payable with
                                    respect to such policy or contract for
                                    the taxable year, and
                                        ``(II) asset management fees,
                                    surrender charges, mortality and expense
                                    charges, and any other fees or charges
                                    specified in regulations prescribed by
                                    the Secretary which are imposed (or
                                    which would be imposed were the policy
                                    or contract canceled) with respect to
                                    such policy or contract for the taxable
                                    year.''.
                (2)(A) Subparagraph (B) of section 807(a)(2) is amended by
            striking ``interest,'' and inserting ``interest and the amount
            of the policyholder's share of the increase for the taxable year
            in policy cash values (within the meaning of section
            805(a)(4)(F)) of life insurance policies and annuity and
            endowment contracts to which section 264(f) applies,''.

    [[Page 111 STAT. 955]]

                (B) Subparagraph (B) of section 807(b)(1) is amended by
            striking ``interest,'' and inserting ``interest and the amount
            of the policyholder's share of the increase for the taxable year
            in policy cash values (within the meaning of section
            805(a)(4)(F)) of life insurance policies and annuity and
            endowment contracts to which section 264(f) applies,''.
                (3) Paragraph (1) of section 812(d) is amended by striking
            ``and'' at the end of subparagraph (B), by striking the period
            at the end of subparagraph (C) and inserting ``, and'', and by
            adding at the end the following new subparagraph:
                        ``(D) the increase for any taxable year in the
                    policy cash values (within the meaning of section
                    805(a)(4)(F)) of life insurance policies and annuity and
                    endowment contracts to which section 264(f) applies.''.
                (4) Subparagraph (B) of section 832(b)(5) is amended by
            striking ``and'' at the end of clause (i), by striking the
            period at the end of clause (ii) and inserting ``, and'', and by
            adding at the end the following new clause:
                              ``(iii) the increase for the taxable year in
                          policy cash values (within the meaning of section
                          805(a)(4)(F)) of life insurance policies and
                          annuity and endowment contracts to which section
                          264(f) applies.''.

        (c) Conforming Amendment.--Subparagraph (A) of section 265(b)(4) is
    amended by inserting ``, section 264,'' before ``and section 291''.
        (d) <<NOTE: 26 USC 101 note.>>  Effective Date.--The amendments made
    by this section shall apply to contracts issued after June 8, 1997, in
    taxable years ending after such date. For purposes of the preceding
    sentence, any material increase in the death benefit or other material
    change in the contract shall be treated as a new contract but the
    addition of covered lives shall be treated as a new contract only with
    respect to such additional covered lives. For purposes of this
    subsection, an increase in the death benefit under a policy or contract
    issued in connection with a lapse described in section 501(d)(2) of the
    Health Insurance Portability and Accountability Act of 1996 shall not be
    treated as a new contract.

    SEC. 1085. IMPROVED ENFORCEMENT OF THE APPLICATION OF THE EARNED INCOME
                CREDIT.

        (a) Restrictions on Availability of Earned Income Credit for
    Taxpayers who Improperly Claimed Credit in Prior Year.--
                (1) In general.--Section 32 is amended by redesignating
            subsections (k) and (l) as subsections (l) and (m),
            respectively, and by inserting after subsection (j) the
            following new subsection:

        ``(k) Restrictions on Taxpayers Who Improperly Claimed Credit in
    Prior Year.--
                ``(1) Taxpayers making prior fraudulent or reckless
            claims.--
                        ``(A) In general.--No credit shall be allowed under
                    this section for any taxable year in the disallowance
                    period.
                        ``(B) Disallowance period.--For purposes of
                    paragraph (1), the disallowance period is--
                              ``(i) the period of 10 taxable years after the
                          most recent taxable year for which there was a
                          final determination that the taxpayer's claim of
                          credit under this section was due to fraud, and

    [[Page 111 STAT. 956]]

                              ``(ii) the period of 2 taxable years after the
                          most recent taxable year for which there was a
                          final determination that the taxpayer's claim of
                          credit under this section was due to reckless or
                          intentional disregard of rules and regulations
                          (but not due to fraud).
                ``(2) Taxpayers making improper prior claims.--In the case
            of a taxpayer who is denied credit under this section for any
            taxable year as a result of the deficiency procedures under
            subchapter B of chapter 63, no credit shall be allowed under
            this section for any subsequent taxable year unless the taxpayer
            provides such information as the Secretary may require to
            demonstrate eligibility for such credit.''.
                (2) Due diligence requirement on income tax return
            preparers.--Section 6695 is amended by adding at the end the
            following new subsection:

        ``(g) Failure To Be Diligent in Determining Eligibility for Earned
    Income Credit.--Any person who is an income tax return preparer with
    respect to any return or claim for refund who fails to comply with due
    diligence requirements imposed by the Secretary by regulations with
    respect to determining eligibility for, or the amount of, the credit
    allowable by section 32 shall pay a penalty of $100 for each such
    failure.''.
                (3) Extension procedures applicable to mathematical or
            clerical errors.--Paragraph (2) of section 6213(g) (relating to
            the definition of mathematical or clerical errors) is amended by
            striking ``and'' at the end of subparagraph (H), by striking the
            period at the end of subparagraph (I) and inserting ``, and'',
            and by inserting after subparagraph (I) the following new
            subparagraph:
                        ``(J) an omission of information required by section
                    32(k)(2) (relating to taxpayers making improper prior
                    claims of earned income credit).''.

        (b) Increase in Net Loss Disregarded for Modified Adjusted gross
    Income.--Section 32(c)(5)(B)(iv) is amended by striking ``50 percent''
    and inserting ``75 percent''.
        (c) Workfare Payments Not Included in Earned Income.--Section
    32(c)(2)(B) is amended by striking ``and'' at the end of clause (iii),
    by striking the period at the end of clause (iv) and inserting ``,
    and'', and by adding at the end the following new clause:
                              ``(v) no amount described in subparagraph (A)
                          received for service performed in work activities
                          as defined in paragraph (4) or (7) of section
                          407(d) of the Social Security Act to which the
                          taxpayer is assigned under any State program under
                          part A of title IV of such Act, but only to the
                          extent such amount is subsidized under such State
                          program.''.

        (d) Certain Nontaxable Income Included in Modified Adjusted Gross
    Income.--Section 32(c)(5)(B) is amended--
                (1) by striking ``and'' at the end of clause (iii),
                (2) by striking the period at the end of clause (iv)(III),
                (3) by inserting after clause (iv)(III) the following new
            clauses:
                              ``(v) interest received or accrued during the
                          taxable year which is exempt from tax imposed by
                          this chapter, and

    [[Page 111 STAT. 957]]

                              ``(vi) amounts received as a pension or
                          annuity, and any distributions or payments
                          received from an individual retirement plan, by
                          the taxpayer during the taxable year to the extent
                          not included in gross income.'', and
                (4) by adding at the end the following new sentence:
            ``Clause (vi) shall not include any amount which is not
            includible in gross income by reason of section 402(c),
            403(a)(4), 403(b), 408(d) (3), (4), or (5), or 457(e)(10).''.

        (e) <<NOTE: 26 USC 32 note.>>  Effective Dates.--
                (1) The amendments made by subsection (a) shall apply to
            taxable years beginning after December 31, 1996.
                (2) The amendments made by subsections (b), (c), and (d)
            shall apply to taxable years beginning after December 31, 1997.

    SEC. 1086. LIMITATION ON PROPERTY FOR WHICH INCOME FORECAST METHOD MAY
                BE USED.

        (a) Limitation.--Subsection (g) of section 167 is amended by adding
    at the end the following new paragraph:
                ``(6) Limitation on property for which income forecast
            method may be used.--The depreciation deduction allowable under
            this section may be determined under the income forecast method
            or any similar method only with respect to--
                        ``(A) property described in paragraph (3) or (4) of
                    section 168(f),
                        ``(B) copyrights,
                        ``(C) books,
                        ``(D) patents, and
                        ``(E) other property specified in regulations.
            Such methods may not be used with respect to any amortizable
            section 197 intangible (as defined in section 197(c)).''.

        (b) Depreciation Period for Rent-To-own Property.--
                (1) In general.--Subparagraph (A) of section 168(e)(3)
            (relating to 3-year property) is amended by striking ``and'' at
            the end of clause (i), by striking the period at the end of
            clause (ii) and inserting ``, and'', and by adding at the end
            the following new clause:
                              ``(iii) any qualified rent-to-own property.''.
                (2) 4-year class life.--The table contained in section
            168(g)(3)(B) is amended by inserting before the first item the
            following new item:

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

                (3) Definition of qualified rent-to-own property.--
            Subsection (i) of section 168 is amended by adding at the end
            the following new paragraph:
                ``(14) Qualified rent-to-own property.--
                        ``(A) In general.--The term `qualified rent-to-own
                    property' means property held by a rent-to-own dealer
                    for purposes of being subject to a rent-to-own contract.
                        ``(B) Rent-to-own dealer.--The term `rent-to-own
                    dealer' means a person that, in the ordinary course of
                    business, regularly enters into rent-to-own contracts
                    with customers for the use of consumer property, if a
                    substantial portion of those contracts terminate and the
                    property is returned to such person before the receipt
                    of all payments

    [[Page 111 STAT. 958]]

                    required to transfer ownership of the property from such
                    person to the customer.
                        ``(C) Consumer property.--The term `consumer
                    property' means tangible personal property of a type
                    generally used within the home for personal use.
                        ``(D) Rent-to-own contract.--The term `rent-to-own
                    contract' means any lease for the use of consumer
                    property between a rent-to-own dealer and a customer who
                    is an individual which--
                              ``(i) is titled `Rent-to-Own Agreement' or
                          `Lease Agreement with Ownership Option,' or uses
                          other similar language,
                              ``(ii) provides for level (or decreasing where
                          no payment is less than 40 percent of the largest
                          payment), regular periodic payments (for a payment
                          period which is a week or month),
                              ``(iii) provides that legal title to such
                          property remains with the rent-to-own dealer until
                          the customer makes all the payments described in
                          clause (ii) or early purchase payments required
                          under the contract to acquire legal title to the
                          item of property,
                              ``(iv) provides a beginning date and a maximum
                          period of time for which the contract may be in
                          effect that does not exceed 156 weeks or 36 months
                          from such beginning date (including renewals or
                          options to extend),
                              ``(v) provides for payments within the 156-
                          week or 36-month period that, in the aggregate,
                          generally exceed the normal retail price of the
                          consumer property plus interest,
                              ``(vi) provides for payments under the
                          contract that, in the aggregate, do not exceed
                          $10,000 per item of consumer property,
                              ``(vii) provides that the customer does not
                          have any legal obligation to make all the payments
                          referred to in clause (ii) set forth under the
                          contract, and that at the end of each payment
                          period the customer may either continue to use the
                          consumer property by making the payment for the
                          next payment period or return such property to the
                          rent-to-own dealer in good working order, in which
                          case the customer does not incur any further
                          obligations under the contract and is not entitled
                          to a return of any payments previously made under
                          the contract, and
                              ``(viii) provides that the customer has no
                          right to sell, sublease, mortgage, pawn, pledge,
                          encumber, or otherwise dispose of the consumer
                          property until all the payments stated in the
                          contract have been made.''.

        (c) <<NOTE: 26 USC 167 note.>>  Effective Date.--The amendment made
    by this section shall apply to property placed in service after the date
    of the enactment of this Act.

    [[Page 111 STAT. 959]]

    SEC. 1087. EXPANSION OF REQUIREMENT THAT INVOLUNTARILY CONVERTED
                PROPERTY BE REPLACED WITH PROPERTY ACQUIRED FROM AN
                UNRELATED PERSON.

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

        (b) <<NOTE: 26 USC 1003 note.>>  Effective Date.--The amendment made
    by this section shall apply to involuntary conversions occurring after
    June 8, 1997.

    SEC. 1088. TREATMENT OF EXCEPTION FROM INSTALLMENT SALES RULES FOR SALES
                OF PROPERTY BY A MANUFACTURER TO A DEALER.

        (a) In General.--Paragraph (2) of section 811(c) of the Tax Reform
    Act of 1986 <<NOTE: 26 USC 453C note.>>  is hereby repealed.

        (b) <<NOTE: 26 USC 453C note.>>  Effective Date.--
                (1) In general.--The amendment made by this section shall
            apply to taxable years beginning more than 1 year after the date
            of the enactment of this Act.
                (2) Coordination with section 481.--In the case of any
            taxpayer required by this section to change its method of
            accounting for any taxable year--
                        (A) such changes shall be treated as initiated by
                    the taxpayer,
                        (B) such changes shall be treated as made with the
                    consent of the Secretary of the Treasury, and
                        (C) the net amount of the adjustments required to be
                    taken into account under section 481(a) of the Internal
                    Revenue Code of 1986 shall be taken into account ratably
                    over the 4 taxable year period beginning with the first

    [[Page 111 STAT. 960]]

                    taxable year beginning after the date of the enactment
                    of this Act.

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

        (a) Limitation on Noncharitable Distributions.--
                (1) In general.--Paragraphs (1)(A) and (2)(A) of section
            664(d) (relating to charitable remainder trusts) are each
            amended by inserting ``nor more than 50 percent'' after ``not
            less than 5 percent''.
                (2) <<NOTE: 26 USC 664 note.>>  Effective date.--The
            amendment made by paragraph (1) shall apply to transfers in
            trust after June 18, 1997.

        (b) Minimum Charitable Benefit.--
                (1) Charitable remainder annuity trusts.--Paragraph (1) of
            section 664(d) is amended by striking ``and'' at the end of
            subparagraph (B), by striking the period at the end of
            subparagraph (C), and by adding at the end the following new
            subparagraph:
                        ``(D) the value (determined under section 7520) of
                    such remainder interest is at least 10 percent of the
                    initial net fair market value of all property placed in
                    the trust.''
                (2) Charitable remainder unitrusts.--Paragraph (2) of
            section 664(d) is amended by striking ``and'' at the end of
            subparagraph (B), by striking the period at the end of
            subparagraph (C), and by adding at the end the following new
            subparagraph:
                        ``(D) with respect to each contribution of property
                    to the trust, the value (determined under section 7520)
                    of such remainder interest in such property is at least
                    10 percent of the net fair market value of such property
                    as of the date such property is contributed to the
                    trust.''.
                (3) Void or reformed trust.--Paragraph (3) of section
            2055(e) is amended by adding at the end the following new
            subparagraph:
                        ``(J) Void or reformed trust in cases of
                    insufficient remainder interests.--In the case of a
                    trust that would qualify (or could be reformed to
                    qualify pursuant to subparagraph (B)) but for failure to
                    satisfy the requirement of paragraph (1)(D) or (2)(D) of
                    section 664(d), such trust may be--
                              ``(i) declared null and void ab initio, or
                              ``(ii) changed by reformation, amendment, or
                          otherwise to meet such requirement by reducing the
                          payout rate or the duration (or both) of any
                          noncharitable beneficiary's interest to the extent
                          necessary to satisfy such requirement,
                    pursuant to a proceeding that is commenced within the
                    period required in subparagraph (C)(iii). In a case
                    described in clause (i), no deduction shall be allowed
                    under this title for any transfer to the trust and any
                    transactions entered into by the trust prior to being
                    declared void shall be treated as entered into by the
                    transferor.''.
                        (4) Severance of certain additional contributions.--
                    Subsection (d) of section 664 is amended by adding at
                    the end the following new paragraph:
                ``(4) <<NOTE: Regulations.>>  Severance of certain
            additional contributions.--If--

    [[Page 111 STAT. 961]]

                        ``(A) any contribution is made to a trust which
                    before the contribution is a charitable remainder
                    unitrust, and
                        ``(B) such contribution would (but for this
                    paragraph) result in such trust ceasing to be a
                    charitable unitrust by reason of paragraph (2)(D),
            such contribution shall be treated as a transfer to a separate
            trust under regulations prescribed by the Secretary.''.
                (5) Conforming amendment.--Section 2055(e)(3)(G) is amended
            by inserting ``(or other proceeding pursuant to subparagraph
            (J)'' after ``reformation''.
                (6) <<NOTE: 26 USC 664 note.>>  Effective dates.--
                        (A) In general.--Except as otherwise provided in
                    this paragraph, the amendments made by this subsection
                    shall apply to transfers in trust after July 28, 1997.
                        (B) Special rule for certain decedents.--The
                    amendments made by this subsection shall not apply to
                    transfers in trust under the terms of a will (or other
                    testamentary instrument) executed on or before July 28,
                    1997, if the decedent--
                              (i) dies before January 1, 1999, without
                          having republished the will (or amended such
                          instrument) by codicil or otherwise, or
                              (ii) was on July 28, 1997, under a mental
                          disability to change the disposition of his
                          property and did not regain his competence to
                          dispose of such property before the date of his
                          death.

    SEC. 1090. EXPANDED SSA RECORDS FOR TAX ENFORCEMENT.

        (a) Expansion of Coordinated Enforcement Efforts of IRS and HHS
    Office of Child Support Enforcement.--
                (1) State reporting of ssn of child.--Section 454A(e)(4)(D)
            of the Social Security Act (42 U.S.C. 654a(e)(4)(D)) is amended
            by striking ``the birth date of any child'' and inserting ``the
            birth date and, beginning not later than October 1, 1999, the
            social security number, of any child''.
                (2) Federal case registry of child support orders.--Section
            453(h) of such Act (42 U.S.C. 653(h)) is amended--
                        (A) in paragraph (2), by adding at the end the
                    following: ``Beginning not later than October 1, 1999,
                    the information referred to in paragraph (1) shall
                    include the names and social security numbers of the
                    children of such individuals.''; and
                        (B) by adding at the end the following:
                ``(3) Administration of federal tax laws.--The Secretary of
            the Treasury shall have access to the information described in
            paragraph (2) for the purpose of administering those sections of
            the Internal Revenue Code of 1986 which grant tax benefits based
            on support or residence of children.''.
                (3) <<NOTE: 42 USC 653 note.>>  Coordination between
            secretaries.--The Secretary of the Treasury and the Secretary of
            Health and Human Services shall consult regarding the
            implementation issues resulting from the amendments made by this
            subsection, including interim deadlines for States that may be
            able before October 1, 1999, to provide the data required by
            such amendments. The Secretaries <<NOTE: Reports.>>  shall
            report to Congress on the results of such consultation.

    [[Page 111 STAT. 962]]

                (4) <<NOTE: 42 USC 653 note.>>  Effective date.--The
            amendments made by this subsection shall take effect on October
            1, 1998.

        (b) Required Submission of SSN's on Applications.--
                (1) In general.--Section 205(c)(2) of the Social Security
            Act (42 U.S.C. 405(c)(2)) is amended--
                        (A) in subparagraph (B)(ii), by adding at the end
                    the following new sentence: ``With respect to an
                    application for a social security account number for an
                    individual who has not attained the age of 18 before
                    such application, such evidence shall include the
                    information described in subparagraph (C)(ii).'',
                        (B) in the second sentence of subparagraph (C)(ii),
                    insert ``the Commissioner of Social Security and'' after
                    ``available to'', and
                        (C) by adding at the end the following new
                    subparagraph:

        ``(H) The Commissioner of Social Security shall share with the
    Secretary of the Treasury the information obtained by the Commissioner
    pursuant to the second sentence of subparagraph (B)(ii) and to
    subparagraph (C)(ii) for the purpose of administering those sections of
    the Internal Revenue Code of 1986 which grant tax benefits based on
    support or residence of children.''.
                (2) <<NOTE: 42 USC 405 note.>>  Effective dates.--
                        (A) The amendment made by paragraph (1)(A) shall
                    apply to applications made after the date which is 180
                    days after the date of the enactment of this Act.
                        (B) The amendments made by subparagraphs (B) and (C)
                    of paragraph (1) shall apply to information obtained on,
                    before, or after the date of the enactment of this Act.

    SEC. 1091. MODIFICATION OF ESTIMATED TAX SAFE HARBORS.

        (a) In General.--Clause (i) of section 6654(d)(1)(C) (relating to
    limitation on use of preceding year's tax) is amended to read as
    follows:
                              ``(i) In general.--If the adjusted gross
                          income shown on the return of the individual for
                          the preceding taxable year beginning in any
                          calendar year exceeds $150,000, clause (ii) of
                          subparagraph (B) shall be applied by substituting
                          the applicable percentage for `100 percent'. For
                          purposes of the preceding sentence, the applicable
                          percentage shall be determined in accordance with
                          the following table:
                                  The.......................................
                                  applicable................................
    ``If the preceding taxable yeapercentage is:............................
        in:
    1998, 1999, or 2000                                                 105
    2001                                                                112
    2002 or thereafter                                                  110.

                          This clause shall not apply in the case of a
                          preceding taxable year beginning in calendar year
                          1997.''.

        (b) <<NOTE: 26 USC 6654 note.>>  Effective Date.--The amendment made
    by this section shall apply with respect to any installment payment for
    taxable years beginning after December 31, 1997.

    [[Page 111 STAT. 963]]

          TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS

                         Subtitle A--General Provisions

    SEC. 1101. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN TAX CREDIT
                LIMITATION.

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

        (b) <<NOTE: 26 USC 904 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to taxable years beginning after December
    31, 1997.

    SEC. 1102. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES.

        (a) Accrued Taxes Translated by Using Average Rate for Year to Which
    Taxes Relate.--

    [[Page 111 STAT. 964]]

                (1) In general.--Subsection (a) of section 986 (relating to
            translation of foreign taxes) is amended to read as follows:

        ``(a) Foreign Income Taxes.--
                ``(1) Translation of accrued taxes.--
                        ``(A) In general.--For purposes of determining the
                    amount of the foreign tax credit, in the case of a
                    taxpayer who takes foreign income taxes into account
                    when accrued, the amount of any foreign income taxes
                    (and any adjustment thereto) shall be translated into
                    dollars by using the average exchange rate for the
                    taxable year to which such taxes relate.
                        ``(B) Exception for certain taxes.--Subparagraph (A)
                    shall not apply to any foreign income taxes--
                              ``(i) paid after the date 2 years after the
                          close of the taxable year to which such taxes
                          relate, or
                              ``(ii) paid before the beginning of the
                          taxable year to which such taxes relate.
                        ``(C) Exception for inflationary currencies.--
                    Subparagraph (A) shall not apply to any foreign income
                    taxes the liability for which is denominated in any
                    inflationary currency (as determined under regulations).
                        ``(D) Cross reference.--
                      ``For adjustments where tax is not paid within 2
                    years, see section 905(c).

                ``(2) Translation of taxes to which paragraph (1) does not
            apply.--For purposes of determining the amount of the foreign
            tax credit, in the case of any foreign income taxes to which
            subparagraph (A) of paragraph (1) does not apply--
                        ``(A) such taxes shall be translated into dollars
                    using the exchange rates as of the time such taxes were
                    paid to the foreign country or possession of the United
                    States, and
                        ``(B) any adjustment to the amount of such taxes
                    shall be translated into dollars using--
                              ``(i) except as provided in clause (ii), the
                          exchange rate as of the time when such adjustment
                          is paid to the foreign country or possession, or
                              ``(ii) in the case of any refund or credit of
                          foreign income taxes, using the exchange rate as
                          of the time of the original payment of such
                          foreign income taxes.
                ``(3) Foreign income taxes.--For purposes of this
            subsection, the term `foreign income taxes' means any income,
            war profits, or excess profits taxes paid or accrued to any
            foreign country or to any possession of the United States.''.
                (2) Adjustment when not paid within 2 years after year to
            which taxes relate.--Subsection (c) of section 905 is amended to
            read as follows:

        ``(c) Adjustments to Accrued Taxes.--
                ``(1) In general.--If--
                        ``(A) accrued taxes when paid differ from the
                    amounts claimed as credits by the taxpayer,
                        ``(B) accrued taxes are not paid before the date 2
                    years after the close of the taxable year to which such
                    taxes relate, or
                        ``(C) <<NOTE: Notification.>>  any tax paid is
                    refunded in whole or in part,
            the taxpayer shall notify the Secretary, who shall redetermine
            the amount of the tax for the year or years affected. The

    [[Page 111 STAT. 965]]

            Secretary may prescribe adjustments to the pools of post-1986
            foreign income taxes and the pools of post-1986 undistributed
            earnings under sections 902 and 960 in lieu of the
            redetermination under the preceding sentence.
                ``(2) Special rule for taxes not paid within 2 years.--
                        ``(A) In general.--Except as provided in
                    subparagraph (B), in making the redetermination under
                    paragraph (1), no credit shall be allowed for accrued
                    taxes not paid before the date referred to in
                    subparagraph (B) of paragraph (1).
                        ``(B) Taxes subsequently paid.--Any such taxes if
                    subsequently paid--
                              ``(i) shall be taken into account--
                                        ``(I) in the case of taxes deemed
                                    paid under section 902 or section 960,
                                    for the taxable year in which paid (and
                                    no redetermination shall be made under
                                    this section by reason of such payment),
                                    and
                                        ``(II) in any other case, for the
                                    taxable year to which such taxes relate,
                                    and
                              ``(ii) shall be translated as provided in
                          section 986(a)(2)(A).
                ``(3) Adjustments.--The amount of tax (if any) due on any
            redetermination under paragraph (1) shall be paid by the
            taxpayer on notice and demand by the Secretary, and the amount
            of tax overpaid (if any) shall be credited or refunded to the
            taxpayer in accordance with subchapter B of chapter 66 (section
            6511 et seq.).
                ``(4) Bond requirements.--In the case of any tax accrued but
            not paid, the Secretary, as a condition precedent to the
            allowance of the credit provided in this subpart, may require
            the taxpayer to give a bond, with sureties satisfactory to and
            approved by the Secretary, in such sum as the Secretary may
            require, conditioned on the payment by the taxpayer of any
            amount of tax found due on any such redetermination. Any such
            bond shall contain such further conditions as the Secretary may
            require.
                ``(5) Other special rules.--In any redetermination under
            paragraph (1) by the Secretary of the amount of tax due from the
            taxpayer for the year or years affected by a refund, the amount
            of the taxes refunded for which credit has been allowed under
            this section shall be reduced by the amount of any tax described
            in section 901 imposed by the foreign country or possession of
            the United States with respect to such refund; but no credit
            under this subpart, or deduction under section 164, shall be
            allowed for any taxable year with respect to any such tax
            imposed on the refund. No interest shall be assessed or
            collected on any amount of tax due on any redetermination by the
            Secretary, resulting from a refund to the taxpayer, for any
            period before the receipt of such refund, except to the extent
            interest was paid by the foreign country or possession of the
            United States on such refund for such period.''.

        (b) Authority To Use Average Rates.--
                (1) In general.--Subsection (a) of section 986 (as amended
            by subsection (a)) is amended by redesignating paragraph (3)

    [[Page 111 STAT. 966]]

            as paragraph (4) and inserting after paragraph (2) the following
            new paragraph:
                ``(3) <<NOTE: Regulations.>>  Authority to permit use of
            average rates.--To the extent prescribed in regulations, the
            average exchange rate for the period (specified in such
            regulations) during which the taxes or adjustment is paid may be
            used instead of the exchange rate as of the time of such
            payment.''.
                (2) Determination of average rates.--Subsection (c) of
            section 989 is amended by striking ``and'' at the end of
            paragraph (4), by striking the period at the end of paragraph
            (5) and inserting ``, and'', and by adding at the end thereof
            the following new paragraph:
                ``(6) setting forth procedures for determining the average
            exchange rate for any period.''.
                (3) Conforming amendments.--Subsection (b) of section 989 is
            amended by striking ``weighted'' each place it appears.

        (c) Effective Dates.--
                (1) <<NOTE: 26 USC 986 note.>>  In general.--The amendments
            made by subsections (a)(1) and (b) shall apply to taxes paid or
            accrued in taxable years beginning after December 31, 1997.
                (2) <<NOTE: 26 USC 905 note.>>  Subsection (a)(2).--The
            amendment made by subsection (a)(2) shall apply to taxes which
            relate to taxable years beginning after December 31, 1997.

    SEC. 1103. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION FOR
                ALTERNATIVE MINIMUM TAX.

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

        (b) <<NOTE: 26 USC 59 note.>>  Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    [[Page 111 STAT. 967]]

    SEC. 1104. TREATMENT OF PERSONAL TRANSACTIONS BY INDIVIDUALS UNDER
                FOREIGN CURRENCY RULES.

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

        (b) <<NOTE: 26 USC 988 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    SEC. 1105. FOREIGN TAX CREDIT TREATMENT OF DIVIDENDS FROM NONCONTROLLED
                SECTION 902 CORPORATIONS.

        (a) Separate Basket Only To Apply to Pre-2003 Earnings.--
                (1) In general.--Subparagraph (E) of section 904(d)(1) is
            amended to read as follows:
                        ``(E) in the case of a corporation, dividends from
                    noncontrolled section 902 corporations out of earnings
                    and profits accumulated in taxable years beginning
                    before January 1, 2003,''.
                (2) Aggregation of non-pfics.--Subparagraph (E) of section
            904(d)(2) (relating to noncontrolled section 902 corporations)
            is amended by adding at the end the following new clause:
                              ``(iv) All non-pfics treated as one.--All
                          noncontrolled section 902 corporations which are
                          not passive foreign investment companies (as
                          defined in section 1297) shall be treated as one
                          noncontrolled section 902 corporation for purposes
                          of paragraph (1).''.
                (3) Conforming amendments.--Subparagraphs (C)(iii)(II) and
            (D) of section 904(d)(2) are each amended by inserting ``out of
            earnings and profits accumulated in taxable years beginning
            before January 1, 2003'' after ``corporation''.

        (b) Application of Look-Thru Rules to Dividends of Noncontrolled
    Section 902 Corporations Attributable to Post-2002 Earnings.--Section
    904(d) is amended by redesignating paragraphs (4) and (5) as paragraphs
    (5) and (6), respectively, and by inserting after paragraph (3) the
    following new paragraph:

    [[Page 111 STAT. 968]]

                ``(4) Look-thru applies to dividends from noncontrolled
            section 902 corporations.--
                        ``(A) In general.--For purposes of this subsection,
                    any applicable dividend shall be treated as income in a
                    separate category in proportion to the ratio of--
                              ``(i) the portion of the earnings and profits
                          described in subparagraph (B)(ii) attributable to
                          income in such category, to
                              ``(ii) the total amount of such earnings and
                          profits.
                        ``(B) Applicable dividend.--For purposes of
                    subparagraph (A), the term `applicable dividend' means
                    any dividend--
                              ``(i) from a noncontrolled section 902
                          corporation with respect to the taxpayer, and
                              ``(ii) paid out of earnings and profits
                          accumulated in taxable years beginning after
                          December 31, 2002.
                        ``(C) <<NOTE: Applicability.>>  Special rules.--
                              ``(i) In general.--Rules similar to the rules
                          of paragraph (3)(F) shall apply for purposes of
                          this paragraph.
                              ``(ii) Earnings and profits.--For purposes of
                          this paragraph and paragraph (1)(E)--
                                        ``(I) In general.--The rules of
                                    section 316 shall apply.
                                        ``(II) Regulations.--The Secretary
                                    may prescribe regulations regarding the
                                    treatment of distributions out of
                                    earnings and profits for periods prior
                                    to the taxpayer's acquisition of such
                                    stock.''.

        (c) <<NOTE: 26 USC 904 note.>>  Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 2002.

            Subtitle B--Treatment of Controlled Foreign Corporations

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

        (a) General Rule.--Section 964 (relating to miscellaneous
    provisions) is amended by adding at the end thereof the following new
    subsection:
        ``(e) Gain on Certain Stock Sales by Controlled Foreign Corporations
    Treated as Dividends.--
                ``(1) In general.--If a controlled foreign corporation sells
            or exchanges stock in any other foreign corporation, gain
            recognized on such sale or exchange shall be included in the
            gross income of such controlled foreign corporation as a
            dividend to the same extent that it would have been so included
            under section 1248(a) if such controlled foreign corporation
            were a United States person. For purposes of determining the
            amount which would have been so includible, the determination of
            whether such other foreign corporation was a controlled foreign
            corporation shall be made without regard to the preceding
            sentence.
                ``(2) Same country exception not applicable.--Clause (i) of
            section 954(c)(3)(A) shall not apply to any amount treated as a
            dividend by reason of paragraph (1).

    [[Page 111 STAT. 969]]

                ``(3) Clarification of deemed sales.--For purposes of this
            subsection, a controlled foreign corporation shall be treated as
            having sold or exchanged any stock if, under any provision of
            this subtitle, such controlled foreign corporation is treated as
            having gain from the sale or exchange of such stock.''.

        (b) Amendment of Section 904(d).--Clause (i) of section 904(d)(2)(E)
    is amended by striking ``and except as provided in regulations, the
    taxpayer was a United States shareholder in such corporation''.
        (c) Effective Dates.--
                (1) <<NOTE: 26 USC 964 note.>>  The amendment made by
            subsection (a) shall apply to gain recognized on transactions
            occurring after the date of the enactment of this Act.
                (2) <<NOTE: 26 USC 904 note.>>  The amendment made by
            subsection (b) shall apply to distributions after the date of
            the enactment of this Act.

    SEC. 1112. MISCELLANEOUS MODIFICATIONS TO SUBPART F.

        (a) Section 1248 Gain Taken Into Account in Determining Pro Rata
    Share.--
                (1) In general.--Paragraph (2) of section 951(a) (defining
            pro rata share of subpart F income) is amended by adding at the
            end thereof the following new sentence: ``For purposes of
            subparagraph (B), any gain included in the gross income of any
            person as a dividend under section 1248 shall be treated as a
            distribution received by such person with respect to the stock
            involved.''.
                (2) <<NOTE: 26 USC 951 note.>>  Effective date.--The
            amendment made by paragraph (1) shall apply to dispositions
            after the date of the enactment of this Act.

        (b) Basis Adjustments in Stock Held by Foreign Corporation.--
                (1) In general.--Section 961 (relating to adjustments to
            basis of stock in controlled foreign corporations and of other
            property) is amended by adding at the end thereof the following
            new subsection:

        ``(c) <<NOTE: Regulations.>>  Basis Adjustments in Stock Held by
    Foreign Corporation.--Under regulations prescribed by the Secretary, if
    a United States shareholder is treated under section 958(a)(2) as owning
    any stock in a controlled foreign corporation which is actually owned by
    another controlled foreign corporation, adjustments similar to the
    adjustments provided by subsections (a) and (b) shall be made to the
    basis of such stock in the hands of such other controlled foreign
    corporation, but only for the purposes of determining the amount
    included under section 951 in the gross income of such United States
    shareholder (or any other United States shareholder who acquires from
    any person any portion of the interest of such United States shareholder
    by reason of which such shareholder was treated as owning such stock,
    but only to the extent of such portion, and subject to such proof of
    identity of such interest as the Secretary may prescribe by
    regulations).''.
                (2) <<NOTE: 26 USC 961 note.>>  Effective date.--The
            amendment made by paragraph (1) shall apply for purposes of
            determining inclusions for taxable years of United States
            shareholders beginning after December 31, 1997.

        (c) Clarification of Treatment of Branch Tax Exemptions or
    Reductions.--

    [[Page 111 STAT. 970]]

                (1) In general.--Subsection (b) of section 952 is amended by
            adding at the end thereof the following new sentence: ``For
            purposes of this subsection, any exemption (or reduction) with
            respect to the tax imposed by section 884 shall not be taken
            into account.''.
                (2) <<NOTE: 26 USC 952 note.>>  Effective date.--The
            amendment made by paragraph (1) shall apply to taxable years
            beginning after December 31, 1986.

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

        (a) Section 902 Credit.--
                (1) In general.--Subsection (b) of section 902 (relating to
            deemed taxes increased in case of certain 2nd and 3rd tier
            foreign corporations) is amended to read as follows:

        ``(b) Deemed Taxes Increased in Case of Certain Lower Tier
    Corporations.--
                ``(1) In general.--If--
                        ``(A) any foreign corporation is a member of a
                    qualified group, and
                        ``(B) such foreign corporation owns 10 percent or
                    more of the voting stock of another member of such group
                    from which it receives dividends in any taxable year,
            such foreign corporation shall be deemed to have paid the same
            proportion of such other member's post-1986 foreign income taxes
            as would be determined under subsection (a) if such foreign
            corporation were a domestic corporation.
                ``(2) Qualified group.--For purposes of paragraph (1), the
            term `qualified group' means--
                        ``(A) the foreign corporation described in
                    subsection (a), and
                        ``(B) any other foreign corporation if--
                              ``(i) the domestic corporation owns at least 5
                          percent of the voting stock of such other foreign
                          corporation indirectly through a chain of foreign
                          corporations connected through stock ownership of
                          at least 10 percent of their voting stock,
                              ``(ii) the foreign corporation described in
                          subsection (a) is the first tier corporation in
                          such chain, and
                              ``(iii) such other corporation is not below
                          the sixth tier in such chain.
            The term `qualified group' shall not include any foreign
            corporation below the third tier in the chain referred to in
            clause (i) unless such foreign corporation is a controlled
            foreign corporation (as defined in section 957) and the domestic
            corporation is a United States shareholder (as defined in
            section 951(b)) in such foreign corporation. Paragraph (1) shall
            apply to those taxes paid by a member of the qualified group
            below the third tier only with respect to periods during which
            it was a controlled foreign corporation.''.
                (2) Conforming amendments.--
                        (A) Subparagraph (B) of section 902(c)(3) is amended
                    by adding ``or'' at the end of clause (i) and by
                    striking clauses (ii) and (iii) and inserting the
                    following new clause:
                              ``(ii) the requirements of subsection (b)(2)
                          are met with respect to such foreign
                          corporation.''.

    [[Page 111 STAT. 971]]

                        (B) Subparagraph (B) of section 902(c)(4) is amended
                    by striking ``3rd foreign corporation'' and inserting
                    ``sixth tier foreign corporation''.
                        (C) The heading for paragraph (3) of section 902(c)
                    is amended by striking ``where domestic corporation
                    acquires 10 percent of foreign corporation'' and
                    inserting ``where foreign corporation first qualifies''.
                        (D) Paragraph (3) of section 902(c) is amended by
                    striking ``ownership'' each place it appears.

        (b) Section 960 Credit.--Paragraph (1) of section 960(a) (relating
    to special rules for foreign tax credits) is amended to read as follows:
                ``(1) <<NOTE: Applicability.>>  Deemed paid credit.--For
            purposes of subpart A of this part, if there is included under
            section 951(a) in the gross income of a domestic corporation any
            amount attributable to earnings and profits of a foreign
            corporation which is a member of a qualified group (as defined
            in section 902(b)) with respect to the domestic corporation,
            then, except to the extent provided in regulations, section 902
            shall be applied as if the amount so included were a dividend
            paid by such foreign corporation (determined by applying section
            902(c) in accordance with section 904(d)(3)(B)).''.

        (c) <<NOTE: 26 USC 902 note.>>  Effective Date.--
                (1) In general.--The amendments made by this section shall
            apply to taxes of foreign corporations for taxable years of such
            corporations beginning after the date of enactment of this Act.
                (2) Special rule.--In the case of any chain of foreign
            corporations described in clauses (i) and (ii) of section
            902(b)(2)(B) of the Internal Revenue Code of 1986 (as amended by
            this section), no liquidation, reorganization, or similar
            transaction in a taxable year beginning after the date of the
            enactment of this Act shall have the effect of permitting taxes
            to be taken into account under section 902 of the Internal
            Revenue Code of 1986 which could not have been taken into
            account under such section but for such transaction.

          Subtitle C--Treatment of Passive Foreign Investment Companies

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

        Section 1296 is amended by adding at the end the following new
    subsection:
        ``(e) Exception for United States Shareholders of Controlled Foreign
    Corporations.--
                ``(1) In general.--For purposes of this part, a corporation
            shall not be treated with respect to a shareholder as a passive
            foreign investment company during the qualified portion of such
            shareholder's holding period with respect to stock in such
            corporation.
                ``(2) Qualified portion.--For purposes of this subsection,
            the term `qualified portion' means the portion of the
            shareholder's holding period--
                        ``(A) which is after December 31, 1997, and

    [[Page 111 STAT. 972]]

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

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

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

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

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

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

        ``(a) General Rule.--In the case of marketable stock in a passive
    foreign investment company which is owned (or treated under subsection
    (g) as owned) by a United States person at the close of any taxable year
    of such person, at the election of such person--
                ``(1) If the fair market value of such stock as of the close
            of such taxable year exceeds its adjusted basis, such United
            States person shall include in gross income for such taxable
            year an amount equal to the amount of such excess.
                ``(2) If the adjusted basis of such stock exceeds the fair
            market value of such stock as of the close of such taxable year,
            such United States person shall be allowed a deduction for such
            taxable year equal to the lesser of--
                        ``(A) the amount of such excess, or
                        ``(B) the unreversed inclusions with respect to such
                    stock.

        ``(b) Basis Adjustments.--
                ``(1) In general.--The adjusted basis of stock in a passive
            foreign investment company--
                        ``(A) shall be increased by the amount included in
                    the gross income of the United States person under
                    subsection (a)(1) with respect to such stock, and
                        ``(B) shall be decreased by the amount allowed as a
                    deduction to the United States person under subsection
                    (a)(2) with respect to such stock.
                ``(2) Special rule for stock constructively owned.--In the
            case of stock in a passive foreign investment company

    [[Page 111 STAT. 973]]

            which the United States person is treated as owning under
            subsection (g)--
                        ``(A) <<NOTE: Applicability.>>  the adjustments
                    under paragraph (1) shall apply to such stock in the
                    hands of the person actually holding such stock but only
                    for purposes of determining the subsequent treatment
                    under this chapter of the United States person with
                    respect to such stock, and
                        ``(B) similar adjustments shall be made to the
                    adjusted basis of the property by reason of which the
                    United States person is treated as owning such stock.

        ``(c) Character and Source Rules.--
                ``(1) Ordinary treatment.--
                        ``(A) Gain.--Any amount included in gross income
                    under subsection (a)(1), and any gain on the sale or
                    other disposition of marketable stock in a passive
                    foreign investment company (with respect to which an
                    election under this section is in effect), shall be
                    treated as ordinary income.
                        ``(B) Loss.--Any--
                              ``(i) amount allowed as a deduction under
                          subsection (a)(2), and
                              ``(ii) loss on the sale or other disposition
                          of marketable stock in a passive foreign
                          investment company (with respect to which an
                          election under this section is in effect) to the
                          extent that the amount of such loss does not
                          exceed the unreversed inclusions with respect to
                          such stock,
                    shall be treated as an ordinary loss. The amount so
                    treated shall be treated as a deduction allowable in
                    computing adjusted gross income.
                ``(2) Source.--The source of any amount included in gross
            income under subsection (a)(1) (or allowed as a deduction under
            subsection (a)(2)) shall be determined in the same manner as if
            such amount were gain or loss (as the case may be) from the sale
            of stock in the passive foreign investment company.

        ``(d) Unreversed Inclusions.--For purposes of this section, the term
    `unreversed inclusions' means, with respect to any stock in a passive
    foreign investment company, the excess (if any) of--
                ``(1) the amount included in gross income of the taxpayer
            under subsection (a)(1) with respect to such stock for prior
            taxable years, over
                ``(2) the amount allowed as a deduction under subsection
            (a)(2) with respect to such stock for prior taxable years.

