Text: H.R.1836 — 107th Congress (2001-2002)All Information (Except Text)

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Public Law No: 107-16 (06/07/2001)

 
[107th Congress Public Law 16]
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[DOCID: f:publ016.107]


[[Page 37]]

        ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001

[[Page 115 STAT. 38]]

Public Law 107-16
107th Congress

                                 An Act


 
To provide for reconciliation pursuant to section 104 of the concurrent 
     resolution on the budget for fiscal year 2002. <<NOTE: June 7, 
                         2001 -  [H.R. 1836]>> 

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled, <<NOTE: Economic Growth 
and Tax Relief Reconciliation Act of 2001.>> 

SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

    (a) <<NOTE: 26 USC 1 note.>>  Short Title.--This Act may be cited as 
the ``Economic Growth and Tax Relief Reconciliation Act of 2001''.

    (b) Amendment of 1986 Code.--Except as otherwise expressly provided, 
whenever in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; references; table of contents.

             TITLE I--INDIVIDUAL INCOME TAX RATE REDUCTIONS

Sec. 101. Reduction in income tax rates for individuals.
Sec. 102. Repeal of phaseout of personal exemptions.
Sec. 103. Phaseout of overall limitation on itemized deductions.

               TITLE II--TAX BENEFITS RELATING TO CHILDREN

Sec. 201. Modifications to child tax credit.
Sec. 202. Expansion of adoption credit and adoption assistance programs.
Sec. 203. Refunds disregarded in the administration of Federal programs 
           and federally assisted programs.
Sec. 204. Dependent care credit.
Sec. 205. Allowance of credit for employer expenses for child care 
           assistance.

                   TITLE III--MARRIAGE PENALTY RELIEF

Sec. 301. Elimination of marriage penalty in standard deduction.
Sec. 302. Phaseout of marriage penalty in 15-percent bracket.
Sec. 303. Marriage penalty relief for earned income credit; earned 
           income to include only amounts includible in gross income; 
           simplification of earned income credit.

                TITLE IV--AFFORDABLE EDUCATION PROVISIONS

                Subtitle A--Education Savings Incentives

Sec. 401. Modifications to education individual retirement accounts.
Sec. 402. Modifications to qualified tuition programs.

                   Subtitle B--Educational Assistance

Sec. 411. Extension of exclusion for employer-provided educational 
           assistance.
Sec. 412. Elimination of 60-month limit and increase in income 
           limitation on 
           student loan interest deduction.
Sec. 413. Exclusion of certain amounts received under the National 
           Health Service Corps Scholarship Program and the F. Edward 
           Hebert Armed Forces Health Professions Scholarship and 
           Financial Assistance Program.

[[Page 115 STAT. 39]]

  Subtitle C--Liberalization of Tax-Exempt Financing Rules for Public 
                           School Construction

Sec. 421. Additional increase in arbitrage rebate exception for 
           governmental bonds used to finance educational facilities.
Sec. 422. Treatment of qualified public educational facility bonds as 
           exempt facility bonds.

                      Subtitle D--Other Provisions

Sec. 431. Deduction for higher education expenses.

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

   Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes

Sec. 501. Repeal of estate and generation-skipping transfer taxes.

           Subtitle B--Reductions of Estate and Gift Tax Rates

Sec. 511. Additional reductions of estate and gift tax rates.

                Subtitle C--Increase in Exemption Amounts

Sec. 521. Increase in exemption equivalent of unified credit, lifetime 
           gifts exemption, and GST exemption amounts.

                Subtitle D--Credit for State Death Taxes

Sec. 531. Reduction of credit for State death taxes.
Sec. 532. Credit for State death taxes replaced with deduction for such 
           taxes.

 Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With 
                                 Repeal

Sec. 541. Termination of step-up in basis at death.
Sec. 542. Treatment of property acquired from a decedent dying after 
           December 31, 2009.

                   Subtitle F--Conservation Easements

Sec. 551. Expansion of estate tax rule for conservation easements.

      Subtitle G--Modifications of Generation-Skipping Transfer Tax

Sec. 561. Deemed allocation of GST exemption to lifetime transfers to 
           trusts; retroactive allocations.
Sec. 562. Severing of trusts.
Sec. 563. Modification of certain valuation rules.
Sec. 564. Relief provisions.

         Subtitle H--Extension of Time for Payment of Estate Tax

Sec. 571. Increase in number of allowable partners and shareholders in 
           closely held businesses.
Sec. 572. Expansion of availability of installment payment for estates 
           with interests qualifying lending and finance businesses.
Sec. 573. Clarification of availability of installment payment.

                      Subtitle I--Other Provisions

Sec. 581. Waiver of statute of limitation for taxes on certain farm 
           valuations.

   TITLE VI--PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS

               Subtitle A--Individual Retirement Accounts

Sec. 601. Modification of IRA contribution limits.
Sec. 602. Deemed IRAs under employer plans.

                     Subtitle B--Expanding Coverage

Sec. 611. Increase in benefit and contribution limits.
Sec. 612. Plan loans for subchapter S owners, partners, and sole 
           proprietors.
Sec. 613. Modification of top-heavy rules.
Sec. 614. Elective deferrals not taken into account for purposes of 
           deduction limits.
Sec. 615. Repeal of coordination requirements for deferred compensation 
           plans of State and local governments and tax-exempt 
           organizations.
Sec. 616. Deduction limits.
Sec. 617. Option to treat elective deferrals as after-tax Roth 
           contributions.

[[Page 115 STAT. 40]]

Sec. 618. Nonrefundable credit to certain individuals for elective 
           deferrals and IRA contributions.
Sec. 619. Credit for pension plan startup costs of small employers.
Sec. 620. Elimination of user fee for requests to IRS regarding pension 
           plans.
Sec. 621. Treatment of nonresident aliens engaged in international 
           transportation services.

                Subtitle C--Enhancing Fairness for Women

Sec. 631. Catch-up contributions for individuals age 50 or over.
Sec. 632. Equitable treatment for contributions of employees to defined 
           contribution plans.
Sec. 633. Faster vesting of certain employer matching contributions.
Sec. 634. Modification to minimum distribution rules.
Sec. 635. Clarification of tax treatment of division of section 457 plan 
           benefits upon divorce.
Sec. 636. Provisions relating to hardship distributions.
Sec. 637. Waiver of tax on nondeductible contributions for domestic or 
           similar workers.

           Subtitle D--Increasing Portability for Participants

Sec. 641. Rollovers allowed among various types of plans.
Sec. 642. Rollovers of IRAs into workplace retirement plans.
Sec. 643. Rollovers of after-tax contributions.
Sec. 644. Hardship exception to 60-day rule.
Sec. 645. Treatment of forms of distribution.
Sec. 646. Rationalization of restrictions on distributions.
Sec. 647. Purchase of service credit in governmental defined benefit 
           plans.
Sec. 648. Employers may disregard rollovers for purposes of cash-out 
           amounts.
Sec. 649. Minimum distribution and inclusion requirements for section 
           457 plans.

       Subtitle E--Strengthening Pension Security and Enforcement

                       Part I--General Provisions

Sec. 651. Repeal of 160 percent of current liability funding limit.
Sec. 652. Maximum contribution deduction rules modified and applied to 
           all 
           defined benefit plans.
Sec. 653. Excise tax relief for sound pension funding.
Sec. 654. Treatment of multiemployer plans under section 415.
Sec. 655. Protection of investment of employee contributions to 401(k) 
           plans.
Sec. 656. Prohibited allocations of stock in S corporation ESOP.
Sec. 657. Automatic rollovers of certain mandatory distributions.
Sec. 658. Clarification of treatment of contributions to multiemployer 
           plan.

 Part II--Treatment of Plan Amendments Reducing Future Benefit Accruals

Sec. 659. Excise tax on failure to provide notice by defined benefit 
           plans significantly reducing future benefit accruals.

                 Subtitle F--Reducing Regulatory Burdens

Sec. 661. Modification of timing of plan valuations.
Sec. 662. ESOP dividends may be reinvested without loss of dividend 
           deduction.
Sec. 663. Repeal of transition rule relating to certain highly 
           compensated employees.
Sec. 664. Employees of tax-exempt entities.
Sec. 665. Clarification of treatment of employer-provided retirement 
           advice.
Sec. 666. Repeal of the multiple use test.

                  Subtitle G--Miscellaneous Provisions

Sec. 671. Tax treatment and information requirements of Alaska Native 
           Settlement Trusts.

                   TITLE VII--ALTERNATIVE MINIMUM TAX

Sec. 701. Increase in alternative minimum tax exemption.

                      TITLE VIII--OTHER PROVISIONS

Sec. 801. Time for payment of corporate estimated taxes.
Sec. 802. Expansion of authority to postpone certain tax-related 
           deadlines by reason of Presidentially declared disaster.
Sec. 803. No Federal income tax on restitution received by victims of 
           the Nazi 
           regime or their heirs or estates.

           TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

Sec. 901. Sunset of provisions of Act.

[[Page 115 STAT. 41]]

             TITLE I--INDIVIDUAL INCOME TAX RATE REDUCTIONS

SEC. 101. REDUCTION IN INCOME TAX RATES FOR INDIVIDUALS.

    (a) In General.--Section 1 <<NOTE: 26 USC 1.>>  (relating to tax 
imposed) is amended by adding at the end the following new subsection:

    ``(i) Rate Reductions After 2000.--
            ``(1) 10-percent rate bracket.--
                    ``(A) In general.--In the case of taxable years 
                beginning after December 31, 2000--
                          ``(i) the rate of tax under subsections (a), 
                      (b), (c), and (d) on taxable income not over the 
                      initial bracket amount shall be 10 percent, and
                          ``(ii) the 15 percent rate of tax shall apply 
                      only to taxable income over the initial bracket 
                      amount but not over the maximum dollar amount for 
                      the 15-percent rate bracket.
                    ``(B) Initial bracket amount.--For purposes of this 
                paragraph, the initial bracket amount is--
                          ``(i) $14,000 ($12,000 in the case of taxable 
                      years beginning before January 1, 2008) in the 
                      case of subsection (a),
                          ``(ii) $10,000 in the case of subsection (b), 
                      and
                          ``(iii) \1/2\ the amount applicable under 
                      clause (i) (after adjustment, if any, under 
                      subparagraph (C)) in the case of subsections (c) 
                      and (d).
                    ``(C) <<NOTE: Applicability.>>  Inflation 
                adjustment.--In prescribing the tables under subsection 
                (f ) which apply with respect to taxable years beginning 
                in calendar years after 2000--
                          ``(i) the Secretary shall make no adjustment 
                      to the initial bracket amount for any taxable year 
                      beginning before January 1, 2009,
                          ``(ii) the cost-of-living adjustment used in 
                      making adjustments to the initial bracket amount 
                      for any taxable year beginning after December 31, 
                      2008, shall be determined under subsection (f )(3) 
                      by substituting `2007' for `1992' in subparagraph 
                      (B) thereof, and
                          ``(iii) such adjustment shall not apply to the 
                      amount referred to in subparagraph (B)(iii).
                If any amount after adjustment under the preceding 
                sentence is not a multiple of $50, such amount shall be 
                rounded to the next lowest multiple of $50.
                    ``(D) Coordination with acceleration of 10 percent 
                rate bracket benefit for 2001.--This paragraph shall not 
                apply to any taxable year to which section 6428 applies.
            ``(2) Reductions in rates after june 30, 2001.--In the case 
        of taxable years beginning in a calendar year after 2000, the 
        corresponding percentage specified for such calendar year in the 
        following table shall be substituted for the otherwise 
        applicable tax rate in the tables under subsections (a), (b), 
        (c), (d), and (e).

[[Page 115 STAT. 42]]



------------------------------------------------------------------------
                                         The corresponding percentages
                 ``In the case of        shall be substituted for  the
                   taxable years            following percentages:
                 beginning during    -----------------------------------
                  calendar year:        28%      31%      36%     39.6%
------------------------------------------------------------------------
              2001..................   27.5%    30.5%    35.5%    39.1%
              2002 and 2003.........   27.0%    30.0%    35.0%    38.6%
              2004 and 2005.........   26.0%    29.0%    34.0%    37.6%
              2006 and thereafter...   25.0%    28.0%    33.0%    35.0%
------------------------------------------------------------------------

            ``(3) Adjustment of tables.--The Secretary shall adjust the 
        tables prescribed under subsection (f ) to carry out this 
        subsection.''.

    (b) Acceleration of 10 Percent Rate Bracket Benefit for 2001.--
            (1) In general.--Subchapter B of chapter 65 (relating to 
        abatements, credits, and refunds) is amended by adding at the 
        end the following new section:

``SEC. 6428. ACCELERATION OF 10 PERCENT INCOME TAX RATE BRACKET BENEFIT 
            FOR 2001.

    ``(a) In General.--In the case of an eligible individual, there 
shall be allowed as a credit against the tax imposed by chapter 1 for 
the taxpayer's first taxable year beginning in 2001 an amount equal to 5 
percent of so much of the taxpayer's taxable income as does not exceed 
the initial bracket amount (as defined in section 1(i)(1)(B)).
    ``(b) Limitation Based on Amount of Tax.--The credit allowed by 
subsection (a) shall not exceed the excess (if any) 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 of chapter 1 (other than the credits allowable 
        under subpart C thereof, relating to refundable credits).

    ``(c) Eligible Individual.--For purposes of this section, the term 
`eligible individual' means any individual other than--
            ``(1) any estate or trust,
            ``(2) any nonresident alien individual, and
            ``(3) any individual with respect to whom a deduction under 
        section 151 is allowable to another taxpayer for a taxable year 
        beginning in the calendar year in which the individual's taxable 
        year begins.

    ``(d) Special Rules.--
            ``(1) Coordination with advance refunds of credit.--
                    ``(A) In general.--The amount of credit which would 
                (but for this paragraph) be allowable under this section 
                shall be reduced (but not below zero) by the aggregate 
                refunds and credits made or allowed to the taxpayer 
                under subsection (e). Any failure to so reduce the 
                credit shall be treated as arising out of a mathematical 
                or clerical error and assessed according to section 
                6213(b)(1).
                    ``(B) Joint returns.--In the case of a refund or 
                credit made or allowed under subsection (e) with respect 
                to a joint return, half of such refund or credit shall 
                be treated as having been made or allowed to each 
                individual filing such return.
            ``(2) Coordination with estimated tax.--The credit under 
        this section shall be treated for purposes of section 6654(f )

[[Page 115 STAT. 43]]

        in the same manner as a credit under subpart A of part IV of 
        subchapter A of chapter 1.

    ``(e) Advance Refunds of Credit Based on Prior Year Data.--
            ``(1) In general.--Each individual who was an eligible 
        individual for such individual's first taxable year beginning in 
        2000 shall be treated as having made a payment against the tax 
        imposed by chapter 1 for such first taxable year in an amount 
        equal to the advance refund amount for such taxable year.
            ``(2) Advance refund amount.--For purposes of paragraph (1), 
        the advance refund amount is the amount that would have been 
        allowed as a credit under this section for such first taxable 
        year if this section (other than subsection (d) and this 
        subsection) had applied to such taxable year.
            ``(3) Timing of payments.--In the case of any overpayment 
        attributable to this subsection, the Secretary shall, subject to 
        the provisions of this title, refund or credit such overpayment 
        as rapidly as possible and, to the extent practicable, before 
        October 1, 2001. No refund or credit shall be made or allowed 
        under this subsection after December 31, 2001.
            ``(4) No interest.--No interest shall be allowed on any 
        overpayment attributable to this subsection.''.
            (2) Clerical amendment.--The table of sections for 
        subchapter B of chapter 65 is amended by adding at the end the 
        following new item:
                ``Sec. 6428. Acceleration of 10 percent income tax rate 
                                bracket benefit for 2001.''.

    (c) Conforming Amendments.--
            (1) Subparagraph (B) of section 1(g)(7) <<NOTE: 26 USC 1.>>  
        is amended by striking ``15 percent'' in clause (ii)(II) and 
        inserting ``10 percent.''.
            (2) Section 1(h) is amended--
                    (A) by striking ``28 percent'' both places it 
                appears in paragraphs (1)(A)(ii)(I) and (1)(B)(i) and 
                inserting ``25 percent'', and
                    (B) by striking paragraph (13).
            (3) Section 15 is amended by adding at the end the following 
        new subsection:

    ``(f ) Rate Reductions Enacted by Economic Growth and Tax Relief 
Reconciliation Act of 2001.--This section shall not apply to any change 
in rates under subsection (i) of section 1 (relating to rate reductions 
after 2000).''.
            (4) Section 531 is amended by striking ``equal to'' and all 
        that follows and inserting ``equal to the product of the highest 
        rate of tax under section 1(c) and the accumulated taxable 
        income.''.
            (5) Section 541 is amended by striking ``equal to'' and all 
        that follows and inserting ``equal to the product of the highest 
        rate of tax under section 1(c) and the undistributed personal 
        holding company income.''.
            (6) Section 3402(p)(1)(B) is amended by striking ``7, 15, 
        28, or 31 percent'' and inserting ``7 percent, any percentage 
        applicable to any of the 3 lowest income brackets in the table 
        under section 1(c),''.
            (7) Section 3402(p)(2) is amended by striking ``15 percent'' 
        and inserting ``10 percent''.

