[105th Congress Public Law 34]
[From the U.S. Government Printing 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.
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    * Note: This is a hand enrollment pursuant to Public Law 105-
32.
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    (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 pla