    The amount referred to in paragraph (1) shall include any amount which
    would have been included in gross income under subsection (a)(1) with
    respect to such stock for any prior taxable year but for section 1291.
        ``(e) Marketable Stock.--For purposes of this section--
                ``(1) In general.--The term `marketable stock' means--
                        ``(A) any stock which is regularly traded on--
                              ``(i) a national securities exchange which is
                          registered with the Securities and Exchange
                          Commission or the national market system
                          established pursuant to section 11A of the
                          Securities and Exchange Act of 1934, or

    [[Page 111 STAT. 974]]

                              ``(ii) any exchange or other market which the
                          Secretary determines has rules adequate to carry
                          out the purposes of this part,
                        ``(B) to the extent provided in regulations, stock
                    in any foreign corporation which is comparable to a
                    regulated investment company and which offers for sale
                    or has outstanding any stock of which it is the issuer
                    and which is redeemable at its net asset value, and
                        ``(C) to the extent provided in regulations, any
                    option on stock described in subparagraph (A) or (B).
                ``(2) Special rule for regulated investment companies.--In
            the case of any regulated investment company which is offering
            for sale or has outstanding any stock of which it is the issuer
            and which is redeemable at its net asset value, all stock in a
            passive foreign investment company which it owns directly or
            indirectly shall be treated as marketable stock for purposes of
            this section. <<NOTE: Applicability.>> Except as provided in
            regulations, similar treatment as marketable stock shall apply
            in the case of any other regulated investment company which
            publishes net asset valuations at least annually.

        ``(f) Treatment of Controlled Foreign Corporations Which are
    Shareholders in Passive Foreign Investment Companies.--In the case of a
    foreign corporation which is a controlled foreign corporation and which
    owns (or is treated under subsection (g) as owning) stock in a passive
    foreign investment company--
                ``(1) <<NOTE: Applicability.>>  this section (other than
            subsection (c)(2)) shall apply to such foreign corporation in
            the same manner as if such corporation were a United States
            person, and
                ``(2) for purposes of subpart F of part III of subchapter
            N--
                        ``(A) any amount included in gross income under
                    subsection (a)(1) shall be treated as foreign personal
                    holding company income described in section
                    954(c)(1)(A), and
                        ``(B) any amount allowed as a deduction under
                    subsection (a)(2) shall be treated as a deduction
                    allocable to foreign personal holding company income so
                    described.

        ``(g) Stock Owned Through Certain Foreign Entities.--Except as
    provided in regulations--
                ``(1) In general.--For purposes of this section, stock
            owned, directly or indirectly, by or for a foreign partnership
            or foreign trust or foreign estate shall be considered as being
            owned proportionately by its partners or beneficiaries. Stock
            considered to be owned by a person by reason of the application
            of the preceding sentence shall, for purposes of applying such
            sentence, be treated as actually owned by such person.
                ``(2) Treatment of certain dispositions.--In any case in
            which a United States person is treated as owning stock in a
            passive foreign investment company by reason of paragraph (1)--
                        ``(A) any disposition by the United States person or
                    by any other person which results in the United States
                    person being treated as no longer owning such stock, and
                        ``(B) any disposition by the person owning such
                    stock,
            shall be treated as a disposition by the United States person of
            the stock in the passive foreign investment company.

    [[Page 111 STAT. 975]]

        ``(h) Coordination With Section 851(b).--For purposes of paragraphs
    (2) and (3) of section 851(b), any amount included in gross income under
    subsection (a) shall be treated as a dividend.
        ``(i) Stock Acquired From a Decedent.--In the case of stock of a
    passive foreign investment company which is acquired by bequest, devise,
    or inheritance (or by the decedent's estate) and with respect to which
    an election under this section was in effect as of the date of the
    decedent's death, notwithstanding section 1014, the basis of such stock
    in the hands of the person so acquiring it shall be the adjusted basis
    of such stock in the hands of the decedent immediately before his death
    (or, if lesser, the basis which would have been determined under section
    1014 without regard to this subsection).
        ``(j) Coordination With Section 1291 for First Year of Election.--
                ``(1) Taxpayers other than regulated investment companies.--
                        ``(A) In general.--If the taxpayer elects the
                    application of this section with respect to any
                    marketable stock in a corporation after the beginning of
                    the taxpayer's holding period in such stock, and if the
                    requirements of subparagraph (B) are not satisfied,
                    section 1291 shall apply to--
                              ``(i) any distributions with respect to, or
                          disposition of, such stock in the first taxable
                          year of the taxpayer for which such election is
                          made, and
                              ``(ii) any amount which, but for section 1291,
                          would have been included in gross income under
                          subsection (a) with respect to such stock for such
                          taxable year in the same manner as if such amount
                          were gain on the disposition of such stock.
                        ``(B) Requirements.--The requirements of this
                    subparagraph are met if, with respect to each of such
                    corporation's taxable years for which such corporation
                    was a passive foreign investment company and which begin
                    after December 31, 1986, and included any portion of the
                    taxpayer's holding period in such stock, such
                    corporation was treated as a qualified electing fund
                    under this part with respect to the taxpayer.
                ``(2) Special rules for regulated investment companies.--
                        ``(A) In general.--If a regulated investment company
                    elects the application of this section with respect to
                    any marketable stock in a corporation after the
                    beginning of the taxpayer's holding period in such
                    stock, then, with respect to such company's first
                    taxable year for which such company elects the
                    application of this section with respect to such stock--
                              ``(i) section 1291 shall not apply to such
                          stock with respect to any distribution or
                          disposition during, or amount included in gross
                          income under this section for, such first taxable
                          year, but
                              ``(ii) such regulated investment company's tax
                          under this chapter for such first taxable year
                          shall be increased by the aggregate amount of
                          interest which would have been determined under
                          section 1291(c)(3) if section 1291 were applied
                          without regard to this subparagraph.

    [[Page 111 STAT. 976]]

                    Clause (ii) shall not apply if for the preceding taxable
                    year the company elected to mark to market the stock
                    held by such company as of the last day of such
                    preceding taxable year.
                        ``(B) Disallowance of deduction.--No deduction shall
                    be allowed to any regulated investment company for the
                    increase in tax under subparagraph (A)(ii).

        ``(k) <<NOTE: Applicability.>>  Election.--This section shall apply
    to marketable stock in a passive foreign investment company which is
    held by a United States person only if such person elects to apply this
    section with respect to such stock. Such an election shall apply to the
    taxable year for which made and all subsequent taxable years unless--
                ``(1) such stock ceases to be marketable stock, or
                ``(2) the Secretary consents to the revocation of such
            election.

        ``(l) Transition Rule for Individuals Becoming Subject to United
    States Tax.--If any individual becomes a United States person in a
    taxable year beginning after December 31, 1997, solely for purposes of
    this section, the adjusted basis (before adjustments under subsection
    (b)) of any marketable stock in a passive foreign investment company
    owned by such individual on the first day of such taxable year shall be
    treated as being the greater of its fair market value on such first day
    or its adjusted basis on such first day.''.
        (b) Coordination With Interest Charge, Etc.--
                (1) Paragraph (1) of section 1291(d) is amended by adding at
            the end the following new flush sentence:
            ``Except as provided in section 1296(j), this section also shall
            not apply if an election under section 1296(k) is in effect for
            the taxpayer's taxable year.''.
                (2) The subsection heading for subsection (d) of section
            1291 is amended by striking ``Subpart B'' and inserting
            ``Subparts B and C''.
                (3) Subparagraph (A) of section 1291(a)(3) is amended to
            read as follows:
                        ``(A) Holding period.--The taxpayer's holding period
                    shall be determined under section 1223; except that--
                              ``(i) for purposes of applying this section to
                          an excess distribution, such holding period shall
                          be treated as ending on the date of such
                          distribution, and
                              ``(ii) if section 1296 applied to such stock
                          with respect to the taxpayer for any prior taxable
                          year, such holding period shall be treated as
                          beginning on the first day of the first taxable
                          year beginning after the last taxable year for
                          which section 1296 so applied.''.

        (c) Treatment of Mark-to-Market Gain Under Section 4982.--
                (1) Subsection (e) of section 4982 is amended by adding at
            the end thereof the following new paragraph:
                ``(6) Treatment of gain recognized under section 1296.--For
            purposes of determining a regulated investment company's
            ordinary income--
                        ``(A) <<NOTE: Applicability.>>  notwithstanding
                    paragraph (1)(C), section 1296 shall be applied as if
                    such company's taxable year ended on October 31, and

    [[Page 111 STAT. 977]]

                        ``(B) any ordinary gain or loss from an actual
                    disposition of stock in a passive foreign investment
                    company during the portion of the calendar year after
                    October 31 shall be taken into account in determining
                    such regulated investment company's ordinary income for
                    the following calendar year.
            In the case of a company making an election under paragraph (4),
            the preceding sentence shall be applied by substituting the last
            day of the company's taxable year for October 31.''.
                (2) Subsection (b) of section 852 is amended by adding at
            the end thereof the following new paragraph:
                ``(10) Special rule for certain losses on stock in passive
            foreign investment company.--To the extent provided in
            regulations, the taxable income of a regulated investment
            company (other than a company to which an election under section
            4982(e)(4) applies) shall be computed without regard to any net
            reduction in the value of any stock of a passive foreign
            investment company with respect to which an election under
            section 1296(k) is in effect occurring after October 31 of the
            taxable year, and any such reduction shall be treated as
            occurring on the first day of the following taxable year.''.
                (3) Subsection (c) of section 852 is amended by inserting
            after ``October 31 of such year'' the following: ``, without
            regard to any net reduction in the value of any stock of a
            passive foreign investment company with respect to which an
            election under section 1296(k) is in effect occurring after
            October 31 of such year,''.

        (d) Conforming Amendments.--
                (1) Sections 532(b)(4) and 542(c)(10) are each amended by
            striking ``section 1296'' and inserting ``section 1297''.
                (2) Subsection (f) of section 551 is amended by striking
            ``section 1297(b)(5)'' and inserting ``section 1298(b)(5)''.
                (3) Subsections (a)(1) and (d) of section 1293 are each
            amended by striking ``section 1297(a)'' and inserting ``section
            1298(a)''.
                (4) Paragraph (3) of section 1297(b), as redesignated by
            subsection (a), is hereby repealed.
                (5) The table of sections for subpart D of part VI of
            subchapter P of chapter 1, as redesignated by subsection (a), is
            amended to read as follows:
                    ``Sec. 1297. Passive foreign investment company.
                    ``Sec. 1298. Special rules.''.

                (6) The table of subparts for part VI of subchapter P of
            chapter 1 is amended by striking the last item and inserting the
            following new items:
                    ``Subpart C. Election of mark to market for marketable
                                    stock.
                    ``Subpart D. General provisions.''.

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

    SEC. 1123. VALUATION OF ASSETS FOR PASSIVE FOREIGN INVESTMENT COMPANY
                DETERMINATION.

        (a) In General.--Section 1297, as redesignated by section 1122, is
    amended by adding at the end the following new subsection:
        ``(e) Methods for Measuring Assets.--

    [[Page 111 STAT. 978]]

                ``(1) Determination using value.--The determination under
            subsection (a)(2) shall be made on the basis of the value of the
            assets of a foreign corporation if--
                        ``(A) such corporation is a publicly traded
                    corporation for the taxable year, or
                        ``(B) paragraph (2) does not apply to such
                    corporation for the taxable year.
                ``(2) Determination using adjusted bases.--The determination
            under subsection (a)(2) shall be based on the adjusted bases (as
            determined for the purposes of computing earnings and profits)
            of the assets of a foreign corporation if such corporation is
            not described in paragraph (1)(A) and such corporation--
                        ``(A) is a controlled foreign corporation, or
                        ``(B) elects the application of this paragraph.
            An election under subparagraph (B), once made, may be revoked
            only with the consent of the Secretary.
                ``(3) Publicly traded corporation.--For purposes of this
            subsection, a foreign corporation shall be treated as a publicly
            traded corporation if the stock in the corporation is regularly
            traded on--
                        ``(A) a national securities exchange which is
                    registered with the Securities and Exchange Commission
                    or the national market system established pursuant to
                    section 11A of the Securities and Exchange Act of 1934,
                    or
                        ``(B) any exchange or other market which the
                    Secretary determines has rules adequate to carry out the
                    purposes of this subsection.''.

        (b) Conforming Amendments.--Section 1297(a), as redesignated by
    section 1122, is amended--
                (1) by striking ``(by value)'' and inserting ``(as
            determined in accordance with subsection (e))'', and
                (2) by striking the last two sentences.

    SEC. 1124. <<NOTE: 26 USC 532 note.>>  EFFECTIVE DATE.

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

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

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

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

    [[Page 111 STAT. 979]]

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

        ``(a) In General.--Except as provided in regulations, in the case of
    any transfer of property by a United States person to a foreign estate
    or trust, for purposes of this subtitle, such transfer shall be treated
    as a sale or exchange for an amount equal to the fair market value of
    the property transferred, and the transferor shall recognize as gain the
    excess of--
                ``(1) the fair market value of the property so transferred,
            over
                ``(2) the adjusted basis (for purposes of determining gain)
            of such property in the hands of the transferor.

        ``(b) Exception.--Subsection (a) shall not apply to a transfer to a
    trust by a United States person to the extent that any person is treated
    as the owner of such trust under section 671.
        ``(c) Treatment of Trusts Which Become Foreign Trusts.--If a trust
    which is not a foreign trust becomes a foreign trust, such trust shall
    be treated for purposes of this section as having transferred,
    immediately before becoming a foreign trust, all of its assets to a
    foreign trust.''.
        (b) Other Anti-Avoidance Provisions Replacing Repealed Excise Tax.--
                (1) Gain recognition on exchanges involving foreign
            persons.--Section 1035 is amended by redesignating subsection
            (c) as subsection (d) and by inserting after subsection (b) the
            following new subsection:

        ``(c) Exchanges Involving Foreign Persons.--To the extent provided
    in regulations, subsection (a) shall not apply to any exchange having
    the effect of transferring property to any person other than a United
    States person.''.
                (2) Transfers to foreign corporations.--Section 367 is
            amended by adding at the end the following new subsection:

        ``(f) Other Transfers.--To the extent provided in regulations, if a
    United States person transfers property to a foreign corporation as
    paid-in surplus or as a contribution to capital (in a transaction not
    otherwise described in this section), such transfer shall be treated as
    a sale or exchange for an amount equal to the fair market value of the
    property transferred, and the transferor shall recognize as gain the
    excess of--
                ``(1) the fair market value of the property so transferred,
            over
                ``(2) the adjusted basis (for purposes of determining gain)
            of such property in the hands of the transferor.''.
                (3) Certain transfers to partnerships.--Section 721 is
            amended by adding at the end the following new subsection:

        ``(c) Regulations Relating to Certain Transfers to Partnerships.--
    The Secretary may provide by regulations that subsection (a) shall not
    apply to gain realized on the transfer of property to a partnership if
    such gain, when recognized, will be includible in the gross income of a
    person other than a United States person.''.
                (4) Repeal of u.s. source treatment of deemed royalties.--
            Subparagraph (C) of section 367(d)(2) is amended to read as
            follows:
                        ``(C) Amounts received treated as ordinary income.--
                    For purposes of this chapter, any amount included in
                    gross income by reason of this subsection shall be
                    treated as ordinary income.''.

    [[Page 111 STAT. 980]]

                (5) Transfers of intangibles to partnerships.--
                        (A) Subsection (d) of section 367 is amended by
                    adding at the end the following new paragraph:
                ``(3) Regulations relating to transfers of intangibles to
            partnerships.--The Secretary may provide by regulations that the
            rules of paragraph (2) also apply to the transfer of intangible
            property by a United States person to a partnership in
            circumstances consistent with the purposes of this
            subsection.''.
                        (B) Section 721 is amended by adding at the end the
                    following new subsection:

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

        (c) Technical and Conforming Amendments.--
                (1) Subsection (h) of section 814 is amended by striking
            ``or 1491''.
                (2) Section 1057 (relating to election to treat transfer to
            foreign trust, etc., as taxable exchange) is hereby repealed.
                (3) Section 6422 is amended by striking paragraph (5) and by
            redesignating paragraphs (6) through (13) as paragraphs (5)
            through (12), respectively.
                (4) The table of chapters for subtitle A is amended by
            striking the item relating to chapter 5.
                (5) The table of sections for part IV of subchapter O of
            chapter 1 is amended by striking the item relating to section
            1057.
                (6) The table of sections for subpart F of part I of
            subchapter J of chapter 1 is amended by adding at the end the
            following new item:
                    ``Sec. 684. Recognition of gain on certain transfers to
                                    certain foreign trusts and estates.''.

        (d) <<NOTE: 26 USC 367 note.>>  Effective Date.--The amendments made
    by this section shall take effect on the date of the enactment of this
    Act.

                        Subtitle E--Information Reporting

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

        (a) In General.--Section 6031 (relating to return of partnership
    income) is amended by adding at the end the following new subsection:
        ``(e) Foreign Partnerships.--
                ``(1) Exception for foreign partnership.--Except as provided
            in paragraph (2), the preceding provisions of this section shall
            not apply to a foreign partnership.
                ``(2) Certain foreign partnerships required to file
            return.--Except as provided in regulations prescribed by the
            Secretary, this section shall apply to a foreign partnership for
            any taxable year if for such year, such partnership has--
                        ``(A) gross income derived from sources within the
                    United States, or
                        ``(B) gross income which is effectively connected
                    with the conduct of a trade or business within the
                    United States.

    [[Page 111 STAT. 981]]

            The Secretary may provide simplified filing procedures for
            foreign partnerships to which this section applies.''.

        (b) Sanction for Failure by Foreign Partnership To Comply With
    Section 6031 To Include Denial of Deductions.--Subsection (f) of section
    6231 is amended--
                (1) by striking ``Losses and'' in the heading and inserting
            ``Deductions, Losses, and'', and
                (2) by striking ``loss or'' each place it appears and
            inserting ``deduction, loss, or''.

        (c) <<NOTE: 26 USC 6031 note.>>  Effective Date.--The amendments
    made by this section shall apply to taxable years beginning after the
    date of the enactment of this Act.

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

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

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

        ``(a) Requirement.--
                ``(1) In general.--Every United States person shall furnish,
            with respect to any foreign business entity which such person
            controls, such information as the Secretary may prescribe
            relating to--
                        ``(A) the name, the principal place of business, and
                    the nature of business of such entity, and the country
                    under whose laws such entity is incorporated (or
                    organized in the case of a partnership);
                        ``(B) in the case of a foreign corporation, its
                    post-1986 undistributed earnings (as defined in section
                    902(c));
                        ``(C) a balance sheet for such entity listing
                    assets, liabilities, and capital;
                        ``(D) transactions between such entity and--
                              ``(i) such person,
                              ``(ii) any corporation or partnership which
                          such person controls, and
                              ``(iii) any United States person owning, at
                          the time the transaction takes place--
                                        ``(I) in the case of a foreign
                                    corporation, 10 percent or more of the
                                    value of any class of stock outstanding
                                    of such corporation, and
                                        ``(II) in the case of a foreign
                                    partnership, at least a 10-percent
                                    interest in such partnership; and
                        ``(E)(i) in the case of a foreign corporation, a
                    description of the various classes of stock outstanding,
                    and a list showing the name and address of, and number
                    of shares held by, each United States person who is a
                    shareholder of record owning at any time during the
                    annual accounting period 5 percent or more in value of
                    any class of stock outstanding of such foreign
                    corporation, and
                        ``(ii) information comparable to the information
                    described in clause (i) in the case of a foreign
                    partnership.

    [[Page 111 STAT. 982]]

            The Secretary may also require the furnishing of any other
            information which is similar or related in nature to that
            specified in the preceding sentence or which the Secretary
            determines to be appropriate to carry out the provisions of this
            title.''.

        (b) Definitions.--
                (1) In general.--Subsection (e) of section 6038 (relating to
            definitions) is amended--
                        (A) by redesignating paragraphs (1) and (2) as
                    paragraphs (2) and (4), respectively,
                        (B) by inserting before paragraph (2) (as so
                    redesignated) the following new paragraph:
                ``(1) Foreign business entity.--The term `foreign business
            entity' means a foreign corporation and a foreign
            partnership.'', and
                        (C) by inserting after paragraph (2) (as so
                    redesignated) the following new paragraph:
                ``(3) Partnership-related definitions.--
                        ``(A) Control.--A person is in control of a
                    partnership if such person owns directly or indirectly
                    more than a 50 percent interest in such partnership.
                        ``(B) 50-percent interest.--For purposes of
                    subparagraph (A), a 50-percent interest in a partnership
                    is--
                              ``(i) an interest equal to 50 percent of the
                          capital interest, or 50 percent of the profits
                          interest, in such partnership, or
                              ``(ii) to the extent provided in regulations,
                          an interest to which 50 percent of the deductions
                          or losses of such partnership are allocated.
                    For purposes of the preceding sentence, rules similar to
                    the rules of section 267(c) (other than paragraph (3))
                    shall apply.
                        ``(C) 10-percent interest.--A 10-percent interest in
                    a partnership is an interest which would be described in
                    subparagraph (B) if `10 percent' were substituted for
                    `50 percent' each place it appears.''.
                (2) Clerical amendment.--The paragraph heading for paragraph
            (2) of section 6038(e) (as so redesignated) is amended by
            inserting ``of corporation'' after ``Control''.

        (c) Modification of Sanctions on Partnerships and Corporations for
    Failure To Furnish Information.--
                (1) In general.--Subsection (b) of section 6038 is amended--
                        (A) by striking ``$1,000'' each place it appears and
                    inserting ``$10,000'', and
                        (B) by striking ``$24,000'' in paragraph (2) and
                    inserting ``$50,000''.

        (d) Reporting by 10-Percent Partners.--Subsection (a) of section
    6038 is amended by adding at the end the following new paragraph:
                ``(5) Information required from 10-percent partner of
            controlled foreign partnership.--In the case of a foreign
            partnership which is controlled by United States persons holding
            at least 10-percent interests (but not by any one United States
            person), the Secretary may require each United States person who
            holds a 10-percent interest in such partnership to furnish
            information relating to such partnership, including

    [[Page 111 STAT. 983]]

            information relating to such partner's ownership interests in
            the partnership and allocations to such partner of partnership
            items.''.

        (e) Technical Amendments.--
                (1) The following provisions of section 6038 are each
            amended by striking ``foreign corporation'' each place it
            appears and inserting ``foreign business entity'':
                        (A) Paragraphs (2) and (3) of subsection (a).
                        (B) Subsection (b).
                        (C) Subsection (c) other than paragraph (1)(B)
                    thereof.
                        (D) Subsection (d).
                        (E) Subsection (e)(4) (as redesignated by subsection
                    (b)).
                (2) Subparagraph (B) of section 6038(c)(1) is amended by
            inserting ``in the case of a foreign business entity which is a
            foreign corporation,'' after ``(B)''.
                (3) Paragraph (8) of section 318(b) is amended by striking
            ``6038(d)(1)'' and inserting ``6038(d)(2)''.
                (4) Paragraph (4) of section 901(k) is amended by striking
            ``foreign corporation'' and inserting ``foreign corporation or
            partnership''.
                (5) The table of sections for subpart A of part III of
            subchapter A of chapter 61 is amended by striking the item
            relating to section 6038 and inserting the following new item:
                    ``Sec. 6038. Information reporting with respect to
                                    certain foreign corporations and
                                    partnerships.''.

        (f) <<NOTE: 26 USC 318 note.>>  Effective Date.--The amendments made
    by this section shall apply to annual accounting periods beginning after
    the date of the enactment of this Act.

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

        (a) No Return Required Unless Changes Involve 10-Percent Interest in
    Partnership.--
                (1) In general.--Subsection (a) of section 6046A (relating
            to returns as to interests in foreign partnerships) is amended
            by adding at the end the following new
            sentence: <<NOTE: Applicability.>>  ``Paragraphs (1) and (2)
            shall apply to any acquisition or disposition only if the United
            States person directly or indirectly holds at least a 10-percent
            interest in such partnership either before or after such
            acquisition or disposition, and paragraph (3) shall apply to any
            change only if the change is equivalent to at least a 10-percent
            interest in such partnership.''.
                (2) 10-percent interest.--Section 6046A is amended by
            redesignating subsection (d) as subsection (e) and by inserting
            after subsection (c) the following new subsection:

        ``(d) 10-Percent Interest.--For purposes of subsection (a), a 10-
    percent interest in a partnership is an interest described in section
    6038(e)(3)(C).''.
        (b) Modification of Penalty on Failure to Report Changes in
    Ownership Interests in Foreign Corporations and Partnerships.--
    Subsection (a) of section 6679 (relating to failure to file returns,
    etc., with respect to foreign corporations or foreign partnerships) is
    amended to read as follows:
        ``(a) Civil Penalty.--

    [[Page 111 STAT. 984]]

                ``(1) In general.--In addition to any criminal penalty
            provided by law, any person required to file a return under
            section 6035, 6046, or 6046A who fails to file such return at
            the time provided in such section, or who files a return which
            does not show the information required pursuant to such section,
            shall pay a penalty of $10,000, unless it is shown that such
            failure is due to reasonable cause.
                ``(2) Increase in penalty where failure continues after
            notification.--If any failure described in paragraph (1)
            continues for more than 90 days after the day on which the
            Secretary mails notice of such failure to the United States
            person, such person shall pay a penalty (in addition to the
            amount required under paragraph (1)) of $10,000 for each 30-day
            period (or fraction thereof) during which such failure continues
            after the expiration of such 90-day period. The increase in any
            penalty under this paragraph shall not exceed $50,000.
                ``(3) Reduced penalty for returns relating to foreign
            personal holding companies.--In the case of a return required
            under section 6035, paragraph (1) shall be applied by
            substituting `$1,000' for `$10,000', and paragraph (2) shall not
            apply.''.

        (c) <<NOTE: 26 USC 6046A note.>>  Effective Date.--The amendments
    made by this section shall apply to transfers and changes after the date
    of the enactment of this Act.

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

        (a) In General.--Paragraph (1) of section 6038B(a) (relating to
    notice of certain transfers to foreign corporations) is amended to read
    as follows:
                ``(1) transfers property to--
                        ``(A) a foreign corporation in an exchange described
                    in section 332, 351, 354, 355, 356, or 361, or
                        ``(B) a foreign partnership in a contribution
                    described in section 721 or in any other contribution
                    described in regulations prescribed by the Secretary,''.

        (b) Exceptions.--Section 6038B is amended by redesignating
    subsection (b) as subsection (c) and by inserting after subsection (a)
    the following new subsection:
        ``(b) Exceptions for Certain Transfers to Foreign Partnerships;
    Special Rule.--
                ``(1) <<NOTE: Applicability.>>  Exceptions.--Subsection
            (a)(1)(B) shall apply to a transfer by a United States person to
            a foreign partnership only if--
                        ``(A) the United States person holds (immediately
                    after the transfer) directly or indirectly at least a
                    10-percent interest (as defined in section 6046A(d)) in
                    the partnership, or
                        ``(B) the value of the property transferred (when
                    added to the value of the property transferred by such
                    person or any related person to such partnership or a
                    related partnership during the 12-month period ending on
                    the date of the transfer) exceeds $100,000.

    [[Page 111 STAT. 985]]

            For purposes of the preceding sentence, the value of any
            transferred property is its fair market value at the time of its
            transfer.
                ``(2) Special rule.--If by reason of an adjustment under
            section 482 or otherwise, a contribution described in subsection
            (a)(1) is deemed to have been made, such contribution shall be
            treated for purposes of this section as having been made not
            earlier than the date specified by the Secretary.''.

         (c) Modification of Penalty Applicable to Foreign Corporations and
    Partnerships.--
                (1) In general.--Paragraph (1) of section 6038B(b) is
            amended by striking ``equal to'' and all that follows and
            inserting ``equal to 10 percent of the fair market value of the
            property at the time of the exchange (and, in the case of a
            contribution described in subsection (a)(1)(B), such person
            shall recognize gain as if the contributed property had been
            sold for such value at the time of such contribution).''.
                (2) Limit on penalty.--Section 6038B(b) is amended by adding
            at the end the following new paragraph:
                ``(3) Limit on penalty.--The penalty under paragraph (1)
            with respect to any exchange shall not exceed $100,000 unless
            the failure with respect to such exchange was due to intentional
            disregard.''.

        (d) <<NOTE: 26 USC 6038B note.>>  Effective Date.--
                (1) In general.--The amendments made by this section shall
            apply to transfers made after the date of the enactment of this
            Act.
                (2) Election of retroactive effect.--Section 1494(c) of the
            Internal Revenue Code of 1986 shall not apply to any transfer
            after August 20, 1996, if all applicable reporting requirements
            under section 6038B of such Code (as amended by this section)
            are satisfied. The Secretary of the Treasury or his delegate may
            prescribe simplified reporting requirements under the preceding
            sentence.

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

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

        (b) Effective Date.--The amendment made by subsection (a) shall
    apply to information the due date for the reporting of which is after
    the date of the enactment of this Act.

    [[Page 111 STAT. 986]]

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

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

        (b) <<NOTE: 26 USC 6046 note.>>  Effective Date.--The amendment made
    by this section shall take effect on January 1, 1998.

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

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

        (a) In General.--Paragraph (4) of section 7701(a) is amended by
    inserting before the period ``unless, in the case of a partnership, the
    Secretary provides otherwise by regulations''.
        (b) <<NOTE: 26 USC 7701 note.>>  Effective Date.--Any regulations
    issued with respect to the amendment made by subsection (a) shall apply
    to partnerships created or organized after the date determined under
    section 7805(b)

    [[Page 111 STAT. 987]]

    of the Internal Revenue Code of 1986 (without regard to paragraph (2)
    thereof) with respect to such regulations.

                   Subtitle G--Other Simplification Provisions

    SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS.

        (a) In General.--Paragraph (3) of section 1907(a) of the Small
    Business Job Protection Act of 1996 <<NOTE: 26 USC 7701 note.>>  is
    amended by adding at the end the following flush sentence:
            ``To the extent prescribed in regulations by the Secretary of
            the Treasury or his delegate, a trust which was in existence on
            August 20, 1996 (other than a trust treated as owned by the
            grantor under subpart E of part I of subchapter J of chapter 1
            of the Internal Revenue Code of 1986), and which was treated as
            a United States person on the day before the date of the
            enactment of this Act may elect to continue to be treated as a
            United States person notwithstanding section 7701(a)(30)(E) of
            such Code.''.

        (b) <<NOTE: 26 USC 7701 note.>>  Effective Date.--The amendment made
    by subsection (a) shall take effect as if included in the amendments
    made by section 1907(a) of the Small Business Job Protection Act of
    1996.

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

        (a) In General.--The last sentence of clause (ii) of section
    864(b)(2)(A) (relating to stock or securities) is amended by striking
    ``, or in the case of a corporation'' and all that follows and inserting
    a period.
        (b) <<NOTE: 26 USC 864 note.>>  Effective Date.--The amendment made
    by subsection (a) shall apply to taxable years beginning after December
    31, 1997.

    SEC. 1163. MISCELLANEOUS CLARIFICATIONS.

        (a) Attribution of Deemed Paid Foreign Taxes to Prior
    Distributions.--Subparagraph (B) of section 902(c)(2) is amended by
    striking ``deemed paid with respect to'' and inserting ``attributable
    to''.
        (b) Financial Services Income Determined Without Regard to High-
    Taxed Income.--Subclause (II) of section 904(d)(2)(C)(i) is amended by
    striking ``subclause (I)'' and inserting ``subclauses (I) and (III)''.
        (c) <<NOTE: 26 USC 902 note.>>  Effective Date.--The amendments made
    by this section shall take effect on the date of the enactment of this
    Act.

                          Subtitle H--Other Provisions

    SEC. 1171. TREATMENT OF COMPUTER SOFTWARE AS FSC EXPORT PROPERTY.

        (a) In General.--Subparagraph (B) of section 927(a)(2) (relating to
    property excluded from eligibility as FSC export property) is amended by
    inserting ``, and other than computer software (whether or not
    patented)'' before ``, for commercial or home use''.

    [[Page 111 STAT. 988]]

    <<NOTE: 26 USC 927 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply to gross receipts attributable to periods
    after December 31, 1997, in taxable years ending after such date.

    SEC. 1172. ADJUSTMENT OF DOLLAR LIMITATION ON SECTION 911 EXCLUSION.

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

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

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

    <<NOTE: 26 USC 911 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    SEC. 1173. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS ACQUIRED
                BY DEALERS IN ORDINARY COURSE OF TRADE OR BUSINESS.

        (a) In General.--Section 956(c)(2) is amended by striking ``and'' at
    the end of subparagraph (H), by striking the period at the end of
    subparagraph (I) and inserting a semicolon, and by adding at the end the
    following new subparagraphs:
                        ``(J) deposits of cash or securities made or
                    received on commercial terms in the ordinary course of a
                    United States or foreign person's business as a dealer
                    in securities or in commodities, but only to the extent
                    such deposits are made or received as collateral or
                    margin for (i) a securities loan, notional principal
                    contract, options contract, forward contract, or futures
                    contract, or (ii) any other financial transaction in
                    which the Secretary determines that it is customary to
                    post collateral or margin; and
                        ``(K) an obligation of a United States person to the
                    extent the principal amount of the obligation does not

    [[Page 111 STAT. 989]]

                    exceed the fair market value of readily marketable
                    securities sold or purchased pursuant to a sale and
                    repurchase agreement or otherwise posted or received as
                    collateral for the obligation in the ordinary course of
                    its business by a United States or foreign person which
                    is a dealer in securities or commodities.
            For purposes of subparagraphs (J) and (K), the term `dealer in
            securities' has the meaning given such term by section
            475(c)(1), and the term `dealer in commodities' has the meaning
            given such term by section 475(e), except that such term shall
            include a futures commission merchant.''.

    <<NOTE: 26 USC 956 note.>>     (b) Effective Date.--The amendments made
    by this section shall apply to taxable years of foreign corporations
    beginning after December 31, 1997, and to taxable years of United States
    shareholders with or within which such taxable years of foreign
    corporations end.

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

        (a) Sourcing Rules.--
                (1) In general.--Section 861(a)(3) is amended by adding at
            the end the following new flush sentence:
            ``In addition, except for purposes of sections 79 and 105 and
            subchapter D, compensation for labor or services performed in
            the United States shall not be deemed to be income from sources
            within the United States if the labor or services are performed
            by a nonresident alien individual in connection with the
            individual's temporary presence in the United States as a
            regular member of the crew of a foreign vessel engaged in
            transportation between the United States and a foreign country
            or a possession of the United States.''.
                (2) Transportation income.--Subparagraph (B) of section
            863(c)(2) is amended by adding at the end the following flush
            sentence:
                    ``In the case of transportation income derived from, or
                    in connection with, a vessel, this subparagraph shall
                    only apply if the taxpayer is a citizen or resident
                    alien.''.

        (b) Presence in United States.--
                (1) In general.--Paragraph (7) of section 7701(b) is amended
            by adding at the end the following new subparagraph:
                        ``(D) Crew members temporarily present.--An
                    individual who is temporarily present in the United
                    States on any day as a regular member of the crew of a
                    foreign vessel engaged in transportation between the
                    United States and a foreign country or a possession of
                    the United States shall not be treated as present in the
                    United States on such day unless such individual
                    otherwise engages in any trade or business in the United
                    States on such day.''.
                (2) Conforming amendment.--Subparagraph (A) of section
            7701(b)(7) is amended by striking ``or (C)'' and inserting ``,
            (C), or (D)''.

    <<NOTE: 26 USC 7701 note.>>     (c) Effective Dates.--
                (1) In general.--The amendments made by this section shall
            apply to remuneration for services performed in taxable years
            beginning after December 31, 1997.
                (2) Presence.--The amendment made by subsection (b) shall
            apply to taxable years beginning after December 31, 1997.

    [[Page 111 STAT. 990]]

    SEC. 1175. EXEMPTION FOR ACTIVE FINANCING INCOME.

        (a) Exemption From Foreign Personal Holding Company Income.--Section
    954 is amended by adding at the end the following new subsection:
        ``(h) Special Rule for Income Derived in the Active Conduct of
    Banking, Financing, or Similar Businesses.--
                ``(1) In general.--For purposes of subsection (c)(1),
            foreign personal holding company income shall not include income
            which is--
                        ``(A) derived in the active conduct by a controlled
                    foreign corporation of a banking, financing, or similar
                    business, but only if the corporation is predominantly
                    engaged in the active conduct of such business,
                        ``(B) received from a person other than a related
                    person (within the meaning of subsection (d)(3)) and
                    derived from the investments made by a qualifying
                    insurance company of its reserves or of 80 percent of
                    its unearned premiums (as both are determined in the
                    manner prescribed under paragraph (4)), or
                        ``(C) received from a person other than a related
                    person (within the meaning of subsection (d)(3)) and
                    derived from investments made by a qualifying insurance
                    company of an amount of its assets equal to--
                              ``(i) in the case of contracts regulated in
                          the country in which sold as property, casualty,
                          or health insurance contracts, one-third of its
                          premiums earned on such insurance contracts during
                          the taxable year (as defined in section
                          832(b)(4)), and
                              ``(ii) in the case of contracts regulated in
                          the country in which sold as life insurance or
                          annuity contracts, the greater of--
                                        ``(I) 10 percent of the reserves
                                    described in subparagraph (B) for such
                                    contracts, or
                                        ``(II) in the case of a qualifying
                                    insurance company which is a start-up
                                    company, $10,000,000.
                ``(2) Principles for determining applicable income.--
                        ``(A) Banking and financing income.--The
                    determination as to whether income is described in
                    paragraph (1)(A) shall be made--
                              ``(i) except as provided in clause (ii), in
                          accordance with the applicable principles of
                          section 904(d)(2)(C)(ii), except that such income
                          shall include income from all leases entered into
                          in the ordinary course of the active conduct of a
                          banking, financing, or similar business, and
                              ``(ii) in the case of a corporation described
                          in paragraph (3)(B), in accordance with the
                          applicable principles of section 1296(b) (as in
                          effect on the day before the enactment of the
                          Taxpayer Relief Act of 1997) for determining what
                          is not passive income.
                        ``(B) Insurance income.--Under rules prescribed by
                    the Secretary, for purposes of paragraphs (1) (B) and
                    (C)--
                              ``(i) in the case of contracts which are
                          separate account-type contracts (including
                          variable contracts not meeting the requirements of
                          section 817), only income specifically allocable
                          to such contracts shall be taken into account, and

    [[Page 111 STAT. 991]]

                              ``(ii) in the case of other contracts, income
                          not allocable under clause (i) shall be allocated
                          ratably among such contracts.
                    <<NOTE: Regulations.>>     ``(C) Look-thru rules.--The
                    Secretary shall prescribe regulations consistent with
                    the principles of section 904(d)(3) which provide that
                    dividends, interest, income equivalent to interest,
                    rents, or royalties received or accrued from a related
                    person (within the meaning of subsection (d)(3)) shall
                    be subject to look-thru treatment for purposes of this
                    subsection.
                ``(3) Predominantly engaged.--For purposes of paragraph
            (1)(A), a corporation shall be deemed predominantly engaged in
            the active conduct of a banking, financing, or similar business
            only if--
                        ``(A) more than 70 percent of its gross income is
                    derived from such business from transactions with
                    persons which are not related persons (as defined in
                    subsection (d)(3)) and which are located within the
                    country under the laws of which the controlled foreign
                    corporation is created or organized, or
                        ``(B) the corporation is--
                              ``(i) engaged in the active conduct of a
                          banking or securities business (within the meaning
                          of section 1296(b), as in effect before the
                          enactment of the Taxpayer Relief Act of 1997), or
                              ``(ii) a qualified bank affiliate or a
                          qualified securities affiliate (within the meaning
                          of the proposed regulations under such section
                          1296(b)).
                ``(4) Methods for determining unearned premiums and
            reserves.--For purposes of paragraph (1)(B)--
                        ``(A) Property and casualty contracts.--The unearned
                    premiums and reserves of a qualifying insurance company
                    with respect to property, casualty, or health insurance
                    contracts shall be determined using the same methods and
                    interest rates which would be used if such company were
                    subject to tax under subchapter L.
                        ``(B) Life insurance and annuity contracts.--The
                    reserves of a qualifying insurance company with respect
                    to life insurance or annuity contracts shall be
                    determined under the method described in paragraph (5)
                    which such company elects to apply for purposes of this
                    paragraph. Such election shall be made at such time and
                    in such manner as the Secretary may prescribe and, once
                    made, shall be irrevocable without the consent of the
                    Secretary.
                        ``(C) Limitation on reserves.--In no event shall the
                    reserve determined under this paragraph for any contract
                    as of any time exceed the amount which would be taken
                    into account with respect to such contract as of such
                    time in determining foreign annual statement reserves
                    (less any catastrophe or deficiency reserves).
                ``(5) Methods.--The methods described in this paragraph are
            as follows:
                        ``(A) U.S. method.--The method which would apply if
                    the qualifying insurance company were subject to tax
                    under subchapter L, except that the interest rate used
                    shall be an interest rate determined for the foreign
                    country in which such company is created or organized
                    and which

    [[Page 111 STAT. 992]]

                    is calculated in the same manner as the Federal mid-term
                    rate under section 1274(d).
                        ``(B) Foreign method.--A preliminary term method,
                    except that the interest rate used shall be the interest
                    rate determined for the foreign country in which such
                    company is created or organized and which is calculated
                    in the same manner as the Federal mid-term rate under
                    section 1274(d). If a qualifying insurance company uses
                    such a preliminary term method with respect to contracts
                    insuring risks located in such foreign country, such
                    method shall apply if such company elects the method
                    under this clause.
                        ``(C) Cash surrender value.--A method under which
                    reserves are equal to the net surrender value (as
                    defined in section 807(e)(1)(A)) of the contract.
                ``(6) Definitions.--For purposes of this subsection--
                        ``(A) Terms relating to insurance companies.--
                              ``(i) Qualifying insurance company.--The term
                          `qualifying insurance company' means any entity
                          which--
                                        ``(I) is subject to regulation as an
                                    insurance company under the laws of its
                                    country of incorporation,
                                        ``(II) realizes at least 50 percent
                                    of its net written premiums from the
                                    insurance or reinsurance of risks
                                    located within the country in which such
                                    entity is created or organized, and
                                        ``(III) is engaged in the active
                                    conduct of an insurance business and
                                    would be subject to tax under subchapter
                                    L if it were a domestic corporation.
                              ``(ii) Start-up company.--A qualifying
                          insurance company shall be treated as a start-up
                          company if such company (and any predecessor) has
                          not been engaged in the active conduct of an
                          insurance business for more than 5 years as of the
                          beginning of the taxable year of such company.
                        ``(B) Located.--For purposes of paragraph (3)(A)--
                              ``(i) In general.--A person shall be treated
                          as located--
                                        ``(I) except as provided in
                                    subclause (II), within the country in
                                    which it maintains an office or other
                                    fixed place of business through which it
                                    engages in a trade or business and by
                                    which the transaction is effected, or
                                        ``(II) in the case of a natural
                                    person, within the country in which such
                                    person is physically located when such
                                    person enters into a transaction.
                              ``(ii) Special rule for qualified business
                          units.--Gross income derived by a corporation's
                          qualified business unit (within the meaning of
                          section 989(a)) from transactions with persons
                          which are not related persons (as defined in
                          subsection (d)(3)) and which are located in the
                          country in which the qualified business unit both
                          maintains its principal office and conducts
                          substantial business activity shall be treated as
                          derived from transactions with persons which are

    [[Page 111 STAT. 993]]

                          not related persons (as defined in subsection
                          (d)(3)) and which are located within the country
                          under the laws of which the controlled foreign
                          corporation is created or organized.
                ``(7) Anti-abuse rules.--For purposes of applying this
            subsection, there shall be disregarded any item of income, gain,
            loss, or deduction with respect to any transaction or series of
            transactions one of the principal purposes of which is
            qualifying income or gain for the exclusion under this section,
            including any change in the method of computing reserves or any
            other transaction or series of transactions a principal purpose
            of which is the acceleration or deferral of any item in order to
            claim the benefits of such exclusion through the application of
            this subsection.
                ``(8) Coordination with section 953.--This subsection shall
            not apply to investment income allocable to contracts that
            insure related party risks or risks located in a foreign country
            other than the country in which the qualifying insurance comapny
            is created or organized.
                ``(9) Application.--This subsection shall apply to the first
            full taxable year of a foreign corporation beginning after
            December 31, 1997, and before January 1, 1999, and to taxable
            years of United States shareholders with or within which such
            taxable year of such foreign corporation ends.''.