[[Page 115 STAT. 44]]

            (8) Section 3402(q)(1) <<NOTE: 26 USC 3402.>>  is amended by 
        striking ``equal to 28 percent of such payment'' and inserting 
        ``equal to the product of the third lowest rate of tax 
        applicable under section 1(c) and such payment''.
            (9) Section 3402(r)(3) is amended by striking ``31 percent'' 
        and inserting ``the fourth lowest rate of tax applicable under 
        section 1(c)''.
            (10) Section 3406(a)(1) is amended by striking ``equal to 31 
        percent of such payment'' and inserting ``equal to the product 
        of the fourth lowest rate of tax applicable under section 1(c) 
        and such payment''.
            (11) Section 13273 of the Revenue Reconciliation Act of 1993 
        is amended by striking ``28 percent'' and inserting ``the third 
        lowest rate of tax applicable under section 1(c) of the Internal 
        Revenue Code of 1986''.

    (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 
        beginning after December 31, 2000.
            (2) Amendments to withholding provisions.--The amendments 
        made by paragraphs (6), (7), (8), (9), (10), and (11) of 
        subsection (c) shall apply to amounts paid after the 60th day 
        after the date of the enactment of this Act. References to 
        income brackets and rates of tax in such paragraphs shall be 
        applied without regard to section 1(i)(1)(D) of the Internal 
        Revenue Code of 1986.

SEC. 102. REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.

    (a) In General.--Paragraph (3) of section 151(d) (relating to 
exemption amount) is amended by adding at the end the following new 
subparagraphs:
                    ``(E) Reduction of phaseout.--
                          ``(i) In general.--In the case of taxable 
                      years beginning after December 31, 2005, and 
                      before January 1, 2010, the reduction under 
                      subparagraph (A) shall be equal to the applicable 
                      fraction of the amount which would (but for this 
                      subparagraph) be the amount of such reduction.
                          ``(ii) Applicable fraction.--For purposes of 
                      clause (i), the applicable fraction shall be 
                      determined in accordance with the following table:

                ``For taxable years beginning             The applicable
                  in calendar year--                       fraction is--
                    2006 and 2007...............................  \2/3\ 
                    2008 and 2009...............................  \1/3\.

                    ``(F) Termination.--This paragraph shall not apply 
                to any taxable year beginning after December 31, 
                2009.''.

    (b) <<NOTE: Applicability. 26 USC 151 note.>>  Effective Date.--The 
amendment made by this section shall apply to taxable years beginning 
after December 31, 2005.

SEC. 103. PHASEOUT OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

    (a) In General.--Section 68 is amended by adding at the end the 
following new subsections:
    ``(f ) Phaseout of Limitation.--
            ``(1) In general.--In the case of taxable years beginning 
        after December 31, 2005, and before January 1, 2010, the 
        reduction under subsection (a) shall be equal to the applicable

[[Page 115 STAT. 45]]

        fraction of the amount which would (but for this subsection) be 
        the amount of such reduction.
            ``(2) Applicable fraction.--For purposes of paragraph (1), 
        the applicable fraction shall be determined in accordance with 
        the following table:

                ``For taxable years beginning             The applicable
                  in calendar year--                       fraction is--
                    2006 and 2007...............................  \2/3\ 
                    2008 and 2009...............................  \1/3\.

    ``(g) Termination.--This section shall not apply to any taxable year 
beginning after December 31, 2009.''.
    (b) <<NOTE: Applicability. 26 USC 68 note.>>  Effective Date.--The 
amendment made by this section shall apply to taxable years beginning 
after December 31, 2005.

               TITLE II--TAX BENEFITS RELATING TO CHILDREN

SEC. 201. MODIFICATIONS TO CHILD TAX CREDIT.

    (a) Increase in Per Child Amount.--Subsection (a) of section 24 
(relating to child tax credit) <<NOTE: 26 USC 24.>>  is amended to read 
as follows:

    ``(a) Allowance of Credit.--
            ``(1) In general.--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 the per child amount.
            ``(2) Per child amount.--For purposes of paragraph (1), the 
        per child amount shall be determined as follows:
``In the case of any taxab    The per child amount is--
        beginning in--
2001, 2002, 2003, or 2004                                        $  600 
2005, 2006, 2007, or 2008                                           700 
2009                                                                800 
2010 or thereafter                                             1,000.''.

    (b) Credit Allowed Against Alternative Minimum Tax.--
            (1) In general.--Subsection (b) of section 24 (relating to 
        child tax credit) is amended by adding at the end the following 
        new paragraph:
            ``(3) Limitation based on amount of tax.--The credit allowed 
        under subsection (a) for any taxable year shall not exceed the 
        excess of--
                    ``(A) the sum of the regular tax liability (as 
                defined in section 26(b)) plus the tax imposed by 
                section 55, over
                    ``(B) the sum of the credits allowable under this 
                subpart (other than this section) and section 27 for the 
                taxable year.''.
            (2) Conforming amendments.--
                    (A) The heading for section 24(b) is amended to read 
                as follows: ``Limitations.--''.
                    (B) The heading for section 24(b)(1) is amended to 
                read as follows: ``Limitation based on adjusted gross 
                income.--''.
                    (C) Section 24(d), as amended by subsection (c), is 
                amended--
                          (i) by striking ``section 26(a)'' each place 
                      it appears and inserting ``subsection (b)(3)'', 
                      and

[[Page 115 STAT. 46]]

                          (ii) in paragraph (1)(B) by striking 
                      ``aggregate amount of credits allowed by this 
                      subpart'' and inserting ``amount of credit allowed 
                      by this section''.
                    (D) Paragraph (1) of section 26(a) <<NOTE: 26 USC 
                26.>>  is amended by inserting ``(other than section 
                24)'' after ``this subpart''.
                    (E) Subsection (c) of section 23 is amended by 
                striking ``and section 1400C'' and inserting ``and 
                sections 24 and 1400C''.
                    (F) Subparagraph (C) of section 25(e)(1) is amended 
                by inserting ``, 24,'' after ``sections 23''.
                    (G) Section 904(h) is amended by inserting ``(other 
                than section 24)'' after ``chapter''.
                    (H) Subsection (d) of section 1400C is amended by 
                inserting ``and section 24'' after ``this section''.

    (c) Refundable Child Credit.--
            (1) In general.--So much of section 24(d) (relating to 
        additional credit for families with 3 or more children) as 
        precedes paragraph (2) is amended to read as follows:

    ``(d) Portion of Credit Refundable.--
            ``(1) In general.--The aggregate credits allowed to a 
        taxpayer under subpart C shall be increased by the lesser of--
                    ``(A) the credit which would be allowed under this 
                section without regard to this subsection and the 
                limitation under section 26(a), or
                    ``(B) the amount by which the amount of credit 
                allowed by this section (determined without regard to 
                this subsection) would increase if the limitation 
                imposed by section 26(a) were increased by the greater 
                of--
                          ``(i) 15 percent (10 percent in the case of 
                      taxable years beginning before January 1, 2005) of 
                      so much of the taxpayer's earned income (within 
                      the meaning of section 32) which is taken into 
                      account in computing taxable income for the 
                      taxable year as exceeds $10,000, or
                          ``(ii) in the case of a taxpayer with 3 or 
                      more qualifying children, the excess (if any) of--
                                    ``(I) the taxpayer's social security 
                                taxes for the taxable year, over
                                    ``(II) the credit allowed under 
                                section 32 for the taxable year.
        The amount of the credit allowed under this subsection shall not 
        be treated as a credit allowed under this subpart and shall 
        reduce the amount of credit otherwise allowable under subsection 
        (a) without regard to section 26(a).''.
            (2) Inflation adjustment.--Subsection (d) of section 24 is 
        amended by adding at the end the following new paragraph:
            ``(4) Inflation adjustment.--In the case of any taxable year 
        beginning in a calendar year after 2001, the $10,000 amount 
        contained in paragraph (1)(B) shall be increased by an amount 
        equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined under 
                section 1(f )(3) for the calendar year in which the 
                taxable year begins, determined by substituting 
                `calendar year 2000' for `calendar year 1992' in 
                subparagraph (B) thereof.
        Any increase determined under the preceding sentence shall be 
        rounded to the nearest multiple of $50.''.

[[Page 115 STAT. 47]]

            (3) Conforming amendment.--Section 32 <<NOTE: 26 USC 32.>>  
        is amended by striking subsection (n).

    (d) Elimination of Reduction of Credit to Taxpayer Subject to 
Alternative Minimum Tax Provision.--Section 24(d) is amended--
            (1) by striking paragraph (2), and
            (2) by redesignating paragraphs (3) and (4) as paragraphs 
        (2) and (3), respectively.

    (e) Effective Dates.-- <<NOTE: Applicability. 26 USC 24 note.>> 
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2000.
            (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to taxable years beginning after December 31, 2001.

SEC. 202. EXPANSION OF ADOPTION CREDIT AND ADOPTION ASSISTANCE PROGRAMS.

    (a) In General.--
            (1) Adoption credit.--Section 23(a)(1) (relating to 
        allowance of credit) is amended to read as follows:
            ``(1) In general.--In the case of an individual, there shall 
        be allowed as a credit against the tax imposed by this chapter--
                    ``(A) in the case of an adoption of a child other 
                than a child with special needs, the amount of the 
                qualified adoption expenses paid or incurred by the 
                taxpayer, and
                    ``(B) in the case of an adoption of a child with 
                special needs, $10,000.''.
            (2) Adoption assistance programs.--Section 137(a) (relating 
        to adoption assistance programs) is amended to read as follows:

    ``(a) In General.--Gross income of an employee does not include 
amounts paid or expenses incurred by the employer for adoption expenses 
in connection with the adoption of a child by an employee if such 
amounts are furnished pursuant to an adoption assistance program. The 
amount of the exclusion shall be--
            ``(1) in the case of an adoption of a child other than a 
        child with special needs, the amount of the qualified adoption 
        expenses paid or incurred by the taxpayer, and
            ``(2) in the case of an adoption of a child with special 
        needs, $10,000.''.

    (b) Dollar Limitations.--
            (1) Dollar amount of allowed expenses.--
                    (A) Adoption expenses.--Section 23(b)(1) (relating 
                to allowance of credit) is amended--
                          (i) by striking ``$5,000'' and inserting 
                      ``$10,000'',
                          (ii) by striking ``($6,000, in the case of a 
                      child with special needs)'', and
                          (iii) by striking ``subsection (a)'' and 
                      inserting ``subsection (a)(1)(A)''.
                    (B) Adoption assistance programs.--Section 137(b)(1) 
                (relating to dollar limitations for adoption assistance 
                programs) is amended--
                          (i) by striking ``$5,000'' and inserting 
                      ``$10,000'', and
                          (ii) by striking ``($6,000, in the case of a 
                      child with special needs)'', and

[[Page 115 STAT. 48]]

                          (iii) by striking ``subsection (a)'' and 
                      inserting ``subsection (a)(1)''.
            (2) Phase-out limitation.--
                    (A) Adoption expenses.--Clause (i) of section 
                23(b)(2)(A) (relating to income limitation) <<NOTE: 26 
                USC 23.>>  is amended by striking ``$75,000'' and 
                inserting ``$150,000''.
                    (B) Adoption assistance programs.--Section 
                137(b)(2)(A) (relating to income limitation) is amended 
                by striking ``$75,000'' and inserting ``$150,000''.

    (c) Year Credit Allowed.--Section 23(a)(2) (relating to year credit 
allowed) is amended by adding at the end the following new flush 
sentence:
        ``In the case of the adoption of a child with special needs, the 
        credit allowed under paragraph (1) shall be allowed for the 
        taxable year in which the adoption becomes final.''.

    (d) Repeal of Terminations.--
            (1) Children without special needs.--Paragraph (2) of 
        section 23(d) (relating to definition of eligible child) is 
        amended to read as follows:
            ``(2) Eligible child.--The term `eligible child' means any 
        individual who--
                    ``(A) has not attained age 18, or
                    ``(B) is physically or mentally incapable of caring 
                for himself.''.
            (2) Adoption assistance programs.--Section 137 (relating to 
        adoption assistance programs) is amended by striking subsection 
        (f ).

    (e) Adjustment of Dollar and Income Limitations for Inflation.--
            (1) Adoption credit.--Section 23 (relating to adoption 
        expenses) is amended by redesignating subsection (h) as 
        subsection (i) and by inserting after subsection (g) the 
        following new subsection:

    ``(h) Adjustments for Inflation.--In the case of a taxable year 
beginning after December 31, 2002, each of the dollar amounts in 
subsection (a)(1)(B) and paragraphs (1) and (2)(A)(i) of subsection (b) 
shall be increased by an amount equal to--
            ``(1) such dollar amount, multiplied by
            ``(2) 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) Adoption assistance programs.--Section 137 (relating to 
        adoption assistance programs), as amended by subsection (d), is 
        amended by adding at the end the following new subsection:

    ``(f ) Adjustments for Inflation.--In the case of a taxable year 
beginning after December 31, 2002, each of the dollar amounts in 
subsection (a)(2) and paragraphs (1) and (2)(A) of subsection (b) shall 
be increased by an amount equal to--
            ``(1) such dollar amount, multiplied by
            ``(2) 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.''.

    (f ) Credit Allowed Against Alternative Minimum Tax.--

[[Page 115 STAT. 49]]

            (1) In general.--Subsection (b) of section 23 <<NOTE: 26 USC 
        23.>>  is amended by adding at the end the following new 
        paragraph:
            ``(4) Limitation based on amount of tax.--The credit allowed 
        under subsection (a) for any taxable year shall not exceed the 
        excess of--
                    ``(A) the sum of the regular tax liability (as 
                defined in section 26(b)) plus the tax imposed by 
                section 55, over
                    ``(B) the sum of the credits allowable under this 
                subpart (other than this section) and section 27 for the 
                taxable year.''.
            (2) Conforming amendments.--
                    (A) Section 23(c), as amended by section 201(b), is 
                amended--
                          (i) by striking ``section 26(a)'' and 
                      inserting ``subsection (b)(4)'', and
                          (ii) by striking ``reduced by the sum of the 
                      credits allowable under this subpart (other than 
                      this section and sections 24 and 1400C)''.
                    (B) Section 24(b)(3)(B), as added by section 201(b), 
                is amended by striking ``this section'' and inserting 
                ``this section and section 23''.
                    (C) Sections 26(a)(1), 904(h), and 1400C(d), as 
                amended by section 201(b), are each amended by striking 
                ``section 24'' and inserting ``sections 23 and 24''.

    (g) Effective Date.-- <<NOTE: Applicability. 26 USC 23 note.>> 
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2001.
            (2) Subsection (a).--The amendments made by subsection (a) 
        shall apply to taxable years beginning after December 31, 2002.

SEC. 203. <<NOTE: 26 USC 24 note.>>  REFUNDS DISREGARDED IN THE 
            ADMINISTRATION OF FEDERAL PROGRAMS AND FEDERALLY ASSISTED 
            PROGRAMS.

    Any payment considered to have been made to any individual by reason 
of section 24 of the Internal Revenue Code of 1986, as amended by 
section 201, shall not be taken into account as income and shall not be 
taken into account as resources for the month of receipt and the 
following month, for purposes of determining the eligibility of such 
individual or any other individual for benefits or assistance, or the 
amount or extent of benefits or assistance, under any Federal program or 
under any State or local program financed in whole or in part with 
Federal funds.

SEC. 204. DEPENDENT CARE CREDIT.

    (a) Increase in Dollar Limit.--Subsection (c) of section 21 
(relating to expenses for household and dependent care services 
necessary for gainful employment) is amended--
            (1) by striking ``$2,400'' in paragraph (1) and inserting 
        ``$3,000'', and
            (2) by striking ``$4,800'' in paragraph (2) and inserting 
        ``$6,000''.

    (b) Increase in Applicable Percentage.--Section 21(a)(2) (defining 
applicable percentage) is amended--
            (1) by striking ``30 percent'' and inserting ``35 percent'', 
        and
            (2) by striking ``$10,000'' and inserting ``$15,000''.

[[Page 115 STAT. 50]]

    (c) <<NOTE: Applicability. 26 USC 21 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2002.

SEC. 205. ALLOWANCE OF CREDIT FOR EMPLOYER EXPENSES FOR CHILD CARE 
            ASSISTANCE.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits), as amended by section 619, is 
further amended by adding at the end the following:

``SEC. 45F. EMPLOYER-PROVIDED CHILD CARE CREDIT.