        (b) Exemption From Foreign Base Company Services Income.--Paragraph
    (2) of section 954(e) is amended by striking ``or'' at the end of
    subparagraph (A), by striking the period at the end of subparagraph (B)
    and inserting ``, or'', and by adding at the end the following:
                        ``(C) in the case of taxable years described in
                    subsection (h)(8), the active conduct by a controlled
                    foreign corporation of a banking, financing, insurance,
                    or similar business, but only if the corporation is
                    predominantly engaged in the active conduct of such
                    business (within the meaning of subsection (h)(3)) or is
                    a qualifying insurance company.''.

    <<NOTE: 26 USC 954 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to the first full taxable year of a foreign
    corporation beginning after December 31, 1997, and before January 1,
    1999, and to taxable years of United States shareholders with or within
    which such taxable year of such foreign corporation ends.

        TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND
                                   BUSINESSES

                 Subtitle A--Provisions Relating to Individuals

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

        (a) Basic Standard Deduction.--
                (1) In general.--Paragraph (5) of section 63(c) (relating to
            limitation on basic standard deduction in the case of certain
            dependents) is amended by striking ``shall not exceed'' and

    [[Page 111 STAT. 994]]

            all that follows and inserting ``shall not exceed the greater
            of--
                        ``(A) $500, or
                        ``(B) the sum of $250 and such individual's earned
                    income.''.
                (2) Conforming amendment.--Paragraph (4) of section 63(c) is
            amended--
                        (A) by striking ``(5)(A)'' in the material preceding
                    subparagraph (A) and inserting ``(5)'', and
                        (B) by striking ``by substituting'' and all that
                    follows in subparagraph (B) and inserting ``by
                    substituting for `calendar year 1992' in subparagraph
                    (B) thereof--
                              ``(i) `calendar year 1987' in the case of the
                          dollar amounts contained in paragraph (2) or
                          (5)(A) or subsection (f), and
                              ``(ii) `calendar year 1997' in the case of the
                          dollar amount contained in paragraph (5)(B).''.

        (b) Minimum Tax Exemption Amount.--
                (1) In general.--Subsection (j) of section 59 is amended to
            read as follows:

        ``(j) Treatment of Unearned Income of Minor Children.--
                ``(1) In general.--In the case of a child to whom section
            1(g) applies, the exemption amount for purposes of section 55
            shall not exceed the sum of--
                        ``(A) such child's earned income (as defined in
                    section 911(d)(2)) for the taxable year, plus
                        ``(B) $5,000.
                ``(2) Inflation adjustment.--In the case of any taxable year
            beginning in a calendar year after 1998, the dollar amount in
            paragraph (1)(B) shall be increased by an amount equal to the
            product of--
                        ``(A) such dollar amount, and
                        ``(B) the cost-of-living adjustment determined under
                    section 1(f)(3) for the calendar year in which the
                    taxable year begins, determined by substituting `1997'
                    for `1992' in subparagraph (B) thereof.
            If any increase determined under the preceding sentence is not a
            multiple of $50, such increase shall be rounded to the nearest
            multiple of $50.''.
                (2) Conforming amendment.--Clause (iv) of section
            6103(e)(1)(A) is amended by striking ``or 59(j)''.

    <<NOTE: 26 USC 59 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

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

        (a) In General.--Paragraph (1) of section 6654(e) (relating to
    exception where tax is small amount) is amended by striking ``$500'' and
    inserting ``$1,000''.
    <<NOTE: 26 USC 6654 note.>>     (b) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    SEC. 1203. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL MAIL
                CARRIERS.

        (a) In General.--Section 162 (relating to trade or business
    expenses) is amended by redesignating subsection (o) as subsection (p)
    and by inserting after subsection (n) the following new subsection:

    [[Page 111 STAT. 995]]

        ``(o) Treatment of Certain Reimbursed Expenses of Rural Mail
    Carriers.--
                ``(1) General rule.--In the case of any employee of the
            United States Postal Service who performs services involving the
            collection and delivery of mail on a rural route and who
            receives qualified reimbursements for the expenses incurred by
            such employee for the use of a vehicle in performing such
            services--
                        ``(A) the amount allowable as a deduction under this
                    chapter for the use of a vehicle in performing such
                    services shall be equal to the amount of such qualified
                    reimbursements; and
                        ``(B) such qualified reimbursements shall be treated
                    as paid under a reimbursement or other expense allowance
                    arrangement for purposes of section 62(a)(2)(A) (and
                    section 62(c) shall not apply to such qualified
                    reimbursements).
                ``(2) Definition of qualified reimbursements.--For purposes
            of this subsection, the term `qualified reimbursements' means
            the amounts paid by the United States Postal Service to
            employees as an equipment maintenance allowance under the 1991
            collective bargaining agreement between the United States Postal
            Service and the National Rural Letter Carriers' Association.
            Amounts paid as an equipment maintenance allowance by such
            Postal Service under later collective bargaining agreements that
            supersede the 1991 agreement shall be considered qualified
            reimbursements if such amounts do not exceed the amounts that
            would have been paid under the 1991 agreement, adjusted for
            changes in the Consumer Price Index (as defined in section
            1(f)(5)) since 1991.''.

        (b) Technical Amendment.--Section 6008 of the Technical and
    Miscellaneous Revenue Act of 1988 <<NOTE: 26 USC 162 note.>>  is hereby
    repealed.

    <<NOTE: 26 USC 162 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    SEC. 1204. TREATMENT OF TRAVELING EXPENSES OF CERTAIN FEDERAL EMPLOYEES
                ENGAGED IN CRIMINAL INVESTIGATIONS.

        (a) In General.--Subsection (a) of section 162 is amended by adding
    at the end the following new sentence: ``The preceding sentence shall
    not apply to any Federal employee during any period for which such
    employee is certified by the Attorney General (or the designee thereof)
    as traveling on behalf of the United States in temporary duty status to
    investigate, or provide support services for the investigation of, a
    Federal crime.''.
    <<NOTE: 26 USC 162 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply to amounts paid or incurred with respect
    to taxable years ending after the date of the enactment of this Act.

    SEC. 1205. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.

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

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

        ``(a) Authority To Receive.--It shall be lawful for the Secretary to
    receive for internal revenue taxes (or in payment for internal revenue
    stamps) any commercially acceptable means that the Secretary deems
    appropriate to the extent and under the conditions provided in
    regulations prescribed by the Secretary.

    [[Page 111 STAT. 996]]

        ``(b) Ultimate Liability.--If a check, money order, or other method
    of payment, including payment by credit card, debit card, or charge card
    so received is not duly paid, or is paid and subsequently charged back
    to the Secretary, the person by whom such check, or money order, or
    other method of payment has been tendered shall remain liable for the
    payment of the tax or for the stamps, and for all legal penalties and
    additions, to the same extent as if such check, money order, or other
    method of payment had not been tendered.
        ``(c) Liability of Banks and Others.--If any certified, treasurer's,
    or cashier's check (or other guaranteed draft), or any money order, or
    any other means of payment that has been guaranteed by a financial
    institution (such as a credit card, debit card, or charge card
    transaction which has been guaranteed expressly by a financial
    institution) so received is not duly paid, the United States shall, in
    addition to its right to exact payment from the party originally
    indebted therefor, have a lien for--
                ``(1) the amount of such check (or draft) upon all assets of
            the financial institution on which drawn,
                ``(2) the amount of such money order upon all the assets of
            the issuer thereof, or
                ``(3) the guaranteed amount of any other transaction upon
            all the assets of the institution making such guarantee,

    and such amount shall be paid out of such assets in preference to any
    other claims whatsoever against such financial institution, issuer, or
    guaranteeing institution, except the necessary costs and expenses of
    administration and the reimbursement of the United States for the amount
    expended in the redemption of the circulating notes of such financial
    institution.
        ``(d) Payment by Other Means.--
                ``(1) Authority to prescribe regulations.--The Secretary
            shall prescribe such regulations as the Secretary deems
            necessary to receive payment by commercially acceptable means,
            including regulations that--
                        ``(A) specify which methods of payment by
                    commercially acceptable means will be acceptable,
                        ``(B) specify when payment by such means will be
                    considered received,
                        ``(C) identify types of nontax matters related to
                    payment by such means that are to be resolved by persons
                    ultimately liable for payment and financial
                    intermediaries, without the involvement of the
                    Secretary, and
                        ``(D) ensure that tax matters will be resolved by
                    the Secretary, without the involvement of financial
                    intermediaries.
                ``(2) Authority to enter into contracts.--Notwithstanding
            section 3718(f) of title 31, United States Code, the Secretary
            is authorized to enter into contracts to obtain services related
            to receiving payment by other means where cost beneficial to the
            Government. The Secretary may not pay any fee or provide any
            other consideration under such contracts.
                ``(3) Special provisions for use of credit cards.--If use of
            credit cards is accepted as a method of payment of taxes
            pursuant to subsection (a)--
                        ``(A) a payment of internal revenue taxes (or a
                    payment for internal revenue stamps) by a person by use
                    of a credit card shall not be subject to section 161 of
                    the Truth in

    [[Page 111 STAT. 997]]

                    Lending Act (15 U.S.C. 1666), or to any similar
                    provisions of State law, if the error alleged by the
                    person is an error relating to the underlying tax
                    liability, rather than an error relating to the credit
                    card account such as a computational error or numerical
                    transposition in the credit card transaction or an issue
                    as to whether the person authorized payment by use of
                    the credit card,
                        ``(B) a payment of internal revenue taxes (or a
                    payment for internal revenue stamps) shall not be
                    subject to section 170 of the Truth in Lending Act (15
                    U.S.C. 1666i), or to any similar provisions of State
                    law,
                        ``(C) a payment of internal revenue taxes (or a
                    payment for internal revenue stamps) by a person by use
                    of a debit card shall not be subject to section 908 of
                    the Electronic Fund Transfer Act (15 U.S.C. 1693f), or
                    to any similar provisions of State law, if the error
                    alleged by the person is an error relating to the
                    underlying tax liability, rather than an error relating
                    to the debit card account such as a computational error
                    or numerical transposition in the debit card transaction
                    or an issue as to whether the person authorized payment
                    by use of the debit card,
                        ``(D) the term `creditor' under section 103(f) of
                    the Truth in Lending Act (15 U.S.C. 1602(f)) shall not
                    include the Secretary with respect to credit card
                    transactions in payment of internal revenue taxes (or
                    payment for internal revenue stamps), and
                        ``(E) notwithstanding any other provision of law to
                    the contrary, in the case of payment made by credit card
                    or debit card transaction of an amount owed to a person
                    as the result of the correction of an error under
                    section 161 of the Truth in Lending Act (15 U.S.C. 1666)
                    or section 908 of the Electronic Fund Transfer Act (15
                    U.S.C. 1693f), the Secretary is authorized to provide
                    such amount to such person as a credit to that person's
                    credit card or debit card account through the applicable
                    credit card or debit card system.

        ``(e) Confidentiality of Information.--
                ``(1) In general.--Except as otherwise authorized by this
            subsection, no person may use or disclose any information
            relating to credit or debit card transactions obtained pursuant
            to section 6103(k)(8) other than for purposes directly related
            to the processing of such transactions, or the billing or
            collection of amounts charged or debited pursuant thereto.
                ``(2) Exceptions.--
                        ``(A) Debit or credit card issuers or others acting
                    on behalf of such issuers may also use and disclose such
                    information for purposes directly related to servicing
                    an issuer's accounts.
                        ``(B) Debit or credit card issuers or others
                    directly involved in the processing of credit or debit
                    card transactions or the billing or collection of
                    amounts charged or debited thereto may also use and
                    disclose such information for purposes directly related
                    to--
                              ``(i) statistical risk and profitability
                          assessment;
                              ``(ii) transferring receivables, accounts, or
                          interest therein;
                              ``(iii) auditing the account information;

    [[Page 111 STAT. 998]]

                              ``(iv) complying with Federal, State, or local
                          law; and
                              ``(v) properly authorized civil, criminal, or
                          regulatory investigation by Federal, State, or
                          local authorities.
                ``(3) Procedures.--Use and disclosure of information under
            this paragraph shall be made only to the extent authorized by
            written procedures promulgated by the Secretary.
                ``(4) Cross reference.--
                      ``For provision providing for civil damages for
                    violation of paragraph (1), see section 7431.''.

        (b) Clerical Amendment.--The table of sections for subchapter B of
    chapter 64 is amended by striking the item relating to section 6311 and
    inserting the following:
                    ``Sec. 6311. Payment of tax by commercially acceptable
                                    means.''.

        (c) Amendments to Sections 6103 and 7431 With Respect to Disclosure
    Authorization.--
                (1) Subsection (k) of section 6103 (relating to
            confidentiality and disclosure of returns and return
            information) is amended by adding at the end the following new
            paragraph:
                ``(8) Disclosure of information to administer section
            6311.--The Secretary may disclose returns or return information
            to financial institutions and others to the extent the Secretary
            deems necessary for the administration of section 6311.
            Disclosures of information for purposes other than to accept
            payments by checks or money orders shall be made only to the
            extent authorized by written procedures promulgated by the
            Secretary.''.
                (2) Section 7431 (relating to civil damages for unauthorized
            disclosure of returns and return information) is amended by
            adding at the end the following new subsection:

        ``(g) Special Rule for Information Obtained Under Section
    6103(k)(8).--For purposes of this section, any reference to section 6103
    shall be treated as including a reference to section 6311(e).''.
                (3) Section 6103(p)(3)(A) is amended by striking ``or (6)''
            and inserting ``(6), or (8)''.

    <<NOTE: 26 USC 6103 note.>>     (d) Effective Date.--The amendments made
    by this section shall take effect on the day 9 months after the date of
    the enactment of this Act.

             Subtitle B--Provisions Relating to Businesses Generally

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

        (a) Look-Back Method Not To Apply in Certain Cases.--Subsection (b)
    of section 460 (relating to percentage of completion method) is amended
    by adding at the end the following new paragraph:
                ``(6) Election to have look-back method not apply in de
            minimis cases.--
                        ``(A) Amounts taken into account after completion of
                    contract.--Paragraph (1)(B) shall not apply with respect
                    to any taxable year (beginning after the taxable year in
                    which the contract is completed) if--

    [[Page 111 STAT. 999]]

                              ``(i) the cumulative taxable income (or loss)
                          under the contract as of the close of such taxable
                          year, is within
                              ``(ii) 10 percent of the cumulative look-back
                          taxable income (or loss) under the contract as of
                          the close of the most recent taxable year to which
                          paragraph (1)(B) applied (or would have applied
                          but for subparagraph (B)).
                        ``(B) De minimis discrepancies.--Paragraph (1)(B)
                    shall not apply in any case to which it would otherwise
                    apply if--
                              ``(i) the cumulative taxable income (or loss)
                          under the contract as of the close of each prior
                          contract year, is within
                              ``(ii) 10 percent of the cumulative look-back
                          income (or loss) under the contract as of the
                          close of such prior contract year.
                        ``(C) Definitions.--For purposes of this paragraph--
                              ``(i) Contract year.--The term `contract year'
                          means any taxable year for which income is taken
                          into account under the contract.
                              ``(ii) Look-back income or loss.--The look-
                          back income (or loss) is the amount which would be
                          the taxable income (or loss) under the contract if
                          the allocation method set forth in paragraph
                          (2)(A) were used in determining taxable income.
                              ``(iii) Discounting not applicable.--The
                          amounts taken into account after the completion of
                          the contract shall be determined without regard to
                          any discounting under the 2nd sentence of
                          paragraph (2).
                        ``(D) Contracts to which paragraph applies.--This
                    paragraph shall only apply if the taxpayer makes an
                    election under this subparagraph. Unless revoked with
                    the consent of the Secretary, such an election shall
                    apply to all long-term contracts completed during the
                    taxable year for which election is made or during any
                    subsequent taxable year.''.

        (b) Modification of Interest Rate.--
                (1) In general.--Subparagraph (C) of section 460(b)(2) is
            amended by striking ``the overpayment rate established by
            section 6621'' and inserting ``the adjusted overpayment rate (as
            defined in paragraph (7))''.
                (2) Adjusted overpayment rate.--Subsection (b) of section
            460 is amended by adding at the end the following new paragraph:
                ``(7) Adjusted overpayment rate.--
                        ``(A) In general.--The adjusted overpayment rate for
                    any interest accrual period is the overpayment rate in
                    effect under section 6621 for the calendar quarter in
                    which such interest accrual period begins.
                        ``(B) Interest accrual period.--For purposes of
                    subparagraph (A), the term `interest accrual period'
                    means the period--
                              ``(i) beginning on the day after the return
                          due date for any taxable year of the taxpayer, and
                              ``(ii) ending on the return due date for the
                          following taxable year.

    [[Page 111 STAT. 1000]]

                    For purposes of the preceding sentence, the term `return
                    due date' means the date prescribed for filing the
                    return of the tax imposed by this chapter (determined
                    without regard to extensions).''.

    <<NOTE: 26 USC 460 note.>>     (c) Effective Date.--
                (1) In general.--Except as provided in paragraph (2), the
            amendments made by this section shall apply to contracts
            completed in taxable years ending after the date of the
            enactment of this Act.
                (2) Subsection (b).--The amendments made by subsection (b)
            shall apply for purposes of section 167(g) of the Internal
            Revenue Code of 1986 to property placed in service after
            September 13, 1995.

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

        (a) In General.--Clause (i) of section 56(g)(4)(B) (relating to
    inclusion of items included for purposes of computing earnings and
    profits) is amended by adding at the end the following new sentence:
    ``In the case of any insurance company taxable under section 831(b),
    this clause shall not apply to any amount not described in section
    834(b).''.
    <<NOTE: 26 USC 56 note.>>     (b) Effective Date.--The amendment made by
    subsection (a) shall apply to taxable years beginning after December 31,
    1997.

    SEC. 1213. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR SHORT-TERM
                LEASES.

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

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

        ``(a) In General.--Gross income of a lessee does not include any
    amount received in cash (or treated as a rent reduction) by a lessee
    from a lessor--
                ``(1) under a short-term lease of retail space, and
                ``(2) for the purpose of such lessee's constructing or
            improving qualified long-term real property for use in such
            lessee's trade or business at such retail space,

    but only to the extent that such amount does not exceed the amount
    expended by the lessee for such construction or improvement.
        ``(b) Consistent Treatment by Lessor.--Qualified long-term real
    property constructed or improved in connection with any amount excluded
    from a lessee's income by reason of subsection (a) shall be treated as
    nonresidential real property of the lessor (including for purposes of
    section 168(i)(8)(B)).
        ``(c) Definitions.--For purposes of this section--
                ``(1) Qualified long-term real property.--The term
            `qualified long-term real property' means nonresidential real
            property which is part of, or otherwise present at, the retail
            space referred to in subsection (a) and which reverts to the
            lessor at the termination of the lease.
                ``(2) Short-term lease.--The term `short-term lease' means a
            lease (or other agreement for occupancy or use) of retail space
            for 15 years or less (as determined under the rules of section
            168(i)(3)).

    [[Page 111 STAT. 1001]]

                ``(3) Retail space.--The term `retail space' means real
            property leased, occupied, or otherwise used by a lessee in its
            trade or business of selling tangible personal property or
            services to the general public.

    <<NOTE: Regulations.>>     ``(d) Information Required To Be Furnished to
    Secretary.--Under regulations, the lessee and lessor described in
    subsection (a) shall, at such times and in such manner as may be
    provided in such regulations, furnish to the Secretary--
                ``(1) information concerning the amounts received (or
            treated as a rent reduction) and expended as described in
            subsection (a), and
                ``(2) any other information which the Secretary deems
            necessary to carry out the provisions of this section.''.

        (b) Treatment as Information Return.--Subparagraph (A) of section
    6724(d)(1)(A) is amended by striking ``or'' at the end of clause (vii),
    by adding ``or'' at the end of clause (viii), and by adding at the end
    the following new clause:
                              ``(ix) section 110(d) (relating to qualified
                          lessee construction allowances for short-term
                          leases),''.

        (c) Cross Reference.--Paragraph (8) of section 168(i) (relating to
    treatment of leasehold improvements) is amended by adding at the end the
    following new subparagraph:
                        ``(C) Cross reference.--
                      ``For treatment of qualified long-term real property
                    constructed or improved in connection with cash or rent
                    reduction from lessor to lessee, see section 110(b).''.

        (d) Clerical Amendment.--The table of sections for part III of
    subchapter B of chapter 1 is amended by inserting after the item
    relating to section 109 the following new item:
                    ``Sec. 110. Qualified lessee construction allowances for
                                    short-term leases.''.

    <<NOTE: 26 USC 110 note.>>     (e) Effective Date.--The amendments made
    by this section shall apply to leases entered into after the date of the
    enactment of this Act.

       Subtitle C--Simplification Relating to Electing Large Partnerships

                           PART I--GENERAL PROVISIONS

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

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

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

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

    [[Page 111 STAT. 1002]]

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

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

    ``SEC. 772. SIMPLIFIED FLOW-THROUGH.

        ``(a) General Rule.--In determining the income tax of a partner of
    an electing large partnership, such partner shall take into account
    separately such partner's distributive share of the partnership's--
                ``(1) taxable income or loss from passive loss limitation
            activities,
                ``(2) taxable income or loss from other activities,
                ``(3) net capital gain (or net capital loss)--
                        ``(A) to the extent allocable to passive loss
                    limitation activities, and
                        ``(B) to the extent allocable to other activities,
                ``(4) tax-exempt interest,
                ``(5) applicable net AMT adjustment separately computed
            for--
                        ``(A) passive loss limitation activities, and
                        ``(B) other activities,
                ``(6) general credits,
                ``(7) low-income housing credit determined under section 42,
                ``(8) rehabilitation credit determined under section 47,
                ``(9) foreign income taxes,
                ``(10) the credit allowable under section 29, and
                ``(11) other items to the extent that the Secretary
            determines that the separate treatment of such items is
            appropriate.

        ``(b) Separate Computations.--In determining the amounts required
    under subsection (a) to be separately taken into account by any partner,
    this section and section 773 shall be applied separately with respect to
    such partner by taking into account such partner's distributive share of
    the items of income, gain, loss, deduction, or credit of the
    partnership.
    <<NOTE: Applicability.>>     ``(c) Treatment at Partner Level.--
                ``(1) In general.--Except as provided in this subsection,
            rules similar to the rules of section 702(b) shall apply to any
            partner's distributive share of the amounts referred to in
            subsection (a).
                ``(2) Income or loss from passive loss limitation
            activities.--For purposes of this chapter, any partner's
            distributive share of any income or loss described in subsection
            (a)(1) shall be treated as an item of income or loss (as the
            case may be) from the conduct of a trade or business which is a
            single passive activity (as defined in section 469). A similar
            rule shall apply to a partner's distributive share of amounts
            referred to in paragraphs (3)(A) and (5)(A) of subsection (a).
                ``(3) Income or loss from other activities.--
                        ``(A) In general.--For purposes of this chapter, any
                    partner's distributive share of any income or loss
                    described in subsection (a)(2) shall be treated as an
                    item of income or expense (as the case may be) with
                    respect to property held for investment.

    [[Page 111 STAT. 1003]]

                        ``(B) Deductions for loss not subject to section
                    67.--The deduction under section 212 for any loss
                    described in subparagraph (A) shall not be treated as a
                    miscellaneous itemized deduction for purposes of section
                    67.
                ``(4) Treatment of net capital gain or loss.--For purposes
            of this chapter, any partner's distributive share of any gain or
            loss described in subsection (a)(3) shall be treated as a long-
            term capital gain or loss, as the case may be.
                ``(5) Minimum tax treatment.--In determining the alternative
            minimum taxable income of any partner, such partner's
            distributive share of any applicable net AMT adjustment shall be
            taken into account in lieu of making the separate adjustments
            provided in sections 56, 57, and 58 with respect to the items of
            the partnership. Except as provided in regulations, the
            applicable net AMT adjustment shall be treated, for purposes of
            section 53, as an adjustment or item of tax preference not
            specified in section 53(d)(1)(B)(ii).
                ``(6) General credits.--A partner's distributive share of
            the amount referred to in paragraph (6) of subsection (a) shall
            be taken into account as a current year business credit.

        ``(d) Operating Rules.--For purposes of this section--
                ``(1) Passive loss limitation activity.--The term `passive
            loss limitation activity' means--
                        ``(A) any activity which involves the conduct of a
                    trade or business, and
                        ``(B) any rental activity.
            For purposes of the preceding sentence, the term `trade or
            business' includes any activity treated as a trade or business
            under paragraph (5) or (6) of section 469(c).
                ``(2) Tax-exempt interest.--The term `tax-exempt interest'
            means interest excludable from gross income under section 103.
                ``(3) Applicable net amt adjustment.--
                        ``(A) In general.--The applicable net AMT adjustment
                    is--
                              ``(i) with respect to taxpayers other than
                          corporations, the net adjustment determined by
                          using the adjustments applicable to individuals,
                          and
                              ``(ii) with respect to corporations, the net
                          adjustment determined by using the adjustments
                          applicable to corporations.
                        ``(B) Net adjustment.--The term `net adjustment'
                    means the net adjustment in the items attributable to
                    passive loss activities or other activities (as the case
                    may be) which would result if such items were determined
                    with the adjustments of sections 56, 57, and 58.
                ``(4) Treatment of certain separately stated items.--
                        ``(A) Exclusion for certain purposes.--In
                    determining the amounts referred to in paragraphs (1)
                    and (2) of subsection (a), any net capital gain or net
                    capital loss (as the case may be), and any item referred
                    to in subsection (a)(11), shall be excluded.
                        ``(B) Allocation rules.--The net capital gain shall
                    be treated--
                              ``(i) as allocable to passive loss limitation
                          activities to the extent the net capital gain does
                          not exceed the net capital gain determined by only
                          taking into

    [[Page 111 STAT. 1004]]

                          account gains and losses from sales and exchanges
                          of property used in connection with such
                          activities, and
                              ``(ii) as allocable to other activities to the
                          extent such gain exceeds the amount allocated
                          under clause (i).
                    <<NOTE: Applicability.>> A similar rule shall apply for
                    purposes of allocating any net capital loss.
                        ``(C) Net capital loss.--The term `net capital loss'
                    means the excess of the losses from sales or exchanges
                    of capital assets over the gains from sales or exchange
                    of capital assets.
                ``(5) General credits.--The term `general credits' means any
            credit other than the low-income housing credit, the
            rehabilitation credit, the foreign tax credit, and the credit
            allowable under section 29.
                ``(6) Foreign income taxes.--The term `foreign income taxes'
            means taxes described in section 901 which are paid or accrued
            to foreign countries and to possessions of the United States.

        ``(e) Special Rule for Unrelated Business Tax.--In the case of a
    partner which is an organization subject to tax under section 511, such
    partner's distributive share of any items shall be taken into account
    separately to the extent necessary to comply with the provisions of
    section 512(c)(1).
        ``(f) Special Rules for Applying Passive Loss Limitations.--If any
    person holds an interest in an electing large partnership other than as
    a limited partner--
                ``(1) paragraph (2) of subsection (c) shall not apply to
            such partner, and
                ``(2) such partner's distributive share of the partnership
            items allocable to passive loss limitation activities shall be
            taken into account separately to the extent necessary to comply
            with the provisions of section 469.

    The preceding sentence shall not apply to any items allocable to an
    interest held as a limited partner.

    ``SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.

        ``(a) General Rule.--
                ``(1) Taxable income.--The taxable income of an electing
            large partnership shall be computed in the same manner as in the
            case of an individual except that--
                        ``(A) the items described in section 772(a) shall be
                    separately stated, and
                    <<NOTE: Applicability.>>     ``(B) the modifications of
                    subsection (b) shall apply.
                ``(2) Elections.--All elections affecting the computation of
            the taxable income of an electing large partnership or the
            computation of any credit of an electing large partnership shall
            be made by the partnership; except that the election under
            section 901, and any election under section 108, shall be made
            by each partner separately.
                ``(3) Limitations, etc.--
                        ``(A) In general.--Except as provided in
                    subparagraph (B), all limitations and other provisions
                    affecting the computation of the taxable income of an
                    electing large partnership or the computation of any
                    credit of an electing large

    [[Page 111 STAT. 1005]]

                    partnership shall be applied at the partnership level
                    (and not at the partner level).
                        ``(B) Certain limitations applied at partner
                    level.--The following provisions shall be applied at the
                    partner level (and not at the partnership level):
                              ``(i) Section 68 (relating to overall
                          limitation on itemized deductions).
                              ``(ii) Sections 49 and 465 (relating to at
                          risk limitations).
                              ``(iii) Section 469 (relating to limitation on
                          passive activity losses and credits).
                              ``(iv) Any other provision specified in
                          regulations.
            <<NOTE: Applicability.>>     ``(4) Coordination with other
            provisions.--Paragraphs (2) and (3) shall apply notwithstanding
            any other provision of this chapter other than this part.

        ``(b) Modifications to Determination of Taxable Income.--In
    determining the taxable income of an electing large partnership--
                ``(1) Certain deductions not allowed.--The following
            deductions shall not be allowed:
                        ``(A) The deduction for personal exemptions provided
                    in section 151.
                        ``(B) The net operating loss deduction provided in
                    section 172.
                        ``(C) The additional itemized deductions for
                    individuals provided in part VII of subchapter B (other
                    than section 212 thereof).
                ``(2) Charitable deductions.--In determining the amount
            allowable under section 170, the limitation of section 170(b)(2)
            shall apply.
                ``(3) Coordination with section 67.--In lieu of applying
            section 67, 70 percent of the amount of the miscellaneous
            itemized deductions shall be disallowed.

        ``(c) Special Rules for Income From Discharge of Indebtedness.--If
    an electing large partnership has income from the discharge of any
    indebtedness--
                ``(1) such income shall be excluded in determining the
            amounts referred to in section 772(a), and
                ``(2) in determining the income tax of any partner of such
            partnership--
                        ``(A) such income shall be treated as an item
                    required to be separately taken into account under
                    section 772(a), and
                        ``(B) the provisions of section 108 shall be applied
                    without regard to this part.

    ``SEC. 774. OTHER MODIFICATIONS.

        ``(a) Treatment of Certain Optional Adjustments, Etc.--In the case
    of an electing large partnership--
                ``(1) computations under section 773 shall be made without
            regard to any adjustment under section 743(b) or 108(b), but
                ``(2) a partner's distributive share of any amount referred
            to in section 772(a) shall be appropriately adjusted to take
            into account any adjustment under section 743(b) or 108(b) with
            respect to such partner.

        ``(b) Credit Recapture Determined at Partnership Level.--
                ``(1) In general.--In the case of an electing large
            partnership--

    [[Page 111 STAT. 1006]]

                        ``(A) any credit recapture shall be taken into
                    account by the partnership, and
                        ``(B) the amount of such recapture shall be
                    determined as if the credit with respect to which the
                    recapture is made had been fully utilized to reduce tax.
                ``(2) Method of taking recapture into account.--An electing
            large partnership shall take into account a credit recapture by
            reducing the amount of the appropriate current year credit to
            the extent thereof, and if such recapture exceeds the amount of
            such current year credit, the partnership shall be liable to pay
            such excess.
                ``(3) Dispositions not to trigger recapture.--No credit
            recapture shall be required by reason of any transfer of an
            interest in an electing large partnership.
                ``(4) Credit recapture.--For purposes of this subsection,
            the term `credit recapture' means any increase in tax under
            section 42(j) or 50(a).

        ``(c) Partnership Not Terminated by Reason of Change in Ownership.--
    Subparagraph (B) of section 708(b)(1) shall not apply to an electing
    large partnership.
        ``(d) Partnership Entitled to Certain Credits.--The following shall
    be allowed to an electing large partnership and shall not be taken into
    account by the partners of such partnership:
                ``(1) The credit provided by section 34.
                ``(2) Any credit or refund under section 852(b)(3)(D).

        ``(e) Treatment of REMIC Residuals.--For purposes of applying
    section 860E(e)(6) to any electing large partnership--
                ``(1) all interests in such partnership shall be treated as
            held by disqualified organizations,
                ``(2) in lieu of applying subparagraph (C) of section
            860E(e)(6), the amount subject to tax under section 860E(e)(6)
            shall be excluded from the gross income of such partnership, and
                ``(3) subparagraph (D) of section 860E(e)(6) shall not
            apply.

        ``(f) Special Rules for Applying Certain Installment Sale Rules.--In
    the case of an electing large partnership--
                ``(1) the provisions of sections 453(l)(3) and 453A shall be
            applied at the partnership level, and
                ``(2) in determining the amount of interest payable under
            such sections, such partnership shall be treated as subject to
            tax under this chapter at the highest rate of tax in effect
            under section 1 or 11.

    ``SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.

        ``(a) General Rule.--For purposes of this part--
                ``(1) In general.--The term `electing large partnership'
            means, with respect to any partnership taxable year, any
            partnership if--
                        ``(A) the number of persons who were partners in
                    such partnership in the preceding partnership taxable
                    year equaled or exceeded 100, and
                        ``(B) such partnership elects the application of
                    this part.
            To the extent provided in regulations, a partnership shall cease
            to be treated as an electing large partnership for any
            partnership taxable year if in such taxable year fewer than 100
            persons were partners in such partnership.

    [[Page 111 STAT. 1007]]

            <<NOTE: Applicability.>>     ``(2) Election.--The election under
            this subsection shall apply to the taxable year for which made
            and all subsequent taxable years unless revoked with the consent
            of the Secretary.

        ``(b) Special Rules for Certain Service Partnerships.--
                ``(1) Certain partners not counted.--For purposes of this
            section, the term `partner' does not include any individual
            performing substantial services in connection with the
            activities of the partnership and holding an interest in such
            partnership, or an individual who formerly performed substantial
            services in connection with such activities and who held an
            interest in such partnership at the time the individual
            performed such services.
                ``(2) Exclusion.--For purposes of this part, an election
            under subsection (a) shall not be effective with respect to any
            partnership if substantially all the partners of such
            partnership--
                        ``(A) are individuals performing substantial
                    services in connection with the activities of such
                    partnership or are personal service corporations (as
                    defined in section 269A(b)) the owner-employees (as
                    defined in section 269A(b)) of which perform such
                    substantial services,
                        ``(B) are retired partners who had performed such
                    substantial services, or
                        ``(C) are spouses of partners who are performing (or
                    had previously performed) such substantial services.
                ``(3) Special rule for lower tier partnerships.--For
            purposes of this subsection, the activities of a partnership
            shall include the activities of any other partnership in which
            the partnership owns directly an interest in the capital and
            profits of at least 80 percent.

        ``(c) Exclusion of Commodity Pools.--For purposes of this part, an
    election under subsection (a) shall not be effective with respect to any
    partnership the principal activity of which is the buying and selling of
    commodities (not described in section 1221(1)), or options, futures, or
    forwards with respect to such commodities.
        ``(d) Secretary May Rely on Treatment on Return.--If, on the
    partnership return of any partnership, such partnership is treated as an
    electing large partnership, such treatment shall be binding on such
    partnership and all partners of such partnership but not on the
    Secretary.

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

        ``(a) Computation of Percentage Depletion.--In the case of an
    electing large partnership, except as provided in subsection (b)--
                ``(1) the allowance for depletion under section 611 with
            respect to any partnership oil or gas property shall be computed
            at the partnership level without regard to any provision of
            section 613A requiring such allowance to be computed separately
            by each partner,
                ``(2) such allowance shall be determined without regard to
            the provisions of section 613A(c) limiting the amount of
            production for which percentage depletion is allowable and
            without regard to paragraph (1) of section 613A(d), and
                ``(3) paragraph (3) of section 705(a) shall not apply.

        ``(b) Treatment of Certain Partners.--

    [[Page 111 STAT. 1008]]

                ``(1) In general.--In the case of a disqualified person, the
            treatment under this chapter of such person's distributive share
            of any item of income, gain, loss, deduction, or credit
            attributable to any partnership oil or gas property shall be
            determined without regard to this part. Such person's
            distributive share of any such items shall be excluded for
            purposes of making determinations under sections 772 and 773.
                ``(2) Disqualified person.--For purposes of paragraph (1),
            the term `disqualified person' means, with respect to any
            partnership taxable year--
                        ``(A) any person referred to in paragraph (2) or (4)
                    of section 613A(d) for such person's taxable year in
                    which such partnership taxable year ends, and
                        ``(B) any other person if such person's average
                    daily production of domestic crude oil and natural gas
                    for such person's taxable year in which such partnership
                    taxable year ends exceeds 500 barrels.
                ``(3) Average daily production.--For purposes of paragraph
            (2), a person's average daily production of domestic crude oil
            and natural gas for any taxable year shall be computed as
            provided in section 613A(c)(2)--
                        ``(A) by taking into account all production of
                    domestic crude oil and natural gas (including such
                    person's proportionate share of any production of a
                    partnership),
                        ``(B) by treating 6,000 cubic feet of natural gas as
                    a barrel of crude oil, and
                        ``(C) by treating as 1 person all persons treated as
                    1 taxpayer under section 613A(c)(8) or among whom
                    allocations are required under such section.

    ``SEC. 777. REGULATIONS.

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

    <<NOTE: 26 USC 771 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to partnership taxable years beginning after
    December 31, 1997.

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

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

            ``Subchapter D--Treatment of electing large partnerships

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

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

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

    [[Page 111 STAT. 1009]]

    ``SEC. 6240. APPLICATION OF SUBCHAPTER.

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

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

        ``(a) General Rule.--A partner of any electing large partnership
    shall, on the partner's return, treat each partnership item attributable
    to such partnership in a manner which is consistent with the treatment
    of such partnership item on the partnership return.
        ``(b) Underpayment Due to Inconsistent Treatment Assessed as Math
    Error.--Any underpayment of tax by a partner by reason of failing to
    comply with the requirements of subsection (a) shall be assessed and
    collected in the same manner as if such underpayment were on account of
    a mathematical or clerical error appearing on the partner's return.
    Paragraph (2) of section 6213(b) shall not apply to any assessment of an
    underpayment referred to in the preceding sentence.
        ``(c) Adjustments Not To Affect Prior Year of Partners.--
                ``(1) In general.--Except as provided in paragraph (2),
            subsections (a) and (b) shall apply without regard to any
            adjustment to the partnership item under part II.
                ``(2) Certain changes in distributive share taken into
            account by partner.--
                        ``(A) In general.--To the extent that any adjustment
                    under part II involves a change under section 704 in a
                    partner's distributive share of the amount of any
                    partnership item shown on the partnership return, such
                    adjustment shall be taken into account in applying this
                    title to such partner for the partner's taxable year for
                    which such item was required to be taken into account.
                        ``(B) Coordination with deficiency procedures.--
                              ``(i) In general.--Subchapter B shall not
                          apply to the assessment or collection of any
                          underpayment of tax attributable to an adjustment
                          referred to in subparagraph (A).
                              ``(ii) Adjustment not precluded.--
                          Notwithstanding any other law or rule of law,
                          nothing in subchapter B (or in any proceeding
                          under subchapter B) shall preclude the assessment
                          or collection of any underpayment of tax (or the
                          allowance of any credit or refund

    [[Page 111 STAT. 1010]]

                          of any overpayment of tax) attributable to an
                          adjustment referred to in subparagraph (A) and
                          such assessment or collection or allowance (or any
                          notice thereof) shall not preclude any notice,
                          proceeding, or determination under subchapter B.
                        ``(C) Period of limitations.--The period for--
                              ``(i) assessing any underpayment of tax, or
                              ``(ii) filing a claim for credit or refund of
                          any overpayment of tax,
                    attributable to an adjustment referred to in
                    subparagraph (A) shall not expire before the close of
                    the period prescribed by section 6248 for making
                    adjustments with respect to the partnership taxable year
                    involved.
                        ``(D) Tiered structures.--If the partner referred to
                    in subparagraph (A) is another partnership or an S
                    corporation, the rules of this paragraph shall also
                    apply to persons holding interests in such partnership
                    or S corporation (as the case may be); except that, if
                    such partner is an electing large partnership, the
                    adjustment referred to in subparagraph (A) shall be
                    taken into account in the manner provided by section
                    6242.

        ``(d) Addition to Tax for Failure to Comply With Section.--
                      ``For addition to tax in case of partner's disregard
                    of requirements of this section, see part II of
                    subchapter A of chapter 68.

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

        ``(a) Adjustments Flow Through To Partners for Year in Which
    Adjustment Takes Effect.--
                ``(1) In general.--If any partnership adjustment with
            respect to any partnership item takes effect (within the meaning
            of subsection (d)(2)) during any partnership taxable year and if
            an election under paragraph (2) does not apply to such
            adjustment, such adjustment shall be taken into account in
            determining the amount of such item for the partnership taxable
            year in which such adjustment takes effect. In applying this
            title to any person who is (directly or indirectly) a partner in
            such partnership during such partnership taxable year, such
            adjustment shall be treated as an item actually arising during
            such taxable year.
                ``(2) Partnership liable in certain cases.--If--
                        ``(A) a partnership elects under this paragraph to
                    not take an adjustment into account under paragraph (1),
                        ``(B) a partnership does not make such an election
                    but in filing its return for any partnership taxable
                    year fails to take fully into account any partnership
                    adjustment as required under paragraph (1), or
                        ``(C) any partnership adjustment involves a
                    reduction in a credit which exceeds the amount of such
                    credit determined for the partnership taxable year in
                    which the adjustment takes effect,
            the partnership shall pay to the Secretary an amount determined
            by applying the rules of subsection (b)(4) to the adjustments
            not so taken into account and any excess referred to in
            subparagraph (C).
                ``(3) Offsetting adjustments taken into account.--If a
            partnership adjustment requires another adjustment in a

    [[Page 111 STAT. 1011]]

            taxable year after the adjusted year and before the partnership
            taxable year in which such partnership adjustment takes effect,
            such other adjustment shall be taken into account under this
            subsection for the partnership taxable year in which such
            partnership adjustment takes effect.
                ``(4) Coordination with part ii.--Amounts taken into account
            under this subsection for any partnership taxable year shall
            continue to be treated as adjustments for the adjusted year for
            purposes of determining whether such amounts may be readjusted
            under part II.