    ``(a) In General.--For purposes of section 38, the employer-provided 
child care credit determined under this section for the taxable year is 
an amount equal to the sum of--
            ``(1) 25 percent of the qualified child care expenditures, 
        and
            ``(2) 10 percent of the qualified child care resource and 
        referral expenditures,

of the taxpayer for such taxable year.
    ``(b) Dollar Limitation.--The credit allowable under subsection (a) 
for any taxable year shall not exceed $150,000.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Qualified child care expenditure.--
                    ``(A) In general.--The term `qualified child care 
                expenditure' means any amount paid or incurred--
                          ``(i) to acquire, construct, rehabilitate, or 
                      expand property--
                                    ``(I) which is to be used as part of 
                                a qualified child care facility of the 
                                taxpayer,
                                    ``(II) with respect to which a 
                                deduction for depreciation (or 
                                amortization in lieu of depreciation) is 
                                allowable, and
                                    ``(III) which does not constitute 
                                part of the principal residence (within 
                                the meaning of section 121) of the 
                                taxpayer or any employee of the 
                                taxpayer,
                          ``(ii) for the operating costs of a qualified 
                      child care facility of the taxpayer, including 
                      costs related to the training of employees, to 
                      scholarship programs, and to the providing of 
                      increased compensation to employees with higher 
                      levels of child care training, or
                          ``(iii) under a contract with a qualified 
                      child care facility to provide child care services 
                      to employees of the taxpayer.
                    ``(B) Fair market value.--The term `qualified child 
                care expenditures' shall not include expenses in excess 
                of the fair market value of such care.
            ``(2) Qualified child care facility.--
                    ``(A) In general.--The term `qualified child care 
                facility' means a facility--
                          ``(i) the principal use of which is to provide 
                      child care assistance, and
                          ``(ii) which meets the requirements of all 
                      applicable laws and regulations of the State or 
                      local government in which it is located, including 
                      the licensing of the facility as a child care 
                      facility.

[[Page 115 STAT. 51]]

                Clause (i) shall not apply to a facility which is the 
                principal residence (within the meaning of section 121) 
                of the operator of the facility.
                    ``(B) Special rules with respect to a taxpayer.--A 
                facility shall not be treated as a qualified child care 
                facility with respect to a taxpayer unless--
                          ``(i) enrollment in the facility is open to 
                      employees of the taxpayer during the taxable year,
                          ``(ii) if the facility is the principal trade 
                      or business of the taxpayer, at least 30 percent 
                      of the enrollees of such facility are dependents 
                      of employees of the taxpayer, and
                          ``(iii) the use of such facility (or the 
                      eligibility to use such facility) does not 
                      discriminate in favor of employees of the taxpayer 
                      who are highly compensated employees (within the 
                      meaning of section 414(q)).
            ``(3) Qualified child care resource and referral 
        expenditure.--
                    ``(A) In general.--The term `qualified child care 
                resource and referral expenditure' means any amount paid 
                or incurred under a contract to provide child care 
                resource and referral services to an employee of the 
                taxpayer.
                    ``(B) Nondiscrimination.--The services shall not be 
                treated as qualified unless the provision of such 
                services (or the eligibility to use such services) does 
                not discriminate in favor of employees of the taxpayer 
                who are highly compensated employees (within the meaning 
                of section 414(q)).

    ``(d) Recapture of Acquisition and Construction Credit.--
            ``(1) In general.--If, as of the close of any taxable year, 
        there is a recapture event with respect to any qualified child 
        care facility of the taxpayer, then the tax of the taxpayer 
        under this chapter for such taxable year shall be increased by 
        an amount equal to the product of--
                    ``(A) the applicable recapture percentage, and
                    ``(B) the aggregate decrease in the credits allowed 
                under section 38 for all prior taxable years which would 
                have resulted if the qualified child care expenditures 
                of the taxpayer described in subsection (c)(1)(A) with 
                respect to such facility had been zero.
            ``(2) Applicable recapture percentage.--
                    ``(A) In general.--For purposes of this subsection, 
                the applicable recapture percentage shall be determined 
                from the following table:

                                                          The applicable
                                                               recapture
            ``If the recapture event 
            occurs in:                                    percentage is:
                Years 1-3.....................................  100     
                Year 4........................................   85     
                Year 5........................................   70     
                Year 6........................................   55     
                Year 7........................................   40     
                Year 8........................................   25     
                Years 9 and 10................................   10     
                Years 11 and thereafter.......................    0.    

                    ``(B) Years.--For purposes of subparagraph (A), year 
                1 shall begin on the first day of the taxable year in 
                which the qualified child care facility is placed in 
                service by the taxpayer.

[[Page 115 STAT. 52]]

            ``(3) Recapture event defined.--For purposes of this 
        subsection, the term `recapture event' means--
                    ``(A) Cessation of operation.--The cessation of the 
                operation of the facility as a qualified child care 
                facility.
                    ``(B) Change in ownership.--
                          ``(i) In general.--Except as provided in 
                      clause (ii), the disposition of a taxpayer's 
                      interest in a qualified child care facility with 
                      respect to which the credit described in 
                      subsection (a) was allowable.
                          ``(ii) Agreement to assume recapture 
                      liability.--Clause (i) shall not apply if the 
                      person acquiring such interest in the facility 
                      agrees in writing to assume the recapture 
                      liability of the person disposing of such interest 
                      in effect immediately before such disposition. In 
                      the event of such an assumption, the person 
                      acquiring the interest in the facility shall be 
                      treated as the taxpayer for purposes of assessing 
                      any recapture liability (computed as if there had 
                      been no change in ownership).
            ``(4) Special rules.--
                    ``(A) Tax benefit rule.--The tax for the taxable 
                year shall be increased under paragraph (1) only with 
                respect to credits allowed by reason of this section 
                which were used to reduce tax liability. In the case of 
                credits not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 shall be 
                appropriately adjusted.
                    ``(B) No credits against tax.--Any increase in tax 
                under this subsection shall not be treated as a tax 
                imposed by this chapter for purposes of determining the 
                amount of any credit under subpart A, B, or D of this 
                part.
                    ``(C) No recapture by reason of casualty loss.--The 
                increase in tax under this subsection shall not apply to 
                a cessation of operation of the facility as a qualified 
                child care facility by reason of a casualty loss to the 
                extent such loss is restored by reconstruction or 
                replacement within a reasonable period established by 
                the Secretary.

    ``(e) Special Rules.--For purposes of this section--
            ``(1) Aggregation rules.--All persons which are treated as a 
        single employer under subsections (a) and (b) of section 52 
        shall be treated as a single taxpayer.
            ``(2) <<NOTE: Regulations. Applicability.>>  Pass-thru in 
        the case of estates and trusts.--Under regulations prescribed by 
        the Secretary, rules similar to the rules of subsection (d) of 
        section 52 shall apply.
            ``(3) Allocation in the case of partnerships.--In the case 
        of partnerships, the credit shall be allocated among partners 
        under regulations prescribed by the Secretary.

    ``(f ) No Double Benefit.--
            ``(1) Reduction in basis.--For purposes of this subtitle--
                    ``(A) In general.--If a credit is determined under 
                this section with respect to any property by reason of 
                expenditures described in subsection (c)(1)(A), the 
                basis of such property shall be reduced by the amount of 
                the credit so determined.
                    ``(B) Certain dispositions.--If, during any taxable 
                year, there is a recapture amount determined with 
                respect to any property the basis of which was reduced 
                under

[[Page 115 STAT. 53]]

                subparagraph (A), the basis of such property 
                (immediately before the event resulting in such 
                recapture) shall be increased by an amount equal to such 
                recapture amount. For purposes of the preceding 
                sentence, the term `recapture amount' means any increase 
                in tax (or adjustment in carrybacks or carryovers) 
                determined under subsection (d).
            ``(2) Other deductions and credits.--No deduction or credit 
        shall be allowed under any other provision of this chapter with 
        respect to the amount of the credit determined under this 
        section.''.

    (b) Conforming Amendments.--
            (1) Section 38(b), <<NOTE: 26 USC 38.>>  as amended by 
        section 619, is amended by striking ``plus'' at the end of 
        paragraph (13), by striking the period at the end of paragraph 
        (14) and inserting ``, plus'', and by adding at the end the 
        following:
            ``(15) the employer-provided child care credit determined 
        under section 45F.''.
            (2) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1 is amended by adding at the end the 
        following:
                ``Sec. 45F. Employer-provided child care credit.''.

            (3) Section 1016(a) is amended by striking ``and'' at the 
        end of paragraph (26), by striking the period at the end of 
        paragraph (27) and inserting ``, and'', and by adding at the end 
        the following:
            ``(28) in the case of a facility with respect to which a 
        credit was allowed under section 45F, to the extent provided in 
        section 45F(f )(1).''.

    (c) <<NOTE: Applicability. 26 USC 38 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2001.

                   TITLE III--MARRIAGE PENALTY RELIEF

SEC. 301. ELIMINATION OF MARRIAGE PENALTY IN STANDARD DEDUCTION.

    (a) In General.--Paragraph (2) of section 63(c) (relating to 
standard deduction) is amended--
            (1) by striking ``$5,000'' in subparagraph (A) and inserting 
        ``the applicable percentage of the dollar amount in effect under 
        subparagraph (C) for the taxable year'';
            (2) by adding ``or'' at the end of subparagraph (B);
            (3) by striking ``in the case of'' and all that follows in 
        subparagraph (C) and inserting ``in any other case.''; and
            (4) by striking subparagraph (D).

    (b) Applicable Percentage.--Section 63(c) (relating to standard 
deduction) is amended by adding at the end the following new paragraph:
            ``(7) Applicable percentage.--For purposes of paragraph (2), 
        the applicable percentage shall be determined in accordance with 
        the following table:

                ``For taxable years beginning             The applicable
                  in calendar year--                     percentage is--
                    2005........................................    174 
                    2006........................................    184 
                    2007........................................    187 
                    2008........................................    190 
                    2009 and thereafter......................... 200.''.


[[Page 115 STAT. 54]]



    (c) Technical Amendments.--
            (1) Subparagraph (B) of section 1(f )(6) <<NOTE: 26 USC 
        1.>>  is amended by striking ``(other than with'' and all that 
        follows through ``shall be applied'' and inserting ``(other than 
        with respect to sections 63(c)(4) and 151(d)(4)(A)) shall be 
        applied''.
            (2) Paragraph (4) of section 63(c) is amended by adding at 
        the end the following flush sentence:
        ``The preceding sentence shall not apply to the amount referred 
        to in paragraph (2)(A).''.

    (d) <<NOTE: Applicability. 26 USC 1 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2004.

SEC. 302. PHASEOUT OF MARRIAGE PENALTY IN 15-PERCENT BRACKET.

    (a) In General.--Section 1(f ) (relating to adjustments in tax 
tables so that inflation will not result in tax increases) is amended by 
adding at the end the following new paragraph:
            ``(8) Phaseout of marriage penalty in 15-percent bracket.--
                    ``(A) In general.--With respect to taxable years 
                beginning after December 31, 2004, in prescribing the 
                tables under paragraph (1)--
                          ``(i) the maximum taxable income in the 15-
                      percent rate bracket in the table contained in 
                      subsection (a) (and the minimum taxable income in 
                      the next higher taxable income bracket in such 
                      table) shall be the applicable percentage of the 
                      maximum taxable income in the 15-percent rate 
                      bracket in the table contained in subsection (c) 
                      (after any other adjustment under this 
                      subsection), and
                          ``(ii) the comparable taxable income amounts 
                      in the table contained in subsection (d) shall be 
                      \1/2\ of the amounts determined under clause (i).
                    ``(B) Applicable percentage.--For purposes of 
                subparagraph (A), the applicable percentage shall be 
                determined in accordance with the following table:

                ``For taxable years beginning             The applicable
                  in calendar year--                     percentage is--
                    2005........................................    180 
                    2006........................................    187 
                    2007........................................    193 
                    2008 and thereafter.........................    200.

                    ``(C) Rounding.--If any amount determined under 
                subparagraph (A)(i) is not a multiple of $50, such 
                amount shall be rounded to the next lowest multiple of 
                $50.''.

    (b) Technical Amendments.--
            (1) Subparagraph (A) of section 1(f )(2) is amended by 
        inserting ``except as provided in paragraph (8),'' before ``by 
        increasing''.
            (2) The heading for subsection (f ) of section 1 is amended 
        by inserting ``Phaseout of Marriage Penalty in 15-Percent 
        Bracket;'' before ``Adjustments''.

    (c) <<NOTE: Applicability. 26 USC 1 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2004.

[[Page 115 STAT. 55]]

SEC. 303. MARRIAGE PENALTY RELIEF FOR EARNED INCOME CREDIT; EARNED 
            INCOME TO INCLUDE ONLY AMOUNTS INCLUDIBLE IN GROSS INCOME; 
            SIMPLIFICATION OF EARNED INCOME CREDIT.

    (a) Increased Phaseout Amount.--
            (1) In general.--Section 32(b)(2) <<NOTE: 26 USC 32.>>  
        (relating to amounts) is amended--
                    (A) by striking ``Amounts.--The earned'' and 
                inserting ``Amounts.--
                    ``(A) In general.--Subject to subparagraph (B), the 
                earned'', and
                    (B) by adding at the end the following new 
                subparagraph:
                    ``(B) Joint returns.--In the case of a joint return 
                filed by an eligible individual and such individual's 
                spouse, the phaseout amount determined under 
                subparagraph (A) shall be increased by--
                          ``(i) $1,000 in the case of taxable years 
                      beginning in 2002, 2003, and 2004,
                          ``(ii) $2,000 in the case of taxable years 
                      beginning in 2005, 2006, and 2007, and
                          ``(iii) $3,000 in the case of taxable years 
                      beginning after 2007.''.
            (2) Inflation adjustment.--Paragraph (1)(B) of section 32( 
        j) (relating to inflation adjustments) is amended to read as 
        follows:
                    ``(B) the cost-of-living adjustment determined under 
                section 1(f )(3) for the calendar year in which the 
                taxable year begins, determined--
                          ``(i) in the case of amounts in subsections 
                      (b)(2)(A) and (i)(1), by substituting `calendar 
                      year 1995' for `calendar year 1992' in 
                      subparagraph (B) thereof, and
                          ``(ii) in the case of the $3,000 amount in 
                      subsection (b)(2)(B)(iii), by substituting 
                      `calendar year 2007' for `calendar year 1992' in 
                      subparagraph (B) of such section 1.''.
            (3) Rounding.--Section 32( j)(2)(A) (relating to rounding) 
        is amended by striking ``subsection (b)(2)'' and inserting 
        ``subsection (b)(2)(A) (after being increased under subparagraph 
        (B) thereof )''.

    (b) Earned Income To Include Only Amounts Includible in Gross 
Income.--Clause (i) of section 32(c)(2)(A) (defining earned income) is 
amended by inserting ``, but only if such amounts are includible in 
gross income for the taxable year'' after ``other employee 
compensation''.
    (c) Repeal of Reduction of Credit to Taxpayers Subject to 
Alternative Minimum Tax.--Section 32(h) is repealed.
    (d) Replacement of Modified Adjusted Gross Income With Adjusted 
Gross Income.--
            (1) In general.--Section 32(a)(2)(B) is amended by striking 
        ``modified''.
            (2) Conforming amendments.--
                    (A) Section 32(c) is amended by striking paragraph 
                (5).
                    (B) Section 32(f )(2)(B) is amended by striking 
                ``modified'' each place it appears.

    (e) Relationship Test.--

[[Page 115 STAT. 56]]

            (1) In general.--Clause (i) of section 
        32(c)(3)(B) <<NOTE: 26 USC 32.>>  (relating to relationship 
        test) is amended to read as follows:
                          ``(i) In general.--An individual bears a 
                      relationship to the taxpayer described in this 
                      subparagraph if such individual is--
                                    ``(I) a son, daughter, stepson, or 
                                stepdaughter, or a descendant of any 
                                such individual,
                                    ``(II) a brother, sister, 
                                stepbrother, or stepsister, or a 
                                descendant of any such individual, who 
                                the taxpayer cares for as the taxpayer's 
                                own child, or
                                    ``(III) an eligible foster child of 
                                the taxpayer.''.
            (2) Eligible foster child.--
                    (A) In general.--Clause (iii) of section 32(c)(3)(B) 
                is amended to read as follows:
                          ``(iii) Eligible foster child.--For purposes 
                      of clause (i), the term `eligible foster child' 
                      means an individual not described in subclause (I) 
                      or (II) of clause (i) who--
                                    ``(I) is placed with the taxpayer by 
                                an authorized placement agency, and
                                    ``(II) the taxpayer cares for as the 
                                taxpayer's own child.''.
                    (B) Conforming amendment.--Section 32(c)(3)(A)(ii) 
                is amended by striking ``except as provided in 
                subparagraph (B)(iii),''.

    (f ) 2 or More Claiming Qualifying Child.--Section 32(c)(1)(C) is 
amended to read as follows:
                    ``(C) 2 or more claiming qualifying child.--
                          ``(i) In general.--Except as provided in 
                      clause (ii), if (but for this paragraph) an 
                      individual may be claimed, and is claimed, as a 
                      qualifying child by 2 or more taxpayers for a 
                      taxable year beginning in the same calendar year, 
                      such individual shall be treated as the qualifying 
                      child of the taxpayer who is--
                                    ``(I) a parent of the individual, or
                                    ``(II) if subclause (I) does not 
                                apply, the taxpayer with the highest 
                                adjusted gross income for such taxable 
                                year.
                          ``(ii) More than 1 claiming credit.--If the 
                      parents claiming the credit with respect to any 
                      qualifying child do not file a joint return 
                      together, such child shall be treated as the 
                      qualifying child of--
                                    ``(I) the parent with whom the child 
                                resided for the longest period of time 
                                during the taxable year, or
                                    ``(II) if the child resides with 
                                both parents for the same amount of time 
                                during such taxable year, the parent 
                                with the highest adjusted gross 
                                income.''.

    (g) Expansion of Mathematical Error Authority.--Paragraph (2) of 
section 6213(g) is amended by striking ``and'' at the end of 
subparagraph (K), by striking the period at the end of subparagraph (L) 
and inserting ``, and'', and by inserting after subparagraph (L) the 
following new subparagraph:

[[Page 115 STAT. 57]]

                    ``(M) the entry on the return claiming the credit 
                under section 32 with respect to a child if, according 
                to the Federal Case Registry of Child Support Orders 
                established under section 453(h) of the Social Security 
                Act, the taxpayer is a noncustodial parent of such 
                child.''.

    (h) Clerical Amendment.--Subparagraph (E) of section 
32(c)(3) <<NOTE: 26 USC 32.>>  is amended by striking ``subparagraphs 
(A)(ii) and (B)(iii)(II)'' and inserting ``subparagraph (A)(ii)''.

    (i) <<NOTE: 26 USC 32 note.>>  Effective Dates.--
            (1) In <<NOTE: Applicability.>>  general.--Except as 
        provided in paragraph (2), the amendments made by this section 
        shall apply to taxable years beginning after December 31, 2001.
            (2) Subsection (g).--The amendment made by subsection (g) 
        shall take effect on January 1, 2004.

                TITLE IV--AFFORDABLE EDUCATION PROVISIONS

                Subtitle A--Education Savings Incentives

SEC. 401. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

    (a) Maximum Annual Contributions.--
            (1) In general.--Section 530(b)(1)(A)(iii) (defining 
        education individual retirement account) is amended by striking 
        ``$500'' and inserting ``$2,000''.
            (2) Conforming amendment.--Section 4973(e)(1)(A) is amended 
        by striking ``$500'' and inserting ``$2,000''.

    (b) Modification of AGI Limits To Remove Marriage Penalty.--Section 
530(c)(1) (relating to reduction in permitted contributions based on 
adjusted gross income) is amended--
            (1) by striking ``$150,000'' in subparagraph (A)(ii) and 
        inserting ``$190,000'', and
            (2) by striking ``$10,000'' in subparagraph (B) and 
        inserting ``$30,000''.

    (c) Tax-Free Expenditures for Elementary and Secondary School 
Expenses.--
            (1) In general.--Section 530(b)(2) (defining qualified 
        higher education expenses) is amended to read as follows:
            ``(2) Qualified education expenses.--
                    ``(A) In general.--The term `qualified education 
                expenses' means--
                          ``(i) qualified higher education expenses (as 
                      defined in section 529(e)(3)), and
                          ``(ii) qualified elementary and secondary 
                      education expenses (as defined in paragraph (4)).
                    ``(B) Qualified state tuition programs.--Such term 
                shall include any contribution to a qualified State 
                tuition program (as defined in section 529(b)) on behalf 
                of the designated beneficiary (as defined in section 
                529(e)(1)); but there shall be no increase in the 
                investment in the contract for purposes of applying 
                section 72 by reason of any portion of such contribution 
                which is not includible in gross income by reason of 
                subsection (d)(2).''.

[[Page 115 STAT. 58]]

            (2) Qualified elementary and secondary education expenses.--
        Section 530(b) <<NOTE: 26 USC 530.>>  (relating to definitions 
        and special rules) is amended by adding at the end the following 
        new paragraph:
            ``(4) Qualified elementary and secondary education 
        expenses.--
                    ``(A) In general.--The term `qualified elementary 
                and secondary education expenses' means--
                          ``(i) expenses for tuition, fees, academic 
                      tutoring, special needs services in the case of a 
                      special needs beneficiary, books, supplies, and 
                      other equipment which are incurred in connection 
                      with the enrollment or attendance of the 
                      designated beneficiary of the trust as an 
                      elementary or secondary school student at a 
                      public, private, or religious school,
                          ``(ii) expenses for room and board, uniforms, 
                      transportation, and supplementary items and 
                      services (including extended day programs) which 
                      are required or provided by a public, private, or 
                      religious school in connection with such 
                      enrollment or attendance, and
                          ``(iii) expenses for the purchase of any 
                      computer technology or equipment (as defined in 
                      section 170(e)(6)(F)(i)) or Internet access and 
                      related services, if such technology, equipment, 
                      or services are to be used by the beneficiary and 
                      the beneficiary's family during any of the years 
                      the beneficiary is in school.
                Clause (iii) shall not include expenses for computer 
                software designed for sports, games, or hobbies unless 
                the software is predominantly educational in nature.
                    ``(B) School.--The term `school' means any school 
                which provides elementary education or secondary 
                education (kindergarten through grade 12), as determined 
                under State law.''.
            (3) Conforming amendments.--Section 530 is amended--
                    (A) by striking ``higher'' each place it appears in 
                subsections (b)(1) and (d)(2), and
                    (B) by striking ``higher'' in the heading for 
                subsection (d)(2).

    (d) <<NOTE: Regulations.>>  Waiver of Age Limitations for Children 
With Special Needs.--Section 530(b)(1) (defining education individual 
retirement account) is amended by adding at the end the following flush 
sentence:
        ``The age limitations in subparagraphs (A)(ii) and (E), and 
        paragraphs (5) and (6) of subsection (d), shall not apply to any 
        designated beneficiary with special needs (as determined under 
        regulations prescribed by the Secretary).''.

    (e) Entities Permitted To Contribute to Accounts.--Section 530(c)(1) 
(relating to reduction in permitted contributions based on adjusted 
gross income) is amended by striking ``The maximum amount which a 
contributor'' and inserting ``In the case of a contributor who is an 
individual, the maximum amount the contributor''.
    (f ) Time When Contributions Deemed Made.--
            (1) In general.--Section 530(b) (relating to definitions and 
        special rules), as amended by subsection (c)(2), is amended by 
        adding at the end the following new paragraph:
            ``(5) Time when contributions deemed made.--An individual 
        shall be deemed to have made a contribution to an

[[Page 115 STAT. 59]]

        education individual retirement account on the last day of the 
        preceding taxable year if the contribution is made on account of 
        such taxable year and is made not later than the time prescribed 
        by law for filing the return for such taxable year (not 
        including extensions thereof ).''.
            (2) Extension of time to return excess contributions.--
        Subparagraph (C) of section 530(d)(4) <<NOTE: 26 USC 530.>>  
        (relating to additional tax for distributions not used for 
        educational expenses) is amended--
                    (A) by striking clause (i) and inserting the 
                following new clause:
                          ``(i) such distribution is made before the 
                      first day of the sixth month of the taxable year 
                      following the taxable year, and'', and
                    (B) by striking ``due date of return'' in the 
                heading and inserting ``certain date''.

    (g) Coordination With Hope and Lifetime Learning Credits and 
Qualified Tuition Programs.--
            (1) In general.--Section 530(d)(2)(C) is amended to read as 
        follows:
                    ``(C) Coordination with hope and lifetime learning 
                credits and qualified tuition programs.--For purposes of 
                subparagraph (A)--
                          ``(i) Credit coordination.--The total amount 
                      of qualified higher education expenses with 
                      respect to an individual for the taxable year 
                      shall be reduced--
                                    ``(I) as provided in section 
                                25A(g)(2), and
                                    ``(II) by the amount of such 
                                expenses which were taken into account 
                                in determining the credit allowed to the 
                                taxpayer or any other person under 
                                section 25A.
                          ``(ii) Coordination with qualified tuition 
                      programs.--If, with respect to an individual for 
                      any taxable year--
                                    ``(I) the aggregate distributions 
                                during such year to which subparagraph 
                                (A) and section 529(c)(3)(B) apply, 
                                exceed
                                    ``(II) the total amount of qualified 
                                education expenses (after the 
                                application of clause (i)) for such 
                                year,
                      the taxpayer shall allocate such expenses among 
                      such distributions for purposes of determining the 
                      amount of the exclusion under subparagraph (A) and 
                      section 529(c)(3)(B).''.
            (2) Conforming amendments.--
                    (A) Subsection (e) of section 25A is amended to read 
                as follows:

    ``(e) Election Not To Have Section Apply.--A taxpayer may elect not 
to have this section apply with respect to the qualified tuition and 
related expenses of an individual for any taxable year.''.
                    (B) Section 135(d)(2)(A) is amended by striking 
                ``allowable'' and inserting ``allowed''.
                    (C) Section 530(d)(2)(D) is amended--
                          (i) by striking ``or credit'' and inserting 
                      ``, credit, or exclusion'', and

[[Page 115 STAT. 60]]

                          (ii) by striking ``credit or deduction'' in 
                      the heading and inserting ``deduction, credit, or 
                      exclusion''.
                    (D) Section 4973(e)(1) <<NOTE: 26 USC 4973.>>  is 
                amended by adding ``and'' at the end of subparagraph 
                (A), by striking subparagraph (B), and by redesignating 
                subparagraph (C) as subparagraph (B).

    (h) <<NOTE: Applicability. 26 USC 25A note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2001.

SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

    (a) Eligible Educational Institutions Permitted To Maintain 
Qualified Tuition Programs.--
          (1) In general.--Section 529(b)(1) (defining qualified State 
        tuition program) is amended--
                    (A) by inserting ``or by 1 or more eligible 
                educational institutions'' after ``maintained by a State 
                or agency or instrumentality thereof '' in the matter 
                preceding subparagraph (A), and
                    (B) by adding at the end the following new flush 
                sentence:
        ``Except to the extent provided in regulations, a program 
        established and maintained by 1 or more eligible educational 
        institutions shall not be treated as a qualified tuition program 
        unless such program provides that amounts are held in a 
        qualified trust and such program has received a ruling or 
        determination that such program meets the applicable 
        requirements for a qualified tuition program. For purposes of 
        the preceding sentence, the term `qualified trust' means a trust 
        which is created or organized in the United States for the 
        exclusive benefit of designated beneficiaries and with respect 
        to which the requirements of paragraphs (2) and (5) of section 
        408(a) are met.''.
            (2) Private qualified tuition programs limited to benefit 
        plans.--Clause (ii) of section 529(b)(1)(A) is amended by 
        inserting ``in the case of a program established and maintained 
        by a State or agency or instrumentality thereof,'' before ``may 
        make''.
            (3) Additional tax on nonqualified withdrawals.--Section 529 
        is amended--
                    (A) by striking paragraph (3) of subsection (b) and 
                by redesignating paragraphs (4), (5), (6), and (7) of 
                such subsection as paragraphs (3), (4), (5), and (6), 
                respectively, and
                    (B) by adding at the end of subsection (c) the 
                following new paragraph:
            ``(6) Additional tax.--The tax imposed by section 530(d)(4) 
        shall apply to any payment or distribution from a qualified 
        tuition program in the same manner as such tax applies to a 
        payment or distribution from an education individual retirement 
        account. This paragraph shall not apply to any payment or 
        distribution in any taxable year beginning before January 1, 
        2004, which is includible in gross income but used for qualified 
        higher education expenses of the designated beneficiary.''.
            (4) Conforming amendments.--
                    (A) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 
                529, 530(b)(2)(B), 4973(e), and 6693(a)(2)(C) are 
                amended by

[[Page 115 STAT. 61]]

                striking ``qualified State tuition'' each place it 
                appears and inserting ``qualified tuition''.
                    (B) The headings for sections <<NOTE: 26 USC 72, 
                135.>>  72(e)(9) and 135(c)(2)(C) are amended by 
                striking ``qualified state tuition'' each place it 
                appears and inserting ``qualified tuition''.
                    (C) The headings for sections 529(b) and 
                530(b)(2)(B) are amended by striking ``Qualified state 
                tuition'' each place it appears and inserting 
                ``Qualified tuition''.
                    (D) The heading for section 529 is amended by 
                striking ``state''.
                    (E) The item relating to section 529 in the table of 
                sections for part VIII of subchapter F of chapter 1 is 
                amended by striking ``State''.

    (b) Exclusion From Gross Income of Education Distributions From 
Qualified Tuition Programs.--
            (1) In general.--Section 529(c)(3)(B) (relating to 
        distributions) is amended to read as follows:
                    ``(B) Distributions for qualified higher education 
                expenses.--For purposes of this paragraph--
                          ``(i) In-kind distributions.--No amount shall 
                      be includible in gross income under subparagraph 
                      (A) by reason of a distribution which consists of 
                      providing a benefit to the distributee which, if 
                      paid for by the distributee, would constitute 
                      payment of a qualified higher education expense.
                          ``(ii) Cash distributions.--In the case of 
                      distributions not described in clause (i), if--
                                    ``(I) such distributions do not 
                                exceed the qualified higher education 
                                expenses (reduced by expenses described 
                                in clause (i)), no amount shall be 
                                includible in gross income, and
                                    ``(II) in any other case, the amount 
                                otherwise includible in gross income 
                                shall be reduced by an amount which 
                                bears the same ratio to such amount as 
                                such expenses bear to such 
                                distributions.
                          ``(iii) Exception for institutional 
                      programs.--In the case of any taxable year 
                      beginning before January 1, 2004, clauses (i) and 
                      (ii) shall not apply with respect to any 
                      distribution during such taxable year under a 
                      qualified tuition program established and 
                      maintained by 1 or more eligible educational 
                      institutions.
                          ``(iv) Treatment as distributions.--Any 
                      benefit furnished to a designated beneficiary 
                      under a qualified tuition program shall be treated 
                      as a distribution to the beneficiary for purposes 
                      of this paragraph.
                          ``(v) Coordination with hope and lifetime 
                      learning credits.--The total amount of qualified 
                      higher education expenses with respect to an 
                      individual for the taxable year shall be reduced--
                                    ``(I) as provided in section 
                                25A(g)(2), and
                                    ``(II) by the amount of such 
                                expenses which were taken into account 
                                in determining the credit allowed to the 
                                taxpayer or any other person under 
                                section 25A.

[[Page 115 STAT. 62]]

                          ``(vi) Coordination with education individual 
                      retirement accounts.--If, with respect to an 
                      individual for any taxable year--
                                    ``(I) the aggregate distributions to 
                                which clauses (i) and (ii) and section 
                                530(d)(2)(A) apply, exceed
                                    ``(II) the total amount of qualified 
                                higher education expenses otherwise 
                                taken into account under clauses (i) and 
                                (ii) (after the application of clause 
                                (v)) for such year,
                      the taxpayer shall allocate such expenses among 
                      such distributions for purposes of determining the 
                      amount of the exclusion under clauses (i) and (ii) 
                      and section 530(d)(2)(A).''.
            (2) Conforming amendments.--
                    (A) Section 135(d)(2)(B) <<NOTE: 26 USC 135.>>  is 
                amended by striking ``the exclusion under section 
                530(d)(2)'' and inserting ``the exclusions under 
                sections 529(c)(3)(B) and 530(d)(2)''.
                    (B) Section 221(e)(2)(A) is amended by inserting 
                ``529,'' after ``135,''.

    (c) Rollover to Different Program for Benefit of Same Designated 
Beneficiary.--Section 529(c)(3)(C) (relating to change in beneficiaries) 
is amended--
            (1) by striking ``transferred to the credit'' in clause (i) 
        and inserting ``transferred--
                                    ``(I) to another qualified tuition 
                                program for the benefit of the 
                                designated beneficiary, or
                                    ``(II) to the credit'',
            (2) by adding at the end the following new clause:
                          ``(iii) Limitation on certain rollovers.--
                      Clause (i)(I) shall not apply to any transfer if 
                      such transfer occurs within 12 months from the 
                      date of a previous transfer to any qualified 
                      tuition program for the benefit of the designated 
                      beneficiary.'', and
            (3) by inserting ``or programs'' after ``beneficiaries'' in 
        the heading.

    (d) Member of Family Includes First Cousin.--Section 529(e)(2) 
(defining member of family) is amended by striking ``and'' at the end of 
subparagraph (B), by striking the period at the end of subparagraph (C) 
and by inserting ``; and'', and by adding at the end the following new 
subparagraph:
                    ``(D) any first cousin of such beneficiary.''.

    (e) Adjustment of Limitation on Room and Board Distributions.--
Section 529(e)(3)(B)(ii) is amended to read as follows:
                          ``(ii) Limitation.--The amount treated as 
                      qualified higher education expenses by reason of 
                      clause (i) shall not exceed--
                                    ``(I) the allowance (applicable to 
                                the student) for room and board included 
                                in the cost of attendance (as defined in 
                                section 472 of the Higher Education Act 
                                of 1965 (20 U.S.C. 1087ll), as in effect 
                                on the date of the enactment of the 
                                Economic Growth and Tax Relief 
                                Reconciliation Act of 2001) as 
                                determined by the eligible educational 
                                institution for such period, or
                                    ``(II) if greater, the actual 
                                invoice amount the student residing in 
                                housing owned or operated by

[[Page 115 STAT. 63]]

                                the eligible educational institution is 
                                charged by such institution for room and 
                                board costs for such period.''.