        ``(b) Partnership Liable for Interest and Penalties.--
                ``(1) In general.--If a partnership adjustment takes effect
            during any partnership taxable year and such adjustment results
            in an imputed underpayment for the adjusted year, the
            partnership--
                        ``(A) shall pay to the Secretary interest computed
                    under paragraph (2), and
                        ``(B) shall be liable for any penalty, addition to
                    tax, or additional amount as provided in paragraph (3).
                ``(2) Determination of amount of interest.--The interest
            computed under this paragraph with respect to any partnership
            adjustment is the interest which would be determined under
            chapter 67--
                        ``(A) on the imputed underpayment determined under
                    paragraph (4) with respect to such adjustment,
                        ``(B) for the period beginning on the day after the
                    return due date for the adjusted year and ending on the
                    return due date for the partnership taxable year in
                    which such adjustment takes effect (or, if earlier, in
                    the case of any adjustment to which subsection (a)(2)
                    applies, the date on which the payment under subsection
                    (a)(2) is made).
            Proper adjustments in the amount determined under the preceding
            sentence shall be made for adjustments required for partnership
            taxable years after the adjusted year and before the year in
            which the partnership adjustment takes effect by reason of such
            partnership adjustment.
                ``(3) Penalties.--A partnership shall be liable for any
            penalty, addition to tax, or additional amount for which it
            would have been liable if such partnership had been an
            individual subject to tax under chapter 1 for the adjusted year
            and the imputed underpayment determined under paragraph (4) were
            an actual underpayment (or understatement) for such year.
                ``(4) Imputed underpayment.--For purposes of this
            subsection, the imputed underpayment determined under this
            paragraph with respect to any partnership adjustment is the
            underpayment (if any) which would result--
                        ``(A) by netting all adjustments to items of income,
                    gain, loss, or deduction and by treating any net
                    increase in income as an underpayment equal to the
                    amount of such net increase multiplied by the highest
                    rate of tax in effect under section 1 or 11 for the
                    adjusted year, and
                        ``(B) by taking adjustments to credits into account
                    as increases or decreases (whichever is appropriate) in
                    the amount of tax.

    [[Page 111 STAT. 1012]]

            For purposes of the preceding sentence, any net decrease in a
            loss shall be treated as an increase in income and a similar
            rule shall apply to a net increase in a loss.

        ``(c) Administrative Provisions.--
                ``(1) In general.--Any payment required by subsection (a)(2)
            or (b)(1)(A)--
                        ``(A) shall be assessed and collected in the same
                    manner as if it were a tax imposed by subtitle C, and
                        ``(B) shall be paid on or before the return due date
                    for the partnership taxable year in which the
                    partnership adjustment takes effect.
                ``(2) Interest.--For purposes of determining interest, any
            payment required by subsection (a)(2) or (b)(1)(A) shall be
            treated as an underpayment of tax.
                ``(3) Penalties.--
                        ``(A) In general.--In the case of any failure by any
                    partnership to pay on the date prescribed therefor any
                    amount required by subsection (a)(2) or (b)(1)(A), there
                    is hereby imposed on such partnership a penalty of 10
                    percent of the underpayment. For purposes of the
                    preceding sentence, the term `underpayment' means the
                    excess of any payment required under this section over
                    the amount (if any) paid on or before the date
                    prescribed therefor.
                        ``(B) Accuracy-related and fraud penalties made
                    applicable.--For purposes of part II of subchapter A of
                    chapter 68, any payment required by subsection (a)(2)
                    shall be treated as an underpayment of tax.

        ``(d) Definitions and Special Rules.--For purposes of this section--
                ``(1) Partnership adjustment.--The term `partnership
            adjustment' means any adjustment in the amount of any
            partnership item of an electing large partnership.
                ``(2) When adjustment takes effect.--A partnership
            adjustment takes effect--
                        ``(A) in the case of an adjustment pursuant to the
                    decision of a court in a proceeding brought under part
                    II, when such decision becomes final,
                        ``(B) in the case of an adjustment pursuant to any
                    administrative adjustment request under section 6251,
                    when such adjustment is allowed by the Secretary, or
                        ``(C) in any other case, when such adjustment is
                    made.
                ``(3) Adjusted year.--The term `adjusted year' means the
            partnership taxable year to which the item being adjusted
            relates.
                ``(4) Return due date.--The term `return due date' means,
            with respect to any taxable year, the date prescribed for filing
            the partnership return for such taxable year (determined without
            regard to extensions).
                ``(5) Adjustments involving changes in character.--Under
            regulations, appropriate adjustments in the application of this
            section shall be made for purposes of taking into account
            partnership adjustments which involve a change in the character
            of any item of income, gain, loss, or deduction.

        ``(e) Payments Nondeductible.--No deduction shall be allowed under
    subtitle A for any payment required to be made by an electing large
    partnership under this section.

    [[Page 111 STAT. 1013]]

                    ``PART II--PARTNERSHIP LEVEL ADJUSTMENTS

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

                      ``Subpart A--Adjustments by Secretary

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

    ``SEC. 6245. SECRETARIAL AUTHORITY.

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

    ``SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUSTMENTS.

        ``(a) General Rule.--Except as otherwise provided in this chapter,
    no adjustment to any partnership item may be made (and no levy or
    proceeding in any court for the collection of any amount resulting from
    such adjustment may be made, begun or prosecuted) before--
                ``(1) the close of the 90th day after the day on which a
            notice of a partnership adjustment was mailed to the
            partnership, and
                ``(2) if a petition is filed under section 6247 with respect
            to such notice, the decision of the court has become final.

        ``(b) Premature Action May Be Enjoined.--Notwithstanding section
    7421(a), any action which violates subsection (a) may be

    [[Page 111 STAT. 1014]]

    enjoined in the proper court, including the Tax Court. The Tax Court
    shall have no jurisdiction to enjoin any action under this subsection
    unless a timely petition has been filed under section 6247 and then only
    in respect of the adjustments that are the subject of such petition.
        ``(c) Exceptions to Restrictions on Adjustments.--
                ``(1) Adjustments arising out of math or clerical errors.--
                    <<NOTE: Applicability.>>     ``(A) In general.--If the
                    partnership is notified that, on account of a
                    mathematical or clerical error appearing on the
                    partnership return, an adjustment to a partnership item
                    is required, rules similar to the rules of paragraphs
                    (1) and (2) of section 6213(b) shall apply to such
                    adjustment.
                        ``(B) Special rule.--If an electing large
                    partnership is a partner in another electing large
                    partnership, any adjustment on account of such
                    partnership's failure to comply with the requirements of
                    section 6241(a) with respect to its interest in such
                    other partnership shall be treated as an adjustment
                    referred to in subparagraph (A), except that paragraph
                    (2) of section 6213(b) shall not apply to such
                    adjustment.
                ``(2) Partnership may waive restrictions.--The partnership
            shall at any time (whether or not a notice of partnership
            adjustment has been issued) have the right, by a signed notice
            in writing filed with the Secretary, to waive the restrictions
            provided in subsection (a) on the making of any partnership
            adjustment.

        ``(d) Limit Where No Proceeding Begun.--If no proceeding under
    section 6247 is begun with respect to any notice of a partnership
    adjustment during the 90-day period described in subsection (a), the
    amount for which the partnership is liable under section 6242 (and any
    increase in any partner's liability for tax under chapter 1 by reason of
    any adjustment under section 6242(a)) shall not exceed the amount
    determined in accordance with such notice.

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

        ``(a) General Rule.--Within 90 days after the date on which a notice
    of a partnership adjustment is mailed to the partnership with respect to
    any partnership taxable year, the partnership may file a petition for a
    readjustment of the partnership items for such taxable year with--
                ``(1) the Tax Court,
                ``(2) the district court of the United States for the
            district in which the partnership's principal place of business
            is located, or
                ``(3) the Claims Court.

        ``(b) Jurisdictional Requirement for Bringing Action in District
    Court or Claims Court.--
                ``(1) In general.--A readjustment petition under this
            section may be filed in a district court of the United States or
            the Claims Court only if the partnership filing the petition
            deposits with the Secretary, on or before the date the petition
            is filed, the amount for which the partnership would be liable
            under section 6242(b) (as of the date of the filing of the
            petition) if the partnership items were adjusted as provided by
            the

    [[Page 111 STAT. 1015]]

            notice of partnership adjustment. The court may by order provide
            that the jurisdictional requirements of this paragraph are
            satisfied where there has been a good faith attempt to satisfy
            such requirement and any shortfall of the amount required to be
            deposited is timely corrected.
                ``(2) Interest payable.--Any amount deposited under
            paragraph (1), while deposited, shall not be treated as a
            payment of tax for purposes of this title (other than chapter
            67).

        ``(c) Scope of Judicial Review.--A court with which a petition is
    filed in accordance with this section shall have jurisdiction to
    determine all partnership items of the partnership for the partnership
    taxable year to which the notice of partnership adjustment relates and
    the proper allocation of such items among the partners (and the
    applicability of any penalty, addition to tax, or additional amount for
    which the partnership may be liable under section 6242(b)).
        ``(d) Determination of Court Reviewable.--Any determination by a
    court under this section shall have the force and effect of a decision
    of the Tax Court or a final judgment or decree of the district court or
    the Claims Court, as the case may be, and shall be reviewable as such.
    The date of any such determination shall be treated as being the date of
    the court's order entering the decision.
        ``(e) Effect of Decision Dismissing Action.--If an action brought
    under this section is dismissed other than by reason of a rescission
    under section 6245(b)(3), the decision of the court dismissing the
    action shall be considered as its decision that the notice of
    partnership adjustment is correct, and an appropriate order shall be
    entered in the records of the court.

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

        ``(a) General Rule.--Except as otherwise provided in this section,
    no adjustment under this subpart to any partnership item for any
    partnership taxable year may be made after the date which is 3 years
    after the later of--
                ``(1) the date on which the partnership return for such
            taxable year was filed, or
                ``(2) the last day for filing such return for such year
            (determined without regard to extensions).

        ``(b) Extension by Agreement.--The period described in subsection
    (a) (including an extension period under this subsection) may be
    extended by an agreement entered into by the Secretary and the
    partnership before the expiration of such period.
        ``(c) Special Rule in Case of Fraud, Etc.--
                ``(1) False return.--In the case of a false or fraudulent
            partnership return with intent to evade tax, the adjustment may
            be made at any time.
                ``(2) Substantial omission of income.--If any partnership
            omits from gross income an amount properly includible therein
            which is in excess of 25 percent of the amount of gross income
            stated in its return, subsection (a) shall be applied by
            substituting `6 years' for `3 years'.
                ``(3) No return.--In the case of a failure by a partnership
            to file a return for any taxable year, the adjustment may be
            made at any time.
                ``(4) Return filed by secretary.--For purposes of this
            section, a return executed by the Secretary under subsection

    [[Page 111 STAT. 1016]]

            (b) of section 6020 on behalf of the partnership shall not be
            treated as a return of the partnership.

        ``(d) Suspension When Secretary Mails Notice of Adjustment.--If
    notice of a partnership adjustment with respect to any taxable year is
    mailed to the partnership, the running of the period specified in
    subsection (a) (as modified by the other provisions of this section)
    shall be suspended--
                ``(1) for the period during which an action may be brought
            under section 6247 (and, if a petition is filed under section
            6247 with respect to such notice, until the decision of the
            court becomes final), and
                ``(2) for 1 year thereafter.

               ``Subpart B--Claims for Adjustments by Partnership

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

    ``SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.

        ``(a) General Rule.--A partnership may file a request for an
    administrative adjustment of partnership items for any partnership
    taxable year at any time which is--
                ``(1) within 3 years after the later of--
                        ``(A) the date on which the partnership return for
                    such year is filed, or
                        ``(B) the last day for filing the partnership return
                    for such year (determined without regard to extensions),
                    and
                ``(2) before the mailing to the partnership of a notice of a
            partnership adjustment with respect to such taxable year.

        ``(b) Secretarial Action.--If a partnership files an administrative
    adjustment request under subsection (a), the Secretary may allow any
    part of the requested adjustments.
        ``(c) Special Rule in Case of Extension Under Section 6248.--If the
    period described in section 6248(a) is extended pursuant to an agreement
    under section 6248(b), the period prescribed by subsection (a)(1) shall
    not expire before the date 6 months after the expiration of the
    extension under section 6248(b).

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

        ``(a) In General.--If any part of an administrative adjustment
    request filed under section 6251 is not allowed by the Secretary, the
    partnership may file a petition for an adjustment with respect to the
    partnership items to which such part of the request relates with--
                ``(1) the Tax Court,
                ``(2) the district court of the United States for the
            district in which the principal place of business of the
            partnership is located, or
                ``(3) the Claims Court.

        ``(b) Period for Filing Petition.--A petition may be filed under
    subsection (a) with respect to partnership items for a partnership
    taxable year only--
                ``(1) after the expiration of 6 months from the date of
            filing of the request under section 6251, and

    [[Page 111 STAT. 1017]]

                ``(2) before the date which is 2 years after the date of
            such request.

    The 2-year period set forth in paragraph (2) shall be extended for such
    period as may be agreed upon in writing by the partnership and the
    Secretary.
        ``(c) Coordination With Subpart A.--
                ``(1) Notice of partnership adjustment before filing of
            petition.--No petition may be filed under this section after the
            Secretary mails to the partnership a notice of a partnership
            adjustment for the partnership taxable year to which the request
            under section 6251 relates.
                ``(2) Notice of partnership adjustment after filing but
            before hearing of petition.--If the Secretary mails to the
            partnership a notice of a partnership adjustment for the
            partnership taxable year to which the request under section 6251
            relates after the filing of a petition under this subsection but
            before the hearing of such petition, such petition shall be
            treated as an action brought under section 6247 with respect to
            such notice, except that subsection (b) of section 6247 shall
            not apply.
                ``(3) Notice must be before expiration of statute of
            limitations.--A notice of a partnership adjustment for the
            partnership taxable year shall be taken into account under
            paragraphs (1) and (2) only if such notice is mailed before the
            expiration of the period prescribed by section 6248 for making
            adjustments to partnership items for such taxable year.

        ``(d) Scope of Judicial Review.--Except in the case described in
    paragraph (2) of subsection (c), a court with which a petition is filed
    in accordance with this section shall have jurisdiction to determine
    only those partnership items to which the part of the request under
    section 6251 not allowed by the Secretary relates and those items with
    respect to which the Secretary asserts adjustments as offsets to the
    adjustments requested by the partnership.
        ``(e) Determination of Court Reviewable.--Any determination by a
    court under this section shall have the force and effect of a decision
    of the Tax Court or a final judgment or decree of the district court or
    the Claims Court, as the case may be, and shall be reviewable as such.
    The date of any such determination shall be treated as being the date of
    the court's order entering the decision.

                    ``PART III--DEFINITIONS AND SPECIAL RULES

                    ``Sec. 6255. Definitions and special rules.

    ``SEC. 6255. DEFINITIONS AND SPECIAL RULES.

        ``(a) Definitions.--For purposes of this subchapter--
                ``(1) Electing large partnership.--The term `electing large
            partnership' has the meaning given to such term by section 775.
                ``(2) Partnership item.--The term `partnership item' has the
            meaning given to such term by section 6231(a)(3).

        ``(b) Partners Bound by Actions of Partnership, Etc.--
                ``(1) Designation of partner.--Each electing large
            partnership shall designate (in the manner prescribed by the
            Secretary) a partner (or other person) who shall have the sole

    [[Page 111 STAT. 1018]]

            authority to act on behalf of such partnership under this
            subchapter. In any case in which such a designation is not in
            effect, the Secretary may select any partner as the partner with
            such authority.
                ``(2) Binding effect.--An electing large partnership and all
            partners of such partnership shall be bound--
                        ``(A) by actions taken under this subchapter by the
                    partnership, and
                        ``(B) by any decision in a proceeding brought under
                    this subchapter.

        ``(c) Partnerships Having Principal Place of Business Outside the
    United States.--For purposes of sections 6247 and 6252, a principal
    place of business located outside the United States shall be treated as
    located in the District of Columbia.
        ``(d) Treatment Where Partnership Ceases To Exist.--If a partnership
    ceases to exist before a partnership adjustment under this subchapter
    takes effect, such adjustment shall be taken into account by the former
    partners of such partnership under regulations prescribed by the
    Secretary.
        ``(e) Date Decision Becomes Final.--For purposes of this subchapter,
    the principles of section 7481(a) shall be applied in determining the
    date on which a decision of a district court or the Claims Court becomes
    final.
        ``(f) Partnerships in Cases Under Title 11 of the United States
    Code.--
                ``(1) Suspension of period of limitations on making
            adjustment, assessment, or collection.--The running of any
            period of limitations provided in this subchapter on making a
            partnership adjustment (or provided by section 6501 or 6502 on
            the assessment or collection of any amount required to be paid
            under section 6242) shall, in a case under title 11 of the
            United States Code, be suspended during the period during which
            the Secretary is prohibited by reason of such case from making
            the adjustment (or assessment or collection) and--
                        ``(A) for adjustment or assessment, 60 days
                    thereafter, and
                        ``(B) for collection, 6 months thereafter.
            <<NOTE: Applicability.>> A rule similar to the rule of section
            6213(f)(2) shall apply for purposes of section 6246.
                ``(2) Suspension of period of limitation for filing for
            judicial review.--The running of the period specified in section
            6247(a) or 6252(b) shall, in a case under title 11 of the United
            States Code, be suspended during the period during which the
            partnership is prohibited by reason of such case from filing a
            petition under section 6247 or 6252 and for 60 days thereafter.

        ``(g) Regulations.--The Secretary shall prescribe such regulations
    as may be necessary to carry out the provisions of this subchapter,
    including regulations--
                ``(1) to prevent abuse through manipulation of the
            provisions of this subchapter, and
                ``(2) providing that this subchapter shall not apply to any
            case described in section 6231(c)(1) (or the regulations
            prescribed thereunder) where the application of this subchapter
            to such a case would interfere with the effective and efficient
            enforcement of this title.

    [[Page 111 STAT. 1019]]

    <<NOTE: Applicability.>> In any case to which this subchapter does not
    apply by reason of paragraph (2), rules similar to the rules of sections
    6229(f) and 6255(f) shall apply.''.

        (b) Conforming Amendments.--
                (1) Subsection (a) of section 7421 is amended by inserting
            ``6246(b),'' after ``6213(a),''.
                (2) Subsection (c) of section 7459 is amended by striking
            ``or section 6228(a)'' and inserting ``, 6228(a), 6247, or
            6252''.
                (3) Subparagraph (E) of section 7482(b)(1) is amended by
            striking ``or 6228(a)'' and inserting ``, 6228(a), 6247, or
            6252''.
                (4)(A) The text of section 7485(b) is amended by striking
            ``or 6228(a)'' and inserting ``, 6228(a), 6247, or 6252''.
                (B) The subsection heading for section 7485(b) is amended to
            read as follows:

        ``(b) Bond in Case of Appeal of Certain Partnership-Related
    Decisions.--''.
        (c) Clerical Amendment.--The table of subchapters for chapter 63 is
    amended by adding at the end thereof the following new item:

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

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

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

    SEC. 1224. RETURNS REQUIRED ON MAGNETIC MEDIA.

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

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

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

    [[Page 111 STAT. 1020]]

    <<NOTE: 26 USC 6011 note.>> SEC. 1226. EFFECTIVE DATE.

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

          PART II--PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS

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

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

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

    <<NOTE: Notice.>>     ``(a) General Rule.--If--
                ``(1) a taxpayer files an oversheltered return for a taxable
            year,
                ``(2) the Secretary makes a determination with respect to
            the treatment of items (other than partnership items) of such
            taxpayer for such taxable year, and
                ``(3) the adjustments resulting from such determination do
            not give rise to a deficiency (as defined in section 6211) but
            would give rise to a deficiency if there were no net loss from
            partnership items,

    the Secretary is authorized to send a notice of adjustment reflecting
    such determination to the taxpayer by certified or registered mail.
        ``(b) Oversheltered Return.--For purposes of this section, the term
    `oversheltered return' means an income tax return which--
                ``(1) shows no taxable income for the taxable year, and
                ``(2) shows a net loss from partnership items.

        ``(c) Judicial Review in the Tax Court.--Within 90 days, or 150 days
    if the notice is addressed to a person outside the United States, after
    the day on which the notice of adjustment authorized in subsection (a)
    is mailed to the taxpayer, the taxpayer may file a petition with the Tax
    Court for redetermination of the adjustments. Upon the filing of such a
    petition, the Tax Court shall have jurisdiction to make a declaration
    with respect to all items (other than partnership items and affected
    items which require partner level determinations as described in section
    6230(a)(2)(A)(i)) for the taxable year to which the notice of adjustment
    relates, in accordance with the principles of section 6214(a). Any such
    declaration shall have the force and effect of a decision of the Tax
    Court and shall be reviewable as such.
        ``(d) Failure To File Petition.--
                ``(1) In general.--Except as provided in paragraph (2), if
            the taxpayer does not file a petition with the Tax Court within
            the time prescribed in subsection (c), the determination of the
            Secretary set forth in the notice of adjustment that was mailed
            to the taxpayer shall be deemed to be correct.
                ``(2) Exception.--Paragraph (1) shall not apply after the
            date that the taxpayer--
                        ``(A) files a petition with the Tax Court within the
                    time prescribed in subsection (c) with respect to a
                    subsequent notice of adjustment relating to the same
                    taxable year, or

    [[Page 111 STAT. 1021]]

                        ``(B) files a claim for refund of an overpayment of
                    tax under section 6511 for the taxable year involved.
            If a claim for refund is filed by the taxpayer, then solely for
            purposes of determining (for the taxable year involved) the
            amount of any computational adjustment in connection with a
            partnership proceeding under this subchapter (other than under
            this section) or the amount of any deficiency attributable to
            affected items in a proceeding under section 6230(a)(2), the
            items that are the subject of the notice of adjustment shall be
            presumed to have been correctly reported on the taxpayer's
            return during the pendency of the refund claim (and, if within
            the time prescribed by section 6532 the taxpayer commences a
            civil action for refund under section 7422, until the decision
            in the refund action becomes final).

        ``(e) Limitations Period.--
                ``(1) In general.--Any notice to a taxpayer under subsection
            (a) shall be mailed before the expiration of the period
            prescribed by section 6501 (relating to the period of
            limitations on assessment).
                ``(2) Suspension when secretary mails notice of
            adjustment.--If the Secretary mails a notice of adjustment to
            the taxpayer for a taxable year, the period of limitations on
            the making of assessments shall be suspended for the period
            during which the Secretary is prohibited from making the
            assessment (and, in any event, if a proceeding in respect of the
            notice of adjustment is placed on the docket of the Tax Court,
            until the decision of the Tax Court becomes final), and for 60
            days thereafter.
                ``(3) Restrictions on assessment.--Except as otherwise
            provided in section 6851, 6852, or 6861, no assessment of a
            deficiency with respect to any tax imposed by subtitle A
            attributable to any item (other than a partnership item or any
            item affected by a partnership item) shall be made--
                        ``(A) until the expiration of the applicable 90-day
                    or 150-day period set forth in subsection (c) for filing
                    a petition with the Tax Court, or
                        ``(B) if a petition has been filed with the Tax
                    Court, until the decision of the Tax Court has become
                    final.

        ``(f) Further Notices of Adjustment Restricted.--If the Secretary
    mails a notice of adjustment to the taxpayer for a taxable year and the
    taxpayer files a petition with the Tax Court within the time prescribed
    in subsection (c), the Secretary may not mail another such notice to the
    taxpayer with respect to the same taxable year in the absence of a
    showing of fraud, malfeasance, or misrepresentation of a material fact.
        ``(g) Coordination With Other Proceedings Under This Subchapter.--
                ``(1) In general.--The treatment of any item that has been
            determined pursuant to subsection (c) or (d) shall be taken into
            account in determining the amount of any computational
            adjustment that is made in connection with a partnership
            proceeding under this subchapter (other than under this
            section), or the amount of any deficiency attributable to
            affected items in a proceeding under section 6230(a)(2), for the
            taxable year involved. Notwithstanding any other law or rule of
            law pertaining to the period of limitations on the making of
            assessments, for purposes of the preceding sentence, any
            adjustment

    [[Page 111 STAT. 1022]]

            made in accordance with this section shall be taken into account
            regardless of whether any assessment has been made with respect
            to such adjustment.
                ``(2) Special rule in case of computational adjustment.--In
            the case of a computational adjustment that is made in
            connection with a partnership proceeding under this subchapter
            (other than under this section), the provisions of paragraph (1)
            shall apply only if the computational adjustment is made within
            the period prescribed by section 6229 for assessing any tax
            under subtitle A which is attributable to any partnership item
            or affected item for the taxable year involved.
                ``(3) Conversion to deficiency proceeding.--If--
                        ``(A) after the notice referred to in subsection (a)
                    is mailed to a taxpayer for a taxable year but before
                    the expiration of the period for filing a petition with
                    the Tax Court under subsection (c) (or, if a petition is
                    filed with the Tax Court, before the Tax Court makes a
                    declaration for that taxable year), the treatment of any
                    partnership item for the taxable year is finally
                    determined, or any such item ceases to be a partnership
                    item pursuant to section 6231(b), and
                        ``(B) as a result of that final determination or
                    cessation, a deficiency can be determined with respect
                    to the items that are the subject of the notice of
                    adjustment,
            the notice of adjustment shall be treated as a notice of
            deficiency under section 6212 and any petition filed in respect
            of the notice shall be treated as an action brought under
            section 6213.
                ``(4) Finally determined.--For purposes of this subsection,
            the treatment of partnership items shall be treated as finally
            determined if--
                        ``(A) the Secretary enters into a settlement
                    agreement (within the meaning of section 6224) with the
                    taxpayer regarding such items,
                        ``(B) a notice of final partnership administrative
                    adjustment has been issued and--
                              ``(i) no petition has been filed under section
                          6226 and the time for doing so has expired, or
                              ``(ii) a petition has been filed under section
                          6226 and the decision of the court has become
                          final, or
                        ``(C) the period within which any tax attributable
                    to such items may be assessed against the taxpayer has
                    expired.

        ``(h) Special Rules if Secretary Incorrectly Determines Applicable
    Procedure.--
                ``(1) Special rule if secretary erroneously mails notice of
            adjustment.--If the Secretary erroneously determines that
            subchapter B does not apply to a taxable year of a taxpayer and
            consistent with that determination timely mails a notice of
            adjustment to the taxpayer pursuant to subsection (a) of this
            section, the notice of adjustment shall be treated as a notice
            of deficiency under section 6212 and any petition that is filed
            in respect of the notice shall be treated as an action brought
            under section 6213.
                ``(2) Special rule if secretary erroneously mails notice of
            deficiency.--If the Secretary erroneously determines that
            subchapter B applies to a taxable year of a taxpayer

    [[Page 111 STAT. 1023]]

            and consistent with that determination timely mails a notice of
            deficiency to the taxpayer pursuant to section 6212, the notice
            of deficiency shall be treated as a notice of adjustment under
            subsection (a) and any petition that is filed in respect of the
            notice shall be treated as an action brought under subsection
            (c).''.

        (b) Treatment of Partnership Items in Deficiency Proceedings.--
    Section 6211 (defining deficiency) is amended by adding at the end the
    following new subsection:
        ``(c) Coordination With Subchapter C.--In determining the amount of
    any deficiency for purposes of this subchapter, adjustments to
    partnership items shall be made only as provided in subchapter C.''.
        (c) Clerical Amendment.--The table of sections for subchapter C of
    chapter 63 is amended by adding at the end the following new item:
                    ``Sec. 6234. Declaratory judgment relating to treatment
                                    of items other than partnership items
                                    with respect to an oversheltered
                                    return.''.

    <<NOTE: 26 USC 6211 note.>>     (d) Effective Date.--The amendments made
    by this section shall apply to partnership taxable years ending after
    the date of the enactment of this Act.

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

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

    <<NOTE: 26 USC 6231 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to partnership taxable years ending after
    the date of the enactment of this Act.

    SEC. 1233. PROVISIONS RELATING TO STATUTE OF LIMITATIONS.

        (a) Suspension of Statute Where Untimely Petition Filed.--Paragraph
    (1) of section 6229(d) (relating to suspension where Secretary makes
    administrative adjustment) is amended by striking all that follows
    ``section 6226'' and inserting the following: ``(and, if a petition is
    filed under section 6226 with respect to such administrative adjustment,
    until the decision of the court becomes final), and''.

    [[Page 111 STAT. 1024]]

        (b) Suspension of Statute During Bankruptcy Proceeding.--Section
    6229 is amended by adding at the end the following new subsection:
        ``(h) Suspension During Pendency of Bankruptcy Proceeding.--If a
    petition is filed naming a partner as a debtor in a bankruptcy
    proceeding under title 11 of the United States Code, the running of the
    period of limitations provided in this section with respect to such
    partner shall be suspended--
                ``(1) for the period during which the Secretary is
            prohibited by reason of such bankruptcy proceeding from making
            an assessment, and
                ``(2) for 60 days thereafter.''.

        (c) Tax Matters Partner in Bankruptcy.--Section 6229(b) is amended
    by redesignating paragraph (2) as paragraph (3) and by inserting after
    paragraph (1) the following new paragraph:
                ``(2) Special rule with respect to debtors in title 11
            cases.--Notwithstanding any other law or rule of law, if an
            agreement is entered into under paragraph (1)(B) and the
            agreement is signed by a person who would be the tax matters
            partner but for the fact that, at the time that the agreement is
            executed, the person is a debtor in a bankruptcy proceeding
            under title 11 of the United States Code, such agreement shall
            be binding on all partners in the partnership unless the
            Secretary has been notified of the bankruptcy proceeding in
            accordance with regulations prescribed by the Secretary.''.

    <<NOTE: 26 USC 6229 note.>>     (d) Effective Dates.--
                (1) Subsections (a) and (b).--The amendments made by
            subsections (a) and (b) shall apply to partnership taxable years
            with respect to which the period under section 6229 of the
            Internal Revenue Code of 1986 for assessing tax has not expired
            on or before the date of the enactment of this Act.
                (2) Subsection (c).--The amendment made by subsection (c)
            shall apply to agreements entered into after the date of the
            enactment of this Act.

    SEC. 1234. EXPANSION OF SMALL PARTNERSHIP EXCEPTION.

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

    <<NOTE: 26 USC 6231 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to partnership taxable years ending after
    the date of the enactment of this Act.

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

        (a) In General.--Subsection (f) of section 6229 (relating to items
    becoming nonpartnership items) is amended--
                (1) by striking ``(f) Items Becoming Nonpartnership Items.--
            If'' and inserting the following:

        ``(f) Special Rules.--
                ``(1) Items becoming nonpartnership items.--If'',

    [[Page 111 STAT. 1025]]

                (2) by moving the text of such subsection 2 ems to the
            right, and
                (3) by adding at the end the following new paragraph:
                ``(2) Special rule for partial settlement agreements.--If a
            partner enters into a settlement agreement with the Secretary
            with respect to the treatment of some of the partnership items
            in dispute for a partnership taxable year but other partnership
            items for such year remain in dispute, the period of limitations
            for assessing any tax attributable to the settled items shall be
            determined as if such agreement had not been entered into.''.

    <<NOTE: 26 USC 6229 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to settlements entered into after the date
    of the enactment of this Act.

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

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

    <<NOTE: 26 USC 6227 note.>>     (b) Effective Date.--The amendment made
    by this section shall take effect as if included in the amendments made
    by section 402 of the Tax Equity and Fiscal Responsibility Act of 1982.

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

        (a) In General.--Subsection (a) of section 6230 is amended by adding
    at the end the following new paragraph:
                ``(3) Special rule in case of assertion by partner's spouse
            of innocent spouse relief.--
                        ``(A) Notwithstanding section 6404(b), if the spouse
                    of a partner asserts that section 6013(e) applies with
                    respect to a liability that is attributable to any
                    adjustment to a partnership item, then such spouse may
                    file with the Secretary within 60 days after the notice
                    of computational adjustment is mailed to the spouse a
                    request for abatement of the assessment specified in
                    such notice. Upon receipt of such request, the Secretary
                    shall abate the assessment. Any reassessment of the tax
                    with respect to which an abatement is made under this
                    subparagraph shall be subject to the deficiency
                    procedures prescribed by subchapter B. The period for
                    making any such reassessment shall not expire before the
                    expiration of 60 days after the date of such abatement.
                        ``(B) If the spouse files a petition with the Tax
                    Court pursuant to section 6213 with respect to the
                    request for abatement described in subparagraph (A), the
                    Tax Court shall only have jurisdiction pursuant to this
                    section to determine whether the requirements of section
                    6013(e)

    [[Page 111 STAT. 1026]]

                    have been satisfied. For purposes of such determination,
                    the treatment of partnership items under the settlement,
                    the final partnership administrative adjustment, or the
                    decision of the court (whichever is appropriate) that
                    gave rise to the liability in question shall be
                    conclusive.
                    <<NOTE: Applicability.>>     ``(C) Rules similar to the
                    rules contained in subparagraphs (B) and (C) of
                    paragraph (2) shall apply for purposes of this
                    paragraph.''.

        (b) Claims for Refund.--Subsection (c) of section 6230 is amended by
    adding at the end the following new paragraph:
                ``(5) Rules for seeking innocent spouse relief.--
                        ``(A) In general.--The spouse of a partner may file
                    a claim for refund on the ground that the Secretary
                    failed to relieve the spouse under section 6013(e) from
                    a liability that is attributable to an adjustment to a
                    partnership item.
                        ``(B) Time for filing claim.--Any claim under
                    subparagraph (A) shall be filed within 6 months after
                    the day on which the Secretary mails to the spouse the
                    notice of computational adjustment referred to in
                    subsection (a)(3)(A).
                        ``(C) Suit if claim not allowed.--If the claim under
                    subparagraph (B) is not allowed, the spouse may bring
                    suit with respect to the claim within the period
                    specified in paragraph (3).
                        ``(D) Prior determinations are binding.--For
                    purposes of any claim or suit under this paragraph, the
                    treatment of partnership items under the settlement, the
                    final partnership administrative adjustment, or the
                    decision of the court (whichever is appropriate) that
                    gave rise to the liability in question shall be
                    conclusive.''.

        (c) Technical Amendments.--
                (1) Paragraph (1) of section 6230(a) is amended by striking
            ``paragraph (2)'' and inserting ``paragraph (2) or (3)''.
                (2) Subsection (a) of section 6503 is amended by striking
            ``section 6230(a)(2)(A)'' and inserting ``paragraph (2)(A) or
            (3) of section 6230(a)''.

    <<NOTE: 26 USC 6230 note.>>     (d) Effective Date.--The amendments made
    by this section shall take effect as if included in the amendments made
    by section 402 of the Tax Equity and Fiscal Responsibility Act of 1982.

    SEC. 1238. DETERMINATION OF PENALTIES AT PARTNERSHIP LEVEL.

        (a) In General.--Section 6221 (relating to tax treatment determined
    at partnership level) is amended by striking ``item'' and inserting
    ``item (and the applicability of any penalty, addition to tax, or
    additional amount which relates to an adjustment to a partnership
    item)''.
        (b) Conforming Amendments.--
                (1) Subsection (f) of section 6226 is amended--
                        (A) by striking ``relates and'' and inserting
                    ``relates,'', and
                        (B) by inserting before the period ``, and the
                    applicability of any penalty, addition to tax, or
                    additional amount which relates to an adjustment to a
                    partnership item''.
                (2) Clause (i) of section 6230(a)(2)(A) is amended to read
            as follows:

    [[Page 111 STAT. 1027]]

                              ``(i) affected items which require partner
                          level determinations (other than penalties,
                          additions to tax, and additional amounts that
                          relate to adjustments to partnership items), or''.
                (3)(A) Subparagraph (A) of section 6230(a)(3), as added by
            section 1237, is amended by inserting ``(including any liability
            for any penalties, additions to tax, or additional amounts
            relating to such adjustment)'' after ``partnership item''.
                (B) Subparagraph (B) of such section is amended by inserting
            ``(and the applicability of any penalties, additions to tax, or
            additional amounts)'' after ``partnership items''.
                (C) Subparagraph (A) of section 6230(c)(5), as added by
            section 1237, is amended by inserting before the period
            ``(including any liability for any penalties, additions to tax,
            or additional amounts relating to such adjustment)''.
                (D) Subparagraph (D) of section 6230(c)(5), as added by
            section 1237, is amended by inserting ``(and the applicability
            of any penalties, additions to tax, or additional amounts)''
            after ``partnership items''.
                (4) Paragraph (1) of section 6230(c) is amended by striking
            ``or'' at the end of subparagraph (A), by striking the period at
            the end of subparagraph (B) and inserting ``, or'', and by
            adding at the end the following new subparagraph:
                        ``(C) the Secretary erroneously imposed any penalty,
                    addition to tax, or additional amount which relates to
                    an adjustment to a partnership item.''.
                (5) So much of subparagraph (A) of section 6230(c)(2) as
            precedes ``shall be filed'' is amended to read as follows:
                        ``(A) Under paragraph (1) (a) or (c).--Any claim
                    under subparagraph (A) or (C) of paragraph (1)''.
                (6) Paragraph (4) of section 6230(c) is amended by adding at
            the end the following: ``In addition, the determination under
            the final partnership administrative adjustment or under the
            decision of the court (whichever is appropriate) concerning the
            applicability of any penalty, addition to tax, or additional
            amount which relates to an adjustment to a partnership item
            shall also be conclusive. Notwithstanding the preceding
            sentence, the partner shall be allowed to assert any partner
            level defenses that may apply or to challenge the amount of the
            computational adjustment.''.

    <<NOTE: 26 USC 6221 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to partnership taxable years ending after
    the date of the enactment of this Act.

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

        (a) Tax Court Jurisdiction To Enjoin Premature Assessments of
    Deficiencies Attributable to Partnership Items.--Subsection (b) of
    section 6225 is amended by striking ``the proper court.'' and inserting
    ``the proper court, including the Tax Court. The Tax Court shall have no
    jurisdiction to enjoin any action or proceeding under this subsection
    unless a timely petition for a readjustment of the partnership items for
    the taxable year has been filed and then only in respect of the
    adjustments that are the subject of such petition.''.
        (b) Jurisdiction To Consider Statute of Limitations With Respect to
    Partners.--Paragraph (1) of section 6226(d) is amended by adding at the
    end the following new sentence:

    [[Page 111 STAT. 1028]]

            ``Notwithstanding subparagraph (B), any person treated under
            subsection (c) as a party to an action shall be permitted to
            participate in such action (or file a readjustment petition
            under subsection (b) or paragraph (2) of this subsection) solely
            for the purpose of asserting that the period of limitations for
            assessing any tax attributable to partnership items has expired
            with respect to such person, and the court having jurisdiction
            of such action shall have jurisdiction to consider such
            assertion.''.

        (c) Tax Court Jurisdiction To Determine Overpayments Attributable to
    Affected Items.--
                (1) Paragraph (6) of section 6230(d) is amended by striking
            ``(or an affected item)''.
                (2) Paragraph (3) of section 6512(b) is amended by adding at
            the end the following new sentence:
            ``In the case of a credit or refund relating to an affected item
            (within the meaning of section 6231(a)(5)), the preceding
            sentence shall be applied by substituting the periods under
            sections 6229 and 6230(d) for the periods under section
            6511(b)(2), (c), and (d).''.

        (d) Venue on Appeal.--
                (1) Paragraph (1) of section 7482(b) is amended by striking
            ``or'' at the end of subparagraph (D), by striking the period at
            the end of subparagraph (E) and inserting ``, or'', and by
            inserting after subparagraph (E) the following new subparagraph:
                        ``(F) in the case of a petition under section
                    6234(c)--
                              ``(i) the legal residence of the petitioner if
                          the petitioner is not a corporation, and
                              ``(ii) the place or office applicable under
                          subparagraph (B) if the petitioner is a
                          corporation.''.
                (2) The last sentence of section 7482(b)(1) is amended by
            striking ``or 6228(a)'' and inserting ``, 6228(a), or 6234(c)''.

        (e) Other Provisions.--
                (1) Subsection (c) of section 7459 is amended by striking
            ``or section 6228(a)'' and inserting ``, 6228(a), or 6234(c)''.
                (2) Subsection (o) of section 6501 is amended by adding at
            the end the following new paragraph:
                ``(3) For declaratory judgment relating to treatment of
            items other than partnership items with respect to an
            oversheltered return, see section 6234.''.
                (3) Subsection (a) of section 7421, as amended by section
            1222, is amended by inserting ``6225(b),'' after ``6213(a),''.

    <<NOTE: 26 USC 6225 note.>>     (f) Effective Date.--The amendments made
    by this section shall apply to partnership taxable years ending after
    the date of the enactment of this Act.

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

        (a) In General.--Subsection (b) of section 6226 (relating to
    judicial review of final partnership administrative adjustments) is
    amended by redesignating paragraph (5) as paragraph (6) and by inserting
    after paragraph (4) the following new paragraph:
                ``(5) Treatment of premature petitions.--If--
                        ``(A) a petition for a readjustment of partnership
                    items for the taxable year involved is filed by a notice
                    partner (or a 5-percent group) during the 90-day period
                    described in subsection (a), and

    [[Page 111 STAT. 1029]]

                        ``(B) no action is brought under paragraph (1)
                    during the 60-day period described therein with respect
                    to such taxable year which is not dismissed,
            such petition shall be treated for purposes of paragraph (1) as
            filed on the last day of such 60-day period.''.

    <<NOTE: 26 USC 6226 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to petitions filed after the date of the
    enactment of this Act.

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

        (a) In General.--Subsection (b) of section 7485 (relating to bonds
    to stay assessment of collection) is amended--
                (1) by inserting ``penalties,'' after ``any interest,'', and
                (2) by striking ``aggregate of such deficiencies'' and
            inserting ``aggregate liability of the parties to the action''.

    <<NOTE: 26 USC 7485 note.>>     (b) Effective Date.--The amendment made
    by this section shall take effect as if included in the amendments made
    by section 402 of the Tax Equity and Fiscal Responsibility Act of 1982.

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

        (a) In General.--Subsection (c) of section 6601 (relating to
    interest on underpayment, nonpayment, or extension of time for payment,
    of tax) is amended by adding at the end the following new sentence: ``In
    the case of a settlement under section 6224(c) which results in the
    conversion of partnership items to nonpartnership items pursuant to
    section 6231(b)(1)(C), the preceding sentence shall apply to a
    computational adjustment resulting from such settlement in the same
    manner as if such adjustment were a deficiency and such settlement were
    a waiver referred to in the preceding sentence.''.
    <<NOTE: 26 USC 6601 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to adjustments with respect to partnership
    taxable years beginning after the date of the enactment of this Act.

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

        (a) General Rule.--Section 6227 (relating to administrative
    adjustment requests) is amended by adding at the end the following new
    subsection:
        ``(e) Requests With Respect to Bad Debts or Worthless Securities.--
    In the case of that portion of any request for an administrative
    adjustment which relates to the deductibility by the partnership under
    section 166 of a debt as a debt which became worthless, or under section
    165(g) of a loss from worthlessness of a security, the period prescribed
    in subsection (a)(1) shall be 7 years from the last day for filing the
    partnership return for the year with respect to which such request is
    made (determined without regard to extensions).''.
    <<NOTE: 26 USC 6227 note.>>     (b) Effective Date.--
                (1) In general.--The amendment made by subsection (a) shall
            take effect as if included in the amendments made by section 402
            of the Tax Equity and Fiscal Responsibility Act of 1982.
                (2) Treatment of requests filed before date of enactment.--
            In the case of that portion of any request (filed before

    [[Page 111 STAT. 1030]]

            the date of the enactment of this Act) for an administrative
            adjustment which relates to the deductibility of a debt as a
            debt which became worthless or the deductibility of a loss from
            the worthlessness of a security--
                        (A) paragraph (2) of section 6227(a) of the Internal
                    Revenue Code of 1986 shall not apply,
                        (B) the period for filing a petition under section
                    6228 of the Internal Revenue Code of 1986 with respect
                    to such request shall not expire before the date 6
                    months after the date of the enactment of this Act, and
                        (C) such a petition may be filed without regard to
                    whether there was a notice of the beginning of an
                    administrative proceeding or a final partnership
                    administrative adjustment.

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

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

        (a) General Rule.--Subparagraph (A) of section 706(c)(2) (relating
    to disposition of entire interest) is amended to read as follows:
                        ``(A) Disposition of entire interest.--The taxable
                    year of a partnership shall close with respect to a
                    partner whose entire interest in the partnership
                    terminates (whether by reason of death, liquidation, or
                    otherwise).''.

        (b) Clerical Amendment.--The paragraph heading for paragraph (2) of
    section 706(c) is amended to read as follows:
                ``(2) Treatment of dispositions.--''.

    <<NOTE: 26 USC 706 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to partnership taxable years beginning after
    December 31, 1997.

        Subtitle D--Provisions Relating to Real Estate Investment Trusts

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

        (a) Rules Relating to Determination of Ownership.--
                (1) Failure to issue shareholder demand letter not to
            disqualify reit.--Section 857(a) (relating to requirements
            applicable to real estate investment trusts) is amended by
            striking paragraph (2) and by redesignating paragraph (3) as
            paragraph (2).
                (2) Shareholder demand letter requirement; penalty.--Section
            857 (relating to taxation of real estate investment trusts and
            their beneficiaries) is amended by redesignating subsection (f)
            as subsection (g) and by inserting after subsection (e) the
            following new subsection:

        ``(f) Real Estate Investment Trusts To Ascertain Ownership.--
                ``(1) In general.--Each real estate investment trust shall
            each taxable year comply with regulations prescribed by the

    [[Page 111 STAT. 1031]]

            Secretary for the purposes of ascertaining the actual ownership
            of the outstanding shares, or certificates of beneficial
            interest, of such trust.
                ``(2) Failure to comply.--
                        ``(A) In general.--If a real estate investment trust
                    fails to comply with the requirements of paragraph (1)
                    for a taxable year, such trust shall pay (on notice and
                    demand by the Secretary and in the same manner as tax) a
                    penalty of $25,000.
                        ``(B) Intentional disregard.--If any failure under
                    paragraph (1) is due to intentional disregard of the
                    requirement under paragraph (1), the penalty under
                    subparagraph (A) shall be $50,000.
                        ``(C) Failure to comply after notice.--The Secretary
                    may require a real estate investment trust to take such
                    actions as the Secretary determines appropriate to
                    ascertain actual ownership if the trust fails to meet
                    the requirements of paragraph (1). If the trust fails to
                    take such actions, the trust shall pay (on notice and
                    demand by the Secretary and in the same manner as tax)
                    an additional penalty equal to the penalty determined
                    under subparagraph (A) or (B), whichever is applicable.
                        ``(D) Reasonable cause.--No penalty shall be imposed
                    under this paragraph with respect to any failure if it
                    is shown that such failure is due to reasonable cause
                    and not to willful neglect.''.

        (b) Compliance With Closely Held Prohibition.--
                (1) In general.--Section 856 (defining real estate
            investment trust) is amended by adding at the end the following
            new subsection:

        ``(k) Requirement That Entity Not Be Closely Held Treated as Met in
    Certain Cases.--A corporation, trust, or association--
                ``(1) which for a taxable year meets the requirements of
            section 857(f)(1), and
                ``(2) which does not know, or exercising reasonable
            diligence would not have known, whether the entity failed to
            meet the requirement of subsection (a)(6),

    shall be treated as having met the requirement of subsection (a)(6) for
    the taxable year.''.
                (2) Conforming amendment.--Paragraph (6) of section 856(a)
            is amended by inserting ``subject to the provisions of
            subsection (k),'' before ``which is not''.

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

        (a) In General.--Paragraph (2) of section 856(d) (defining rents
    from real property) is amended by striking subparagraph (C) and the last
    sentence and inserting:
                        ``(C) any impermissible tenant service income (as
                    defined in paragraph (7)).''.

        (b) Impermissible Tenant Service Income.--Section 856(d) is amended
    by adding at the end the following new paragraph:
                ``(7) Impermissible tenant service income.--For purposes of
            paragraph (2)(C)--
                        ``(A) In general.--The term `impermissible tenant
                    service income' means, with respect to any real or
                    personal

    [[Page 111 STAT. 1032]]

                    property, any amount received or accrued directly or
                    indirectly by the real estate investment trust for--
                              ``(i) services furnished or rendered by the
                          trust to the tenants of such property, or
                              ``(ii) managing or operating such property.
                        ``(B) Disqualification of all amounts where more
                    than de minimis amount.--If the amount described in
                    subparagraph (A) with respect to a property for any
                    taxable year exceeds 1 percent of all amounts received
                    or accrued during such taxable year directly or
                    indirectly by the real estate investment trust with
                    respect to such property, the impermissible tenant
                    service income of the trust with respect to the property
                    shall include all such amounts.
                        ``(C) Exceptions.--For purposes of subparagraph
                    (A)--
                              ``(i) services furnished or rendered, or
                          management or operation provided, through an
                          independent contractor from whom the trust itself
                          does not derive or receive any income shall not be
                          treated as furnished, rendered, or provided by the
                          trust, and
                              ``(ii) there shall not be taken into account
                          any amount which would be excluded from unrelated
                          business taxable income under section 512(b)(3) if
                          received by an organization described in section
                          511(a)(2).
                        ``(D) Amount attributable to impermissible
                    services.--For purposes of subparagraph (A), the amount
                    treated as received for any service (or management or
                    operation) shall not be less than 150 percent of the
                    direct cost of the trust in furnishing or rendering the
                    service (or providing the management or operation).
                        ``(E) Coordination with limitations.--For purposes
                    of paragraphs (2) and (3) of subsection (c), amounts
                    described in subparagraph (A) shall be included in the
                    gross income of the corporation, trust, or
                    association.''.

    SEC. 1253. ATTRIBUTION RULES APPLICABLE TO STOCK OWNERSHIP.

        Section 856(d)(5) (relating to constructive ownership of stock) is
    amended by striking ``except that'' and all that follows and inserting
    ``except that--
                        ``(A) `10 percent' shall be substituted for `50
                    percent' in subparagraph (C) of paragraphs (2) and (3)
                    of section 318(a), and
                        ``(B) section 318(a)(3)(A) shall be applied in the
                    case of a partnership by taking into account only
                    partners who own (directly or indirectly) 25 percent or
                    more of the capital interest, or the profits interest,
                    in the partnership.''.

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

        (a) General Rule.--Paragraph (3) of section 857(b) (relating to
    capital gains) is amended by redesignating subparagraph (D) as
    subparagraph (E) and by inserting after subparagraph (C) the following
    new subparagraph:
                        ``(D) Treatment by shareholders of undistributed
                    capital gains.--
                              ``(i) Every shareholder of a real estate
                          investment trust at the close of the trust's
                          taxable year shall include, in computing his long-
                          term capital gains in his return for his taxable
                          year in which the last day

    [[Page 111 STAT. 1033]]

                          of the trust's taxable year falls, such amount as
                          the trust shall designate in respect of such
                          shares in a written notice mailed to its
                          shareholders at any time prior to the expiration
                          of 60 days after the close of its taxable year (or
                          mailed to its shareholders or holders of
                          beneficial interests with its annual report for
                          the taxable year), but the amount so includible by
                          any shareholder shall not exceed that part of the
                          amount subjected to tax in subparagraph (A)(ii)
                          which he would have received if all of such amount
                          had been distributed as capital gain dividends by
                          the trust to the holders of such shares at the
                          close of its taxable year.
                              ``(ii) For purposes of this title, every such
                          shareholder shall be deemed to have paid, for his
                          taxable year under clause (i), the tax imposed by
                          subparagraph (A)(ii) on the amounts required by
                          this subparagraph to be included in respect of
                          such shares in computing his long-term capital
                          gains for that year; and such shareholders shall
                          be allowed credit or refund as the case may be,
                          for the tax so deemed to have been paid by him.
                              ``(iii) The adjusted basis of such shares in
                          the hands of the holder shall be increased with
                          respect to the amounts required by this
                          subparagraph to be included in computing his long-
                          term capital gains, by the difference between the
                          amount of such includible gains and the tax deemed
                          paid by such shareholder in respect of such shares
                          under clause (ii).
                              ``(iv) In the event of such designation, the
                          tax imposed by subparagraph (A)(ii) shall be paid
                          by the real estate investment trust within 30 days
                          after the close of its taxable year.
                              ``(v) The earnings and profits of such real
                          estate investment trust, and the earnings and
                          profits of any such shareholder which is a
                          corporation, shall be appropriately adjusted in
                          accordance with regulations prescribed by the
                          Secretary.
                              ``(vi) As used in this subparagraph, the terms
                          `shares' and `shareholders' shall include
                          beneficial interests and holders of beneficial
                          interests, respectively.''.

        (b) Conforming Amendments.--
                (1) Clause (i) of section 857(b)(7)(A) is amended by
            striking ``subparagraph (B)'' and inserting ``subparagraph (B)
            or (D)''.
                (2) Clause (iii) of section 852(b)(3)(D) is amended by
            striking ``by 65 percent'' and all that follows and inserting
            ``by the difference between the amount of such includible gains
            and the tax deemed paid by such shareholder in respect of such
            shares under clause (ii).''.

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

        (a) General Rule.--Subsection (c) of section 856 (relating to
    limitations) is amended--
                (1) by adding ``and'' at the end of paragraph (3),
                (2) by striking paragraphs (4) and (8), and

    [[Page 111 STAT. 1034]]

                (3) by redesignating paragraphs (5), (6), and (7) as
            paragraphs (4), (5), and (6), respectively.

        (b) Conforming Amendments.--
                (1) Subparagraph (G) of section 856(c)(5), as redesignated
            by subsection (a), is amended by striking ``and such agreement
            shall be treated as a security for purposes of paragraph
            (4)(A)''.
                (2) Paragraph (5) of section 857(b) is amended by striking
            ``section 856(c)(7)'' and inserting ``section 856(c)(6)''.
                (3) Subparagraph (C) of section 857(b)(6) is amended by
            striking ``section 856(c)(6)(B)'' and inserting ``section
            856(c)(5)(B)''.

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

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

    SEC. 1257. TREATMENT OF FORECLOSURE PROPERTY.

        (a) Grace Periods.--
                (1) Initial period.--Paragraph (2) of section 856(e)
            (relating to special rules for foreclosure property) is amended
            by striking ``on the date which is 2 years after the date the
            trust acquired such property'' and inserting ``as of the close
            of the 3d taxable year following the taxable year in which the
            trust acquired such property''.
                (2) Extension.--Paragraph (3) of section 856(e) is amended--
                        (A) by striking ``or more extensions'' and inserting
                    ``extension'', and
                        (B) by striking the last sentence and inserting:
                    ``Any such extension shall not extend the grace period
                    beyond the close of the 3d taxable year following the
                    last taxable year in the period under paragraph (2).''.

        (b) Revocation of Election.--Paragraph (5) of section 856(e) is
    amended by striking the last sentence and inserting: ``A real estate
    investment trust may revoke any such election for a taxable year by
    filing the revocation (in the manner provided by the Secretary) on or
    before the due date (including any extension of time) for filing its
    return of tax under this chapter for the taxable year. If a trust
    revokes an election for any property, no election may be made by the
    trust under this paragraph with respect to the property for any
    subsequent taxable year.''.
        (c) Certain Activities Not To Disqualify Property.--Paragraph (4) of
    section 856(e) is amended by adding at the end the following new flush
    sentence:

    [[Page 111 STAT. 1035]]

            ``For purposes of subparagraph (C), property shall not be
            treated as used in a trade or business by reason of any
            activities of the real estate investment trust with respect to
            such property to the extent that such activities would not
            result in amounts received or accrued, directly or indirectly,
            with respect to such property being treated as other than rents
            from real property.''.

    SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS.

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

    SEC. 1259. EXCESS NONCASH INCOME.

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

    SEC. 1260. PROHIBITED TRANSACTION SAFE HARBOR.

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

    SEC. 1261. SHARED APPRECIATION MORTGAGES.

        (a) Bankruptcy Safe Harbor.--Section 856(j) (relating to treatment
    of shared appreciation mortgages) is amended by redesignating paragraph
    (4) as paragraph (5) and by inserting after paragraph (3) the following
    new paragraph:
                ``(4) Coordination with 4-year holding period.--

    [[Page 111 STAT. 1036]]

                        ``(A) In general.--For purposes of section
                    857(b)(6)(C), if a real estate investment trust is
                    treated as having sold secured property under paragraph
                    (3)(A), the trust shall be treated as having held such
                    property for at least 4 years if--
                              ``(i) the secured property is sold or
                          otherwise disposed of pursuant to a case under
                          title 11 of the United States Code,
                              ``(ii) the seller is under the jurisdiction of
                          the court in such case, and
                              ``(iii) the disposition is required by the
                          court or is pursuant to a plan approved by the
                          court.
                        ``(B) Exception.--Subparagraph (A) shall not apply
                    if--
                              ``(i) the secured property was acquired by the
                          seller with the intent to evict or foreclose, or
                              ``(ii) the trust knew or had reason to know
                          that default on the obligation described in
                          paragraph (5)(A) would occur.''.

        (b) Clarification of Definition of Shared Appreciation Provision.--
    Clause (ii) of section 856(j)(5)(A) is amended by inserting before the
    period ``or appreciation in value as of any specified date''.

    SEC. 1262. WHOLLY OWNED SUBSIDIARIES.

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

    <<NOTE: 26 USC 852 note.>> SEC. 1263. EFFECTIVE DATE.

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

        Subtitle E--Provisions Relating to Regulated Investment Companies

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

        (a) General Rule.--Subsection (b) of section 851 (relating to
    limitations) is amended by striking paragraph (3), by adding ``and'' at
    the end of paragraph (2), and by redesignating paragraph (4) as
    paragraph (3).
        (b) Technical Amendments.--
                (1) The material following paragraph (3) of section 851(b)
            (as redesignated by subsection (a)) is amended--
                        (A) by striking out ``paragraphs (2) and (3)'' and
                    inserting ``paragraph (2)'', and
                        (B) by striking out the last sentence thereof.
                (2) Subsection (c) of section 851 is amended by striking
            ``subsection (b)(4)'' each place it appears (including the
            heading) and inserting ``subsection (b)(3)''.
                (3) Subsection (d) of section 851 is amended by striking
            ``subsections (b)(4)'' and inserting ``subsections (b)(3)''.
                (4) Paragraph (1) of section 851(e) is amended by striking
            ``subsection (b)(4)'' and inserting ``subsection (b)(3)''.
                (5) Paragraph (4) of section 851(e) is amended by striking
            ``subsections (b)(4)'' and inserting ``subsections (b)(3)''.

    [[Page 111 STAT. 1037]]

                (6) Section 851 is amended by striking subsection (g) and
            redesignating subsection (h) as subsection (g).
                (7) Subsection (g) of section 851 (as redesignated by
            paragraph (6)) is amended by striking paragraph (3).
                (8) Section 817(h)(2) is amended--
                        (A) by striking ``851(b)(4)'' in subparagraph (A)
                    and inserting ``851(b)(3)'', and
                        (B) by striking ``851(b)(4)(A)(i)'' in subparagraph
                    (B) and inserting ``851(b)(3)(A)(i)''.
                (9) Section 1092(f)(2) is amended by striking ``Except for
            purposes of section 851(b)(3), the'' and inserting ``The''.

    <<NOTE: 26 USC 817 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after the date of
    the enactment of this Act.

                        Subtitle F--Taxpayer Protections

    SEC. 1281. REASONABLE CAUSE EXCEPTION FOR CERTAIN PENALTIES.

        (a) Information on Deductible Employee Contributions.--Subsection
    (g) of section 6652 (relating to information required in connection with
    deductible employee contributions) is amended by adding at the end the
    following new sentence: ``No penalty shall be imposed under this
    subsection on any failure which is shown to be due to reasonable cause
    and not willful neglect.''.
        (b) Reports on Status as Qualified Small Business.--Subsection (k)
    of section 6652 (relating to failure to make reports required under
    section 1202) is amended by adding at the end the following new
    sentence: ``No penalty shall be imposed under this subsection on any
    failure which is shown to be due to reasonable cause and not willful
    neglect.''.
        (c) Returns of Personal Holding Company Tax by Foreign
    Corporations.--Section 6683 (relating to failure of foreign corporation
    to file return of personal holding company tax) is amended by adding at
    the end the following new sentence: ``No penalty shall be imposed under
    this section on any failure which is shown to be due to reasonable cause
    and not willful neglect.''.
        (d) Failure To Make Required Payments.--Subparagraph (A) of section
    7519(f)(4) is amended by adding at the end the following new sentence:
    ``No penalty shall be imposed under this subparagraph on any failure
    which is shown to be due to reasonable cause and not willful neglect.''.
    <<NOTE: 26 USC 6652 note.>>     (e) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after the date of
    the enactment of this Act.

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

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

    [[Page 111 STAT. 1038]]

    <<NOTE: 26 USC 6512 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply to claims for credit or refund for taxable
    years ending after the date of the enactment of this Act.

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

        (a) In General.--Subsection (h) of section 6103 (relating to
    disclosure to certain Federal officers and employees for purposes of tax
    administration, etc.) is amended by striking paragraph (5) and by
    redesignating paragraph (6) as paragraph (5).
        (b) Conforming Amendment.--Paragraph (4) of section 6103(p) is
    amended by striking ``(h)(6)'' each place it appears and inserting
    ``(h)(5)''.
    <<NOTE: 26 USC 6103 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to judicial proceedings commenced after the
    date of the enactment of this Act.

    SEC. 1284. CLARIFICATION OF STATUTE OF LIMITATIONS.

        (a) In General.--Subsection (a) of section 6501 (relating to
    limitations on assessment and collection) is amended by adding at the
    end thereof the following new sentence: ``For purposes of this chapter,
    the term `return' means the return required to be filed by the taxpayer
    (and does not include a return of any person from whom the taxpayer has
    received an item of income, gain, loss, deduction, or credit).''.
    <<NOTE: 26 USC 6501 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to taxable years beginning after the date of
    the enactment of this Act.

    SEC. 1285. AWARDING OF ADMINISTRATIVE COSTS.

        (a) Right to Appeal Tax Court Decision.--Subsection (f) of section
    7430 (relating to right of appeal) is amended by adding at the end the
    following new paragraph:
                ``(3) Appeal of tax court decision.--An order of the Tax
            Court disposing of a petition under paragraph (2) shall be
            reviewable in the same manner as a decision of the Tax Court,
            but only with respect to the matters determined in such
            order.''.

        (b) Period for Applying to IRS for Costs.--Subsection (b) of section
    7430 (relating to limitations) is amended by adding at the end the
    following new paragraph:
                ``(5) Period for applying to irs for administrative costs.--
            An award may be made under subsection (a) by the Internal
            Revenue Service for reasonable administrative costs only if the
            prevailing party files an application with the Internal Revenue
            Service for such costs before the 91st day after the date on
            which the final decision of the Internal Revenue Service as to
            the determination of the tax, interest, or penalty is mailed to
            such party.''.

        (c) Period for Petitioning of Tax Court for Review of Denial of
    Costs.--Paragraph (2) of section 7430(f) (relating to right of appeal)
    is amended--
                (1) by striking ``appeal to'' and inserting ``the filing of
            a petition for review with'', and
            <<NOTE: Notice.>>     (2) by adding at the end the following new
            sentence: ``If the Secretary sends by certified or registered
            mail a notice of such decision to the petitioner, no proceeding
            in the Tax Court may be initiated under this paragraph unless
            such petition is filed before the 91st day after the date of
            such mailing.''.

    [[Page 111 STAT. 1039]]

    <<NOTE: 26 USC 7430 note.>>     (d) Effective Date.--The amendments made
    by this section shall apply to civil actions or proceedings commenced
    after the date of the enactment of this Act.

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

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

        (a) In General.--Section 6019 is amended by striking ``or'' at the
    end of paragraph (1), by adding ``or'' at the end of paragraph (2), and
    by inserting after paragraph (2) the following new paragraph:
                ``(3) a transfer with respect to which a deduction is
            allowed under section 2522 but only if--
                        ``(A)(i) such transfer is of the donor's entire
                    interest in the property transferred, and
                        ``(ii) no other interest in such property is or has
                    been transferred (for less than adequate and full
                    consideration in money or money's worth) from the donor
                    to a person, or for a use, not described in subsection
                    (a) or (b) of section 2522, or
                        ``(B) such transfer is described in section
                    2522(d),''.

    <<NOTE: 26 USC 6019 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to gifts made after the date of the
    enactment of this Act.

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

        (a) Amendment to Section 2207A.--Paragraph (2) of section 2207A(a)
    (relating to right of recovery in the case of certain marital deduction
    property) is amended to read as follows:
                ``(2) Decedent may otherwise direct.--Paragraph (1) shall
            not apply with respect to any property to the extent that the
            decedent in his will (or a revocable trust) specifically
            indicates an intent to waive any right of recovery under this
            subchapter with respect to such property.''.

        (b) Amendment to Section 2207B.--Paragraph (2) of section 2207B(a)
    (relating to right of recovery where decedent retained interest) is
    amended to read as follows:
                ``(2) Decedent may otherwise direct.--Paragraph (1) shall
            not apply with respect to any property to the extent that the
            decedent in his will (or a revocable trust) specifically
            indicates an intent to waive any right of recovery under this
            subchapter with respect to such property.''.

    <<NOTE: 26 USC 2207A note.>>     (c) Effective Date.--The amendments
    made by this section shall apply with respect to the estates of
    decedents dying after the date of the enactment of this Act.

    <<NOTE: 26 USC 2056A note.>> SEC. 1303. TRANSITIONAL RULE UNDER SECTION
                2056A.

        (a) General Rule.--In the case of any trust created under an
    instrument executed before the date of the enactment of the Revenue
    Reconciliation Act of 1990, such trust shall be treated as meeting the
    requirements of paragraph (1) of section 2056A(a)

    [[Page 111 STAT. 1040]]

    of the Internal Revenue Code of 1986 if the trust instrument requires
    that all trustees of the trust be individual citizens of the United
    States or domestic corporations.
        (b) Effective Date.--The provisions of subsection (a) shall take
    effect as if included in the provisions of section 11702(g) of the
    Revenue Reconciliation Act of 1990.

    SEC. 1304. TREATMENT FOR ESTATE TAX PURPOSES OF SHORT-TERM OBLIGATIONS
                HELD BY NONRESIDENT ALIENS.

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

    <<NOTE: 26 USC 2105 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to estates of decedents dying after the date
    of the enactment of this Act.

    SEC. 1305. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.

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

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

        ``(a) General Rule.--For purposes of this subtitle, if both the
    executor (if any) of an estate and the trustee of a qualified revocable
    trust elect the treatment provided in this section, such trust shall be
    treated and taxed as part of such estate (and not as a separate trust)
    for all taxable years of the estate ending after the date of the
    decedent's death and before the applicable date.
        ``(b) Definitions.--For purposes of subsection (a)--
                ``(1) Qualified revocable trust.--The term `qualified
            revocable trust' means any trust (or portion thereof) which was
            treated under section 676 as owned by the decedent of the estate
            referred to in subsection (a) by reason of a power in the
            grantor (determined without regard to section 672(e)).
                ``(2) Applicable date.--The term `applicable date' means--
                        ``(A) if no return of tax imposed by chapter 11 is
                    required to be filed, the date which is 2 years after
                    the date of the decedent's death, and
                        ``(B) if such a return is required to be filed, the
                    date which is 6 months after the date of the final
                    determination of the liability for tax imposed by
                    chapter 11.

        ``(c) Election.--The election under subsection (a) shall be made not
    later than the time prescribed for filing the return of tax imposed by
    this chapter for the first taxable year of the estate (determined with
    regard to extensions) and, once made, shall be irrevocable.''.
        (b) Comparable Treatment Under Generation-Skipping Tax.--Paragraph
    (1) of section 2652(b) is amended by adding at

    [[Page 111 STAT. 1041]]

    the end the following new sentence: ``Such term shall not include any
    trust during any period the trust is treated as part of an estate under
    section 646.''.
        (c) Clerical Amendment.--The table of sections for such subpart A is
    amended by adding at the end the following new item:
                    ``Sec. 646. Certain revocable trusts treated as part of
                                    estate.''.

    <<NOTE: 26 USC 646 note.>>     (d) Effective Date.--The amendments made
    by this section shall apply with respect to estates of decedents dying
    after the date of the enactment of this Act.

    SEC. 1306. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAXABLE YEAR OF ESTATE.

        (a) In General.--Subsection (b) of section 663 (relating to
    distributions in first 65 days of taxable year) is amended by inserting
    ``an estate or'' before ``a trust'' each place it appears.
        (b) Conforming Amendment.--Paragraph (2) of section 663(b) is
    amended by striking ``the fiduciary of such trust'' and inserting ``the
    executor of such estate or the fiduciary of such trust (as the case may
    be)''.
    <<NOTE: 26 USC 663 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after the date of
    the enactment of this Act.

    SEC. 1307. SEPARATE SHARE RULES AVAILABLE TO ESTATES.

        (a) In General.--Subsection (c) of section 663 (relating to separate
    shares treated as separate trusts) is amended--
                (1) by inserting before the last sentence the following new
            sentence: ``Rules similar to the rules of the preceding
            provisions of this subsection shall apply to treat substantially
            separate and independent shares of different beneficiaries in an
            estate having more than 1 beneficiary as separate estates.'',
            and
                (2) by inserting ``or estates'' after ``trusts'' in the last
            sentence.

        (b) Conforming Amendment.--The subsection heading of section 663(c)
    is amended by inserting ``Estates or'' before ``Trusts''.
    <<NOTE: 26 USC 663 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to estates of decedents dying after the date
    of the enactment of this Act.

    SEC. 1308. EXECUTOR OF ESTATE AND BENEFICIARIES TREATED AS RELATED
                PERSONS FOR DISALLOWANCE OF LOSSES, ETC.

        (a) Disallowance of Losses.--Subsection (b) of section 267 (relating
    to losses, expenses, and interest with respect to transactions between
    related taxpayers) is amended by striking ``or'' at the end of paragraph
    (11), by striking the period at the end of paragraph (12) and inserting
    ``; or'', and by adding at the end the following new paragraph:
                ``(13) Except in the case of a sale or exchange in
            satisfaction of a pecuniary bequest, an executor of an estate
            and a beneficiary of such estate.''.

        (b) Ordinary Income From Gain From Sale of Depreciable Property.--
    Subsection (b) of section 1239 is amended by striking the period at the
    end of paragraph (2) and inserting ``, and'' and by adding at the end
    the following new paragraph:

    [[Page 111 STAT. 1042]]

                ``(3) except in the case of a sale or exchange in
            satisfaction of a pecuniary bequest, an executor of an estate
            and a beneficiary of such estate.''.

    <<NOTE: 26 USC 267 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after the date of
    the enactment of this Act.

    SEC. 1309. TREATMENT OF FUNERAL TRUSTS.

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

    ``SEC. 685. TREATMENT OF FUNERAL TRUSTS.

        ``(a) In General.--In the case of a qualified funeral trust--
                ``(1) subparts B, C, D, and E shall not apply, and
                ``(2) no deduction shall be allowed by section 642(b).

        ``(b) Qualified Funeral Trust.--For purposes of this subsection, the
    term `qualified funeral trust' means any trust (other than a foreign
    trust) if--
                ``(1) the trust arises as a result of a contract with a
            person engaged in the trade or business of providing funeral or
            burial services or property necessary to provide such services,
                ``(2) the sole purpose of the trust is to hold, invest, and
            reinvest funds in the trust and to use such funds solely to make
            payments for such services or property for the benefit of the
            beneficiaries of the trust,
                ``(3) the only beneficiaries of such trust are individuals
            with respect to whom such services or property are to be
            provided at their death under contracts described in paragraph
            (1),
                ``(4) the only contributions to the trust are contributions
            by or for the benefit of such beneficiaries,
                ``(5) the trustee elects the application of this subsection,
            and
                ``(6) the trust would (but for the election described in
            paragraph (5)) be treated as owned under subpart E by the
            purchasers of the contracts described in paragraph (1).

        ``(c) Dollar Limitation on Contributions.--
                ``(1) In general.--The term `qualified funeral trust' shall
            not include any trust which accepts aggregate contributions by
            or for the benefit of an individual in excess of $7,000.
                ``(2) Related trusts.--For purposes of paragraph (1), all
            trusts having trustees which are related persons shall be
            treated as 1 trust. For purposes of the preceding sentence,
            persons are related if--
                        ``(A) the relationship between such persons is
                    described in section 267 or 707(b),
                        ``(B) such persons are treated as a single employer
                    under subsection (a) or (b) of section 52, or
                        ``(C) the Secretary determines that treating such
                    persons as related is necessary to prevent avoidance of
                    the purposes of this section.
                ``(3) Inflation adjustment.--In the case of any contract
            referred to in subsection (b)(1) which is entered into during
            any calendar year after 1998, the dollar amount referred to
            paragraph (1) shall be increased by an amount equal to--
                        ``(A) such dollar amount, multiplied by

    [[Page 111 STAT. 1043]]

                        ``(B) the cost-of-living adjustment determined under
                    section 1(f)(3) for such calendar year, by substituting
                    `calendar year 1997' for `calendar year 1992' in
                    subparagraph (B) thereof.
            If any dollar amount after being increased under the preceding
            sentence is not a multiple of $100, such dollar amount shall be
            rounded to the nearest multiple of $100.

        ``(d) Application of Rate Schedule.--Section 1(e) shall be applied
    to each qualified funeral trust by treating each beneficiary's interest
    in each such trust as a separate trust.
        ``(e) Treatment of Amounts Refunded to Purchaser on Cancellation.--
    No gain or loss shall be recognized to a purchaser of a contract
    described in subsection (b)(1) by reason of any payment from such trust
    to such purchaser by reason of cancellation of such contract. If any
    payment referred to in the preceding sentence consists of property other
    than money, the basis of such property in the hands of such purchaser
    shall be the same as the trust's basis in such property immediately
    before the payment.
        ``(f) Simplified Reporting.--The Secretary may prescribe rules for
    simplified reporting of all trusts having a single trustee.''.
        (b) Clerical Amendment.--The table of sections for subpart F of part
    I of subchapter J of chapter 1 is amended by adding at the end the
    following new item:
                    ``Sec. 685. Treatment of funeral trusts.''.

    <<NOTE: 26 USC 685 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to taxable years ending after the date of
    the enactment of this Act.

    SEC. 1310. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF DECEDENT'S DEATH.

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

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

        ``(a) Inclusion of Certain Property in Gross Estate.--If--
                ``(1) the decedent made a transfer (by trust or otherwise)
            of an interest in any property, or relinquished a power with
            respect to any property, during the 3-year period ending on the
            date of the decedent's death, and
                ``(2) the value of such property (or an interest therein)
            would have been included in the decedent's gross estate under
            section 2036, 2037, 2038, or 2042 if such transferred interest
            or relinquished power had been retained by the decedent on the
            date of his death,

    the value of the gross estate shall include the value of any property
    (or interest therein) which would have been so included.
        ``(b) Inclusion of Gift Tax on Gifts Made During 3 Years Before
    Decedent's Death.--The amount of the gross estate (determined without
    regard to this subsection) shall be increased by the amount of any tax
    paid under chapter 12 by the decedent or his estate on any gift made by
    the decedent or his spouse during the 3-year period ending on the date
    of the decedent's death.
        ``(c) Other Rules Relating to Transfers Within 3 Years of Death.--
                ``(1) In general.--For purposes of--

    [[Page 111 STAT. 1044]]

                        ``(A) section 303(b) (relating to distributions in
                    redemption of stock to pay death taxes),
                        ``(B) section 2032A (relating to special valuation
                    of certain farms, etc., real property), and
                        ``(C) subchapter C of chapter 64 (relating to lien
                    for taxes),
            the value of the gross estate shall include the value of all
            property to the extent of any interest therein of which the
            decedent has at any time made a transfer, by trust or otherwise,
            during the 3-year period ending on the date of the decedent's
            death.
                ``(2) Coordination with section 6166.--An estate shall be
            treated as meeting the 35 percent of adjusted gross estate
            requirement of section 6166(a)(1) only if the estate meets such
            requirement both with and without the application of paragraph
            (1).
                ``(3) Marital and small transfers.--Paragraph (1) shall not
            apply to any transfer (other than a transfer with respect to a
            life insurance policy) made during a calendar year to any donee
            if the decedent was not required by section 6019 (other than by
            reason of section 6019(2)) to file any gift tax return for such
            year with respect to transfers to such donee.

        ``(d) Exception.--Subsection (a) shall not apply to any bona fide
    sale for an adequate and full consideration in money or money's worth.
        ``(e) Treatment of Certain Transfers From Revocable Trusts.--For
    purposes of this section and section 2038, any transfer from any portion
    of a trust during any period that such portion was treated under section
    676 as owned by the decedent by reason of a power in the grantor
    (determined without regard to section 672(e)) shall be treated as a
    transfer made directly by the decedent.''.
        (b) Clerical Amendment.--The table of sections for part III of
    subchapter A of chapter 11 is amended by striking ``gifts'' in the item
    relating to section 2035 and inserting ``certain gifts''.
    <<NOTE: 26 USC 2035 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to the estates of decedents dying after the
    date of the enactment of this Act.

    SEC. 1311. CLARIFICATION OF TREATMENT OF SURVIVOR ANNUITIES UNDER
                QUALIFIED TERMINABLE INTEREST RULES.

        (a) In General.--Subparagraph (C) of section 2056(b)(7) is amended
    by inserting ``(or, in the case of an interest in an annuity arising
    under the community property laws of a State, included in the gross
    estate of the decedent under section 2033)'' after ``section 2039''.
    <<NOTE: 26 USC 2056 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to estates of decedents dying after the date
    of the enactment of this Act.

    SEC. 1312. TREATMENT UNDER QUALIFIED DOMESTIC TRUST RULES OF FORMS OF
                OWNERSHIP WHICH ARE NOT TRUSTS.

        (a) In General.--Subsection (c) of section 2056A (defining qualified
    domestic trust) is amended by adding at the end the following new
    paragraph:
                ``(3) Trust.--To the extent provided in regulations
            prescribed by the Secretary, the term `trust' includes other
            arrangements which have substantially the same effect as a
            trust.''.

    [[Page 111 STAT. 1045]]

    <<NOTE: 26 USC 2056A note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to estates of decedents dying after the date
    of the enactment of this Act.

    SEC. 1313. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER SECTION 2032A.

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

    <<NOTE: 26 USC 2032A note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply to the estates of decedents dying after
    the date of the enactment of this Act.

    SEC. 1314. AUTHORITY TO WAIVE REQUIREMENT OF UNITED STATES TRUSTEE FOR
                QUALIFIED DOMESTIC TRUSTS.

        (a) In General.--Subparagraph (A) of section 2056A(a)(1) is amended
    by inserting ``except as provided in regulations prescribed by the
    Secretary,'' before ``requires''.
    <<NOTE: 26 USC 2056A note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to estates of decedents dying after the date
    of the enactment of this Act.

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

                      Subtitle A--Excise Tax Simplification

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

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

        (a) In General.--Sections 4003(a)(3)(C) and 4051(b)(2)(B) (relating
    to exceptions) are each amended by striking ``$200'' and inserting
    ``$1,000''.

    [[Page 111 STAT. 1046]]

    <<NOTE: 26 USC 4003 note.>>     (b) Effective Date.--The amendments made
    by subsection (a) shall apply to installations on vehicles sold after
    the date of the enactment of this Act.

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

        (a) In General.--Subsection (e) of section 4051 is amended to read
    as follows:
        ``(e) Credit Against Tax for Tire Tax.--If--
                ``(1) tires are sold on or in connection with the sale of
            any article, and
                ``(2) tax is imposed by this subchapter on the sale of such
            tires,

    there shall be allowed as a credit against the tax imposed by this
    subchapter an amount equal to the tax (if any) imposed by section 4071
    on such tires.''.
        (b) Conforming Amendment.--Subparagraph (B) of section 4052(b)(1) is
    amended by striking clause (iii), by adding ``and'' at the end of clause
    (ii), and by redesignating clause (iv) as clause (iii).
    <<NOTE: 26 USC 4051 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on January 1, 1998.

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

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

        (a) In General.--Section 5008(c)(1) (relating to distilled spirits
    returned to bonded premises) is amended by striking ``withdrawn from
    bonded premises on payment or determination of tax'' and inserting ``on
    which tax has been determined or paid''.
    <<NOTE: 26 USC 5008 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

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

        (a) In General.--Section 5175(c) (relating to cancellation of credit
    of export bonds) is amended by striking ``on the submission of'' and all
    that follows and inserting ``if there is such proof of exportation as
    the Secretary may by regulations require.''.
    <<NOTE: 26 USC 5175 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

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

        (a) In General.--Section 5207(c) (relating to preservation and
    inspection) is amended by striking ``shall be kept on the premises where
    the operations covered by the record are carried on and''.
    <<NOTE: 26 USC 5207 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

    [[Page 111 STAT. 1047]]

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

        (a) In General.--Section 5222(b)(2) (relating to receipt) is amended
    to read as follows:
                ``(2) beer conveyed without payment of tax from brewery
            premises, beer which has been lawfully removed from brewery
            premises upon determination of tax, or''.

        (b) Clarification of Authority To Permit Removal of Beer Without
    Payment of Tax for Use as Distilling Material.--Section 5053 (relating
    to exemptions) is amended by redesignating subsection (f) as subsection
    (i) and by inserting after subsection (e) the following new subsection:
        ``(f) Removal for Use as Distilling Material.--Subject to such
    regulations as the Secretary may prescribe, beer may be removed from a
    brewery without payment of tax to any distilled spirits plant for use as
    distilling material.''.
        (c) Clarification of Refund and Credit of Tax.--Section 5056
    (relating to refund and credit of tax, or relief from liability) is
    amended--
                (1) by redesignating subsection (c) as subsection (d) and by
            inserting after subsection (b) the following new subsection:

        ``(c) Beer Received at a Distilled Spirits Plant.--Any tax paid by
    any brewer on beer produced in the United States may be refunded or
    credited to the brewer, without interest, or if the tax has not been
    paid, the brewer may be relieved of liability therefor, under
    regulations as the Secretary may prescribe, if such beer is received on
    the bonded premises of a distilled spirits plant pursuant to the
    provisions of section 5222(b)(2), for use in the production of distilled
    spirits.'', and
                (2) by striking ``or rendering unmerchantable'' in
            subsection (d) (as so redesignated) and inserting ``rendering
            unmerchantable, or receipt on the bonded premises of a distilled
            spirits plant''.

    <<NOTE: 26 USC 5053 note.>>     (d) Effective Date.--The amendments made
    by this section shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

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

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

    <<NOTE: 26 USC 5681 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on the date of the enactment of this
    Act.

    [[Page 111 STAT. 1048]]

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

        (a) In General.--Section 5044(a) (relating to refund of tax on
    unmerchantable wine) is amended by striking ``as unmerchantable''.
        (b) Conforming Amendments.--
                (1) Section 5361 is amended by striking ``unmerchantable''.
                (2) The section heading for section 5044 is amended by
            striking ``unmerchantable''.
                (3) The item relating to section 5044 in the table of
            sections for subpart C of part I of subchapter A of chapter 51
            is amended by striking ``unmerchantable''.

    <<NOTE: 26 USC 5044 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

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

        (a) In General.--Section 5384(b)(2)(D) (relating to ameliorated
    fruit and berry wines) is amended by striking ``loganberries, currants,
    or gooseberries,'' and inserting ``any fruit or berry with a natural
    fixed acid of 20 parts per thousand or more (before any correction of
    such fruit or berry)''.
    <<NOTE: 26 USC 5384 note.>>     (b) Effective Date.--The amendment made
    by this section shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

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

        (a) In General.--Section 5053 (relating to exemptions), as amended
    by section 1414(b), is amended by inserting after subsection (f) the
    following new subsection:
        ``(g) Removals for Use of Foreign Embassies, Legations, Etc.--
                ``(1) In general.--Subject to such regulations as the
            Secretary may prescribe--
                        ``(A) beer may be withdrawn from the brewery without
                    payment of tax for transfer to any customs bonded
                    warehouse for entry pending withdrawal therefrom as
                    provided in subparagraph (B), and
                        ``(B) beer entered into any customs bonded warehouse
                    under subparagraph (A) may be withdrawn for consumption
                    in the United States by, and for the official and family
                    use of, such foreign governments, organizations, and
                    individuals as are entitled to withdraw imported beer
                    from such warehouses free of tax.
            Beer transferred to any customs bonded warehouse under
            subparagraph (A) shall be entered, stored, and accounted for in
            such warehouse under such regulations and bonds as the Secretary
            may prescribe, and may be withdrawn therefrom by such
            governments, organizations, and individuals free of tax under
            the same conditions and procedures as imported beer.

    [[Page 111 STAT. 1049]]

                ``(2) Other rules to apply.--Rules similar to the rules of
            paragraphs (2) and (3) of section 5362(e) shall apply for
            purposes of this subsection.''.

    <<NOTE: 26 USC 5053 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

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

        (a) In General.--Section 5053 (relating to exemptions), as amended
    by section 1418(a), is amended by inserting after subsection (g) the
    following new subsection:
        ``(h) Removals for Destruction.--Subject to such regulations as the
    Secretary may prescribe, beer may be removed from the brewery without
    payment of tax for destruction.''.
    <<NOTE: 26 USC 5053 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

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

        (a) In General.--The first sentence of section 5055 (relating to
    drawback of tax on beer) is amended by striking ``found to have been
    paid'' and all that follows and inserting ``paid on such beer if there
    is such proof of exportation as the Secretary may by regulations
    require.''.
    <<NOTE: 26 USC 5055 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

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

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

    ``SEC. 5418. BEER IMPORTED IN BULK.