    (f ) Special Needs Services.--Subparagraph (A) of section 
529(e)(3) <<NOTE: 26 USC 529.>>  (defining qualified higher education 
expenses) is amended to read as follows:
                    ``(A) In general.--The term `qualified higher 
                education expenses' means--
                          ``(i) tuition, fees, books, supplies, and 
                      equipment required for the enrollment or 
                      attendance of a designated beneficiary at an 
                      eligible educational institution; and
                          ``(ii) expenses for special needs services in 
                      the case of a special needs beneficiary which are 
                      incurred in connection with such enrollment or 
                      attendance.''.

    (g) Technical Amendments.--Section 529(c)(3)(D) is amended--
            (1) by inserting ``except to the extent provided by the 
        Secretary,'' before ``all distributions'' in clause (ii), and
            (2) by inserting ``except to the extent provided by the 
        Secretary,'' before ``the value'' in clause (iii).

    (h) <<NOTE: Applicability. 26 USC 72 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2001.

                   Subtitle B--Educational Assistance

SEC. 411. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL 
            ASSISTANCE.

    (a) In General.--Section 127 (relating to exclusion for educational 
assistance programs) is amended by striking subsection (d) and by 
redesignating subsection (e) as subsection (d).
    (b) Repeal of Limitation on Graduate Education.--The last sentence 
of section 127(c)(1) is amended by striking ``, and such term also does 
not include any payment for, or the provision of any benefits with 
respect to, any graduate level course of a kind normally taken by an 
individual pursuing a program leading to a law, business, medical, or 
other advanced academic or professional degree''.
    (c) Conforming Amendment.--Section 51A(b)(5)(B)(iii) is amended by 
striking ``or would be so excludable but for section 127(d)''.
    (d) <<NOTE: Applicability. 26 USC 51A note.>>  Effective Date.--The 
amendments made by this section shall apply with respect to expenses 
relating to courses beginning after December 31, 2001.

SEC. 412. ELIMINATION OF 60-MONTH LIMIT AND INCREASE IN INCOME 
            LIMITATION ON STUDENT LOAN INTEREST DEDUCTION.

    (a) Elimination of 60-Month Limit.--
            (1) In general.--Section 221 (relating to interest on 
        education loans), as amended by section 402(b)(2)(B), is amended 
        by striking subsection (d) and by redesignating subsections (e), 
        (f ), and (g) as subsections (d), (e), and (f ), respectively.
            (2) Conforming amendment.--Section 6050S(e) is amended by 
        striking ``section 221(e)(1)'' and inserting ``section 
        221(d)(1)''.

[[Page 115 STAT. 64]]

            (3) <<NOTE: Applicability. 26 USC 221 note.>>  Effective 
        date.--The amendments made by this subsection shall apply with 
        respect to any loan interest paid after December 31, 2001, in 
        taxable years ending after such date.

    (b) Increase in Income Limitation.--
            (1) In general.--Section 221(b)(2)(B) <<NOTE: 26 USC 221.>>  
        (relating to amount of reduction) is amended by striking clauses 
        (i) and (ii) and inserting the following:
                          ``(i) the excess of--
                                    ``(I) the taxpayer's modified 
                                adjusted gross income for such taxable 
                                year, over
                                    ``(II) $50,000 ($100,000 in the case 
                                of a joint return), bears to
                          ``(ii) $15,000 ($30,000 in the case of a joint 
                      return).''.
            (2) Conforming amendment.--Section 221(g)(1) is amended by 
        striking ``$40,000 and $60,000 amounts'' and inserting ``$50,000 
        and $100,000 amounts''.
            (3) <<NOTE: Applicability. 26 USC 221 note.>>  Effective 
        date.--The amendments made by this subsection shall apply to 
        taxable years ending after December 31, 2001.

SEC. 413. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE NATIONAL 
            HEALTH SERVICE CORPS SCHOLARSHIP PROGRAM AND THE F. EDWARD 
            HEBERT ARMED FORCES HEALTH PROFESSIONS SCHOLARSHIP AND 
            FINANCIAL ASSISTANCE PROGRAM.

    (a) In General.--Section 117(c) (relating to the exclusion from 
gross income amounts received as a qualified scholarship) is amended--
            (1) by striking ``Subsections (a)'' and inserting the 
        following:
            ``(1) In general.--Except as provided in paragraph (2), 
        subsections (a)'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Exceptions.--Paragraph (1) shall not apply to any 
        amount received by an individual under--
                    ``(A) the National Health Service Corps Scholarship 
                Program under section 338A(g)(1)(A) of the Public Health 
                Service Act, or
                    ``(B) the Armed Forces Health Professions 
                Scholarship and Financial Assistance program under 
                subchapter I of chapter 105 of title 10, United States 
                Code.''.

    (b) <<NOTE: Applicability. 26 USC 117 note.>>  Effective Date.--The 
amendments made by subsection (a) shall apply to amounts received in 
taxable years beginning after December 31, 2001.

  Subtitle C--Liberalization of Tax-Exempt Financing Rules for Public 
                           School Construction

SEC. 421. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION FOR 
            GOVERNMENTAL BONDS USED TO FINANCE EDUCATIONAL FACILITIES.

    (a) In General.--Section 148(f )(4)(D)(vii) (relating to increase in 
exception for bonds financing public school capital expenditures)

[[Page 115 STAT. 65]]

is amended by striking ``$5,000,000'' the second place it appears and 
inserting ``$10,000,000''.
    (b) <<NOTE: Applicability. 26 USC 148 note.>>  Effective Date.--The 
amendment made by subsection (a) shall apply to obligations issued in 
calendar years beginning after December 31, 2001.

SEC. 422. TREATMENT OF QUALIFIED PUBLIC EDUCATIONAL FACILITY BONDS AS 
            EXEMPT FACILITY BONDS.

    (a) Treatment as Exempt Facility Bond.--Subsection (a) of section 
142 <<NOTE: 26 USC 142.>>  (relating to exempt facility bond) 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) qualified public educational facilities.''.

    (b) Qualified Public Educational Facilities.--Section 142 (relating 
to exempt facility bond) is amended by adding at the end the following 
new subsection:
    ``(k) Qualified Public Educational Facilities.--
            ``(1) In general.--For purposes of subsection (a)(13), the 
        term `qualified public educational facility' means any school 
        facility which is--
                    ``(A) part of a public elementary school or a public 
                secondary school, and
                    ``(B) owned by a private, for-profit corporation 
                pursuant to a public-private partnership agreement with 
                a State or local educational agency described in 
                paragraph (2).
            ``(2) Public-private partnership agreement described.--A 
        public-private partnership agreement is described in this 
        paragraph if it is an agreement--
                    ``(A) under which the corporation agrees--
                          ``(i) to do 1 or more of the following: 
                      construct, rehabilitate, refurbish, or equip a 
                      school facility, and
                          ``(ii) at the end of the term of the 
                      agreement, to transfer the school facility to such 
                      agency for no additional consideration, and
                    ``(B) the term of which does not exceed the term of 
                the issue to be used to provide the school facility.
            ``(3) School facility.--For purposes of this subsection, the 
        term `school facility' means--
                    ``(A) any school building,
                    ``(B) any functionally related and subordinate 
                facility and land with respect to such building, 
                including any stadium or other facility primarily used 
                for school events, and
                    ``(C) any property, to which section 168 applies (or 
                would apply but for section 179), for use in a facility 
                described in subparagraph (A) or (B).
            ``(4) Public schools.--For purposes of this subsection, the 
        terms `elementary school' and `secondary school' have the 
        meanings given such terms by section 14101 of the Elementary and 
        Secondary Education Act of 1965 (20 U.S.C. 8801), as in effect 
        on the date of the enactment of this subsection.
            ``(5) Annual aggregate face amount of tax-exempt 
        financing.--
                    ``(A) In general.--An issue shall not be treated as 
                an issue described in subsection (a)(13) if the 
                aggregate face amount of bonds issued by the State 
                pursuant thereto

[[Page 115 STAT. 66]]

                (when added to the aggregate face amount of bonds 
                previously so issued during the calendar year) exceeds 
                an amount equal to the greater of--
                          ``(i) $10 multiplied by the State population, 
                      or
                          ``(ii) $5,000,000.
                    ``(B) Allocation rules.--
                          ``(i) In general.--Except as otherwise 
                      provided in this subparagraph, the State may 
                      allocate the amount described in subparagraph (A) 
                      for any calendar year in such manner as the State 
                      determines appropriate.
                          ``(ii) Rules for carryforward of unused 
                      limitation.--A State may elect to carry forward an 
                      unused limitation for any calendar year for 3 
                      calendar years following the calendar year in 
                      which the unused limitation arose under rules 
                      similar to the rules of section 146(f ), except 
                      that the only purpose for which the carryforward 
                      may be elected is the issuance of exempt facility 
                      bonds described in subsection (a)(13).''.

    (c) Exemption From General State Volume Caps.--Paragraph (3) of 
section 146(g) <<NOTE: 26 USC 146.>>  (relating to exception for certain 
bonds) is amended--
            (1) by striking ``or (12)'' and inserting ``(12), or (13)'', 
        and
            (2) by striking ``and environmental enhancements of 
        hydroelectric generating facilities'' and inserting 
        ``environmental enhancements of hydroelectric generating 
        facilities, and qualified public educational facilities''.

    (d) Exemption From Limitation on Use for Land Acquisition.--Section 
147(h) (relating to certain rules not to apply to mortgage revenue 
bonds, qualified student loan bonds, and qualified 501(c)(3) bonds) is 
amended by adding at the end the following new paragraph:
            ``(3) Exempt facility bonds for qualified public-private 
        schools.--Subsection (c) shall not apply to any exempt facility 
        bond issued as part of an issue described in section 142(a)(13) 
        (relating to qualified public educational facilities).''.

    (e) Conforming Amendment.--The heading for section 147(h) is amended 
by striking ``Mortgage Revenue Bonds, Qualified Student Loan Bonds, and 
Qualified 501(c)(3) Bonds'' and inserting ``Certain Bonds''.
    (f ) <<NOTE: Applicability. 26 USC 142 note.>>  Effective Date.--The 
amendments made by this section shall apply to bonds issued after 
December 31, 2001.

                      Subtitle D--Other Provisions

SEC. 431. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

    (a) Deduction Allowed.--Part VII of subchapter B of chapter 1 
(relating to additional itemized deductions for individuals) is amended 
by redesignating section 222 as section 223 and by inserting after 
section 221 the following:

``SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.

    ``(a) Allowance of Deduction.--In the case of an individual, there 
shall be allowed as a deduction an amount equal to the qualified tuition 
and related expenses paid by the taxpayer during the taxable year.

[[Page 115 STAT. 67]]

    ``(b) Dollar limitations.--
            ``(1) In general.--The amount allowed as a deduction under 
        subsection (a) with respect to the taxpayer for any taxable year 
        shall not exceed the applicable dollar limit.
            ``(2) Applicable dollar limit.--
                    ``(A) 2002 and 2003.--In the case of a taxable year 
                beginning in 2002 or 2003, the applicable dollar limit 
                shall be equal to--
                          ``(i) in the case of a taxpayer whose adjusted 
                      gross income for the taxable year does not exceed 
                      $65,000 ($130,000 in the case of a joint return), 
                      $3,000, and--
                          ``(ii) in the case of any other taxpayer, 
                      zero.
                    ``(B) 2004 and 2005.--In the case of a taxable year 
                beginning in 2004 or 2005, the applicable dollar amount 
                shall be equal to--
                          ``(i) in the case of a taxpayer whose adjusted 
                      gross income for the taxable year does not exceed 
                      $65,000 ($130,000 in the case of a joint return), 
                      $4,000,
                          ``(ii) in the case of a taxpayer not described 
                      in clause (i) whose adjusted gross income for the 
                      taxable year does not exceed $80,000 ($160,000 in 
                      the case of a joint return), $2,000, and
                          ``(iii) in the case of any other taxpayer, 
                      zero.
                    ``(C) Adjusted gross income.--For purposes of this 
                paragraph, adjusted gross income shall be determined--
                          ``(i) without regard to this section and 
                      sections 911, 931, and 933, and
                          ``(ii) after application of sections 86, 135, 
                      137, 219, 221, and 469.

    ``(c) No Double Benefit.--
            ``(1) In general.--No deduction shall be allowed under 
        subsection (a) for any expense for which a deduction is allowed 
        to the taxpayer under any other provision of this chapter.
            ``(2) Coordination with other education incentives.--
                    ``(A) Denial of deduction if credit elected.--No 
                deduction shall be allowed under subsection (a) for a 
                taxable year with respect to the qualified tuition and 
                related expenses with respect to an individual if the 
                taxpayer or any other person elects to have section 25A 
                apply with respect to such individual for such year.
                    ``(B) Coordination with exclusions.--The total 
                amount of qualified tuition and related expenses shall 
                be reduced by the amount of such expenses taken into 
                account in determining any amount excluded under section 
                135, 529(c)(1), or 530(d)(2). For purposes of the 
                preceding sentence, the amount taken into account in 
                determining the amount excluded under section 529(c)(1) 
                shall not include that portion of the distribution which 
                represents a return of any contributions to the plan.
            ``(3) Dependents.--No deduction shall be allowed under 
        subsection (a) to any individual with respect to whom a 
        deduction under section 151 is allowable to another taxpayer for 
        a taxable year beginning in the calendar year in which such 
        individual's taxable year begins.

    ``(d) Definitions and Special Rules.--For purposes of this section--

[[Page 115 STAT. 68]]

            ``(1) Qualified tuition and related expenses.--The term 
        `qualified tuition and related expenses' has the meaning given 
        such term by section 25A(f ). Such expenses shall be reduced in 
        the same manner as under section 25A(g)(2).
            ``(2) Identification requirement.--No deduction 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 the individual on the return of tax for the taxable 
        year.
            ``(3) Limitation on taxable year of deduction.--
                    ``(A) In general.--A deduction shall be allowed 
                under subsection (a) for qualified tuition and related 
                expenses for any taxable year only to the extent such 
                expenses are in connection with enrollment at an 
                institution of higher education during the taxable year.
                    ``(B) Certain prepayments allowed.--Subparagraph (A) 
                shall not apply to qualified tuition and related 
                expenses paid during a taxable year if such expenses are 
                in connection with an academic term beginning during 
                such taxable year or during the first 3 months of the 
                next taxable year.
            ``(4) <<NOTE: Applicability.>>  No deduction 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.
            ``(5) 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.
            ``(6) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry out this 
        section, including regulations requiring recordkeeping and 
        information reporting.

    ``(e) Termination.--This section shall not apply to taxable years 
beginning after December 31, 2005.''.
    (b) Deduction Allowed in Computing Adjusted Gross Income.--Section 
62(a) <<NOTE: 26 USC 62.>>  is amended by inserting after paragraph (17) 
the following:
            ``(18) Higher education expenses.--The deduction allowed by 
        section 222.''.

    (c) Conforming Amendments.--
            (1) Sections 86(b)(2), 135(c)(4), 137(b)(3), and 219(g)(3) 
        are each amended by inserting ``222,'' after ``221,''.
            (2) Section 221(b)(2)(C) is amended by inserting ``222,'' 
        before ``911''.
            (3) Section 469(i)(3)(F) is amended by striking ``and 221'' 
        and inserting ``, 221, and 222''.
            (4) The table of sections for part VII of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        222 and inserting the following:

                ``Sec. 222. Qualified tuition and related expenses.
                ``Sec. 223. Cross reference.''.


[[Page 115 STAT. 69]]



    (d) <<NOTE: Applicability. 26 USC 62 note.>>  Effective Date.--The 
amendments made by this section shall apply to payments made in taxable 
years beginning after December 31, 2001.

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

   Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes

SEC. 501. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER TAXES.

    (a) Estate Tax Repeal.--Subchapter C of chapter 11 of subtitle B 
(relating to miscellaneous) is amended by adding at the end the 
following new section:

``SEC. 2210. TERMINATION.

    ``(a) In General.--Except as provided in subsection (b), this 
chapter shall not apply to the estates of decedents dying after December 
31, 2009.
    ``(b) Certain Distributions From Qualified Domestic Trusts.--In 
applying section 2056A with respect to the surviving spouse of a 
decedent dying before January 1, 2010--
            ``(1) section 2056A(b)(1)(A) shall not apply to 
        distributions made after December 31, 2020, and
            ``(2) section 2056A(b)(1)(B) shall not apply after December 
        31, 2009.''.

    (b) Generation-Skipping Transfer Tax Repeal.--Subchapter G of 
chapter 13 of subtitle B (relating to administration) is amended by 
adding at the end the following new section:

``SEC. 2664. TERMINATION.