        ``Beer imported or brought into the United States in bulk containers
    may, under such regulations as the Secretary may prescribe, be withdrawn
    from customs custody and transferred in such bulk containers to the
    premises of a brewery without payment of the internal revenue tax
    imposed on such beer. The proprietor of a brewery to which such beer is
    transferred shall become liable for the tax on the beer withdrawn from
    customs custody under this section upon release of the beer from customs
    custody, and the importer, or the person bringing such beer into the
    United States, shall thereupon be relieved of the liability for such
    tax.''.
        (b) Clerical Amendment.--The table of sections for such part II is
    amended by adding at the end the following new item:
                    ``Sec. 5418. Beer imported in bulk.''.

    <<NOTE: 26 USC 5418 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

    [[Page 111 STAT. 1050]]

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

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

    ``SEC. 5364. WINE IMPORTED IN BULK.

        ``Wine imported or brought into the United States in bulk containers
    may, under such regulations as the Secretary may prescribe, be withdrawn
    from customs custody and transferred in such bulk containers to the
    premises of a bonded wine cellar without payment of the internal revenue
    tax imposed on such wine. The proprietor of a bonded wine cellar to
    which such wine is transferred shall become liable for the tax on the
    wine withdrawn from customs custody under this section upon release of
    the wine from customs custody, and the importer, or the person bringing
    such wine into the United States, shall thereupon be relieved of the
    liability for such tax.''.
        (b) Clerical Amendment.--The table of sections for such part II is
    amended by inserting after the item relating to section 5363 the
    following new item:
                    ``Sec. 5364. Wine imported in bulk.''.

    <<NOTE: 26 USC 5364 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on the 1st day of the 1st calendar
    quarter that begins at least 180 days after the date of the enactment of
    this Act.

                      PART III--OTHER EXCISE TAX PROVISIONS

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

        (a) In General.--Section 4222(b)(2) (relating to export) is
    amended--
                (1) by striking ``in the case of any sale or resale for
            export,'', and
                (2) by striking ``Export'' and inserting ``Under
            regulations''.

    <<NOTE: 26 USC 4222 note.>>     (b) Effective Date.--The amendments made
    by subsection (a) shall take effect on the date of the enactment of this
    Act.

    SEC. 1432. REPEAL OF EXPIRED PROVISIONS.

        (a) Piggy-Back Trailers.--Section 4051 (relating to imposition of
    tax on heavy trucks and trailers sold at retail) is amended by striking
    subsection (d) and by redesignating subsection (e) as subsection (d).
        (b) Deep Seabed Mining.--
                (1) In general.--Subchapter F of chapter 36 (relating to tax
            on removal of hard mineral resources from deep seabed) is hereby
            repealed.
                (2) Conforming amendment.--The table of subchapters for
            chapter 36 is amended by striking the item relating to
            subchapter F.

        (c) Ozone-Depleting Chemicals.--
                (1) Paragraph (1) of section 4681(b) is amended by striking
            subparagraphs (B) and (C) and inserting the following new
            subparagraph:
                        ``(B) Base tax amount.--The base tax amount for
                    purposes of subparagraph (A) with respect to any sale or

    [[Page 111 STAT. 1051]]

                    use during any calendar year after 1995 shall be $5.35
                    increased by 45 cents for each year after 1995.''.
                (2) Subsection (g) of section 4682 is amended to read as
            follows:

        ``(g) Chemicals Used as Propellants in Metered-Dose Inhalers.--
                ``(1) Exemption from tax.--
                        ``(A) In general.--No tax shall be imposed by
                    section 4681 on--
                              ``(i) any use of any substance as a propellant
                          in metered-dose inhalers, or
                              ``(ii) any qualified sale by the manufacturer,
                          producer, or importer of any substance.
                        ``(B) Qualified sale.--For purposes of subparagraph
                    (A), the term `qualified sale' means any sale by the
                    manufacturer, producer, or importer of any substance--
                              ``(i) for use by the purchaser as a propellant
                          in metered dose inhalers, or
                              ``(ii) for resale by the purchaser to a 2d
                          purchaser for such use by the 2d purchaser.
                    <<NOTE: Applicability.>> The preceding sentence shall
                    apply only if the manufacturer, producer, and importer,
                    and the 1st and 2d purchasers (if any) meet such
                    registration requirements as may be prescribed by the
                    Secretary.
                ``(2) Overpayments.--If any substance on which tax was paid
            under this subchapter is used by any person as a propellant in
            metered-dose inhalers, credit or refund without interest shall
            be allowed to such person in an amount equal to the tax so paid.
            Amounts payable under the preceding sentence with respect to
            uses during the taxable year shall be treated as described in
            section 34(a) for such year unless claim thereof has been timely
            filed under this paragraph.''.

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

        (a) In General.--Subsection (b) of section 4161 (relating to
    imposition of tax) is amended to read as follows:
        ``(b) Bows and Arrows, Etc.--
                ``(1) Bows.--
                        ``(A) In general.--There is hereby imposed on the
                    sale by the manufacturer, producer, or importer of any
                    bow which has a draw weight of 10 pounds or more, a tax
                    equal to 11 percent of the price for which so sold.
                        ``(B) Parts and accessories.--There is hereby
                    imposed upon the sale by the manufacturer, producer, or
                    importer--
                              ``(i) of any part of accessory suitable for
                          inclusion in or attachment to a bow described in
                          subparagraph (A), and
                              ``(ii) of any quiver suitable for use with
                          arrows described in paragraph (2),
                    a tax equivalent to 11 percent of the price for which so
                    sold.
                ``(2) Arrows.--There is hereby imposed on the sale by the
            manufacturer, producer, or importer of any shaft, point, nock,
            or vane of a type used in the manufacture of any arrow which
            after its assembly--

    [[Page 111 STAT. 1052]]

                        ``(A) measures 18 inches overall or more in length,
                    or
                        ``(B) measures less than 18 inches overall in length
                    but is suitable for use with a bow described in
                    paragraph (1)(A),
            a tax equal to 12.4 percent of the price for which so sold.
                ``(3) Coordination with subsection (a).--No tax shall be
            imposed under this subsection with respect to any article
            taxable under subsection (a).''.

    <<NOTE: 26 USC 4161 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply to articles sold by the manufacturer,
    producer, or importer after September 30, 1997.

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

        (a) Certain Repairs and Modifications Not Treated as Manufacture.--
    Section 4052 is amended by redesignating the subsection defining a long-
    term lease as subsection (e) and by adding at the end the following new
    subsection:
        ``(f) Certain Repairs and Modifications Not Treated as
    Manufacture.--
                ``(1) In general.--An article described in section
            4051(a)(1) shall not be treated as manufactured or produced
            solely by reason of repairs or modifications to the article
            (including any modification which changes the transportation
            function of the article or restores a wrecked article to a
            functional condition) if the cost of such repairs and
            modifications does not exceed 75 percent of the retail price of
            a comparable new article.
                ``(2) Exception.--Paragraph (1) shall not apply if the
            article (as repaired or modified) would, if new, be taxable
            under section 4051 and the article when new was not taxable
            under this section or the corresponding provision of prior
            law.''.

        (b) Simplification of Certification Procedures With Respect to Sales
    of Taxable Articles.--
                (1) Repeal of registration requirement.--Subsection (d) of
            section 4052 is amended by striking ``rules of--'' and all that
            follows through ``shall apply'' and inserting ``rules of
            subsections (c) and (d) of section 4216 (relating to partial
            payments) shall apply''.
                (2) Requirement to modify regulations.--Section 4052 is
            amended by adding at the end the following new subsection:

        ``(g) Regulations.--The Secretary shall prescribe regulations which
    permit, in lieu of any other certification, persons who are purchasing
    articles taxable under this subchapter for resale or leasing in a long-
    term lease to execute a statement (made under penalties of perjury) on
    the sale invoice that such sale is for resale. The Secretary shall not
    impose any registration requirement as a condition of using such
    procedure.''.
    <<NOTE: 26 USC 4052 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on January 1, 1998.

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

        (a) In General.--Section 4261 (relating to imposition of tax on
    transportation of persons by air), as previously amended by this Act, is
    amended by redesignating subsection (h) as subsection (i) and by
    inserting after subsection (g) the following new subsection:

    [[Page 111 STAT. 1053]]

        ``(h) Exemption for Skydiving Uses.--No tax shall be imposed by this
    section or section 4271 on any air transportation exclusively for the
    purpose of skydiving.''.
        (b) Transportation Treated as Noncommercial Aviation.--The last
    sentence of section 4041(c)(2) is amended by inserting before the period
    ``or by reason of section 4261(h)''.
        (c) Effective Dates.--
            <<NOTE: 26 USC 4261 note.>>     (1) Subsection (a).--The
            amendment made by subsection (a) shall apply to amounts paid
            after September 30, 1997.
            <<NOTE: 26 USC 4041 note.>>     (2) Subsection (b).--The
            amendment made by subsection (b) shall take effect on October 1,
            1997.

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

        (a) In General.--Section 4091 (relating to aviation fuel) is amended
    by adding at the end the following new subsection:
        ``(d) Refund of Tax-Paid Aviation Fuel to Registered Producer of
    Fuel.--If--
                ``(1) a producer of aviation fuel is registered under
            section 4101, and
                ``(2) such producer establishes to the satisfaction of the
            Secretary that a prior tax was paid (and not credited or
            refunded) on aviation fuel held by such producer,

    then an amount equal to the tax so paid shall be allowed as a refund
    (without interest) to such producer in the same manner as if it were an
    overpayment of tax imposed by this section.''.
        (b) Conforming Amendment.--The last sentence of section 6416(d) is
    amended by inserting before the period ``or to the tax imposed by
    section 4091 in the case of refunds described in section 4091(d)''.
    <<NOTE: 26 USC 4091 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to fuel acquired by the producer after
    September 30, 1997.

                     Subtitle B--Tax-Exempt Bond Provisions

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

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

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

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

    [[Page 111 STAT. 1054]]

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

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

    SEC. 1444. REPEAL OF EXPIRED PROVISIONS.

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

    <<NOTE: 26 USC 148 note.>> SEC. 1445. EFFECTIVE DATE.

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

                        Subtitle C--Tax Court Procedures

    SEC. 1451. OVERPAYMENT DETERMINATIONS OF TAX COURT.

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

    <<NOTE: 26 USC 6512 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on the date of the enactment of this
    Act.

    SEC. 1452. REDETERMINATION OF INTEREST PURSUANT TO MOTION.

        (a) In General.--Subsection (c) of section 7481 (relating to
    jurisdiction over interest determinations) is amended to read as
    follows:
        ``(c) Jurisdiction Over Interest Determinations.--
                ``(1) In general.--Notwithstanding subsection (a), if,
            within 1 year after the date the decision of the Tax Court
            becomes final under subsection (a) in a case to which this
            subsection applies, the taxpayer files a motion in the Tax Court
            for a redetermination of the amount of interest involved, then
            the Tax Court may reopen the case solely to determine whether
            the taxpayer has made an overpayment of such interest or the
            Secretary has made an underpayment of such interest and the
            amount thereof.
                ``(2) Cases to which this subsection applies.--This
            subsection shall apply where--
                        ``(A)(i) an assessment has been made by the
                    Secretary under section 6215 which includes interest as
                    imposed by this title, and

    [[Page 111 STAT. 1055]]

                        ``(ii) the taxpayer has paid the entire amount of
                    the deficiency plus interest claimed by the Secretary,
                    and
                        ``(B) the Tax Court finds under section 6512(b) that
                    the taxpayer has made an overpayment.
                ``(3) Special rules.--If the Tax Court determines under this
            subsection that the taxpayer has made an overpayment of interest
            or that the Secretary has made an underpayment of interest, then
            that determination shall be treated under section 6512(b)(1) as
            a determination of an overpayment of tax. An order of the Tax
            Court redetermining interest, when entered upon the records of
            the court, shall be reviewable in the same manner as a decision
            of the Tax Court.''.

    <<NOTE: 26 USC 7481 note.>>     (b) Effective Date.--The amendment made
    by this section shall take effect on the date of the enactment of this
    Act.

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

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

    <<NOTE: 26 USC 7430 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to proceedings commenced after the date of
    the enactment of this Act.

    SEC. 1454. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.

        (a) In General.--Subchapter B of chapter 76 (relating to proceedings
    by taxpayers and third parties) is amended by redesignating section 7436
    as section 7437 and by inserting after section 7435 the following new
    section:

    ``SEC. 7436. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.

        ``(a) Creation of Remedy.--If, in connection with an audit of any
    person, there is an actual controversy involving a determination by the
    Secretary as part of an examination that--
                ``(1) one or more individuals performing services for such
            person are employees of such person for purposes of subtitle C,
            or
                ``(2) such person is not entitled to the treatment under
            subsection (a) of section 530 of the Revenue Act of 1978 with
            respect to such an individual,

    upon the filing of an appropriate pleading, the Tax Court may determine
    whether such a determination by the Secretary is correct.

    [[Page 111 STAT. 1056]]

    Any such redetermination by the Tax Court shall have the force and
    effect of a decision of the Tax Court and shall be reviewable as such.
        ``(b) Limitations.--
                ``(1) Petitioner.--A pleading may be filed under this
            section only by the person for whom the services are performed.
                ``(2) Time for filing action.--If the Secretary sends by
            certified or registered mail notice to the petitioner of a
            determination by the Secretary described in subsection (a), no
            proceeding may be initiated under this section with respect to
            such determination unless the pleading is filed before the 91st
            day after the date of such mailing.
                ``(3) No adverse inference from treatment while action is
            pending.--If, during the pendency of any proceeding brought
            under this section, the petitioner changes his treatment for
            employment tax purposes of any individual whose employment
            status as an employee is involved in such proceeding (or of any
            individual holding a substantially similar position) to
            treatment as an employee, such change shall not be taken into
            account in the Tax Court's determination under this section.

        ``(c) Small Case Procedures.--
                ``(1) In general.--At the option of the petitioner,
            concurred in by the Tax Court or a division thereof before the
            hearing of the case, proceedings under this section may
            (notwithstanding the provisions of section 7453) be conducted
            subject to the rules of evidence, practice, and procedure
            applicable under section 7463 if the amount of employment taxes
            placed in dispute is $10,000 or less for each calendar quarter
            involved.
                ``(2) Finality of decisions.--A decision entered in any
            proceeding conducted under this subsection shall not be reviewed
            in any other court and shall not be treated as a precedent for
            any other case not involving the same petitioner and the same
            determinations.
                ``(3) Certain rules to apply.--Rules similar to the rules of
            the last sentence of subsection (a), and subsections (c), (d),
            and (e), of section 7463 shall apply to proceedings conducted
            under this subsection.

    <<NOTE: Applicability.>>     ``(d) Special Rules.--
                ``(1) Restrictions on assessment and collection pending
            action, etc.--The principles of subsections (a), (b), (c), (d),
            and (f) of section 6213, section 6214(a), section 6215, section
            6503(a), section 6512, and section 7481 shall apply to
            proceedings brought under this section in the same manner as if
            the Secretary's determination described in subsection (a) were a
            notice of deficiency.
                ``(2) Awarding of costs and certain fees.--Section 7430
            shall apply to proceedings brought under this section.

        ``(e) Employment Tax.--The term `employment tax' means any tax
    imposed by subtitle C.''.
        (b) Conforming Amendments.--
                (1) Subsection (d) of section 6511 is amended by adding at
            the end the following new paragraph:
                ``(7) Special period of limitation with respect to self-
            employment tax in certain cases.--If--
                        ``(A) the claim for credit or refund relates to an
                    overpayment of the tax imposed by chapter 2 (relating to
                    the

    [[Page 111 STAT. 1057]]

                    tax on self-employment income) attributable to Tax Court
                    determination in a proceeding under section 7436, and
                        ``(B) the allowance of a credit or refund of such
                    overpayment is otherwise prevented by the operation of
                    any law or rule of law other than section 7122 (relating
                    to compromises),
            such credit or refund may be allowed or made if claim therefor
            is filed on or before the last day of the second year after the
            calendar year in which such determination becomes final.''.
                (2) Subsection (a) of section 7421 is amended by striking
            ``and 7429(b)'' and inserting ``7429(b), and 7436''.
                (3) Sections 7453 and 7481(b) are each amended by striking
            ``section 7463'' and inserting ``section 7436(c) or 7463''.
                (4) The table of sections for subchapter B of chapter 76 is
            amended by striking the last item and inserting the following:
                    ``Sec. 7436. Proceedings for determination of employment
                                    status.
                    ``Sec. 7437. Cross references.''.

    <<NOTE: 26 USC 6511 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect on the date of the enactment of this
    Act.

                          Subtitle D--Other Provisions

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

        (a) In General.--Paragraph (3) of section 6655(g) is amended by
    adding at the end the following new sentence: ``In the case of a private
    foundation, subsection (c)(2) shall be applied by substituting `May 15'
    for `April 15'.''.
    <<NOTE: 26 USC 6655 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply for purposes of determining underpayments
    of estimated tax for taxable years beginning after the date of the
    enactment of this Act.

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

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

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

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

    [[Page 111 STAT. 1058]]

    <<NOTE: 26 USC 6621 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply for purposes of determining interest for
    periods after December 31, 1997.

                    TITLE XV--PENSIONS AND EMPLOYEE BENEFITS

                           Subtitle A--Simplification

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

        (a) In General.--Section 402(g) (relating to limitation on exclusion
    for elective deferrals) is amended by adding at the end the following:
                ``(9) Matching contributions on behalf of self-employed
            individuals not treated as elective employer contributions.--
            Except as provided in section 401(k)(3)(D)(ii), any matching
            contribution described in section 401(m)(4)(A) which is made on
            behalf of a self-employed individual (as defined in section
            401(c)) shall not be treated as an elective employer
            contribution under a qualified cash or deferred arrangement (as
            defined in section 401(k)) for purposes of this title.''.

        (b) Conforming Amendment for Simple Retirement Accounts.--Section
    408(p) (relating to simple retirement accounts) is amended by adding at
    the end the following:
                ``(8) Matching contributions on behalf of self-employed
            individuals not treated as elective employer contributions.--Any
            matching contribution described in paragraph (2)(A)(iii) which
            is made on behalf of a self-employed individual (as defined in
            section 401(c)) shall not be treated as an elective employer
            contribution to a simple retirement account for purposes of this
            title.''.

        (c) Effective Dates.--
            <<NOTE: 26 USC 402 note.>>     (1) Elective deferrals.--The
            amendment made by subsection (a) shall apply to years beginning
            after December 31, 1997.
            <<NOTE: 26 USC 408 note.>>     (2) Simple retirement accounts.--
            The amendment made by subsection (b) shall apply to years
            beginning after December 31, 1996.

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

        (a) Amendment to ERISA.--Section 206(d) of the Employee Retirement
    Income Security Act of 1974 (29 U.S.C. 1056(d)) is amended by adding at
    the end the following:
        ``(4) Paragraph (1) shall not apply to any offset of a participant's
    benefits provided under an employee pension benefit plan against an
    amount that the participant is ordered or required to pay to the plan
    if--
                ``(A) the order or requirement to pay arises--
                        ``(i) under a judgment of conviction for a crime
                    involving such plan,

    [[Page 111 STAT. 1059]]

                        ``(ii) under a civil judgment (including a consent
                    order or decree) entered by a court in an action brought
                    in connection with a violation (or alleged violation) of
                    part 4 of this subtitle, or
                        ``(iii) pursuant to a settlement agreement between
                    the Secretary and the participant, or a settlement
                    agreement between the Pension Benefit Guaranty
                    Corporation and the participant, in connection with a
                    violation (or alleged violation) of part 4 of this
                    subtitle by a fiduciary or any other person,
                ``(B) the judgment, order, decree, or settlement agreement
            expressly provides for the offset of all or part of the amount
            ordered or required to be paid to the plan against the
            participant's benefits provided under the plan, and
                ``(C) in a case in which the survivor annuity requirements
            of section 205 apply with respect to distributions from the plan
            to the participant, if the participant has a spouse at the time
            at which the offset is to be made--
                        ``(i) either--
                              ``(I) such spouse has consented in writing to
                          such offset and such consent is witnessed by a
                          notary public or representative of the plan (or it
                          is established to the satisfaction of a plan
                          representative that such consent may not be
                          obtained by reason of circumstances described in
                          section 205(c)(2)(B)), or
                              ``(II) an election to waive the right of the
                          spouse to a qualified joint and survivor annuity
                          or a qualified preretirement survivor annuity is
                          in effect in accordance with the requirements of
                          section 205(c),
                        ``(ii) such spouse is ordered or required in such
                    judgment, order, decree, or settlement to pay an amount
                    to the plan in connection with a violation of part 4 of
                    this subtitle, or
                        ``(iii) in such judgment, order, decree, or
                    settlement, such spouse retains the right to receive the
                    survivor annuity under a qualified joint and survivor
                    annuity provided pursuant to section 205(a)(1) and under
                    a qualified preretirement survivor annuity provided
                    pursuant to section 205(a)(2), determined in accordance
                    with paragraph (5).

    A plan shall not be treated as failing to meet the requirements of
    section 205 solely by reason of an offset under this paragraph.
        ``(5)(A) The survivor annuity described in paragraph (4)(C)(iii)
    shall be determined as if--
                ``(i) the participant terminated employment on the date of
            the offset,
                ``(ii) there was no offset,
                ``(iii) the plan permitted commencement of benefits only on
            or after normal retirement age,
                ``(iv) the plan provided only the minimum-required qualified
            joint and survivor annuity, and
                ``(v) the amount of the qualified preretirement survivor
            annuity under the plan is equal to the amount of the survivor
            annuity payable under the minimum-required qualified joint and
            survivor annuity.

        ``(B) For purposes of this paragraph, the term `minimum-required
    qualified joint and survivor annuity' means the qualified joint and
    survivor annuity which is the actuarial equivalent of

    [[Page 111 STAT. 1060]]

    the participant's accrued benefit (within the meaning of section 3(23))
    and under which the survivor annuity is 50 percent of the amount of the
    annuity which is payable during the joint lives of the participant and
    the spouse.''.
        (b) Amendment to 1986 Code.--Section 401(a)(13) (relating to
    assignment and alienation) is amended by adding at the end the
    following:
                        ``(C) Special rule for certain judgments and
                    settlements.--Subparagraph (A) shall not apply to any
                    offset of a participant's benefits provided under a plan
                    against an amount that the participant is ordered or
                    required to pay to the plan if--
                              ``(i) the order or requirement to pay arises--
                                        ``(I) under a judgment of conviction
                                    for a crime involving such plan,
                                        ``(II) under a civil judgment
                                    (including a consent order or decree)
                                    entered by a court in an action brought
                                    in connection with a violation (or
                                    alleged violation) of part 4 of subtitle
                                    B of title I of the Employee Retirement
                                    Income Security Act of 1974, or
                                        ``(III) pursuant to a settlement
                                    agreement between the Secretary of Labor
                                    and the participant, or a settlement
                                    agreement between the Pension Benefit
                                    Guaranty Corporation and the
                                    participant, in connection with a
                                    violation (or alleged violation) of part
                                    4 of such subtitle by a fiduciary or any
                                    other person,
                              ``(ii) the judgment, order, decree, or
                          settlement agreement expressly provides for the
                          offset of all or part of the amount ordered or
                          required to be paid to the plan against the
                          participant's benefits provided under the plan,
                          and
                              ``(iii) in a case in which the survivor
                          annuity requirements of section 401(a)(11) apply
                          with respect to distributions from the plan to the
                          participant, if the participant has a spouse at
                          the time at which the offset is to be made--
                                        ``(I) either such spouse has
                                    consented in writing to such offset and
                                    such consent is witnessed by a notary
                                    public or representative of the plan (or
                                    it is established to the satisfaction of
                                    a plan representative that such consent
                                    may not be obtained by reason of
                                    circumstances described in section
                                    417(a)(2)(B)), or an election to waive
                                    the right of the spouse to either a
                                    qualified joint and survivor annuity or
                                    a qualified preretirement survivor
                                    annuity is in effect in accordance with
                                    the requirements of section 417(a),
                                        ``(II) such spouse is ordered or
                                    required in such judgment, order,
                                    decree, or settlement to pay an amount
                                    to the plan in connection with a
                                    violation of part 4 of such subtitle, or
                                        ``(III) in such judgment, order,
                                    decree, or settlement, such spouse
                                    retains the right to receive the
                                    survivor annuity under a qualified joint
                                    and survivor annuity provided pursuant
                                    to section

    [[Page 111 STAT. 1061]]

                                    401(a)(11)(A)(i) and under a qualified
                                    preretirement survivor annuity provided
                                    pursuant to section 401(a)(11)(A)(ii),
                                    determined in accordance with
                                    subparagraph (D).
                    A plan shall not be treated as failing to meet the
                    requirements of this subsection, subsection (k), section
                    403(b), or section 409(d) solely by reason of an offset
                    described in this subparagraph.
                        ``(D) Survivor annuity.--
                              ``(i) In general.--The survivor annuity
                          described in subparagraph (C)(iii)(III) shall be
                          determined as if--
                                        ``(I) the participant terminated
                                    employment on the date of the offset,
                                        ``(II) there was no offset,
                                        ``(III) the plan permitted
                                    commencement of benefits only on or
                                    after normal retirement age,
                                        ``(IV) the plan provided only the
                                    minimum-required qualified joint and
                                    survivor annuity, and
                                        ``(V) the amount of the qualified
                                    preretirement survivor annuity under the
                                    plan is equal to the amount of the
                                    survivor annuity payable under the
                                    minimum-required qualified joint and
                                    survivor annuity.
                              ``(ii) Definition.--For purposes of this
                          subparagraph, the term `minimum-required qualified
                          joint and survivor annuity' means the qualified
                          joint and survivor annuity which is the actuarial
                          equivalent of the participant's accrued benefit
                          (within the meaning of section 411(a)(7)) and
                          under which the survivor annuity is 50 percent of
                          the amount of the annuity which is payable during
                          the joint lives of the participant and the
                          spouse.''.

    <<NOTE: 26 USC 401 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to judgments, orders, and decrees issued,
    and settlement agreements entered into, on or after the date of the
    enactment of this Act.

    SEC. 1503. ELIMINATION OF PAPERWORK BURDENS ON PLANS.

        (a) Elimination of Unnecessary Filing Requirements.--Section 101(b)
    of the Employee Retirement Income Security Act of 1974 (29 U.S.C.
    1021(b)) is amended by striking paragraphs (1), (2), and (3) and by
    redesignating paragraphs (4) and (5) as paragraphs (1) and (2),
    respectively.
        (b) Elimination of Plan Description.--
                (1) In general.--Section 102(a) of the Employee Retirement
            Income Security Act of 1974 (29 U.S.C. 1022(a)) is amended--
                        (A) by striking paragraph (2), and
                        (B) by striking ``(a)(1)'' and inserting ``(a)''.
                (2) Conforming amendments.--
                        (A) Section 102(b) of such Act (29 U.S.C. 1022(b))
                    is amended by striking ``The plan description and
                    summary plan description shall contain'' and inserting
                    ``The summary plan description shall contain''.
                        (B) The heading for section 102 of such Act is
                    amended by striking ``plan description and''.

    [[Page 111 STAT. 1062]]

        (c) Furnishing of Reports.--
                (1) In general.--Section 104(a)(1) of the Employee
            Retirement Income Security Act of 1974 (29 U.S.C. 1024(a)(1)) is
            amended to read as follows:

        ``Sec. 104. (a)(1) The administrator of any employee benefit plan
    subject to this part shall file with the Secretary the annual report for
    a plan year within 210 days after the close of such year (or within such
    time as may be required by regulations promulgated by the Secretary in
    order to reduce duplicative filing). <<NOTE: Public information.>>  The
    Secretary shall make copies of such annual reports available for
    inspection in the public document room of the Department of Labor.''.
                (2) Secretary may request documents.--
                        (A) In general.--Section 104(a) of such Act (29
                    U.S.C. 1024(a)) is amended by adding at the end the
                    following:

        ``(6) The administrator of any employee benefit plan subject to this
    part shall furnish to the Secretary, upon request, any documents
    relating to the employee benefit plan, including but not limited to, the
    latest summary plan description (including any summaries of plan changes
    not contained in the summary plan description), and the bargaining
    agreement, trust agreement, contract, or other instrument under which
    the plan is established or operated.''.
                        (B) Penalty.--Section 502(c) of such Act (29 U.S.C.
                    1132(c)) is amended by redesignating paragraph (6) as
                    paragraph (7) and by inserting after paragraph (5) the
                    following:

        ``(6) If, within 30 days of a request by the Secretary to a plan
    administrator for documents under section 104(a)(6), the plan
    administrator fails to furnish the material requested to the Secretary,
    the Secretary may assess a civil penalty against the plan administrator
    of up to $100 a day from the date of such failure (but in no event in
    excess of $1,000 per request). No penalty shall be imposed under this
    paragraph for any failure resulting from matters reasonably beyond the
    control of the plan administrator.''.
        (d) Conforming Amendments.--
                (1) Section 104(b)(1) of the Employee Retirement Income
            Security Act of 1974 (29 U.S.C. 1024(b)(1)) is amended by
            striking ``section 102(a)(1)'' each place it appears and
            inserting ``section 102(a)''.
                (2) Section 104(b)(2) of such Act (29 U.S.C. 1024(b)(2)) is
            amended by striking ``the plan description and'' and inserting
            ``the latest updated summary plan description and''.
                (3) Section 104(b)(4) of such Act (29 U.S.C. 1024(b)(4)) is
            amended by striking ``plan description''.
                (4) Section 106(a) of such Act (29 U.S.C. 1026(a)) is
            amended by striking ``descriptions,''.
                (5) Section 107 of such Act (29 U.S.C. 1027) is amended by
            striking ``description or''.
                (6) Section 108(2)(B) of such Act (29 U.S.C. 1028(2)(B)) is
            amended by striking ``plan descriptions, annual reports,'' and
            inserting ``annual reports''.
                (7) Section 502(a)(6) of such Act (29 U.S.C. 1132(a)(6)) is
            amended by striking ``or (5)'' and inserting ``(5), or (6)''.

    [[Page 111 STAT. 1063]]

        (e) Technical Correction.--Section 1144(c) of the Social Security
    Act (42 U.S.C. 1320b-14(c)) is amended by redesignating paragraph (9) as
    paragraph (8).

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

        (a) Definition of Compensation.--
                (1) In general.--Section 403(b)(3) (defining includible
            compensation) is amended by adding at the end the following:
            ``Such term includes--
                        ``(A) any elective deferral (as defined in section
                    402(g)(3)), and
                        ``(B) any amount which is contributed or deferred by
                    the employer at the election of the employee and which
                    is not includible in the gross income of the employee by
                    reason of section 125 or 457.''.
            <<NOTE: 26 USC 403 note.>>     (2) Effective date.--The
            amendment made by this subsection shall apply to years beginning
            after December 31, 1997.

        (b) Repeal of Rules in Section 415(e).--The Secretary of the
    Treasury shall modify the regulations regarding the exclusion allowance
    under section 403(b)(2) of the Internal Revenue Code of 1986 to reflect
    the amendment made by section 1452(a) of the Small Business Job
    Protection Act of 1996. <<NOTE: Effective date.>> Such modification
    shall take effect for years beginning after December 31, 1999.

    SEC. 1505. EXTENSION OF MORATORIUM ON APPLICATION OF CERTAIN
                NONDISCRIMINATION RULES TO STATE AND LOCAL GOVERNMENTS.

        (a) General Nondiscrimination and Participation Rules.--
                (1) Nondiscrimination requirements.--Section 401(a)(5)
            (relating to qualified pension, profit-sharing, and stock bonus
            plans) is amended by adding at the end the following:
                        ``(G) State and local governmental plans.--
                    Paragraphs (3) and (4) shall not apply to a governmental
                    plan (within the meaning of section 414(d)) maintained
                    by a State or local government or political subdivision
                    thereof (or agency or instrumentality thereof).''.
                (2) Additional participation requirements.--Section
            401(a)(26)(H) (relating to additional participation
            requirements) is amended to read as follows:
                        ``(H) Exception for state and local governmental
                    plans.--This paragraph shall not apply to a governmental
                    plan (within the meaning of section 414(d)) maintained
                    by a State or local government or political subdivision
                    thereof (or agency or instrumentality thereof).''.
                (3) Minimum participation standards.--Section 410(c)(2)
            (relating to application of participation standards to certain
            plans) is amended to read as follows:
                ``(2) A plan described in paragraph (1) shall be treated as
            meeting the requirements of this section for purposes of section
            401(a), except that in the case of a plan described in
            subparagraph (B), (C), or (D) of paragraph (1), this paragraph
            shall apply only if such plan meets the requirements of section
            401(a)(3) (as in effect on September 1, 1974).''.

        (b) Participation and Discrimination Standards for Qualified Cash or
    Deferred Arrangements.--Section 401(k)(3) (relating to application of
    participation and discrimination standards) is amended by adding at the
    end the following:

    [[Page 111 STAT. 1064]]

                        ``(G) A governmental plan (within the meaning of
                    section 414(d)) maintained by a State or local
                    government or political subdivision thereof (or agency
                    or instrumentality thereof) shall be treated as meeting
                    the requirements of this paragraph.''.

        (c) Nondiscrimination Rules for Section 403(b) Plans.--Section
    403(b)(12) (relating to nondiscrimination requirements) is amended by
    adding at the end the following:
                        ``(C) State and local governmental plans.--For
                    purposes of paragraph (1)(D), the requirements of
                    subparagraph (A)(i) (other than those relating to
                    section 401(a)(17)) shall not apply to a governmental
                    plan (within the meaning of section 414(d)) maintained
                    by a State or local government or political subdivision
                    thereof (or agency or instrumentality thereof).''.

    <<NOTE: 26 USC 401 note.>>     (d) Effective Dates.--
                (1) In general.--The amendments made by this section apply
            to taxable years beginning on or after the date of enactment of
            this Act.
                (2) Treatment for years beginning before date of
            enactment.--A governmental plan (within the meaning of section
            414(d) of the Internal Revenue Code of 1986) maintained by a
            State or local government or political subdivision thereof (or
            agency or instrumentality thereof) shall be treated as
            satisfying the requirements of sections 401(a)(3), 401(a)(4),
            401(a)(26), 401(k), 401(m), 403 (b)(1)(D) and (b)(12), and 410
            of such Code for all taxable years beginning before the date of
            enactment of this Act.

    SEC. 1506. CLARIFICATION OF CERTAIN RULES RELATING TO EMPLOYEE STOCK
                OWNERSHIP PLANS OF S CORPORATIONS.

        (a) Certain Cash Distributions Permitted.--
                (1) Paragraph (2) of section 409(h) is amended by adding at
            the end the following new subparagraph:
                        ``(B) Exception for certain plans restricted from
                    distributing securities.--
                              ``(i) In general.--A plan to which this
                          subparagraph applies shall not be treated as
                          failing to meet the requirements of this
                          subsection or section 401(a) merely because it
                          does not permit a participant to exercise the
                          right described in paragraph (1)(A) if such plan
                          provides that the participant entitled to a
                          distribution has a right to receive the
                          distribution in cash, except that such plan may
                          distribute employer securities subject to a
                          requirement that such securities may be resold to
                          the employer under terms which meet the
                          requirements of paragraph (1)(B).
                              ``(ii) Applicable plans.--This subparagraph
                          shall apply to a plan which otherwise meets the
                          requirements of this subsection or section
                          4975(e)(7) and which is established and maintained
                          by--
                                        ``(I) an employer whose charter or
                                    bylaws restrict the ownership of
                                    substantially all outstanding employer
                                    securities to employees or to a trust
                                    described in section 401(a), or
                                        ``(II) an S corporation.''.

    [[Page 111 STAT. 1065]]

                (2) Paragraph (2) of section 409(h), as in effect before the
            amendment made by paragraph (1), is amended--
                        (A) by striking ``A plan which'' in the first
                    sentence and inserting the following:
                        ``(A) In general.--A plan which'', and
                        (B) by striking the last sentence.

        (b) Certain Shareholder-Employees Not Treated as Owner-Employees.--
                (1) Amendment to 1986 code.--
                        (A) In general.--Section 4975(f) is amended by
                    adding at the end the following new paragraph:
                ``(6) Exemptions not to apply to certain transactions.--
                        ``(A) In general.--In the case of a trust described
                    in section 401(a) which is part of a plan providing
                    contributions or benefits for employees some or all of
                    whom are owner-employees (as defined in section
                    401(c)(3)), the exemptions provided by subsection (d)
                    (other than paragraphs (9) and (12)) shall not apply to
                    a transaction in which the plan directly or indirectly--
                              ``(i) lends any part of the corpus or income
                          of the plan to,
                              ``(ii) pays any compensation for personal
                          services rendered to the plan to, or
                              ``(iii) acquires for the plan any property
                          from, or sells any property to,
                    any such owner-employee, a member of the family (as
                    defined in section 267(c)(4)) of any such owner-
                    employee, or any corporation in which any such owner-
                    employee owns, directly or indirectly, 50 percent or
                    more of the total combined voting power of all classes
                    of stock entitled to vote or 50 percent or more of the
                    total value of shares of all classes of stock of the
                    corporation.
                        ``(B) Special rules for shareholder-employees,
                    etc.--
                              ``(i) In general.--For purposes of
                          subparagraph (A), the following shall be treated
                          as owner-employees:
                                        ``(I) A shareholder-employee.
                                        ``(II) A participant or beneficiary
                                    of an individual retirement plan (as
                                    defined in section 7701(a)(37)).
                                        ``(III) An employer or association
                                    of employees which establishes such an
                                    individual retirement plan under section
                                    408(c).
                              ``(ii) Exception for certain transactions
                          involving shareholder-employees.--Subparagraph
                          (A)(iii) shall not apply to a transaction which
                          consists of a sale of employer securities to an
                          employee stock ownership plan (as defined in
                          subsection (e)(7)) by a shareholder-employee, a
                          member of the family (as defined in section
                          267(c)(4)) of such shareholder-employee, or a
                          corporation in which such a shareholder-employee
                          owns stock representing a 50 percent or greater
                          interest described in subparagraph (A).
                        ``(C) Shareholder-employee.--For purposes of
                    subparagraph (B), the term `shareholder-employee' means
                    an employee or officer of an S corporation who owns (or

    [[Page 111 STAT. 1066]]

                    is considered as owning within the meaning of section
                    318(a)(1)) more than 5 percent of the outstanding stock
                    of the corporation on any day during the taxable year of
                    such corporation.''.
                        (B) Conforming amendments.--Section 4975(d) is
                    amended--
                              (i) by striking ``The prohibitions'' and
                          inserting ``Except as provided in subsection
                          (f)(6), the prohibitions'', and
                              (ii) by striking the last two sentences
                          thereof.
                (2) Amendment to erisa.--Section 408(d) of the Employee
            Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)) is
            amended to read as follows:

        ``(d)(1) Section 407(b) and subsections (b), (c), and (e) of this
    section shall not apply to a transaction in which a plan directly or
    indirectly--
                ``(A) lends any part of the corpus or income of the plan to,
                ``(B) pays any compensation for personal services rendered
            to the plan to, or
                ``(C) acquires for the plan any property from, or sells any
            property to,

    any person who is with respect to the plan an owner-employee (as defined
    in section 401(c)(3) of the Internal Revenue Code of 1986), a member of
    the family (as defined in section 267(c)(4) of such Code) of any such
    owner-employee, or any corporation in which any such owner-employee
    owns, directly or indirectly, 50 percent or more of the total combined
    voting power of all classes of stock entitled to vote or 50 percent or
    more of the total value of shares of all classes of stock of the
    corporation.
        ``(2)(A) For purposes of paragraph (1), the following shall be
    treated as owner-employees:
                ``(i) A shareholder-employee.
                ``(ii) A participant or beneficiary of an individual
            retirement plan (as defined in section 7701(a)(37) of the
            Internal Revenue Code of 1986).
                ``(iii) An employer or association of employees which
            establishes such an individual retirement plan under section
            408(c) of such Code.

        ``(B) Paragraph (1)(C) shall not apply to a transaction which
    consists of a sale of employer securities to an employee stock ownership
    plan (as defined in section 407(d)(6)) by a shareholder-employee, a
    member of the family (as defined in section 267(c)(4) of such Code) of
    any such owner-employee, or a corporation in which such a shareholder-
    employee owns stock representing a 50 percent or greater interest
    described in paragraph (1).
        ``(3) For purposes of paragraph (2), the term `shareholder-employee'
    means an employee or officer of an S corporation (as defined in section
    1361(a)(1) of such Code) who owns (or is considered as owning within the
    meaning of section 318(a)(1) of such Code) more than 5 percent of the
    outstanding stock of the corporation on any day during the taxable year
    of such corporation.''.
    <<NOTE: 26 USC 409 note.>>     (c) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

    [[Page 111 STAT. 1067]]

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

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

    <<NOTE: 26 USC 4972 note.>>     (b) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

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

        (a) Funding Rules for Certain Plans.--Section 769 of the Retirement
    Protection Act of 1994 <<NOTE: 26 USC 412 note.>> is amended by adding
    at the end the following new subsection:

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

    [[Page 111 STAT. 1068]]

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

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

    <<NOTE: 26 USC 412 note.>>     (b) Effective Date.--The amendment made
    by this section shall apply to plan years beginning after December 31,
    1996.

    <<NOTE: 26 USC 402 note.>> SEC. 1509. CLARIFICATION OF DISQUALIFICATION
                RULES RELATING TO ACCEPTANCE OF ROLLOVER CONTRIBUTIONS.

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

    SEC. 1510. NEW TECHNOLOGIES IN RETIREMENT PLANS.

    <<NOTE: Regulations. 26 USC 401 note.>>     (a) In General.--Not later
    than December 31, 1998, the Secretary of the Treasury and the Secretary
    of Labor shall each issue guidance which is designed to--
                (1) interpret the notice, election, consent, disclosure, and
            time requirements (and related recordkeeping requirements)

    [[Page 111 STAT. 1069]]

            under the Internal Revenue Code of 1986 and the Employee
            Retirement Income Security Act of 1974 relating to retirement
            plans as applied to the use of new technologies by plan sponsors
            and administrators while maintaining the protection of the
            rights of participants and beneficiaries, and
                (2) clarify the extent to which writing requirements under
            the Internal Revenue Code of 1986 relating to retirement plans
            shall be interpreted to permit paperless transactions.

        (b) Applicability of Final Regulations.--Final regulations
    applicable to the guidance regarding new technologies described in
    subsection (a) shall not be effective until the first plan year
    beginning at least 6 months after the issuance of such final
    regulations.

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

    SEC. 1521. INCREASE IN CURRENT LIABILITY FUNDING LIMIT.

        (a) Amendment to 1986 Code.--Section 412(c)(7) (relating to full-
    funding limitation) is amended--
                        (A) by striking ``150 percent'' in subparagraph
                    (A)(i)(I) and inserting ``the applicable percentage'',
                    and
                        (B) by adding at the end the following:
                        ``(F) Applicable percentage.--For purposes of
                    subparagraph (A)(i)(I), the applicable percentage shall
                    be determined in accordance with the following table:
    ``In the case of any plan The applicable percentage is--
            beginning in--
    1999 or 2000                                                        155
    2001 or 2002                                                        160
    2003 or 2004                                                        165
    2005 and succeeding years                                        170.''.