    ``This chapter shall not apply to generation-skipping transfers 
after December 31, 2009.''.
    (c) Conforming Amendments.--
            (1) The table of sections for subchapter C of chapter 11 is 
        amended by adding at the end the following new item:
                ``Sec. 2210. Termination.''.

            (2) The table of sections for subchapter G of chapter 13 is 
        amended by adding at the end the following new item:
                ``Sec. 2664. Termination.''.

    (d) <<NOTE: Applicability. 26 USC 2210 note.>>  Effective Date.--The 
amendments made by this section shall apply to the estates of decedents 
dying, and generation-skipping transfers, after December 31, 2009.

[[Page 115 STAT. 70]]

           Subtitle B--Reductions of Estate and Gift Tax Rates

SEC. 511. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.

    (a) Maximum Rate of Tax Reduced to 50 Percent.--The table contained 
in section 2001(c)(1) <<NOTE: 26 USC 2001.>>  is amended by striking the 
two highest brackets and inserting the following:

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

    (b) Repeal of Phaseout of Graduated Rates.--Subsection (c) of 
section 2001 is amended by striking paragraph (2).
    (c) Additional Reductions of Maximum Rate of Tax.--Subsection (c) of 
section 2001, as amended by subsection (b), is amended by adding at the 
end the following new paragraph:
            ``(2) Phasedown of maximum rate of tax.--
                    ``(A) <<NOTE: Regulations.>>  In general.--In the 
                case of estates of decedents dying, and gifts made, in 
                calendar years after 2002 and before 2010, the tentative 
                tax under this subsection shall be determined by using a 
                table prescribed by the Secretary (in lieu of using the 
                table contained in paragraph (1)) which is the same as 
                such table; except that--
                          ``(i) the maximum rate of tax for any calendar 
                      year shall be determined in the table under 
                      subparagraph (B), and
                          ``(ii) the brackets and the amounts setting 
                      forth the tax shall be adjusted to the extent 
                      necessary to reflect the adjustments under 
                      subparagraph (A).
                    ``(B) Maximum rate.--

                              The maximum...............................
``In calendar year:           rate is:..................................
2003                                                         49 percent 
2004                                                         48 percent 
2005                                                         47 percent 
2006                                                         46 percent 
2007, 2008, and 2009                                      45 percent.''.

    (d) Maximum Gift Tax Rate Reduced to Maximum Individual Rate After 
2009.--Subsection (a) of section 2502 (relating to rate of tax) is 
amended to read as follows:
    ``(a) Computation of Tax.--
            ``(1) In general.--The tax imposed by section 2501 for each 
        calendar year shall be an amount equal to the excess of--
                    ``(A) a tentative tax, computed under paragraph (2), 
                on the aggregate sum of the taxable gifts for such 
                calendar year and for each of the preceding calendar 
                periods, over
                    ``(B) a tentative tax, computed under paragraph (2), 
                on the aggregate sum of the taxable gifts for each of 
                the preceding calendar periods.
            ``(2) Rate schedule.--

``If the amount with respeThe tentative tax is:
        which the tentative tax to 
        be computed is:
    Not over $10,000......18% of such amount.
    Over $10,000 but not o$1,800, plus 20% of the excess over $10,000.
        $20,000.
    Over $20,000 but not o$3,800, plus 22% of the excess over $20,000.
      $40,000.
[[Page 115 STAT. 71]]

    Over $40,000 but not o$8,200, plus 24% of the excess over $40,000.
        $60,000.
    Over $60,000 but not o$13,000, plus 26% of the excess over $60,000.
        $80,000.
    Over $80,000 but not o$18,200, plus 28% of the excess over $80,000.
        $100,000.
    Over $100,000 but not $23,800, plus 30% of the excess over $100,000.
        $150,000.
    Over $150,000 but not $38,800, plus 32% of the excess over $150,000.
        $250,000.
    Over $250,000 but not $70,800, plus 34% of the excess over $250,000.
        $500,000.
    Over $500,000.........$155,800, plus 35% of the excess over 
                              $500,000.''.

    (e) Treatment of Certain Transfers in <<NOTE:   26 USC 
2511.>> Trust.--Section 2511 (relating to transfers in general) is 
amended by adding at the end the following new subsection:

    ``(c) Treatment of Certain Transfers in Trust.--Notwithstanding any 
other provision of this section and except as provided in regulations, a 
transfer in trust shall be treated as a taxable gift under section 2503, 
unless the trust is treated as wholly owned by the donor or the donor's 
spouse under subpart E of part I of subchapter J of chapter 1.''.
    (f ) Effective Dates.-- <<NOTE:   Applicability. 26 USC 2001 
note. 26 USC 2001 note. 26 USC 2502 note.>> 

26 USC 
2001 note.

26 USC 
2001 note.

26 USC 
2502 note.
            (1) Subsections (a) and (b).--The amendments made by 
        subsections (a) and (b) shall apply to estates of decedents 
        dying, and gifts made, after December 31, 2001.
            (2) Subsection (c).--The amendment made by subsection (c) 
        shall apply to estates of decedents dying, and gifts made, after 
        December 31, 2002.
            (3) Subsections (d) and (e).--The amendments made by 
        subsections (d) and (e) shall apply to gifts made after December 
        31, 2009.

                Subtitle C--Increase in Exemption Amounts

SEC. 521. INCREASE IN EXEMPTION EQUIVALENT OF UNIFIED CREDIT, LIFETIME 
            GIFTS EXEMPTION, AND GST EXEMPTION AMOUNTS.

    (a) In General.--Subsection (c) of section 2010 (relating to 
applicable credit amount) is amended by striking the table and inserting 
the following new table:

        ``In the case of estates of decedents             The applicable
          dying during:                             exclusion amount is:
                  2002 and 2003..............................$1,000,000 
                  2004 and 2005..............................$1,500,000 
                  2006, 2007, and 2008.......................$2,000,000 
                  2009....................................$3,500,000.''.

    (b) Lifetime Gift Exemption Increased to $1,000,000.--
            (1) For periods before estate tax repeal.--Paragraph (1) of 
        section 2505(a) (relating to unified credit against gift tax) is 
        amended by inserting ``(determined as if the applicable 
        exclusion amount were $1,000,000)'' after ``calendar year''.
            (2) For periods after estate tax repeal.--Paragraph (1) of 
        section 2505(a) (relating to unified credit against gift

[[Page 115 STAT. 72]]

        tax), as amended by paragraph (1), is amended to read as 
        follows:
            ``(1) the amount of the tentative tax which would be 
        determined under the rate schedule set forth in section 
        2502(a)(2) if the amount with respect to which such tentative 
        tax is to be computed were $1,000,000, reduced by''.

    (c) GST Exemption.--
            (1) In general.--Subsection (a) of 2631 <<NOTE: 26 USC 
        2631.>>  (relating to GST exemption) is amended by striking ``of 
        $1,000,000'' and inserting ``amount''.
            (2) Exemption amount.--Subsection (c) of section 2631 is 
        amended to read as follows:

    ``(c) GST Exemption Amount.--For purposes of subsection (a), the GST 
exemption amount for any calendar year shall be equal to the applicable 
exclusion amount under section 2010(c) for such calendar year.''.
    (d) Repeal of Special Benefit for Family-Owned Business Interests.--
Section 2057 (relating to family-owned business interests) is amended by 
adding at the end the following new subsection:
    ``( j) Termination.--This section shall not apply to the estates of 
decedents dying after December 31, 2003.''.
    (e) <<NOTE: Applicability. 26 USC 2010 note.>>  Effective Dates.--
            (1) In general.--Except as provided in paragraphs (2) and 
        (3), the amendments made by this section shall apply to estates 
        of decedents dying, and gifts made, after December 31, 2001.
            (2) Subsection (b)(2).--The amendments made by subsection 
        (b)(2) shall apply to gifts made after December 31, 2009.
            (3) Subsections (c) and (d).--The amendments made by 
        subsections (c) and (d) shall apply to estates of decedents 
        dying, and generation-skipping transfers, after December 31, 
        2003.

                Subtitle D--Credit for State Death Taxes

SEC. 531. REDUCTION OF CREDIT FOR STATE DEATH TAXES.

    (a) In General.--Section 2011(b) (relating to amount of credit) is 
amended--
            (1) by striking ``Credit.--The credit allowed'' and 
        inserting ``Credit.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        credit allowed'',
            (2) by striking ``For purposes'' and inserting the 
        following:
            ``(3) Adjusted taxable estate.--For purposes'', and
            (3) by inserting after paragraph (1) the following new 
        paragraph:
            ``(2) Reduction of maximum credit.--
                    ``(A) In general.--In the case of estates of 
                decedents dying after December 31, 2001, the credit 
                allowed by this section shall not exceed the applicable 
                percentage of the credit otherwise determined under 
                paragraph (1).
                    ``(B) Applicable percentage.--

        ``In the case of estates of decedents             The applicable
          dying during:                                   percentage is:
                  2002.......................................75 percent 

[[Page 115 STAT. 73]]

                  2003.......................................50 percent 
                  2004....................................25 percent.''.

    (b) <<NOTE: Applicability. 26 USC 2011 note.>>  Effective Date.--The 
amendments made by this subsection shall apply to estates of decedents 
dying after December 31, 2001.

SEC. 532. CREDIT FOR STATE DEATH TAXES REPLACED WITH DEDUCTION FOR SUCH 
            TAXES.

    (a) Repeal of Credit.--Section 2011 <<NOTE: 26 USC 2011.>>  
(relating to credit for State death taxes) is amended by adding at the 
end the following new subsection:

    ``(g) Termination.--This section shall not apply to the estates of 
decedents dying after December 31, 2004.''.
    (b) Deduction for State Death Taxes.--Part IV of subchapter A of 
chapter 11 is amended by adding at the end the following new section:

``SEC. 2058. STATE DEATH TAXES.

    ``(a) Allowance of Deduction.--For purposes of the tax imposed by 
section 2001, the value of the taxable estate shall be determined by 
deducting from the value of the gross estate the amount of any estate, 
inheritance, legacy, or succession taxes actually paid to any State or 
the District of Columbia, in respect of any property included in the 
gross estate (not including any such taxes paid with respect to the 
estate of a person other than the decedent).
    ``(b) Period of Limitations.--The deduction allowed by this section 
shall include only such taxes as were actually paid and deduction 
therefor claimed before the later of--
            ``(1) 4 years after the filing of the return required by 
        section 6018, or
            ``(2) if--
                    ``(A) a petition for redetermination of a deficiency 
                has been filed with the Tax Court within the time 
                prescribed in section 6213(a), the expiration of 60 days 
                after the decision of the Tax Court becomes final,
                    ``(B) an extension of time has been granted under 
                section 6161 or 6166 for payment of the tax shown on the 
                return, or of a deficiency, the date of the expiration 
                of the period of the extension, or
                    ``(C) a claim for refund or credit of an overpayment 
                of tax imposed by this chapter has been filed within the 
                time prescribed in section 6511, the latest of the 
                expiration of--
                          ``(i) 60 days from the date of mailing by 
                      certified mail or registered mail by the Secretary 
                      to the taxpayer of a notice of the disallowance of 
                      any part of such claim,
                          ``(ii) 60 days after a decision by any court 
                      of competent jurisdiction becomes final with 
                      respect to a timely suit instituted upon such 
                      claim, or
                          ``(iii) 2 years after a notice of the waiver 
                      of disallowance is filed under section 6532(a)(3).

Notwithstanding sections 6511 and 6512, refund based on the deduction 
may be made if the claim for refund is filed within the period provided 
in the preceding sentence. Any such refund shall be made without 
interest.''.
    (c) Conforming Amendments.--

[[Page 115 STAT. 74]]

            (1) Subsection (a) of section 2012 <<NOTE: 26 USC 2012.>>  
        is amended by striking ``the credit for State death taxes 
        provided by section 2011 and''.
            (2) Subparagraph (A) of section 2013(c)(1) is amended by 
        striking ``2011,''.
            (3) Paragraph (2) of section 2014(b) is amended by striking 
        ``, 2011,''.
            (4) Sections 2015 and 2016 are each amended by striking 
        ``2011 or''.
            (5) Subsection (d) of section 2053 is amended to read as 
        follows:

    ``(d) Certain Foreign Death Taxes.--
            ``(1) <<NOTE: Regulations.>>  In general.--Notwithstanding 
        the provisions of subsection (c)(1)(B), for purposes of the tax 
        imposed by section 2001, the value of the taxable estate may be 
        determined, if the executor so elects before the expiration of 
        the period of limitation for assessment provided in section 
        6501, by deducting from the value of the gross estate the amount 
        (as determined in accordance with regulations prescribed by the 
        Secretary) of any estate, succession, legacy, or inheritance tax 
        imposed by and actually paid to any foreign country, in respect 
        of any property situated within such foreign country and 
        included in the gross estate of a citizen or resident of the 
        United States, upon a transfer by the decedent for public, 
        charitable, or religious uses described in section 2055. The 
        determination under this paragraph of the country within which 
        property is situated shall be made in accordance with the rules 
        applicable under subchapter B (sec. 2101 and following) in 
        determining whether property is situated within or without the 
        United States. Any election under this paragraph shall be 
        exercised in accordance with regulations prescribed by the 
        Secretary.
            ``(2) Condition for allowance of deduction.--No deduction 
        shall be allowed under paragraph (1) for a foreign death tax 
        specified therein unless the decrease in the tax imposed by 
        section 2001 which results from the deduction provided in 
        paragraph (1) will inure solely for the benefit of the public, 
        charitable, or religious transferees described in section 2055 
        or section 2106(a)(2). In any case where the tax imposed by 
        section 2001 is equitably apportioned among all the transferees 
        of property included in the gross estate, including those 
        described in sections 2055 and 2106(a)(2) (taking into account 
        any exemptions, credits, or deductions allowed by this chapter), 
        in determining such decrease, there shall be disregarded any 
        decrease in the Federal estate tax which any transferees other 
        than those described in sections 2055 and 2106(a)(2) are 
        required to pay.
            ``(3) Effect on credit for foreign death taxes of deduction 
        under this subsection.--
                    ``(A) Election.--An election under this subsection 
                shall be deemed a waiver of the right to claim a credit, 
                against the Federal estate tax, under a death tax 
                convention with any foreign country for any tax or 
                portion thereof in respect of which a deduction is taken 
                under this subsection.
                    ``(B) Cross reference.--
                  ``See section 2014(f ) for the effect of a deduction 
                taken under this paragraph on the credit for foreign 
                death taxes.''.

            (6) Subparagraph (A) of section 2056A(b)(10) is amended--

[[Page 115 STAT. 75]]

                    (A) by striking ``2011,'', and
                    (B) by inserting ``2058,'' after ``2056,''.
            (7)(A) Subsection (a) of section 2102 <<NOTE: 26 USC 
        2102.>>  is amended to read as follows:

    ``(a) In General.--The tax imposed by section 2101 shall be credited 
with the amounts determined in accordance with sections 2012 and 2013 
(relating to gift tax and tax on prior transfers).''.
            (B) Section 2102 is amended by striking subsection (b) and 
        by redesignating subsection (c) as subsection (b).
            (C) Section 2102(b)(5) (as redesignated by subparagraph (B)) 
        and section 2107(c)(3) are each amended by striking ``2011 to 
        2013, inclusive,'' and inserting ``2012 and 2013''.
            (8) Subsection (a) of section 2106 is amended by adding at 
        the end the following new paragraph:
            ``(4) State death taxes.--The amount which bears the same 
        ratio to the State death taxes as the value of the property, as 
        determined for purposes of this chapter, upon which State death 
        taxes were paid and which is included in the gross estate under 
        section 2103 bears to the value of the total gross estate under 
        section 2103. For purposes of this paragraph, the term `State 
        death taxes' means the taxes described in section 2011(a).''.
            (9) Section 2201 is amended--
                    (A) by striking ``as defined in section 2011(d)'', 
                and
                    (B) by adding at the end the following new flush 
                sentence:

``For purposes of this section, the additional estate tax is the 
difference between the tax imposed by section 2001 or 2101 and the 
amount equal to 125 percent of the maximum credit provided by section 
2011(b), as in effect before its repeal by the Economic Growth and Tax 
Relief Reconciliation Act of 2001.''.
            (10) Section 2604 (relating to credit for certain State 
        taxes) is amended by adding at the end the following new 
        subsection:

    ``(c) Termination.--This section shall not apply to the generation-
skipping transfers after December 31, 2004.''.
            (11) Paragraph (2) of section 6511(i) is amended by striking 
        ``2011(c), 2014(b),'' and inserting ``2014(b)''.
            (12) Subsection (c) of section 6612 is amended by striking 
        ``section 2011(c) (relating to refunds due to credit for State 
        taxes),''.
            (13) The table of sections for part II of subchapter A of 
        chapter 11 is amended by striking the item relating to section 
        2011.
            (14) The table of sections for part IV of subchapter A of 
        chapter 11 is amended by adding at the end the following new 
        item:
                ``Sec. 2058. State death taxes.''.

            (15) The table of sections for subchapter A of chapter 13 is 
        amended by striking the item relating to section 2604.