        (b) Amendment to ERISA.--Section 302(c)(7) of the Employee
    Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7)) is
    amended--
                        (A) by striking ``150 percent'' in subparagraph
                    (A)(i)(I) and inserting ``the applicable percentage'',
                    and
                        (B) by adding at the end the following:
                ``(F) Applicable percentage.--For purposes of subparagraph
            (A)(i)(I), the applicable percentage shall be determined in
            accordance with the following table:
    ``In the case of any plan The applicable percentage is--
            beginning in--
    1999 or 2000                                                        155
    2001 or 2002                                                        160
    2003 or 2004                                                        165
    2005 and succeeding years                                        170.''.

        (c) Special Amortization Rule.--
                (1) Code amendment.--Section 412(b)(2) is amended by
            striking ``and'' at the end of subparagraph (C), by striking the
            period at the end of subparagraph (D) and inserting ``, and'',
            and by inserting after subparagraph (D) the following:
                        ``(E) the amount necessary to amortize in equal
                    annual installments (until fully amortized) over a
                    period of 20 years the contributions which would be
                    required to be

    [[Page 111 STAT. 1070]]

                    made under the plan but for the provisions of subsection
                    (c)(7)(A)(i)(I).''.
                (2) ERISA amendment.--Section 302(b)(2) of the Employee
            Retirement Income Security Act of 1974 (29 U.S.C. 1082(b)(2)) is
            amended by striking ``and'' at the end of subparagraph (C), by
            striking the period at the end of subparagraph (D) and inserting
            ``, and'', and by inserting after subparagraph (D) the
            following:
                ``(E) the amount necessary to amortize in equal annual
            installments (until fully amortized) over a period of 20 years
            the contributions which would be required to be made under the
            plan but for the provisions of subsection (c)(7)(A)(i)(I).''.
                (3) Conforming amendments.--
                        (A) Section 412(c)(7)(D) is amended by adding
                    ``and'' at the end of clause (i), by striking ``, and''
                    at the end of clause (ii) and inserting a period, and by
                    striking clause (iii).
                        (B) Section 302(c)(7)(D) of the Employee Retirement
                    Income Security Act of 1974 (29 U.S.C. 1082(c)(7)(D)) is
                    amended by adding ``and'' at the end of clause (i), by
                    striking ``, and'' at the end of clause (ii) and
                    inserting a period, and by striking clause (iii).

    <<NOTE: 26 USC 412 note.>>     (d) Effective Dates.--
                (1) In general.--The amendments made by this section shall
            apply to plan years beginning after December 31, 1998.
                (2) Special rule for unamortized balances under existing
            law.--The unamortized balance (as of the close of the plan year
            preceding the plan's first year beginning in 1999) of any
            amortization base established under section 412(c)(7)(D)(iii) of
            such Code and section 302(c)(7)(D)(iii) of such Act (as repealed
            by subsection (c)(3)) for any plan year beginning before 1999
            shall be amortized in equal annual installments (until fully
            amortized) over a period of years equal to the excess of--
                        (A) 20 years, over
                        (B) the number of years since the amortization base
                    was established.

    SEC. 1522. SPECIAL RULES FOR CHURCH PLANS.

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

    <<NOTE: 26 USC 414 note.>>     (b) Effective Date.--The amendments made
    by this section shall apply to years beginning after December 31, 1997.

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

        (a) In General.--Section 512(e) is amended by adding at the end the
    following new paragraph:

    [[Page 111 STAT. 1071]]

                ``(3) Exception for esops.--This subsection shall not apply
            to employer securities (within the meaning of section 409(l))
            held by an employee stock ownership plan described in section
            4975(e)(7).''.

    <<NOTE: 26 USC 512 note.>>     (b) Effective Date.--The amendments made
    by this section shall apply to taxable years beginning after December
    31, 1997.

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

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

    [[Page 111 STAT. 1072]]

    <<NOTE: 29 USC 1107 note.>>     (b) Effective Date.--The amendments made
    by this section shall apply to elective deferrals for plan years
    beginning after December 31, 1998.

    SEC. 1525. SECTION 401(K) PLANS FOR CERTAIN IRRIGATION AND DRAINAGE
                ENTITIES.

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

    <<NOTE: 26 USC 401 note.>>     (b) Effective Date.--The amendments made
    by subsection (a) shall apply to years beginning after December 31,
    1997.

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

        (a) In General.--Section 415 (relating to limitations on benefits
    and contributions under qualified plans) is amended by adding at the end
    the following new subsection:
        ``(n) Special Rules Relating to Purchase of Permissive Service
    Credit.--
                ``(1) In general.--If an employee makes 1 or more
            contributions to a defined benefit governmental plan (within the
            meaning of section 414(d)) to purchase permissive service credit
            under such plan, then the requirements of this section shall be
            treated as met only if--
                        ``(A) the requirements of subsection (b) are met,
                    determined by treating the accrued benefit derived from
                    all such contributions as an annual benefit for purposes
                    of subsection (b), or
                        ``(B) the requirements of subsection (c) are met,
                    determined by treating all such contributions as annual
                    additions for purposes of subsection (c).
                ``(2) Application of limit.--For purposes of--
                        ``(A) applying paragraph (1)(A), the plan shall not
                    fail to meet the reduced limit under subsection
                    (b)(2)(C) solely by reason of this subsection, and
                        ``(B) applying paragraph (1)(B), the plan shall not
                    fail to meet the percentage limitation under subsection
                    (c)(1)(B) solely by reason of this subsection.
                ``(3) Permissive service credit.--For purposes of this
            subsection--
                        ``(A) In general.--The term `permissive service
                    credit' means service credit--
                              ``(i) recognized by the governmental plan for
                          purposes of calculating a participant's benefit
                          under the plan,

    [[Page 111 STAT. 1073]]

                              ``(ii) which such participant has not received
                          under such governmental plan, and
                              ``(iii) which such participant may receive
                          only by making a voluntary additional
                          contribution, in an amount determined under such
                          governmental plan, which does not exceed the
                          amount necessary to fund the benefit attributable
                          to such service credit.
                        ``(B) Limitation on nonqualified service credit.--A
                    plan shall fail to meet the requirements of this section
                    if--
                              ``(i) more than 5 years of permissive service
                          credit attributable to nonqualified service are
                          taken into account for purposes of this
                          subsection, or
                              ``(ii) any permissive service credit
                          attributable to nonqualified service is taken into
                          account under this subsection before the employee
                          has at least 5 years of participation under the
                          plan.
                        ``(C) Nonqualified service.--For purposes of
                    subparagraph (B), the term `nonqualified service' means
                    service for which permissive service credit is allowed
                    other than--
                              ``(i) service (including parental, medical,
                          sabbatical, and similar leave) as an employee of
                          the Government of the United States, any State or
                          political subdivision thereof, or any agency or
                          instrumentality of any of the foregoing (other
                          than military service or service for credit which
                          was obtained as a result of a repayment described
                          in subsection (k)(3)),
                              ``(ii) service (including parental, medical,
                          sabbatical, and similar leave) as an employee
                          (other than as an employee described in clause
                          (i)) of an educational organization described in
                          section 170(b)(1)(A)(ii) which is a public,
                          private, or sectarian school which provides
                          elementary or secondary education (through grade
                          12), as determined under State law,
                              ``(iii) service as an employee of an
                          association of employees who are described in
                          clause (i), or
                              ``(iv) military service (other than qualified
                          military service under section 414(u)) recognized
                          by such governmental plan.
                    In the case of service described in clauses (i), (ii),
                    or (iii), such service will be nonqualified service if
                    recognition of such service would cause a participant to
                    receive a retirement benefit for the same service under
                    more than one plan.''.

        (b) Special Rule for Repayment of Cashouts.--Section 415(k)
    (relating to special rules) is amended by adding at the end the
    following new paragraph:
                ``(3) Repayments of cashouts under governmental plans.--In
            the case of any repayment of contributions (including interest
            thereon) to the governmental plan with respect to an amount
            previously refunded upon a forfeiture of service credit under
            the plan or under another governmental plan maintained by a
            State or local government employer within the same State, any
            such repayment shall not be taken into account for purposes of
            this section.''.

    <<NOTE: 26 USC 415 note.>>     (c) Effective Dates.--

    [[Page 111 STAT. 1074]]

                (1) In general.--The amendments made by this section shall
            apply to permissive service credit contributions made in years
            beginning after December 31, 1997.
                (2) Transition rule.--
                        (A) In general.--In the case of an eligible
                    participant in a governmental plan (within the meaning
                    of section 414(d) of the Internal Revenue Code of 1986),
                    the limitations of section 415(c)(1) of such Code shall
                    not be applied to reduce the amount of permissive
                    service credit which may be purchased to an amount less
                    than the amount which was allowed to be purchased under
                    the terms of the plan as in effect on the date of the
                    enactment of this Act.
                        (B) Eligible participant.--For purposes of
                    subparagraph (A), an eligible participant is an
                    individual who first became a participant in the plan
                    before the first plan year beginning after the last day
                    of the calendar year in which the next regular session
                    (following the date of the enactment of this Act) of the
                    governing body with authority to amend the plan ends.

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

        (a) In General.--Subparagraph (G) of section 415(b)(2) is amended by
    striking ``participant--'' and all that follows and inserting
    ``participant, subparagraph (C) of this paragraph shall not apply.''.
    <<NOTE: 26 USC 415 note.>>     (b) Effective Date.--The amendment made
    by subsection (a) shall apply to years beginning after December 31,
    1996.

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

        (a) In General.--Section 101 (relating to certain death benefits) is
    amended by adding at the end the following new subsection:
        ``(h) Survivor Benefits Attributable to Service by a Public Safety
    Officer who is Killed in the Line of Duty.--
                ``(1) In general.--Gross income shall not include any amount
            paid as a survivor annuity on account of the death of a public
            safety officer (as such term is defined in section 1204 of the
            Omnibus Crime Control and Safe Streets Act of 1968) killed in
            the line of duty--
                        ``(A) if such annuity is provided, under a
                    governmental plan which meets the requirements of
                    section 401(a), to the spouse (or a former spouse) of
                    the public safety officer or to a child of such officer;
                    and
                        ``(B) to the extent such annuity is attributable to
                    such officer's service as a public safety officer.
                ``(2) Exceptions.--Paragraph (1) shall not apply with
            respect to the death of any public safety officer if, as
            determined in accordance with the provisions of the Omnibus
            Crime Control and Safe Streets Act of 1968--
                        ``(A) the death was caused by the intentional
                    misconduct of the officer or by such officer's intention
                    to bring about such officer's death;
                        ``(B) the officer was voluntarily intoxicated (as
                    defined in section 1204 of such Act) at the time of
                    death;

    [[Page 111 STAT. 1075]]

                        ``(C) the officer was performing such officer's
                    duties in a grossly negligent manner at the time of
                    death; or
                        ``(D) the payment is to an individual whose actions
                    were a substantial contributing factor to the death of
                    the officer.''.

    <<NOTE: 26 USC 101 note.>>     (b) Effective Date.--The amendments made
    by this section shall apply to amounts received in taxable years
    beginning after December 31, 1996, with respect to individuals dying
    after such date.

    SEC. 1529. TREATMENT OF CERTAIN DISABILITY BENEFITS RECEIVED BY FORMER
                POLICE OFFICERS OR FIREFIGHTERS.

        (a) General Rule.--For purposes of determining whether any amount to
    which this section applies is excludable from gross income under section
    104(a)(1) of the Internal Revenue Code of 1986, the following conditions
    shall be treated as personal injuries or sickness in the course of
    employment:
                (1) Heart disease.
                (2) Hypertension.

        (b) Amounts To Which Section Applies.--This section shall apply to
    any amount--
                (1) which is payable--
                        (A) to an individual (or to the survivors of an
                    individual) who was a full-time employee of any police
                    department or fire department which is organized and
                    operated by a State, by any political subdivision
                    thereof, or by any agency or instrumentality of a State
                    or political subdivision thereof, and
                        (B) under a State law (as amended on May 19, 1992)
                    which irrebuttably presumed that heart disease and
                    hypertension are work-related illnesses but only for
                    employees separating from service before July 1, 1992;
                    and
                (2) which was received in calendar year 1989, 1990, or 1991.

        (c) Waiver of Statute of Limitations.--If, on the date of the
    enactment of this Act (or at any time within the 1-year period beginning
    on such date of enactment), credit or refund of any overpayment of tax
    resulting from the provisions of this section is barred by any law or
    rule of law (including res judicata), then credit or refund of such
    overpayment shall, nevertheless, be allowed or made if claim therefore
    is filed before the date 1 year after such date of enactment.

    SEC. 1530. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES.

        (a) In General.--Subparagraph (C) of section 664(d)(1) and
    subparagraph (C) of section 664(d)(2) are each amended by striking the
    period at the end thereof and inserting ``or, to the extent the
    remainder interest is in qualified employer securities (as defined in
    subsection (g)(4)), all or part of such securities are to be transferred
    to an employee stock ownership plan (as defined in section 4975(e)(7))
    in a qualified gratuitous transfer (as defined by subsection (g)).''.
        (b) Qualified Gratuitous Transfer Defined.--Section 664 is amended
    by adding at the end the following new subsection:
        ``(g) Qualified Gratuitous Transfer of Qualified Employer
    Securities.--

    [[Page 111 STAT. 1076]]

                ``(1) In general.--For purposes of this section, the term
            `qualified gratuitous transfer' means a transfer of qualified
            employer securities to an employee stock ownership plan (as
            defined in section 4975(e)(7)) but only to the extent that--
                        ``(A) the securities transferred previously passed
                    from a decedent dying before January 1, 1999, to a trust
                    described in paragraph (1) or (2) of subsection (d),
                        ``(B) no deduction under section 404 is allowable
                    with respect to such transfer,
                        ``(C) such plan contains the provisions required by
                    paragraph (3),
                        ``(D) such plan treats such securities as being
                    attributable to employer contributions but without
                    regard to the limitations otherwise applicable to such
                    contributions under section 404, and
                        ``(E) the employer whose employees are covered by
                    the plan described in this paragraph files with the
                    Secretary a verified written statement consenting to the
                    application of sections 4978 and 4979A with respect to
                    such employer.
                ``(2) Exception.--The term `qualified gratuitous transfer'
            shall not include a transfer of qualified employer securities to
            an employee stock ownership plan unless--
                        ``(A) such plan was in existence on August 1, 1996,
                        ``(B) at the time of the transfer, the decedent and
                    members of the decedent's family (within the meaning of
                    section 2032A(e)(2)) own (directly or through the
                    application of section 318(a)) no more than 10 percent
                    of the value of the stock of the corporation referred to
                    in paragraph (4), and
                        ``(C) immediately after the transfer, such plan owns
                    (after the application of section 318(a)(4)) at least 60
                    percent of the value of the outstanding stock of the
                    corporation.
                ``(3) Plan requirements.--A plan contains the provisions
            required by this paragraph if such plan provides that--
                        ``(A) the qualified employer securities so
                    transferred are allocated to plan participants in a
                    manner consistent with section 401(a)(4),
                        ``(B) plan participants are entitled to direct the
                    plan as to the manner in which such securities which are
                    entitled to vote and are allocated to the account of
                    such participant are to be voted,
                        ``(C) an independent trustee votes the securities so
                    transferred which are not allocated to plan
                    participants,
                        ``(D) each participant who is entitled to a
                    distribution from the plan has the rights described in
                    subparagraphs (A) and (B) of section 409(h)(1),
                        ``(E) such securities are held in a suspense account
                    under the plan to be allocated each year, up to the
                    limitations under section 415(c), after first allocating
                    all other annual additions for the limitation year, up
                    to the limitations under sections 415 (c) and (e), and
                        ``(F) on termination of the plan, all securities so
                    transferred which are not allocated to plan participants
                    as of such termination are to be transferred to, or for
                    the use of, an organization described in section 170(c).

    [[Page 111 STAT. 1077]]

            For purposes of the preceding sentence, the term `independent
            trustee' means any trustee who is not a member of the family
            (within the meaning of section 2032A(e)(2)) of the decedent or a
            5-percent shareholder. A plan shall not fail to be treated as
            meeting the requirements of section 401(a) by reason of meeting
            the requirements of this subsection.
                ``(4) Qualified employer securities.--For purposes of this
            section, the term `qualified employer securities' means employer
            securities (as defined in section 409(l)) which are issued by a
            domestic corporation--
                        ``(A) which has no outstanding stock which is
                    readily tradable on an established securities market,
                    and
                        ``(B) which has only 1 class of stock.
                ``(5) Treatment of securities allocated by employee stock
            ownership plan to persons related to decedent or 5-percent
            shareholders.--
                        ``(A) In general.--If any portion of the assets of
                    the plan attributable to securities acquired by the plan
                    in a qualified gratuitous transfer are allocated to the
                    account of--
                              ``(i) any person who is related to the
                          decedent (within the meaning of section 267(b)) or
                          a member of the decedent's family (within the
                          meaning of section 2032A(e)(2)), or
                              ``(ii) any person who, at the time of such
                          allocation or at any time during the 1-year period
                          ending on the date of the acquisition of qualified
                          employer securities by the plan, is a 5-percent
                          shareholder of the employer maintaining the plan,
                    the plan shall be treated as having distributed (at the
                    time of such allocation) to such person or shareholder
                    the amount so allocated.
                        ``(B) 5-percent shareholder.--For purposes of
                    subparagraph (A), the term `5-percent shareholder' means
                    any person who owns (directly or through the application
                    of section 318(a)) more than 5 percent of the
                    outstanding stock of the corporation which issued such
                    qualified employer securities or of any corporation
                    which is a member of the same controlled group of
                    corporations (within the meaning of section 409(l)(4))
                    as such corporation. For purposes of the preceding
                    sentence, section 318(a) shall be applied without regard
                    to the exception in paragraph (2)(B)(i) thereof.
                        ``(C) Cross reference.--
                      ``For excise tax on allocations described in
                    subparagraph (A), see section 4979A.

                ``(6) Tax on failure to transfer unallocated securities to
            charity on termination of plan.--If the requirements of
            paragraph (3)(F) are not met with respect to any securities,
            there is hereby imposed a tax on the employer maintaining the
            plan in an amount equal to the sum of--
                        ``(A) the amount of the increase in the tax which
                    would be imposed by chapter 11 if such securities were
                    not transferred as described in paragraph (1), and
                        ``(B) interest on such amount at the underpayment
                    rate under section 6621 (and compounded daily) from the

    [[Page 111 STAT. 1078]]

                    due date for filing the return of the tax imposed by
                    chapter 11.''.

        (c) Conforming Amendments.--
                (1) Section 401(a)(1) is amended by inserting ``or by a
            charitable remainder trust pursuant to a qualified gratuitous
            transfer (as defined in section 664(g)(1)),'' after ``stock
            bonus plans),''.
                (2) Section 404(a)(9) is amended by inserting after
            subparagraph (B) the following new subparagraph:
                        ``(C) A qualified gratuitous transfer (as defined in
                    section 664(g)(1)) shall have no effect on the amount or
                    amounts otherwise deductible under paragraph (3) or (7)
                    or under this paragraph.''.
                (3) Section 415(c)(6) is amended by adding at the end
            thereof the following new sentence:
            ``The amount of any qualified gratuitous transfer (as defined in
            section 664(g)(1)) allocated to a participant for any limitation
            year shall not exceed the limitations imposed by this section,
            but such amount shall not be taken into account in determining
            whether any other amount exceeds the limitations imposed by this
            section.''.
                (4) Section 415(e) is amended--
                        (A) by redesignating paragraph (6) as paragraph (7),
                    and
                        (B) by inserting after paragraph (5) the following
                    new paragraph:
                ``(6) Special rule for qualified gratuitous transfers.--Any
            qualified gratuitous transfer of qualified employer securities
            (as defined by section 664(g)) shall not be taken into account
            in calculating, and shall not be subject to, the limitations
            provided in this subsection.''.
                (5) Subparagraph (B) of section 664(d)(1) and subparagraph
            (B) of section 664(d)(2) are each amended by inserting ``and
            other than qualified gratuitous transfers described in
            subparagraph (C)'' after ``subparagraph (A)''.
                (6) Paragraph (4) of section 674(b) is amended by inserting
            before the period ``or to an employee stock ownership plan (as
            defined in section 4975(e)(7)) in a qualified gratuitous
            transfer (as defined in section 664(g)(1))''.
                (7) Section 2055(a) is amended--
                        (i) by striking ``or'' at the end of paragraph (3),
                        (ii) by striking the period at the end of paragraph
                    (4) and inserting ``; or'', and
                        (iii) by inserting after paragraph (4) the following
                    new paragraph:
                ``(5) to an employee stock ownership plan if such transfer
            qualifies as a qualified gratuitous transfer of qualified
            employer securities within the meaning of section 664(g).''.
                (8) Paragraph (8) of section 2056(b) is amended to read as
            follows:
                ``(8) Special rule for charitable remainder trusts.--
                        ``(A) In general.--If the surviving spouse of the
                    decedent is the only beneficiary of a qualified
                    charitable remainder trust who is not a charitable
                    beneficiary nor an ESOP beneficiary, paragraph (1) shall
                    not apply to any interest in such trust which passes or
                    has passed from the decedent to such surviving spouse.

    [[Page 111 STAT. 1079]]

                        ``(B) Definitions.--For purposes of subparagraph
                    (A)--
                              ``(i) Charitable beneficiary.--The term
                          `charitable beneficiary' means any beneficiary
                          which is an organization described in section
                          170(c).
                              ``(ii) ESOP beneficiary.--The term `ESOP
                          beneficiary' means any beneficiary which is an
                          employee stock ownership plan (as defined in
                          section 4975(e)(7)) that holds a remainder
                          interest in qualified employer securities (as
                          defined in section 664(g)(4)) to be transferred to
                          such plan in a qualified gratuitous transfer (as
                          defined in section 664(g)(1)).
                              ``(iii) Qualified charitable remainder
                          trust.--The term `qualified charitable remainder
                          trust' means a charitable remainder annuity trust
                          or a charitable remainder unitrust (described in
                          section 664).''.
                (9) Section 4947(b) is amended by inserting after paragraph
            (3) the following new paragraph:
                ``(4) Section 507.--The provisions of section 507(a) shall
            not apply to a trust which is described in subsection (a)(2) by
            reason of a distribution of qualified employer securities (as
            defined in section 664(g)(4)) to an employee stock ownership
            plan (as defined in section 4975(e)(7)) in a qualified
            gratuitous transfer (as defined by section 664(g)).''.
                (10) The last sentence of section 4975(e)(7) is amended by
            inserting ``and section 664(g)'' after ``section 409(n)''.
                (11) Subsection (a) of section 4978 is amended--
                        (A) by inserting ``or acquired any qualified
                    employer securities in a qualified gratuitous transfer
                    to which section 664(g) applied'' after ``section 1042
                    applied'', and
                        (B) by inserting before the comma at the end of
                    paragraph (2) ``60 percent of the total value of all
                    employer securities as of such disposition in the case
                    of any qualified employer securities acquired in a
                    qualified gratuitous transfer to which section 664(g)
                    applied)''.
                (12) Paragraph (2) of section 4978(b) is amended--
                        (A) by inserting ``or acquired in the qualified
                    gratuitous transfer to which section 664(g) applied''
                    after ``section 1042 applied'', and
                        (B) by inserting ``or to which section 664(g)
                    applied'' after ``section 1042 applied'' in subparagraph
                    (A) thereof.
                (13) Subsection (c) of section 4978 is amended by striking
            ``written statement'' and all that follows and inserting
            ``written statement described in section 664(g)(1)(E) or in
            section 1042(b)(3) (as the case may be).''.
                (14) Paragraph (2) of section 4978(e) is amended by striking
            the period and inserting ``; except that such section shall be
            applied without regard to subparagraph (B) thereof for purposes
            of applying this section and section 4979A with respect to
            securities acquired in a qualified gratuitous transfer (as
            defined in section 664(g)(1)).''.
                (15) Subsection (a) of section 4979A is amended to read as
            follows:

        ``(a) Imposition of Tax.--If--
                ``(1) there is a prohibited allocation of qualified
            securities by any employee stock ownership plan or eligible
            worker-owned cooperative, or
                ``(2) there is an allocation described in section
            664(g)(5)(A),

    [[Page 111 STAT. 1080]]

    there is hereby imposed a tax on such allocation equal to 50 percent of
    the amount involved.''.
                (16) Subsection (c) of section 4979A is amended to read as
            follows:

        ``(c) Liability for Tax.--The tax imposed by this section shall be
    paid by--
                ``(1) the employer sponsoring such plan, or
                ``(2) the eligible worker-owned cooperative,

    which made the written statement described in section 664(g)(1)(E) or in
    section 1042(b)(3)(B) (as the case may be).''.
                (17) Section 4979A is amended by redesignating subsection
            (d) as subsection (e) and by inserting after subsection (c) the
            following new subsection:

        ``(d) Special Statute of Limitations for Tax Attributable to Certain
    Allocations.--The statutory period for the assessment of any tax imposed
    by this section on an allocation described in subsection (a)(2) of
    qualified employer securities shall not expire before the date which is
    3 years from the later of--
                ``(1) the 1st allocation of such securities in connection
            with a qualified gratuitous transfer (as defined in section
            664(g)(1)), or
                ``(2) the date on which the Secretary is notified of the
            allocation described in subsection (a)(2).''.

    <<NOTE: 26 USC 401 note.>>     (d) Effective Date.--The amendments made
    by this section shall apply to transfers made by trusts to, or for the
    use of, an employee stock ownership plan after the date of the enactment
    of this Act.

             Subtitle C--Provisions Relating to Certain Health Acts

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

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

                  ``Subtitle K--Group Health Plan Requirements

                    ``Chapter 100. Group health plan requirements.

                  ``CHAPTER 100--GROUP HEALTH PLAN REQUIREMENTS

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

    [[Page 111 STAT. 1081]]

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

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

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

                       ``Subchapter C--General Provisions

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

                (4) by inserting after section 9803 the following:

                       ``Subchapter B--Other Requirements

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

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

        ``(a) Requirements for Minimum Hospital Stay Following Birth.--
                ``(1) In general.--A group health plan may not--
                        ``(A) except as provided in paragraph (2)--
                              ``(i) restrict benefits for any hospital
                          length of stay in connection with childbirth for
                          the mother or newborn child, following a normal
                          vaginal delivery, to less than 48 hours, or
                              ``(ii) restrict benefits for any hospital
                          length of stay in connection with childbirth for
                          the mother or newborn child, following a caesarean
                          section, to less than 96 hours; or
                        ``(B) require that a provider obtain authorization
                    from the plan or the issuer for prescribing any length
                    of stay required under subparagraph (A) (without regard
                    to paragraph (2)).
                ``(2) Exception.--Paragraph (1)(A) shall not apply in
            connection with any group health plan in any case in which the
            decision to discharge the mother or her newborn child prior to
            the expiration of the minimum length of stay otherwise required
            under paragraph (1)(A) is made by an attending provider in
            consultation with the mother.

        ``(b) Prohibitions.--A group health plan may not--
                ``(1) deny to the mother or her newborn child eligibility,
            or continued eligibility, to enroll or to renew coverage under
            the terms of the plan, solely for the purpose of avoiding the
            requirements of this section;
                ``(2) provide monetary payments or rebates to mothers to
            encourage such mothers to accept less than the minimum
            protections available under this section;

    [[Page 111 STAT. 1082]]

                ``(3) penalize or otherwise reduce or limit the
            reimbursement of an attending provider because such provider
            provided care to an individual participant or beneficiary in
            accordance with this section;
                ``(4) provide incentives (monetary or otherwise) to an
            attending provider to induce such provider to provide care to an
            individual participant or beneficiary in a manner inconsistent
            with this section; or
                ``(5) subject to subsection (c)(3), restrict benefits for
            any portion of a period within a hospital length of stay
            required under subsection (a) in a manner which is less
            favorable than the benefits provided for any preceding portion
            of such stay.

        ``(c) Rules of Construction.--
                ``(1) Nothing in this section shall be construed to require
            a mother who is a participant or beneficiary--
                        ``(A) to give birth in a hospital; or
                        ``(B) to stay in the hospital for a fixed period of
                    time following the birth of her child.
                ``(2) This section shall not apply with respect to any group
            health plan which does not provide benefits for hospital lengths
            of stay in connection with childbirth for a mother or her
            newborn child.
                ``(3) Nothing in this section shall be construed as
            preventing a group health plan from imposing deductibles,
            coinsurance, or other cost-sharing in relation to benefits for
            hospital lengths of stay in connection with childbirth for a
            mother or newborn child under the plan, except that such
            coinsurance or other cost-sharing for any portion of a period
            within a hospital length of stay required under subsection (a)
            may not be greater than such coinsurance or cost-sharing for any
            preceding portion of such stay.

        ``(d) Level and Type of Reimbursements.--Nothing in this section
    shall be construed to prevent a group health plan from negotiating the
    level and type of reimbursement with a provider for care provided in
    accordance with this section.
        ``(f) Preemption; Exception for Health Insurance Coverage in Certain
    States.--The requirements of this section shall not apply with respect
    to health insurance coverage if there is a State law (including a
    decision, rule, regulation, or other State action having the effect of
    law) for a State that regulates such coverage that is described in any
    of the following paragraphs:
                ``(1) Such State law requires such coverage to provide for
            at least a 48-hour hospital length of stay following a normal
            vaginal delivery and at least a 96-hour hospital length of stay
            following a caesarean section.
                ``(2) Such State law requires such coverage to provide for
            maternity and pediatric care in accordance with guidelines
            established by the American College of Obstetricians and
            Gynecologists, the American Academy of Pediatrics, or other
            established professional medical associations.
                ``(3) Such State law requires, in connection with such
            coverage for maternity care, that the hospital length of stay
            for such care is left to the decision of (or required to be made
            by) the attending provider in consultation with the mother.

    [[Page 111 STAT. 1083]]

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

        ``(a) In General.--
                ``(1) Aggregate lifetime limits.--In the case of a group
            health plan that provides both medical and surgical benefits and
            mental health benefits--
                        ``(A) No lifetime limit.--If the plan does not
                    include an aggregate lifetime limit on substantially all
                    medical and surgical benefits, the plan may not impose
                    any aggregate lifetime limit on mental health benefits.
                        ``(B) Lifetime limit.--If the plan includes an
                    aggregate lifetime limit on substantially all medical
                    and surgical benefits (in this paragraph referred to as
                    the `applicable lifetime limit'), the plan shall
                    either--
                              ``(i) apply the applicable lifetime limit both
                          to the medical and surgical benefits to which it
                          otherwise would apply and to mental health
                          benefits and not distinguish in the application of
                          such limit between such medical and surgical
                          benefits and mental health benefits; or
                              ``(ii) not include any aggregate lifetime
                          limit on mental health benefits that is less than
                          the applicable lifetime limit.
                        ``(C) Rule in case of different limits.--In the case
                    of a plan that is not described in subparagraph (A) or
                    (B) and that includes no or different aggregate lifetime
                    limits on different categories of medical and surgical
                    benefits, the Secretary shall establish rules under
                    which subparagraph (B) is applied to such plan with
                    respect to mental health benefits by substituting for
                    the applicable lifetime limit an average aggregate
                    lifetime limit that is computed taking into account the
                    weighted average of the aggregate lifetime limits
                    applicable to such categories.
                ``(2) Annual limits.--In the case of a group health plan
            that provides both medical and surgical benefits and mental
            health benefits--
                        ``(A) No annual limit.--If the plan does not include
                    an annual limit on substantially all medical and
                    surgical benefits, the plan may not impose any annual
                    limit on mental health benefits.
                        ``(B) Annual limit.--If the plan includes an annual
                    limit on substantially all medical and surgical benefits
                    (in this paragraph referred to as the `applicable annual
                    limit'), the plan shall either--
                              ``(i) apply the applicable annual limit both
                          to medical and surgical benefits to which it
                          otherwise would apply and to mental health
                          benefits and not distinguish in the application of
                          such limit between such medical and surgical
                          benefits and mental health benefits; or
                              ``(ii) not include any annual limit on mental
                          health benefits that is less than the applicable
                          annual limit.
                        ``(C) Rule in case of different limits.--In the case
                    of a plan that is not described in subparagraph (A) or
                    (B) and that includes no or different annual limits on
                    different categories of medical and surgical benefits,
                    the Secretary shall establish rules under which
                    subparagraph (B) is applied to such plan with respect to
                    mental health

    [[Page 111 STAT. 1084]]

                    benefits by substituting for the applicable annual limit
                    an average annual limit that is computed taking into
                    account the weighted average of the annual limits
                    applicable to such categories.

        ``(b) Construction.--Nothing in this section shall be construed--
                ``(1) as requiring a group health plan to provide any mental
            health benefits; or
                ``(2) in the case of a group health plan that provides
            mental health benefits, as affecting the terms and conditions
            (including cost sharing, limits on numbers of visits or days of
            coverage, and requirements relating to medical necessity)
            relating to the amount, duration, or scope of mental health
            benefits under the plan, except as specifically provided in
            subsection (a) (in regard to parity in the imposition of
            aggregate lifetime limits and annual limits for mental health
            benefits).

        ``(c) Exemptions.--
                ``(1) Small employer exemption.--This section shall not
            apply to any group health plan for any plan year of a small
            employer (as defined in section 4980D(d)(2)).
                ``(2) Increased cost exemption.--This section shall not
            apply with respect to a group health plan if the application of
            this section to such plan results in an increase in the cost
            under the plan of at least 1 percent.

        ``(d) Separate Application to Each Option Offered.--In the case of a
    group health plan that offers a participant or beneficiary two or more
    benefit package options under the plan, the requirements of this section
    shall be applied separately with respect to each such option.
        ``(e) Definitions.--For purposes of this section:
                ``(1) Aggregate lifetime limit.--The term `aggregate
            lifetime limit' means, with respect to benefits under a group
            health plan, a dollar limitation on the total amount that may be
            paid with respect to such benefits under the plan with respect
            to an individual or other coverage unit.
                ``(2) Annual limit.--The term `annual limit' means, with
            respect to benefits under a group health plan, a dollar
            limitation on the total amount of benefits that may be paid with
            respect to such benefits in a 12-month period under the plan
            with respect to an individual or other coverage unit.
                ``(3) Medical or surgical benefits.--The term `medical or
            surgical benefits' means benefits with respect to medical or
            surgical services, as defined under the terms of the plan, but
            does not include mental health benefits.
                ``(4) Mental health benefits.--The term `mental health
            benefits' means benefits with respect to mental health services,
            as defined under the terms of the plan, but does not include
            benefits with respect to treatment of substance abuse or
            chemical dependency.

        ``(f) Sunset.--This section shall not apply to benefits for services
    furnished on or after September 30, 2001.''.
        (b) Conforming Amendments.--
                (1) Chapter 100 of such Code is further amended--
                        (A) in the last sentence of section 9801(c)(1), by
                    striking ``section 9805(c)'' and inserting ``section
                    9832(c)'';
                        (B) in section 9831(b), by striking ``9805(c)(1)''
                    and inserting ``9832(c)(1)'';

    [[Page 111 STAT. 1085]]

                        (C) in section 9831(c)(1), by striking
                    ``9805(c)(2)'' and inserting ``9832(c)(2)'';
                        (D) in section 9831(c)(2), by striking
                    ``9805(c)(3)'' and inserting ``9832(c)(3)''; and
                        (E) in section 9831(c)(3), by striking
                    ``9805(c)(4)'' and inserting ``9832(c)(4)''.
                (2) Section 4980D of such Code is amended--
                        (A) in subsection (a), by striking ``plan
                    portability, access, and renewability'' and inserting
                    ``plans'';
                        (B) in subsection (c)(3)(B)(i)(I), by striking
                    ``9805(d)(3)'' and inserting ``9832(d)(3)'';
                        (C) in subsection (d)(1), by inserting ``(other than
                    a failure attributable to section 9811)'' after ``on any
                    failure'';
                        (D) in subsection (d)(3), by striking ``9805'' and
                    inserting ``9832'';
                        (E) in subsection (f)(1), by striking ``9805(a)''
                    and inserting ``9832(a)''.
                (3) The table of subtitles for such Code is amended by
            striking the item relating to subtitle K and inserting the
            following new item:
                    ``Subtitle K. Group health plan requirements.''.

    <<NOTE: 26 USC 4980D note.>>     (c) Effective Date.--The amendments
    made by this section shall apply with respect to group health plans for
    plan years beginning on or after January 1, 1998.

    SEC. 1532. SPECIAL RULES RELATING TO CHURCH PLANS.

        (a) In General.--Section 9802 (relating to prohibiting
    discrimination against individual participants and beneficiaries based
    on health status) is amended by adding at the end the following new
    subsection:
        ``(c) Special Rules for Church Plans.--A church plan (as defined in
    section 414(e)) shall not be treated as failing to meet the requirements
    of this section solely because such plan requires evidence of good
    health for coverage of--
                ``(1) both any employee of an employer with 10 or less
            employees (determined without regard to section 414(e)(3)(C))
            and any self-employed individual, or
                ``(2) any individual who enrolls after the first 90 days of
            initial eligibility under the plan.

    This subsection shall apply to a plan for any year only if the plan
    included the provisions described in the preceding sentence on July 15,
    1997, and at all times thereafter before the beginning of such year.''.
    <<NOTE: 26 USC 9802 note.>>     (b) Effective Date.--The amendments made
    by subsection (a) shall take effect as if included in the amendments
    made by section 401(a) of the Health Insurance Portability and
    Accountability Act of 1996.

               Subtitle D--Provisions Relating to Plan Amendments

    <<NOTE: 26 USC 411 note.>> SEC. 1541. PROVISIONS RELATING TO PLAN
                AMENDMENTS.

        (a) In General.--If this section applies to any plan or contract
    amendment--

    [[Page 111 STAT. 1086]]

                (1) such plan or contract shall be treated as being operated
            in accordance with the terms of the plan during the period
            described in subsection (b)(2)(A), and
                (2) such plan shall not fail to meet the requirements of
            section 411(d)(6) of the Internal Revenue Code of 1986 or
            section 204(g) of the Employee Retirement Income Security Act of
            1974 by reason of such amendment.

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

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

    <<NOTE: 26 USC 1 note.>> SEC. 1600. COORDINATION WITH OTHER TITLES.

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

    SEC. 1601. AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION ACT OF
                1996.

        (a) Amendments Related to Subtitle A.--
                (1) Amendment related to section 1116.--Paragraph (1) of
            section 6050R(c) is amended by striking ``name and address'' and
            inserting ``name, address, and phone number of the information
            contact''.
                (2) Amendment to section 1116.--Paragraphs (1) and (2)(C) of
            section 1116(b) of the Small Business Job Protection Act of 1996
            shall each be applied as if the reference to chapter 68 were a
            reference to chapter 61.

    [[Page 111 STAT. 1087]]

        (b) Amendment Related to Subtitle B.--Subsection (c) of section 52
    is amended by striking ``targeted jobs credit'' and inserting ``work
    opportunity credit''.
        (c) Amendments Related to Subtitle C.--
                (1) Amendment related to section 1302.--Subparagraph (B) of
            section 1361(e)(1) is amended by striking ``and'' at the end of
            clause (i), striking the period at the end of clause (ii) and
            inserting ``, and'', and adding at the end the following new
            clause:
                              ``(iii) any charitable remainder annuity trust
                          or charitable remainder unitrust (as defined in
                          section 664(d)).''.
            <<NOTE: 26 USC 1377 note.>>     (2) Effective date for section
            1307.--
                        (A) Notwithstanding section 1317 of the Small
                    Business Job Protection Act of 1996, the amendments made
                    by subsections (a) and (b) of section 1307 of such Act
                    shall apply to determinations made after December 31,
                    1996.
                        (B) In no event shall the 120-day period referred to
                    in section 1377(b)(1)(B) of the Internal Revenue Code of
                    1986 (as added by such section 1307) expire before the
                    end of the 120-day period beginning on the date of the
                    enactment of this Act.
                (3) Amendment related to section 1308.--Subparagraph (A) of
            section 1361(b)(3) is amended by striking ``For purposes of this
            title'' and inserting ``Except as provided in regulations
            prescribed by the Secretary, for purposes of this title''.
                (4) Amendments related to section 1316.--
                        (A) Paragraph (2) of section 512(e) is amended by
                    striking ``within the meaning of section 1012'' and
                    inserting ``as defined in section 1361(e)(1)(C)''.
                        (B) Paragraph (7) of section 1361(c) is redesignated
                    as paragraph (6).
                        (C) Subparagraph (B) of section 1361(b)(1) is
                    amended by striking ``subsection (c)(7)'' and inserting
                    ``subsection (c)(6)''.
                        (D) Paragraph (1) of section 512(e) is amended by
                    striking ``section 1361(c)(7)'' and inserting ``section
                    1361(c)(6)''.

        (d) Amendments Related to Subtitle D.--
                (1) Amendments related to section 1421.--
                        (A) Subsection (i) of section 408 is amended in the
                    last sentence by striking ``30 days'' and inserting ``31
                    days''.
                        (B) Subparagraph (H) of section 408(k)(6) is amended
                    by striking ``if the terms of such pension'' and
                    inserting ``of an employer if the terms of simplified
                    employee pensions of such employer''.
                        (C)(i) Subparagraph (B) of section 408(l)(2) is
                    amended--
                              (I) by inserting ``and the issuer of an
                          annuity established under such an arrangement''
                          after ``under subsection (p)'', and
                              (II) in clause (i), by inserting ``or issuer''
                          after ``trustee''.
                        (ii) Paragraph (2) of section 6693(c) is amended--
                              (I) by inserting ``or issuer'' after
                          ``trustee'', and
                              (II) in the heading, by inserting ``and
                          issuer'' after ``trustee''.