    (d) <<NOTE: Applicability. 26 USC 2011 note.>>  Effective Date.--The 
amendments made by this section shall apply to estates of decedents 
dying, and generation-skipping transfers, after December 31, 2004.

[[Page 115 STAT. 76]]

 Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With 
                                 Repeal

SEC. 541. TERMINATION OF STEP-UP IN BASIS AT DEATH.

    Section 1014 <<NOTE: 26 USC 1014.>>  (relating to basis of property 
acquired from a decedent) is amended by adding at the end the following 
new subsection:

    ``(f ) Termination.--This section shall not apply with respect to 
decedents dying after December 31, 2009.''.

SEC. 542. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER 
            DECEMBER 31, 2009.

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

``SEC. 1022. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER 
            DECEMBER 31, 2009.

    ``(a) In General.--Except as otherwise provided in this section--
            ``(1) property acquired from a decedent dying after December 
        31, 2009, shall be treated for purposes of this subtitle as 
        transferred by gift, and
            ``(2) the basis of the person acquiring property from such a 
        decedent shall be the lesser of--
                    ``(A) the adjusted basis of the decedent, or
                    ``(B) the fair market value of the property at the 
                date of the decedent's death.

    ``(b) Basis Increase for Certain Property.--
            ``(1) In general.--In the case of property to which this 
        subsection applies, the basis of such property under subsection 
        (a) shall be increased by its basis increase under this 
        subsection.
            ``(2) Basis increase.--For purposes of this subsection--
                    ``(A) In general.--The basis increase under this 
                subsection for any property is the portion of the 
                aggregate basis increase which is allocated to the 
                property pursuant to this section.
                    ``(B) Aggregate basis increase.--In the case of any 
                estate, the aggregate basis increase under this 
                subsection is $1,300,000.
                    ``(C) Limit increased by unused built-in losses and 
                loss carryovers.--The limitation under subparagraph (B) 
                shall be increased by--
                          ``(i) the sum of the amount of any capital 
                      loss carryover under section 1212(b), and the 
                      amount of any net operating loss carryover under 
                      section 172, which would (but for the decedent's 
                      death) be carried from the decedent's last taxable 
                      year to a later taxable year of the decedent, plus
                          ``(ii) the sum of the amount of any losses 
                      that would have been allowable under section 165 
                      if the property acquired from the decedent had 
                      been sold at fair market value immediately before 
                      the decedent's death.

[[Page 115 STAT. 77]]

            ``(3) Decedent nonresidents who are not citizens of the 
        united states.--In the case of a decedent nonresident not a 
        citizen of the United States--
                    ``(A) paragraph (2)(B) shall be applied by 
                substituting `$60,000' for `$1,300,000', and
                    ``(B) paragraph (2)(C) shall not apply.

    ``(c) Additional Basis Increase for Property Acquired by Surviving 
Spouse.--
            ``(1) In general.--In the case of property to which this 
        subsection applies and which is qualified spousal property, the 
        basis of such property under subsection (a) (as increased under 
        subsection (b)) shall be increased by its spousal property basis 
        increase.
            ``(2) Spousal property basis increase.--For purposes of this 
        subsection--
                    ``(A) In general.--The spousal property basis 
                increase for property referred to in paragraph (1) is 
                the portion of the aggregate spousal property basis 
                increase which is allocated to the property pursuant to 
                this section.
                    ``(B) Aggregate spousal property basis increase.--In 
                the case of any estate, the aggregate spousal property 
                basis increase is $3,000,000.
            ``(3) Qualified spousal property.--For purposes of this 
        subsection, the term `qualified spousal property' means--
                    ``(A) outright transfer property, and
                    ``(B) qualified terminable interest property.
            ``(4) Outright transfer property.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `outright transfer 
                property' means any interest in property acquired from 
                the decedent by the decedent's surviving spouse.
                    ``(B) Exception.--Subparagraph (A) shall not apply 
                where, on the lapse of time, on the occurrence of an 
                event or contingency, or on the failure of an event or 
                contingency to occur, an interest passing to the 
                surviving spouse will terminate or fail--
                          ``(i)(I) if an interest in such property 
                      passes or has passed (for less than an adequate 
                      and full consideration in money or money's worth) 
                      from the decedent to any person other than such 
                      surviving spouse (or the estate of such spouse), 
                      and
                          ``(II) if by reason of such passing such 
                      person (or his heirs or assigns) may possess or 
                      enjoy any part of such property after such 
                      termination or failure of the interest so passing 
                      to the surviving spouse, or
                          ``(ii) if such interest is to be acquired for 
                      the surviving spouse, pursuant to directions of 
                      the decedent, by his executor or by the trustee of 
                      a trust.
                For purposes of this subparagraph, an interest shall not 
                be considered as an interest which will terminate or 
                fail merely because it is the ownership of a bond, note, 
                or similar contractual obligation, the discharge of 
                which would not have the effect of an annuity for life 
                or for a term.
                    ``(C) Interest of spouse conditional on survival for 
                limited period.--For purposes of this paragraph, an

[[Page 115 STAT. 78]]

                interest passing to the surviving spouse shall not be 
                considered as an interest which will terminate or fail 
                on the death of such spouse if--
                          ``(i) such death will cause a termination or 
                      failure of such interest only if it occurs within 
                      a period not exceeding 6 months after the 
                      decedent's death, or only if it occurs as a result 
                      of a common disaster resulting in the death of the 
                      decedent and the surviving spouse, or only if it 
                      occurs in the case of either such event, and
                          ``(ii) such termination or failure does not in 
                      fact occur.
            ``(5) Qualified terminable interest property.--For purposes 
        of this subsection--
                    ``(A) In general.--The term `qualified terminable 
                interest property' means property--
                          ``(i) which passes from the decedent, and
                          ``(ii) in which the surviving spouse has a 
                      qualifying income interest for life.
                    ``(B) Qualifying income interest for life.--The 
                surviving spouse has a qualifying income interest for 
                life if--
                          ``(i) the surviving spouse is entitled to all 
                      the income from the property, payable annually or 
                      at more frequent intervals, or has a usufruct 
                      interest for life in the property, and
                          ``(ii) no person has a power to appoint any 
                      part of the property to any person other than the 
                      surviving spouse.
                Clause (ii) shall not apply to a power exercisable only 
                at or after the death of the surviving spouse. To the 
                extent provided in regulations, an annuity shall be 
                treated in a manner similar to an income interest in 
                property (regardless of whether the property from which 
                the annuity is payable can be separately identified).
                    ``(C) Property includes interest therein.--The term 
                `property' includes an interest in property.
                    ``(D) Specific portion treated as separate 
                property.--A specific portion of property shall be 
                treated as separate property. For purposes of the 
                preceding sentence, the term `specific portion' only 
                includes a portion determined on a fractional or 
                percentage basis.

    ``(d) Definitions and Special Rules for Application of Subsections 
(b) and (c).--
            ``(1) Property to which subsections (b) and (c) apply.--
                    ``(A) In general.--The basis of property acquired 
                from a decedent may be increased under subsection (b) or 
                (c) only if the property was owned by the decedent at 
                the time of death.
                    ``(B) Rules relating to ownership.--
                          ``(i) Jointly held property.--In the case of 
                      property which was owned by the decedent and 
                      another person as joint tenants with right of 
                      survivorship or tenants by the entirety--
                                    ``(I) if the only such other person 
                                is the surviving spouse, the decedent 
                                shall be treated as the owner of only 50 
                                percent of the property,

[[Page 115 STAT. 79]]

                                    ``(II) in any case (to which 
                                subclause (I) does not apply) in which 
                                the decedent furnished consideration for 
                                the acquisition of the property, the 
                                decedent shall be treated as the owner 
                                to the extent of the portion of the 
                                property which is proportionate to such 
                                consideration, and
                                    ``(III) in any case (to which 
                                subclause (I) does not apply) in which 
                                the property has been acquired by gift, 
                                bequest, devise, or inheritance by the 
                                decedent and any other person as joint 
                                tenants with right of survivorship and 
                                their interests are not otherwise 
                                specified or fixed by law, the decedent 
                                shall be treated as the owner to the 
                                extent of the value of a fractional part 
                                to be determined by dividing the value 
                                of the property by the number of joint 
                                tenants with right of survivorship.
                          ``(ii) Revocable trusts.--The decedent shall 
                      be treated as owning property transferred by the 
                      decedent during life to a qualified revocable 
                      trust (as defined in section 645(b)(1)).
                          ``(iii) Powers of appointment.--The decedent 
                      shall not be treated as owning any property by 
                      reason of holding a power of appointment with 
                      respect to such property.
                          ``(iv) Community property.--Property which 
                      represents the surviving spouse's one-half share 
                      of community property held by the decedent and the 
                      surviving spouse under the community property laws 
                      of any State or possession of the United States or 
                      any foreign country shall be treated for purposes 
                      of this section as owned by, and acquired from, 
                      the decedent if at least one-half of the whole of 
                      the community interest in such property is treated 
                      as owned by, and acquired from, the decedent 
                      without regard to this clause.
                    ``(C) Property acquired by decedent by gift within 3 
                years of death.--
                          ``(i) In general.--Subsections (b) and (c) 
                      shall not apply to property acquired by the 
                      decedent by gift or by inter vivos transfer for 
                      less than adequate and full consideration in money 
                      or money's worth during the 3-year period ending 
                      on the date of the decedent's death.
                          ``(ii) Exception for certain gifts from 
                      spouse.--Clause (i) shall not apply to property 
                      acquired by the decedent from the decedent's 
                      spouse unless, during such 3-year period, such 
                      spouse acquired the property in whole or in part 
                      by gift or by inter vivos transfer for less than 
                      adequate and full consideration in money or 
                      money's worth.
                    ``(D) Stock of certain entities.--Subsections (b) 
                and (c) shall not apply to--
                          ``(i) stock or securities of a foreign 
                      personal holding company,
                          ``(ii) stock of a DISC or former DISC,
                          ``(iii) stock of a foreign investment company, 
                      or

[[Page 115 STAT. 80]]

                          ``(iv) stock of a passive foreign investment 
                      company unless such company is a qualified 
                      electing fund (as defined in section 1295) with 
                      respect to the decedent.
            ``(2) Fair market value limitation.--The adjustments under 
        subsections (b) and (c) shall not increase the basis of any 
        interest in property acquired from the decedent above its fair 
        market value in the hands of the decedent as of the date of the 
        decedent's death.
            ``(3) Allocation rules.--
                    ``(A) In general.--The executor shall allocate the 
                adjustments under subsections (b) and (c) on the return 
                required by section 6018.
                    ``(B) Changes in allocation.--Any allocation made 
                pursuant to subparagraph (A) may be changed only as 
                provided by the Secretary.
            ``(4) Inflation adjustment of basis adjustment amounts.--
                    ``(A) In general.--In the case of decedents dying in 
                a calendar year after 2010, the $1,300,000, $60,000, and 
                $3,000,000 dollar amounts in subsections (b) and 
                (c)(2)(B) shall each 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 such 
                      calendar year, determined by substituting `2009' 
                      for `1992' in subparagraph (B) thereof.
                    ``(B) Rounding.--If any increase determined under 
                subparagraph (A) is not a multiple of--
                          ``(i) $100,000 in the case of the $1,300,000 
                      amount,
                          ``(ii) $5,000 in the case of the $60,000 
                      amount, and
                          ``(iii) $250,000 in the case of the $3,000,000 
                      amount,
                such increase shall be rounded to the next lowest 
                multiple thereof.

    ``(e) Property Acquired From the Decedent.--For purposes of this 
section, the following property shall be considered to have been 
acquired from the decedent:
            ``(1) Property acquired by bequest, devise, or inheritance, 
        or by the decedent's estate from the decedent.
            ``(2) Property transferred by the decedent during his 
        lifetime--
                    ``(A) to a qualified revocable trust (as defined in 
                section 645(b)(1)), or
                    ``(B) to any other trust with respect to which the 
                decedent reserved the right to make any change in the 
                enjoyment thereof through the exercise of a power to 
                alter, amend, or terminate the trust.
            ``(3) Any other property passing from the decedent by reason 
        of death to the extent that such property passed without 
        consideration.

    ``(f ) Coordination With Section 691.--This section shall not apply 
to property which constitutes a right to receive an item of income in 
respect of a decedent under section 691.
    ``(g) Certain Liabilities Disregarded.--

[[Page 115 STAT. 81]]

            ``(1) In general.--In determining whether gain is recognized 
        on the acquisition of property--
                    ``(A) from a decedent by a decedent's estate or any 
                beneficiary other than a tax-exempt beneficiary, and
                    ``(B) from the decedent's estate by any beneficiary 
                other than a tax-exempt beneficiary,
        and in determining the adjusted basis of such property, 
        liabilities in excess of basis shall be disregarded.
            ``(2) Tax-exempt beneficiary.--For purposes of paragraph 
        (1), the term `tax-exempt beneficiary' means--
                    ``(A) the United States, any State or political 
                subdivision thereof, any possession of the United 
                States, any Indian tribal government (within the meaning 
                of section 7871), or any agency or instrumentality of 
                any of the foregoing,
                    ``(B) an organization (other than a cooperative 
                described in section 521) which is exempt from tax 
                imposed by chapter 1,
                    ``(C) any foreign person or entity (within the 
                meaning of section 168(h)(2)), and
                    ``(D) to the extent provided in regulations, any 
                person to whom property is transferred for the principal 
                purpose of tax avoidance.

    ``(h) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary to carry out the purposes of this section.''.
    (b) Information Returns, Etc.--
            (1) Large transfers at death.--So much of subpart C of part 
        II of subchapter A of chapter 61 as precedes section 6019 is 
        amended to read as follows:

   ``Subpart C--Returns Relating to Transfers During Life or at Death

                ``Sec. 6018. Returns relating to large transfers at 
                                death.
                ``Sec. 6019. Gift tax returns.

``SEC. 6018. RETURNS RELATING TO LARGE TRANSFERS AT DEATH.

    ``(a) In General.--If this section applies to property acquired from 
a decedent, the executor of the estate of such decedent shall make a 
return containing the information specified in subsection (c) with 
respect to such property.
    ``(b) Property to Which Section Applies.--
            ``(1) Large transfers.--This section shall apply to all 
        property (other than cash) acquired from a decedent if the fair 
        market value of such property acquired from the decedent exceeds 
        the dollar amount applicable under section 1022(b)(2)(B) 
        (without regard to section 1022(b)(2)(C)).
            ``(2) Transfers of certain gifts received by decedent within 
        3 years of death.--This section shall apply to any appreciated 
        property acquired from the decedent if--
                    ``(A) subsections (b) and (c) of section 1022 do not 
                apply to such property by reason of section 
                1022(d)(1)(C), and
                    ``(B) such property was required to be included on a 
                return required to be filed under section 6019.
            ``(3) Nonresidents not citizens of the united states.--In 
        the case of a decedent who is a nonresident not a citizen of the 
        United States, paragraphs (1) and (2) shall be applied--

[[Page 115 STAT. 82]]

                    ``(A) by taking into account only--
                          ``(i) tangible property situated in the United 
                      States, and
                          ``(ii) other property acquired from the 
                      decedent by a United States person, and
                    ``(B) by substituting the dollar amount applicable 
                under section 1022(b)(3) for the dollar amount referred 
                to in paragraph (1).
            ``(4) Returns by trustees or beneficiaries.--If the executor 
        is unable to make a complete return as to any property acquired 
        from or passing from the decedent, the executor shall include in 
        the return a description of such property and the name of every 
        person holding a legal or beneficial interest therein. Upon 
        notice from the Secretary, such person shall in like manner make 
        a return as to such property.

    ``(c) Information Required To Be Furnished.--The information 
specified in this subsection with respect to any property acquired from 
the decedent is--
            ``(1) the name and TIN of the recipient of such property,
            ``(2) an accurate description of such property,
            ``(3) the adjusted basis of such property in the hands of 
        the decedent and its fair market value at the time of death,
            ``(4) the decedent's holding period for such property,
            ``(5) sufficient information to determine whether any gain 
        on the sale of the property would be treated as ordinary income,
            ``(6) the amount of basis increase allocated to the property 
        under subsection (b) or (c) of section 1022, and
            ``(7) such other information as the Secretary may by 
        regulations prescribe.

    ``(d) <<NOTE: Applicability.>>  Property Acquired From Decedent.--
For purposes of this section, section 1022 shall apply for purposes of 
determining the property acquired from a decedent.

    ``(e) Statements To Be Furnished to Certain Persons.--Every person 
required to make a return under subsection (a) shall furnish to each 
person whose name is required to be set forth in such return (other than 
the person required to make such return) a written statement showing--
            ``(1) the name, address, and phone number of the person 
        required to make such return, and
            ``(2) the information specified in subsection (c) with 
        respect to property acquired from, or passing from, the decedent 
        to the person required to receive such statement.