    [[Page 111 STAT. 1088]]

                        (D) Subsection (p) of section 408 is amended by
                    adding at the end the following new paragraph:
                ``(8) Coordination with maximum limitation under subsection
            (a).--In the case of any simple retirement account, subsections
            (a)(1) and (b)(2) shall be applied by substituting `the sum of
            the dollar amount in effect under paragraph (2)(A)(ii) of this
            subsection and the employer contribution required under
            subparagraph (A)(iii) or (B)(i) of paragraph (2) of this
            subsection, whichever is applicable' for `$2,000'.''.
                        (E) Clause (i) of section 408(p)(2)(D) is amended by
                    adding at the end the following new sentence: ``If only
                    individuals other than employees described in
                    subparagraph (A) or (B) of section 410(b)(3) are
                    eligible to participate in such arrangement, then the
                    preceding sentence shall be applied without regard to
                    any qualified plan in which only employees so described
                    are eligible to participate.''.
                        (F) Subparagraph (D) of section 408(p)(2) is amended
                    by adding at the end the following new clause:
                          <<NOTE: Applicability.>>     ``(iii) Grace
                          period.--In the case of an employer who
                          establishes and maintains a plan under this
                          subsection for 1 or more years and who fails to
                          meet any requirement of this subsection for any
                          subsequent year due to any acquisition,
                          disposition, or similar transaction involving
                          another such employer, rules similar to the rules
                          of section 410(b)(6)(C) shall apply for purposes
                          of this subsection.''.
                        (G) Paragraph (5) of section 408(p) is amended in
                    the text preceding subparagraph (A) by striking
                    ``simplified'' and inserting ``simple''.
                (2) Amendments related to section 1422.--
                        (A) Clause (ii) of section 401(k)(11)(D) is amended
                    by striking the period and inserting ``if such plan
                    allows only contributions required under this
                    paragraph.''.
                        (B) Paragraph (11) of section 401(k) is amended by
                    adding at the end the following new subparagraph:
                        ``(E) Cost-of-living adjustment.--The Secretary
                    shall adjust the $6,000 amount under subparagraph
                    (B)(i)(I) at the same time and in the same manner as
                    under section 408(p)(2)(E).''.
                        (C) Subparagraph (A) of section 404(a)(3) is
                    amended--
                              (i) in clause (i), by striking ``not in excess
                          of'' and all that follows and inserting the
                          following: ``not in excess of the greater of--
                                        ``(I) 15 percent of the compensation
                                    otherwise paid or accrued during the
                                    taxable year to the beneficiaries under
                                    the stock bonus or profit-sharing plan,
                                    or
                                        ``(II) the amount such employer is
                                    required to contribute to such trust
                                    under section 401(k)(11) for such
                                    year.'', and
                              (ii) in clause (ii), by striking ``15
                          percent'' and all that follows and inserting the
                          following ``the amount described in subclause (I)
                          or (II) of clause (i), whichever is greater, with
                          respect to such taxable year.''.
                        (D) Subparagraph (B) of section 401(k)(11) is
                    amended by adding at the end the following new clause:

    [[Page 111 STAT. 1089]]

                              ``(iii) Administrative requirements.--
                                    <<NOTE: Applicability.>>     ``(I) In
                                    general.--Rules similar to the rules of
                                    subparagraphs (B) and (C) of section
                                    408(p)(5) shall apply for purposes of
                                    this subparagraph.
                                        ``(II) Notice of election period.--
                                    The requirements of this subparagraph
                                    shall not be treated as met with respect
                                    to any year unless the employer notifies
                                    each employee eligible to participate,
                                    within a reasonable period of time
                                    before the 60th day before the beginning
                                    of such year (and, for the first year
                                    the employee is so eligible, the 60th
                                    day before the first day such employee
                                    is so eligible), of the rules similar to
                                    the rules of section 408(p)(5)(C) which
                                    apply by reason of subclause (I).''.
                (3) Amendment related to section 1433.--The heading of
            paragraph (11) of section 401(m) is amended by striking
            ``Alternative'' and inserting ``Additional alternative''.
            <<NOTE: 26 USC 403 note.>>     (4) Clarification of section
            1450.--
                        (A) Section 403(b)(11) of the Internal Revenue Code
                    of 1986 shall not apply with respect to a distribution
                    from a contract described in section 1450(b)(1) of such
                    Act to the extent that such distribution is not
                    includible in income by reason of--
                              (i) in the case of distributions before
                          January 1, 1998, section 403 (b)(8) or (b)(10) of
                          such Code (determined after the application of
                          section 1450(b)(2) of such Act), and
                              (ii) in the case of distributions on and after
                          such date, such section 403(b)(1).
                    <<NOTE: Applicability.>>     (B) This paragraph shall
                    apply as if included in section 1450 of the Small
                    Business Job Protection Act of 1996.
                (5) Amendment related to section 1451.--Clause (ii) of
            section 205(c)(8)(A) of the Employee Retirement Income Security
            Act of 1974 <<NOTE: 29 USC 1055.>>  is amended by striking
            ``Secretary'' and inserting ``Secretary of the Treasury''.
                (6) Amendments related to section 1461.--
                        (A) Section 414(e)(5)(A) is amended to read as
                    follows:
                        ``(A) Certain ministers may participate.--For
                    purposes of this part--
                              ``(i) In general.--A duly ordained,
                          commissioned, or licensed minister of a church is
                          described in paragraph (3)(B) if, in connection
                          with the exercise of their ministry, the
                          minister--
                                        ``(I) is a self-employed individual
                                    (within the meaning of section
                                    401(c)(1)(B), or
                                        ``(II) is employed by an
                                    organization other than an organization
                                    which is described in section 501(c)(3)
                                    and with respect to which the minister
                                    shares common religious bonds.
                              ``(ii) Treatment as employer and employee.--
                          For purposes of sections 403(b)(1)(A) and
                          404(a)(10), a minister described in clause (i)(I)
                          shall be treated as employed by the minister's own
                          employer which is an organization described in
                          section 501(c)(3) and exempt from tax under
                          section 501(a).''.

    [[Page 111 STAT. 1090]]

                        (B) Section 403(b)(1)(A) is amended by striking
                    ``or'' at the end of clause (i), by inserting ``or'' at
                    the end of clause (ii), and by adding at the end the
                    following new clause:
                              ``(iii) for the minister described in section
                          414(e)(5)(A) by the minister or by an employer,''.
                (7) Amendment related to section 1462.--The paragraph (7) of
            section 414(q) added by section 1462 of the Small Business Job
            Protection Act of 1996 is redesignated as paragraph (9).

        (e) Amendment Related to Subtitle E.--Subparagraph (A) of section
    956(b)(1) is amended by inserting ``to the extent such amount was
    accumulated in prior taxable years'' after ``section 316(a)(1)''.
        (f) Amendments Related to Subtitle F.--
                (1) Amendments related to section 1601.--
                        (A) The heading of section 30A is amended to read as
                    follows:

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

                        (B) The table of sections for subpart B of part IV
                    of subchapter A of chapter 1 is amended in the item
                    relating to section 30A by striking ``Puerto Rican'' and
                    inserting ``Puerto Rico''.
                        (C) Paragraph (1) of section 55(c) is amended by
                    striking ``Puerto Rican'' and inserting ``Puerto Rico''.
                (2) Amendments related to section 1606.--
                        (A) Clause (ii) of section 9503(c)(2)(A) is amended
                    by striking ``(or with respect to qualified diesel-
                    powered highway vehicles purchased before January 1,
                    1999)''.
                        (B) Subparagraph (A) of section 9503(e)(5) is
                    amended by striking ``; except that'' and all that
                    follows and inserting a period.
                (3) Amendments related to section 1607.--
                        (A) Subsection (f) of section 4001 (relating to
                    phasedown of tax on luxury passenger automobiles) is
                    amended--
                              (i) by inserting ``and section 4003(a)'' after
                          ``subsection (a)'', and
                              (ii) by inserting ``, each place it appears,''
                          before ``the percentage''.
                        (B) Subsection (g) of section 4001 (relating to
                    termination) is amended by striking ``tax imposed by
                    this section'' and inserting ``taxes imposed by this
                    section and section 4003'' and by striking ``or use''
                    and inserting ``, use, or installation''.
                    <<NOTE: Applicability. 26 USC 4001 note.>>     (C) The
                    amendments made by this paragraph shall apply to sales
                    after the date of the enactment of this Act.
                (4) Amendments related to section 1609.--
                        (A) Subsection (l) of section 4041 is amended--
                              (i) by inserting ``or a fixed-wing aircraft''
                          after ``helicopter'', and
                              (ii) in the heading, by striking
                          ``Helicopter''.
                        (B) The last sentence of section 4041(a)(2) is
                    amended by striking ``section 4081(a)(2)(A)'' and
                    inserting ``section 4081(a)(2)(A)(i)''.

    [[Page 111 STAT. 1091]]

                        (C) Subsection (b) of section 4092 is amended by
                    striking ``section 4041(c)(4)'' and inserting ``section
                    4041(c)(2)''.
                        (D) Subsection (g) of section 4261 (as redesignated
                    by title X) is amended by inserting ``on that flight''
                    after ``dedicated''.
                    <<NOTE: 26 USC 4091 note.>>     (E) Paragraph (1) of
                    section 1609(h) of such Act is amended by striking
                    ``paragraph (3)(A)(i)'' and inserting ``paragraph
                    (3)(A)''.
                        (F) Paragraph (4) of section 1609(h) of such Act is
                    amended by inserting before the period ``or exclusively
                    for the use described in section 4092(b) of such Code''.
                (5) Amendments related to section 1616.--
                        (A) Subparagraph (A) of section 593(e)(1) is amended
                    by inserting ``(and, in the case of an S corporation,
                    the accumulated adjustments account, as defined in
                    section 1368(e)(1))'' after ``1951,''.
                        (B) Paragraph (7) of section 1374(d) is amended by
                    adding at the end the following new sentence: ``For
                    purposes of applying this section to any amount
                    includible in income by reason of section 593(e), the
                    preceding sentence shall be applied without regard to
                    the phrase `10-year'.''.
                (6) Amendments related to section 1621.--
                        (A) Subparagraph (A) of section 860L(b)(1) is
                    amended in the text preceding clause (i) by striking
                    ``after the startup date'' and inserting ``on or after
                    the startup date''.
                        (B) Paragraph (2) of section 860L(d) is amended by
                    striking ``section 860I(c)(2)'' and inserting ``section
                    860I(b)(2)''.
                        (C) Subparagraph (B) of section 860L(e)(2) is
                    amended by inserting ``other than foreclosure property''
                    after ``any permitted asset''.
                        (D) Subparagraph (A) of section 860L(e)(3) is
                    amended by striking ``if the FASIT'' and all that
                    follows and inserting the following new flush text after
                    clause (ii):
                    ``if the FASIT were treated as a REMIC and permitted
                    assets (other than cash or cash equivalents) were
                    treated as qualified mortgages.''.
                        (E)(i) Paragraph (3) of section 860L(e) is amended
                    by adding at the end the following new subparagraph:
                        ``(D) Income from dispositions of former hedge
                    assets.--Paragraph (2)(A) shall not apply to income
                    derived from the disposition of--
                              ``(i) an asset which was described in
                          subsection (c)(1)(D) when first acquired by the
                          FASIT but on the date of such disposition was no
                          longer described in subsection (c)(1)(D)(ii), or
                              ``(ii) a contract right to acquire an asset
                          described in clause (i).''.
                        (ii) Subparagraph (A) of section 860L(e)(2) is
                    amended by inserting ``except as provided in paragraph
                    (3),'' before ``the receipt''.

        (g) Amendments Related to Subtitle G.--
            <<NOTE: 26 USC 6427 note.>>     (1) Extension of period for
            claiming refunds for alcohol fuels.--Notwithstanding section
            6427(i)(3)(C) of the Internal Revenue Code of 1986, a claim
            filed under section 6427(f) of such Code for any period after
            September 30, 1995, and before October 1, 1996, shall be treated
            as timely filed

    [[Page 111 STAT. 1092]]

            if filed before the 60th day after the date of the enactment of
            this Act.
            <<NOTE: 26 USC 6501.>>     (2) Amendments to Sections 1703 and
            1704.--Sections 1703(n)(8) and 1704(j)(4)(B) of the Small
            Business Job Protection Act of 1996 shall each be applied as if
            such sections referred to section 1702 instead of section 1602.

        (h) Amendments Related to Subtitle H.--
                (1) Amendments related to section 1806.--
                        (A) Subparagraph (B) of section 529(e)(1) is amended
                    by striking ``subsection (c)(2)(C)'' and inserting
                    ``subsection (c)(3)(C)''.
                        (B) Subparagraph (C) of section 529(e)(1) is amended
                    by inserting ``(or agency or instrumentality thereof)''
                    after ``local government''.
                        (C) Paragraph (2) of section 1806(c) of the Small
                    Business Job Protection Act of 1996 <<NOTE: 26 USC 529
                    note.>> is amended by striking so much of the first
                    sentence as follows subparagraph (B)(ii) and inserting
                    the following:
            <<NOTE: Applicability.>> ``then such program (as in effect on
            August 20, 1996) shall be treated as a qualified State tuition
            program with respect to contributions (and earnings allocable
            thereto) pursuant to contracts entered into under such program
            before the first date on which such program meets such
            requirements (determined without regard to this paragraph) and
            the provisions of such program (as so in effect) shall apply in
            lieu of section 529(b) of the Internal Revenue Code of 1986 with
            respect to such contributions and earnings.''.
                (2) Amendments related to section 1807.--
                        (A) Paragraph (2) of section 23(a) is amended to
                    read as follows:
                ``(2) Year credit allowed.--The credit under paragraph (1)
            with respect to any expense shall be allowed--
                        ``(A) in the case of any expense paid or incurred
                    before the taxable year in which such adoption becomes
                    final, for the taxable year following the taxable year
                    during which such expense is paid or incurred, and
                        ``(B) in the case of an expense paid or incurred
                    during or after the taxable year in which such adoption
                    becomes final, for the taxable year in which such
                    expense is paid or incurred.''.
                        (B) Subparagraph (B) of section 23(b)(2) is amended
                    by striking ``determined--'' and all that follows and
                    inserting the following: ``determined without regard to
                    sections 911, 931, and 933.''.
                        (C) Paragraph (1) of section 137(b) (relating to
                    adoption assistance programs) is amended by striking
                    ``amount excludable from gross income'' and inserting
                    ``of the amounts paid or expenses incurred which may be
                    taken into account''.
                        (D)(i) Subparagraph (C) of section 414(n)(3) is
                    amended by inserting ``137,'' after ``132,''.
                        (ii) Paragraph (2) of section 414(t) is amended by
                    inserting ``137,'' after ``132,''.
                        (iii) Paragraph (1) of section 6039GD(d) is amended
                    by striking ``or 129'' and inserting ``129, or 137''.

        (i) Amendments Related to Subtitle I.--

    [[Page 111 STAT. 1093]]

                (1) Amendment related to section 1901.--Subsection (b) of
            section 6048 is amended in the heading by striking ``Grantor''
            and inserting ``Owner''.
                (2) Amendments related to section 1903.--
                        Clauses (ii) and (iii) of section 679(a)(3)(C) are
                    each amended by inserting ``, owner,'' after
                    ``grantor''.
                (3) Amendments related to section 1907.--
                        (A) Clause (ii) of section 7701(a)(30)(E) is amended
                    by striking ``fiduciaries'' and inserting ``persons''.
                        (B) Subsection (b) of section 641 is amended by
                    adding at the end the following new sentence: ``For
                    purposes of this subsection, a foreign trust or foreign
                    estate shall be treated as a nonresident alien
                    individual who is not present in the United States at
                    any time.''.
            <<NOTE: 26 USC 7701 note.>>     (4) Effective date related to
            subtitle i.--The Secretary of the Treasury may by regulations or
            other administrative guidance provide that the amendments made
            by section 1907(a) of the Small Business Job Protection Act of
            1996 shall not apply to a trust with respect to a reasonable
            period beginning on the date of the enactment of such Act, if--
                        (A) such trust is in existence on August 20, 1996,
                    and is a United States person for purposes of the
                    Internal Revenue Code of 1986 on such date (determined
                    without regard to such amendments),
                        (B) no election is in effect under section
                    1907(a)(3)(B) of such Act with respect to such trust,
                        (C) before the expiration of such reasonable period,
                    such trust makes the modifications necessary to be
                    treated as a United States person for purposes of such
                    Code (determined with regard to such amendments), and
                        (D) such trust meets such other conditions as the
                    Secretary may require.

    <<NOTE: 26 USC 23 note.>>     (j) Effective Date.--
                (1) In general.--Except as provided in paragraph (2), the
            amendments made by this section shall take effect as if included
            in the provisions of the Small Business Job Protection Act of
            1996 to which they relate.
                (2) Certain administrative requirements with respect to
            certain pension plans.--The amendment made by subsection
            (d)(2)(D) shall apply to calendar years beginning after the date
            of the enactment of this Act.

    SEC. 1602. AMENDMENTS RELATED TO HEALTH INSURANCE PORTABILITY AND
                ACCOUNTABILITY ACT OF 1996.

        (a) Amendments Related to Section 301.--
                (1) Paragraph (2) of section 26(b) is amended by striking
            ``and'' at the end of subparagraph (N), by striking the period
            at the end of subparagraph (O) and inserting ``, and'', and by
            adding at the end the following new subparagraph:
                        ``(P) section 220(f)(4) (relating to additional tax
                    on medical savings account distributions not used for
                    qualified medical expenses).''.
                (2) Paragraph (3) of section 220(c) is amended by striking
            subparagraph (A) and redesignating subparagraphs (B) through (D)
            as subparagraphs (A) through (C), respectively.

    [[Page 111 STAT. 1094]]

                (3) Subparagraph (C) of section 220(d)(2) is amended by
            striking ``an eligible individual'' and inserting ``described in
            clauses (i) and (ii) of subsection (c)(1)(A)''.
                (4) Subsection (a) of section 6693 is amended by adding at
            the end the following new sentence:

    ``This subsection shall not apply to any report which is an information
    return described in section 6724(d)(1)(C)(i) or a payee statement
    described in section 6724(d)(2)(X).''.
                (5) Paragraph (4) of section 4975(c) is amended by striking
            ``if, with respect to such transaction'' and all that follows
            and inserting the following: ``if section 220(e)(2) applies to
            such transaction.''.

        (b) Amendment Related to Section 321.--Subparagraph (B) of section
    7702B(c)(2) is amended in the last sentence by inserting ``described in
    subparagraph (A)(i)'' after ``chronically ill individual''.
        (c) Amendments Related to Section 322.--Subparagraph (B) of section
    162(l)(2) is amended by adding at the end the following new sentence:
    ``The preceding sentence shall be applied separately with respect to--
                              ``(i) plans which include coverage for
                          qualified long-term care services (as defined in
                          section 7702B(c)) or are qualified long-term care
                          insurance contracts (as defined in section
                          7702B(b)), and
                              ``(ii) plans which do not include such
                          coverage and are not such contracts.''.

        (d) Amendments Related to Section 323.--
                (1) Paragraph (1) of section 6050Q(b) is amended by
            inserting ``, address, and phone number of the information
            contact'' after ``name''.
                (2)(A) Paragraph (2) of section 6724(d) is amended by
            striking so much as follows subparagraph (Q) and precedes the
            last sentence, and inserting the following new subparagraphs:
                        ``(R) section 6050R(c) (relating to returns relating
                    to certain purchases of fish),
                        ``(S) section 6051 (relating to receipts for
                    employees),
                        ``(T) section 6052(b) (relating to returns regarding
                    payment of wages in the form of group-term life
                    insurance),
                        ``(U) section 6053(b) or (c) (relating to reports of
                    tips),
                        ``(V) section 6048(b)(1)(B) (relating to foreign
                    trust reporting requirements),
                        ``(W) section 4093(c)(4)(B) (relating to certain
                    purchasers of diesel and aviation fuels),
                        ``(X) section 408(i) (relating to reports with
                    respect to individual retirement plans) to any person
                    other than the Secretary with respect to the amount of
                    payments made to such person, or
                        ``(Y) section 6047(d) (relating to reports by plan
                    administrators) to any person other than the Secretary
                    with respect to the amount of payments made to such
                    person.''.
                (B) Subsection (e) of section 6652 is amended in the last
            sentence by striking ``section 6724(d)(2)(X)'' and inserting
            ``section 6724(d)(2)(Y)''.

        (e) Amendment Related to Section 325.--Clauses (ii) and (iii) of
    section 7702B(g)(4)(B) are each amended by striking ``Secretary'' and
    inserting ``appropriate State regulatory agency''.
        (f) Amendments Related to Section 501.--

    [[Page 111 STAT. 1095]]

                (1) Paragraph (4) of section 264(a) is amended by striking
            subparagraph (A) and all that follows through ``by the
            taxpayer.'' and inserting the following:
                        ``(A) is or was an officer or employee, or
                        ``(B) is or was financially interested in,
            any trade or business carried on (currently or formerly) by the
            taxpayer.''.
                (2) The last 2 sentences of section 264(d)(2)(B)(ii) are
            amended to read as follows:
                          ``For purposes of subclause (II), the term
                          `applicable period' means the 12-month period
                          beginning on the date the policy is issued (and
                          each successive 12-month period thereafter) unless
                          the taxpayer elects a number of months (not
                          greater than 12) other than such 12-month period
                          to be its applicable period.
                          Such <<NOTE: Applicability.>>  an election shall
                          be made not later than the 90th day after the date
                          of the enactment of this sentence and, if made,
                          shall apply to the taxpayer's first taxable year
                          ending on or after October 13, 1995, and all
                          subsequent taxable years unless revoked with the
                          consent of the Secretary.''.
                (3) Subparagraph (B) of section 264(d)(4) is amended by
            striking ``the employer'' and inserting ``the taxpayer''.
                (4) Subsection (c) of section 501 of the Health Insurance
            Portability and Accountability Act of 1996 <<NOTE: 26 USC 264
            note.>> is amended by striking paragraph (3).
                (5) Paragraph (2) of section 501(d) of such Act is amended
            by striking ``no additional premiums'' and all that follows and
            inserting the following: ``a lapse occurring after October 13,
            1995, by reason of no additional premiums being received under
            the contract.''.

        (g) Amendments Related to Section 511.--
                (1) Subparagraph (B) of section 877(d)(2) is amended by
            striking ``the 10-year period described in subsection (a)'' and
            inserting ``the 10-year period beginning on the date the
            individual loses United States citizenship''.
                (2) Subparagraph (D) of section 877(d)(2) is amended by
            adding at the end the following new sentence: ``In the case of
            any exchange occurring during such 5 years, any gain recognized
            under this subparagraph shall be recognized immediately after
            such loss of citizenship.''.
                (3) Paragraph (3) of section 877(d) is amended by inserting
            ``and the period applicable under paragraph (2)'' after
            ``subsection (a)''.
                (4) Subparagraph (A) of section 877(d)(4) is amended--
                        (A) by inserting ``during the 10-year period
                    beginning on the date the individual loses United States
                    citizenship'' after ``contributes property'' in clause
                    (i),
                        (B) by inserting ``immediately before such
                    contribution'' after ``from such property'', and
                        (C) by striking ``during the 10-year period referred
                    to in subsection (a),''.
                (5) Subparagraph (C) of section 2501(a)(3) is amended by
            striking ``decedent'' and inserting ``donor''.
                (6)(A) Clause (i) of section 2107(c)(2)(B) is amended by
            striking ``such foreign country in respect of property included
            in the gross estate as the value of the property'' and inserting

    [[Page 111 STAT. 1096]]

            ``such foreign country as the value of the property subjected to
            such taxes by such foreign country and''.
                (B) Subparagraph (C) of section 2107(c)(2) is amended to
            read as follows:
                        ``(C) Proportionate share.--In the case of property
                    which is included in the gross estate solely by reason
                    of subsection (b), such property's proportionate share
                    is the percentage which the value of such property bears
                    to the total value of all property included in the gross
                    estate solely by reason of subsection (b).''.

        (h) Amendments Related to Section 512.--
                (1) Subpart A of part III of subchapter A of chapter 61 is
            amended by redesignating the section 6039F added by section 512
            of the Health Insurance Portability and Accountability Act of
            1996 as section 6039G and by moving such section 6039G to
            immediately after the section 6039F added by section 1905 of the
            Small Business Job Protection Act of 1996.
                (2) The table of sections for subpart A of part III of
            subchapter A of chapter 61 is amended by striking the item
            relating to the section 6039F related to information on
            individuals losing United States citizenship and inserting after
            the item relating to the section 6039F related to notice of
            large gifts received from foreign persons the following new
            item:
                    ``Sec. 6039G. Information on individuals losing United
                                    States citizenship.''.

                (3) Paragraph (1) of section 877(e) is amended by striking
            ``6039F'' and inserting ``6039G''.

    <<NOTE: 26 USC 26 note.>>     (i) Effective Date.--The amendments made
    by this section shall take effect as if included in the provisions of
    the Health Insurance Portability and Accountability Act of 1996 to which
    such amendments relate.

    SEC. 1603. AMENDMENTS RELATED TO TAXPAYER BILL OF RIGHTS 2.

        (a) Amendment Related to Section 1311.--Subsection (b) of section
    4962 is amended by striking ``subchapter A or C'' and inserting
    ``subchapter A, C, or D''.
        (b) Amendments Related to Section 1312.--
                (1)(A) Paragraph (10) of section 6033(b) is amended by
            striking all that precedes subparagraph (A) and inserting the
            following:
                ``(10) the respective amounts (if any) of the taxes imposed
            on the organization, or any organization manager of the
            organization, during the taxable year under any of the following
            provisions (and the respective amounts (if any) of
            reimbursements paid by the organization during the taxable year
            with respect to taxes imposed on any such organization manager
            under any of such provisions):''.
                (B) Subparagraph (C) of section 6033(b)(10) is amended by
            adding at the end the following: ``except to the extent that, by
            reason of section 4962, the taxes imposed under such section are
            not required to be paid or are credited or refunded,''.
                (2) Paragraph (11) of section 6033(b) is amended to read as
            follows:
                ``(11) the respective amounts (if any) of--
                        ``(A) the taxes imposed with respect to the
                    organization on any organization manager, or any
                    disqualified person, during the taxable year under
                    section 4958 (relating to

    [[Page 111 STAT. 1097]]

                    taxes on private excess benefit from certain charitable
                    organizations), and
                        ``(B) reimbursements paid by the organization during
                    the taxable year with respect to taxes imposed under
                    such section,
            except to the extent that, by reason of section 4962, the taxes
            imposed under such section are not required to be paid or are
            credited or refunded,''.

    <<NOTE: 26 USC 4962 note.>>     (c) Effective Date.--The amendments made
    by this section shall take effect as if included in the provisions of
    the Taxpayer Bill of Rights 2 to which such amendments relate.

    SEC. 1604. MISCELLANEOUS PROVISIONS.

        (a) Amendments Related to Energy Policy Act of 1992.--
                (1) Paragraph (1) of section 263(a) is amended by striking
            ``or'' at the end of subparagraph (F), by striking the period at
            the end of subparagraph (G) and inserting ``; or'', and by
            adding at the end the following new subparagraph:
                        ``(H) expenditures for which a deduction is allowed
                    under section 179A.''.
                (2) Subparagraph (B) of section 312(k)(3) is amended--
                        (A) by striking ``179'' in the heading and the first
                    place it appears in the text and inserting ``179 or
                    179A'', and
                        (B) by striking ``179'' the last place it appears
                    and inserting ``179 or 179A, as the case may be''.
                (3) Paragraphs (2)(C) and (3)(C) of section 1245(a) are each
            amended by inserting ``179A,'' after ``179,''.
            <<NOTE: 26 USC 263 note.>>     (4) The amendments made by this
            subsection shall take effect as if included in the amendments
            made by section 1913 of the Energy Policy Act of 1992.

        (b) Amendments Related to Uruguay Round Agreements Act.--
                (1) Paragraph (1) of section 6621(a) is amended in the last
            sentence by striking ``subsection (c)(3))'' and inserting
            ``subsection (c)(3), applied by substituting `overpayment' for
            `underpayment')''.
                (2)(A) Subclause (II) of section 412(m)(5)(E)(ii) is amended
            by striking ``clause (i)'' and inserting ``subclause (I)''.
                (B) Subclause (II) of section 302(e)(5)(E)(ii) of the
            Employee Retirement Income Security Act of 1974 <<NOTE: 29 USC
            1082.>>  is amended by striking ``clause (i)'' and inserting
            ``subclause (I)''.
                (3) Subparagraph (A) of section 767(d)(3) of the Uruguay
            Round Agreements <<NOTE: 26 USC 411 note.>>  Act is amended in
            the last sentence by striking ``(except that'' and all that
            follows through ``into account)''.
            <<NOTE: 26 USC 412 note.>>     (4) The amendments made by this
            subsection shall take effect as if included in the sections of
            the Uruguay Round Agreements Act to which they relate.

        (c) Amendment Related to Omnibus Budget Reconciliation Act of
    1993.--
                (1) Paragraph (6) of section 168(j) (defining Indian
            reservation) is amended by adding at the end the following new
            flush sentence:
            ``For purposes of the preceding sentence, such section 3(d)
            shall be applied by treating the term `former Indian
            reservations in Oklahoma' as including only lands which are
            within the

    [[Page 111 STAT. 1098]]

            jurisdictional area of an Oklahoma Indian tribe (as determined
            by the Secretary of the Interior) and are recognized by such
            Secretary as eligible for trust land status under 25 CFR Part
            151 (as in effect on the date of the enactment of this
            sentence).''.
            <<NOTE: Applicability. 26 USC 168 note.>>     (2) The amendment
            made by paragraph (1) shall apply as if included in the
            amendments made by section 13321 of the Omnibus Budget
            Reconciliation Act of 1993, except that such amendment shall not
            apply--
                        (A) with respect to property (with an applicable
                    recovery period under section 168(j) of the Internal
                    Revenue Code of 1986 of 6 years or less) held by the
                    taxpayer if the taxpayer claimed the benefits of section
                    168(j) of such Code with respect to such property on a
                    return filed before March 18, 1997, but only if such
                    return is the first return of tax filed for the taxable
                    year in which such property was placed in service, or
                        (B) with respect to wages for which the taxpayer
                    claimed the benefits of section 45A of such Code for a
                    taxable year on a return filed before March 18, 1997,
                    but only if such return was the first return of tax
                    filed for such taxable year.

        (d) Amendments Related to Tax Reform Act of 1986.--
                (1) Paragraph (3) of section 1059(d) is amended by striking
            ``subsection (a)(2)'' and inserting ``subsection (a)''.
                (2)(A) Subparagraph (A) of section 833(b)(1) is amended--
                        (i) by inserting before the comma at the end of
                    clause (i) ``and liabilities incurred during the taxable
                    year under cost-plus contracts'', and
                        (ii) by inserting before the comma at the end of
                    clause (ii) ``or in connection with the administration
                    of cost-plus contracts''.
            <<NOTE: 26 USC 833 note.>>     (B) The amendment made by
            subparagraph (A) shall take effect as if included in the
            amendments made by section 1012 of the Tax Reform Act of 1986.

        (e) Amendment Related to Tax Reform Act of 1984.--
                (1) Section 267(f) is amended by adding at the end the
            following new paragraph:
                ``(4) Determination of relationship resulting in
            disallowance of loss, for purposes of other provisions.--For
            purposes of any other section of this title which refers to a
            relationship which would result in a disallowance of losses
            under this section, deferral under paragraph (2) shall be
            treated as disallowance.''.
            <<NOTE: 26 USC 267 note.>>     (2) Effective date.--The
            amendment made by paragraph (1) shall take effect as if included
            in section 174(b) of the Tax Reform Act of 1984.

        (f) Amendments Related to Balanced Budget Act of 1997.--
                (1) The Balanced Budget Act of 1997 is amended--
                        (A) in the table of contents for title IV, in the
                    item relating to section 4921, <<NOTE: Ante, p. 275.>>
                    by striking ``children with'';
                        (B) in the heading for section 4921, <<NOTE: Ante,
                    p. 574.>> by striking ``children with''; and
                        (C) in the section added by section 4921--
                              (i) in the heading for such section, by
                          striking ``children with''; and
                              (ii) by amending subsection (a) to read as
                          follows:

    [[Page 111 STAT. 1099]]

        ``(a) In General.--The Secretary, directly or through grants, shall
    provide for research into the prevention and cure of Type I diabetes.''.
            <<NOTE: Applicability.>>     (2)(A) Section 11201(g)(2)(B)(iii)
            of the Balanced Budget Act of 1997 shall apply as if the
            reference in such section to ``December 31, 2003'' were a
            reference to ``December 31, 2001''.
            <<NOTE: District of Columbia.>>     (B) Notwithstanding section
            11104(b)(3) of the Balanced Budget Act of 1997, in carrying out
            any of the management reform plans under such section, the head
            of a department of the government of the District of Columbia
            shall report solely to the District of Columbia Financial
            Responsibility and Management Assistance Authority.
            <<NOTE: Ante, p. 671.>>     (3) Section 9302 of the Balanced
            Budget Act of 1997 is amended by adding at the end the following
            new subsection:

        ``(k) Coordination With Tobacco Industry Settlement Agreement.--The
    increase in excise taxes collected as a result of the amendments made by
    subsections (a), (e), and (g) of this section shall be credited against
    the total payments made by parties pursuant to Federal legislation
    implementing the tobacco industry settlement agreement of June 20, 1997.
    <<NOTE: 42 USC 254c-2 note.>>     (4) The provisions of, and amendments
    made by, this subsection shall take effect immediately after the
    sections referred to in this subsection take effect.

        (g) Clerical Amendments.--
                (1) Clause (iii) of section 163(j)(2)(B) is amended by
            striking ``clause (i)'' and inserting ``clause (ii)''.
                (2) Paragraph (1) of section 665(d) is amended in the last
            sentence by striking ``or 669(d) and (e)''.
                (3) Subsection (g) of section 1441 (relating to cross
            reference) is amended by striking ``one-half'' and inserting
            ``85 percent''.
                (4) Paragraph (1) of section 2523(g) is amended by striking
            ``qualified remainder trust'' and inserting ``qualified
            charitable remainder trust''.
                (5) Subsection (d) of section 9502 is amended by
            redesignating the paragraph added by section 806 of the Federal
            Aviation Reauthorization Act of 1996 as paragraph (6).

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

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

        Section 1021(a)(3) of the Congressional Budget and Impoundment
    Control Act of 1974 shall only apply to--
                (1) section 101(c) (relating to high risk pools permitted to
            cover dependents of high risk individuals);
                (2) section 222 (relating to limitation on qualified
            501(c)(3) bonds other than hospital bonds);
                (3) section 224 (relating to contributions of computer
            technology and equipment for elementary or secondary school
            purposes);

    [[Page 111 STAT. 1100]]

                (4) section 312(a) (relating to treatment of remainder
            interests for purposes of provision relating to gain on sale of
            principal residence);
                (5) section 501(b) (relating to indexing of alternative
            valuation of certain farm, etc., real property);
                (6) section 504 (relating to extension of treatment of
            certain rents under section 2032A to lineal descendants);
                (7) section 505 (relating to clarification of judicial
            review of eligibility for extension of time for payment of
            estate tax);
                (8) section 508 (relating to treatment of land subject to
            qualified conservation easement);
                (9) section 511 (relating to expansion of exception from
            generation-skipping transfer tax for transfers to individuals
            with deceased parents);
                (10) section 601 (relating to the research tax credit);
                (11) section 602 (relating to contributions of stock to
            private foundations);
                (12) section 603 (relating to the work opportunity tax
            credit);
                (13) section 604 (relating to orphan drug tax credit);
                (14) section 701 (relating to incentives for revitalization
            of the District of Columbia) to the extent it amends the
            Internal Revenue Code of 1986 to create sections 1400 and 1400A
            (relating to tax-exempt economic development bonds);
                (15) section 701 (relating to incentives for revitalization
            of the District of Columbia) to the extent it amends the
            Internal Revenue Code of 1986 to create section 1400C (relating
            to first-time homebuyer credit for District of Columbia);
                (16) section 801 (relating to incentives for employing long-
            term family assistance recipients);
                (17) section 904(b) (relating to uniform rate of tax on
            vaccines) as it relates to any vaccine containing pertussis
            bacteria, extracted or partial cell bacteria, or specific
            pertussis antigens;
                (18) section 904(b) (relating to uniform rate of tax on
            vaccines) as it relates to any vaccine against measles;
                (19) section 904(b) (relating to uniform rate of tax on
            vaccines) as it relates to any vaccine against mumps;
                (20) section 904(b) (relating to uniform rate of tax on
            vaccines) as it relates to any vaccine against rubella;
                (21) section 905 (relating to operators of multiple retail
            gasoline outlets treated as wholesale distributors for refund
            purposes);
                (22) section 906 (relating to exemption of electric and
            other clean-fuel motor vehicles from luxury automobile
            classification);
                (23) section 907(a) (relating to rate of tax on liquefied
            natural gas determined on basis of BTU equivalency with
            gasoline);
                (24) section 907(b) (relating to rate of tax on methanol
            from natural gas determined on basis of BTU equivalency with
            gasoline);
                (25) section 908 (relating to modification of tax treatment
            of hard cider);
                (26) section 914 (relating to mortgage financing for
            residences located in disaster areas);
                (27) section 962 (relating to assignment of workmen's
            compensation liability eligible for exclusion relating to
            personal injury liability assignments);

    [[Page 111 STAT. 1101]]

                (28) section 963 (relating to tax-exempt status for certain
            State worker's compensation act companies);
                (29) section 967 (relating to additional advance refunding
            of certain Virgin Island bonds);
                (30) section 968 (relating to nonrecognition of gain on sale
            of stock to certain farmers' cooperatives);
                (31) section 971 (relating to exemption of the incremental
            cost of a clean fuel vehicle from the limits on depreciation for
            vehicles);
                (32) section 974 (relating to clarification of treatment of
            certain receivables purchased by cooperative hospital service
            organizations);
                (33) section 975 (relating to deduction in computing
            adjusted gross income for expenses in connection with service
            performed by certain officials) with respect to taxable years
            beginning before 1991;
                (34) section 977 (relating to elective carryback of existing
            carryovers of National Railroad Passenger Corporation);
                (35) section 1005(b)(2)(B) (relating to transition rule for
            instruments described in a ruling request submitted to the
            Internal Revenue Service on or before June 8, 1997);
                (36) section 1005(b)(2)(C) (relating to transition rule for
            instruments described on or before June 8, 1997, in a public
            announcement or in a filing with the Securities and Exchange
            Commission) as it relates to a public announcement;
                (37) section 1005(b)(2)(C) (relating to transition rule for
            instruments described on or before June 8, 1997, in a public
            announcement or in a filing with the Securities and Exchange
            Commission) as it relates to a filing with the Securities and
            Exchange Commission;
                (38) section 1011(d)(2)(B) (relating to transition rule for
            distributions made pursuant to the terms of a tender offer
            outstanding on May 3, 1995);
                (39) section 1011(d)(3) (relating to transition rule for
            distributions made pursuant to the terms of a tender offer
            outstanding on September 13, 1995);
                (40) section 1012(d)(3)(B) (relating to transition rule for
            distributions pursuant to an acquisition described in section
            355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described
            in a ruling request submitted to the Internal Revenue Service on
            or before April 16, 1997);
                (41) section 1012(d)(3)(C) (relating to transition rule for
            distributions pursuant to an acquisition described in section
            355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described
            in a public announcement or filing with the Securities and
            Exchange Commission) as it relates to a public announcement;
                (42) section 1012(d)(3)(C) (relating to transition rule for
            distributions pursuant to an acquisition described in section
            355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described
            in a public announcement or filing with the Securities and
            Exchange Commission) as it relates to a filing with the
            Securities and Exchange Commission;
                (43) section 1013(d)(2)(B) (relating to transition rule for
            distributions or acquisitions after June 8, 1997, described in a
            ruling request submitted to the Internal Revenue Service
            submitted on or before June 8, 1997);

    [[Page 111 STAT. 1102]]

                (44) section 1013(d)(2)(C) (relating to transition rule for
            distributions or acquisitions after June 8, 1997, described in a
            public announcement or filing with the Securities and Exchange
            Commission on or before June 8, 1997) as it relates to a public
            announcement;
                (45) section 1013(d)(2)(C) (relating to transition rule for
            distributions or acquisitions after June 8, 1997, described in a
            public announcement or filing with the Securities and Exchange
            Commission on or before June 8, 1997) as it relates to a filing
            with the Securities and Exchange Commission;
                (46) section 1014(f)(2)(B) (relating to transition rule for
            any transaction after June 8, 1997, if such transaction is
            described in a ruling request submitted to the Internal Revenue
            Service on or before June 8, 1997);
                (47) section 1014(f)(2)(C) (relating to transition rule for
            any transaction after June 8, 1997, if such transaction is
            described in a public announcement or filing with the Securities
            and Exchange Commission on or before June 8, 1997) as it relates
            to a public announcement;
                (48) section 1014(f)(2)(C) (relating to transition rule for
            any transaction after June 8, 1997, if such transaction is
            described in a public announcement or filing with the Securities
            and Exchange Commission on or before June 8, 1997) as it relates
            to a filing with the Securities and Exchange Commission;
                (49) section 1042(b) (relating to special rules for
            provision terminating certain exceptions from rules relating to
            exempt organizations which provide commercial-type insurance);
                (50) section 1081(a) (relating to termination of suspense
            accounts for family corporations required to use accrual method
            of accounting) as it relates to the repeal of Internal Revenue
            Code section 447(i)(3);
                (51) section 1089(b)(3) (relating to reformations);
                (52) section 1089(b)(5)(B)(i) (relating to persons under a
            mental disability;
                (53) section 1171 (relating to treatment of computer
            software as FSC export property);
                (54) section 1175 (relating to exemption for active
            financing income);
                (55) section 1204 (relating to travel expenses of certain
            Federal employees engaged in criminal investigations);
                (56) section 1236 (relating to extension of time for filing
            a request for administrative adjustment);
                (57) section 1243 (relating to special rules for
            administrative adjustment request with respect to bad debts or
            worthless securities);
                (58) section 1251 (relating to clarification of limitation
            on maximum number of shareholders);
                (59) section 1253 (relating to attribution rules applicable
            to stock ownership);
                (60) section 1256 (relating to modification of earnings and
            profits rules for determining whether REIT has earnings and
            profits from non-REIT year);
                (61) section 1257 (relating to treatment of foreclosure
            property);
                (62) section 1261 (relating to shared appreciation
            mortgages);

    [[Page 111 STAT. 1103]]

                (63) section 1302 (relating to clarification of waiver of
            certain rights of recovery);
                (64) section 1303 (relating to transitional rule under
            section 2056A);
                (65) section 1304 (relating to treatment for estate tax
            purposes of short-term obligations held by nonresident aliens);
                (66) section 1311 (relating to clarification of treatment of
            survivor annuities under qualified terminable interest rules);
                (67) section 1312 (relating to treatment of qualified
            domestic trust rules of forms of ownership which are not
            trusts);
                (68) section 1313 (relating to opportunity to correct
            failures under section 2032A);
                (69) section 1414 (relating to fermented material from any
            brewery may be received at a distilled spirits plant);
                (70) section 1417 (relating to use of additional
            ameliorating material in certain wines);
                (71) section 1418 (relating to domestically produced beer
            may be withdrawn free of tax for use of foreign embassies,
            legations, etc.);
                (72) section 1421 (relating to transfer to brewery of beer
            imported in bulk without payment of tax);
                (73) section 1422 (relating to transfer to bonded wine
            cellars of wine imported in bulk without payment of tax);
                (74) section 1506 (relating to clarification of certain
            rules relating to employee stock ownership plans of S
            corporations);
                (75) section 1507 (relating to modification of 10-percent
            tax for nondeductible contributions);
                (76) section 1523 (relating to repeal of application of
            unrelated business income tax to ESOPs);
                (77) section 1530 (relating to gratuitous transfers for the
            benefit of employees);
                (78) section 1532 (relating to special rules relating to
            church plans); and
                (79) section 1604(c)(2) (relating to amendment related to
            Omnibus Budget Reconciliation Act of 1993).

        Approved August 5, 1997.

    LEGISLATIVE HISTORY--H.R. 2014 (S. 949):
    ---------------------------------------------------------------------------

    HOUSE REPORTS: Nos. 105-148 (Comm. on the Budget) and 105-220 (Comm. of
    Conference).
    CONGRESSIONAL RECORD, Vol. 143 (1997):
                June 26, considered and passed House.
                June 27, considered and passed Senate, amended, in lieu of
                    S. 949.
                July 31, House and Senate agreed to conference report.
    WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 33 (1997):
                Aug. 5, Presidential remarks and statement.
                Aug. 11, Presidential remarks and special message on line
                    item veto.
    FEDERAL REGISTER, Vol. 62 (1997):
                Aug. 12, Cancellation of items pursuant to Line Item Veto
                    Act.

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