The <<NOTE: Deadline.>>  written statement required under the preceding 
sentence shall be furnished not later than 30 days after the date that 
the return required by subsection (a) is filed.''.
            (2) Gifts.--Section 6019 <<NOTE: 26 USC 6019.>>  (relating 
        to gift tax returns) is amended--
                    (A) by striking ``Any individual'' and inserting 
                ``(a) In General.--Any individual'', and
                    (B) by adding at the end the following new 
                subsection:

    ``(b) Statements To Be Furnished to Certain Persons.--Every person 
required to make a return under subsection (a) shall furnish to each 
person whose name is required to be set forth in such return (other than 
the person required to make such return) a written statement showing--
            ``(1) the name, address, and phone number of the person 
        required to make such return, and

[[Page 115 STAT. 83]]

            ``(2) the information specified in such return with respect 
        to property received by the person required to receive such 
        statement.

The <<NOTE: Deadline.>>  written statement required under the preceding 
sentence shall be furnished not later than 30 days after the date that 
the return required by subsection (a) is filed.''.
            (3) Time for filing section 6018 returns.--
                    (A) Returns relating to large transfers at death.--
                Subsection (a) of section 6075 <<NOTE: 26 USC 6075.>>  
                is amended to read as follows:

    ``(a) Returns Relating to Large Transfers at Death.--The return 
required by section 6018 with respect to a decedent shall be filed with 
the return of the tax imposed by chapter 1 for the decedent's last 
taxable year or such later date specified in regulations prescribed by 
the Secretary.''.
                    (B) Conforming amendments.--Paragraph (3) of section 
                6075(b) is amended--
                          (i) by striking ``estate tax return'' in the 
                      heading and inserting ``section 6018 return'', and
                          (ii) by striking ``(relating to estate tax 
                      returns)'' and inserting ``(relating to returns 
                      relating to large transfers at death)''.
            (4) Penalties.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by adding at the 
        end the following new section:

``SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN 
            TRANSFERS AT DEATH AND GIFTS.

    ``(a) Information Required To Be Furnished to the Secretary.--Any 
person required to furnish any information under section 6018 who fails 
to furnish such information on the date prescribed therefor (determined 
with regard to any extension of time for filing) shall pay a penalty of 
$10,000 ($500 in the case of information required to be furnished under 
section 6018(b)(2)) for each such failure.
    ``(b) Information Required To Be Furnished to Beneficiaries.--Any 
person required to furnish in writing to each person described in 
section 6018(e) or 6019(b) the information required under such section 
who fails to furnish such information shall pay a penalty of $50 for 
each such failure.
    ``(c) Reasonable Cause Exception.--No penalty shall be imposed under 
subsection (a) or (b) with respect to any failure if it is shown that 
such failure is due to reasonable cause.
    ``(d) Intentional Disregard.--If any failure under subsection (a) or 
(b) is due to intentional disregard of the requirements under sections 
6018 and 6019(b), the penalty under such subsection shall be 5 percent 
of the fair market value (as of the date of death or, in the case of 
section 6019(b), the date of the gift) of the property with respect to 
which the information is required.
    ``(e) Deficiency Procedures Not To Apply.--Subchapter B of chapter 
63 (relating to deficiency procedures for income, estate, gift, and 
certain excise taxes) shall not apply in respect of the assessment or 
collection of any penalty imposed by this section.''.
            (5) Clerical amendments.--

[[Page 115 STAT. 84]]

                    (A) The table of sections for part I of subchapter B 
                of chapter 68 is amended by adding at the end the 
                following new item:
                ``Sec. 6716. Failure to file information with respect to 
                                certain transfers at death and gifts.''.

                    (B) The item relating to subpart C in the table of 
                subparts for part II of subchapter A of chapter 61 is 
                amended to read as follows:
                ``Subpart C. Returns relating to transfers during life 
                                or at death.''.

    (c) Exclusion of Gain on Sale of Principal Residence Made Available 
to Heir of Decedent in Certain Cases.--Subsection (d) of section 
121 <<NOTE: 26 USC 121.>>  (relating to exclusion of gain from sale of 
principal residence) is amended by adding at the end the following new 
paragraph:
            ``(9) Property acquired from a decedent.--The exclusion 
        under this section shall apply to property sold by--
                    ``(A) the estate of a decedent,
                    ``(B) any individual who acquired such property from 
                the decedent (within the meaning of section 1022), and
                    ``(C) a trust which, immediately before the death of 
                the decedent, was a qualified revocable trust (as 
                defined in section 645(b)(1)) established by the 
                decedent,
        determined by taking into account the ownership and use by the 
        decedent.''.

    (d) Transfers of Appreciated Carryover Basis Property To Satisfy 
Pecuniary Bequest.--
            (1) In general.--Section 1040 (relating to transfer of 
        certain farm, etc., real property) is amended to read as 
        follows:

``SEC. 1040. USE OF APPRECIATED CARRYOVER BASIS PROPERTY TO SATISFY 
            PECUNIARY BEQUEST.

    ``(a) In General.--If the executor of the estate of any decedent 
satisfies the right of any person to receive a pecuniary bequest with 
appreciated property, then gain on such exchange shall be recognized to 
the estate only to the extent that, on the date of such exchange, the 
fair market value of such property exceeds such value on the date of 
death.
    ``(b) <<NOTE: Regulations.>>  Similar Rule for Certain Trusts.--To 
the extent provided in regulations prescribed by the Secretary, a rule 
similar to the rule provided in subsection (a) shall apply where--
            ``(1) by reason of the death of the decedent, a person has a 
        right to receive from a trust a specific dollar amount which is 
        the equivalent of a pecuniary bequest, and
            ``(2) the trustee of a trust satisfies such right with 
        property.

    ``(c) Basis of Property Acquired in Exchange Described in Subsection 
(a) or (b).--The basis of property acquired in an exchange with respect 
to which gain realized is not recognized by reason of subsection (a) or 
(b) shall be the basis of such property immediately before the exchange 
increased by the amount of the gain recognized to the estate or trust on 
the exchange.''.
            (2) The item relating to section 1040 in the table of 
        sections for part III of subchapter O of chapter 1 is amended to 
        read as follows:
                ``Sec. 1040. Use of appreciated carryover basis property 
                                to satisfy pecuniary bequest.''.

    (e) Amendments Related to Carryover Basis.--

[[Page 115 STAT. 85]]

            (1) Recognition of gain on transfers to nonresidents.--
                    (A) Subsection (a) of section 684 <<NOTE: 26 USC 
                684.>>  is amended by inserting ``or to a nonresident 
                alien'' after ``or trust''.
                    (B) Subsection (b) of section 684 is amended to read 
                as follows:

    ``(b) Exceptions.--
            ``(1) Transfers to certain trusts.--Subsection (a) shall not 
        apply to a transfer to a trust by a United States person to the 
        extent that any United States person is treated as the owner of 
        such trust under section 671.
            ``(2) Lifetime transfers to nonresident aliens.--Subsection 
        (a) shall not apply to a lifetime transfer to a nonresident 
        alien.''.
                    (C) The section heading for section 684 is amended 
                by inserting ``and nonresident aliens'' after 
                ``estates''.
                    (D) The item relating to section 684 in the table of 
                sections for subpart F of part I of subchapter J of 
                chapter 1 is amended by inserting ``and nonresident 
                aliens'' after ``estates''.
            (2) Capital gain treatment for inherited art work or similar 
        property.--
                    (A) In general.--Subparagraph (C) of section 
                1221(a)(3) (defining capital asset) is amended by 
                inserting ``(other than by reason of section 1022)'' 
                after ``is determined''.
                    (B) Coordination with section 170.--Paragraph (1) of 
                section 170(e) (relating to certain contributions of 
                ordinary income and capital gain property) is amended by 
                adding at the end the following: ``For purposes of this 
                paragraph, the determination of whether property is a 
                capital asset shall be made without regard to the 
                exception contained in section 1221(a)(3)(C) for basis 
                determined under section 1022.''.
            (3) Definition of executor.--Section 7701(a) (relating to 
        definitions) is amended by adding at the end the following:
            ``(47) Executor.--The term `executor' means the executor or 
        administrator of the decedent, or, if there is no executor or 
        administrator appointed, qualified, and acting within the United 
        States, then any person in actual or constructive possession of 
        any property of the decedent.''.
            (4) Certain trusts.--Subparagraph (A) of section 4947(a)(2) 
        is amended by inserting ``642(c),'' after ``170(f )(2)(B),''.
            (5) Other amendments.--
                    (A) Section 1246 is amended by striking sub-
                section (e).
                    (B) Subsection (e) of section 1291 is amended--
                          (i) by striking ``(e),''; and
                          (ii) by striking ``; except that'' and all 
                      that follows and inserting a period.
                    (C) Section 1296 is amended by striking sub-
                section (i).

[[Page 115 STAT. 86]]

            (6) Clerical amendment.--The table of sections for part II 
        of subchapter O of chapter 1 is amended by inserting after the 
        item relating to section 1021 the following new item:
                ``Sec. 1022. Treatment of property acquired from a 
                                decedent dying after 
                                December 31, 2009.''.

    (f ) Effective <<NOTE: Applicability. 26 USC 121 note.>>  Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to estates of 
        decedents dying after December 31, 2009.
            (2) Transfers to nonresidents.--The amendments made by 
        subsection (e)(1) shall apply to transfers after December 31, 
        2009.
            (3) Section 4947.--The amendment made by subsection (e)(4) 
        shall apply to deductions for taxable years beginning after 
        December 31, 2009.

                   Subtitle F--Conservation Easements

SEC. 551. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION EASEMENTS.

    (a) Repeal of Certain Restrictions on Where Land Is Located.--Clause 
(i) of section 2031(c)(8)(A) <<NOTE: 26 USC 2031.>>  (defining land 
subject to a qualified conservation easement) is amended to read as 
follows:
                          ``(i) which is located in the United States or 
                      any possession of the United States,''.

    (b) Clarification of Date for Determining Value of Land and 
Easement.--Section 2031(c)(2) (defining applicable percentage) is 
amended by adding at the end the following new sentence: ``The values 
taken into account under the preceding sentence shall be such values as 
of the date of the contribution referred to in paragraph (8)(B).''.
    (c) <<NOTE: Applicability. 26 USC 2031 note.>>  Effective Date.--The 
amendments made by this section shall apply to estates of decedents 
dying after December 31, 2000.

      Subtitle G--Modifications of Generation-Skipping Transfer Tax

SEC. 561. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME TRANSFERS TO 
            TRUSTS; RETROACTIVE ALLOCATIONS.

    (a) In General.--Section 2632 (relating to special rules for 
allocation of GST exemption) is amended by redesignating subsection (c) 
as subsection (e) and by inserting after subsection (b) the following 
new subsections:
    ``(c) Deemed Allocation to Certain Lifetime Transfers to GST 
Trusts.--
            ``(1) In general.--If any individual makes an indirect skip 
        during such individual's lifetime, any unused portion of such 
        individual's GST exemption shall be allocated to the property 
        transferred to the extent necessary to make the inclusion ratio 
        for such property zero. If the amount of the indirect skip 
        exceeds such unused portion, the entire unused portion shall be 
        allocated to the property transferred.

[[Page 115 STAT. 87]]

            ``(2) Unused portion.--For purposes of paragraph (1), the 
        unused portion of an individual's GST exemption is that portion 
        of such exemption which has not previously been--
                    ``(A) allocated by such individual,
                    ``(B) treated as allocated under subsection (b) with 
                respect to a direct skip occurring during or before the 
                calendar year in which the indirect skip is made, or
                    ``(C) treated as allocated under paragraph (1) with 
                respect to a prior indirect skip.
            ``(3) Definitions.--
                    ``(A) Indirect skip.--For purposes of this 
                subsection, the term `indirect skip' means any transfer 
                of property (other than a direct skip) subject to the 
                tax imposed by chapter 12 made to a GST trust.
                    ``(B) GST trust.--The term `GST trust' means a trust 
                that could have a generation-skipping transfer with 
                respect to the transferor unless--
                          ``(i) the trust instrument provides that more 
                      than 25 percent of the trust corpus must be 
                      distributed to or may be withdrawn by one or more 
                      individuals who are non-skip persons--
                                    ``(I) before the date that the 
                                individual attains age 46,
                                    ``(II) on or before one or more 
                                dates specified in the trust instrument 
                                that will occur before the date that 
                                such individual attains age 46, or
                                    ``(III) upon the occurrence of an 
                                event that, in accordance with 
                                regulations prescribed by the Secretary, 
                                may reasonably be expected to occur 
                                before the date that such individual 
                                attains age 46,
                          ``(ii) the trust instrument provides that more 
                      than 25 percent of the trust corpus must be 
                      distributed to or may be withdrawn by one or more 
                      individuals who are non-skip persons and who are 
                      living on the date of death of another person 
                      identified in the instrument (by name or by class) 
                      who is more than 10 years older than such 
                      individuals,
                          ``(iii) the trust instrument provides that, if 
                      one or more individuals who are non-skip persons 
                      die on or before a date or event described in 
                      clause (i) or (ii), more than 25 percent of the 
                      trust corpus either must be distributed to the 
                      estate or estates of one or more of such 
                      individuals or is subject to a general power of 
                      appointment exercisable by one or more of such 
                      individuals,
                          ``(iv) the trust is a trust any portion of 
                      which would be included in the gross estate of a 
                      non-skip person (other than the transferor) if 
                      such person died immediately after the transfer,
                          ``(v) the trust is a charitable lead annuity 
                      trust (within the meaning of section 
                      2642(e)(3)(A)) or a charitable remainder annuity 
                      trust or a charitable remainder unitrust (within 
                      the meaning of section 664(d)), or
                          ``(vi) the trust is a trust with respect to 
                      which a deduction was allowed under section 2522 
                      for the

[[Page 115 STAT. 88]]

                      amount of an interest in the form of the right to 
                      receive annual payments of a fixed percentage of 
                      the net fair market value of the trust property 
                      (determined yearly) and which is required to pay 
                      principal to a non-skip person if such person is 
                      alive when the yearly payments for which the 
                      deduction was allowed terminate.
                For purposes of this subparagraph, the value of 
                transferred property shall not be considered to be 
                includible in the gross estate of a non-skip person or 
                subject to a right of withdrawal by reason of such 
                person holding a right to withdraw so much of such 
                property as does not exceed the amount referred to in 
                section 2503(b) with respect to any transferor, and it 
                shall be assumed that powers of appointment held by non-
                skip persons will not be exercised.
            ``(4) Automatic allocations to certain gst trusts.--For 
        purposes of this subsection, an indirect skip to which section 
        2642(f ) applies shall be deemed to have been made only at the 
        close of the estate tax inclusion period. The fair market value 
        of such transfer shall be the fair market value of the trust 
        property at the close of the estate tax inclusion period.
            ``(5) Applicability and effect.--
                    ``(A) In general.--An individual--
                          ``(i) may elect to have this subsection not 
                      apply to--
                                    ``(I) an indirect skip, or
                                    ``(II) any or all transfers made by 
                                such individual to a particular trust, 
                                and
                          ``(ii) may elect to treat any trust as a GST 
                      trust for purposes of this subsection with respect 
                      to any or all transfers made by such individual to 
                      such trust.
                    ``(B) Elections.--
                          ``(i) Elections with respect to indirect 
                      skips.--An election under subparagraph (A)(i)(I) 
                      shall be deemed to be timely if filed on a timely 
                      filed gift tax return for the calendar year in 
                      which the transfer was made or deemed to have been 
                      made pursuant to paragraph (4) or on such later 
                      date or dates as may be prescribed by the 
                      Secretary.
                          ``(ii) Other elections.--An election under 
                      clause (i)(II) or (ii) of subparagraph (A) may be 
                      made on a timely filed gift tax return for the 
                      calendar year for which the election is to become 
                      effective.

    ``(d) Retroactive Allocations.--
            ``(1) In general.--If--
                    ``(A) a non-skip person has an interest or a future 
                interest in a trust to which any transfer has been made,
                    ``(B) such person--
                          ``(i) is a lineal descendant of a grandparent 
                      of the transferor or of a grandparent of the 
                      transferor's spouse or former spouse, and
                          ``(ii) is assigned to a generation below the 
                      generation assignment of the transferor, and
                    ``(C) such person predeceases the transferor,

[[Page 115 STAT. 89]]

        then the transferor may make an allocation of any of such 
        transferor's unused GST exemption to any previous transfer or 
        transfers to the trust on a chronological basis.
            ``(2) Special rules.--If the allocation under paragraph (1) 
        by the transferor is made on a gift tax return filed on or 
        before the date prescribed by section 6075(b) for gifts made 
        within the calendar year within which the non-skip person's 
        death occurred--
                    ``(A) the value of such transfer or transfers for 
                purposes of section 2642(a) shall be determined as if 
                such allocation had been made on a timely filed gift tax 
                return for each calendar year within which each transfer 
                was made,
                    ``(B) such allocation shall be effective immediately 
                before such death, and
                    ``(C) the amount of the transferor's unused GST 
                exemption available to be allocated shall be determined 
                immediately before such death.
            ``(3) Future interest.--For purposes of this subsection, a 
        person has a future interest in a trust if the trust may permit 
        income or corpus to be paid to such person on a date or dates in 
        the future.''.

    (b) Conforming Amendment.--Paragraph (2) of section <<NOTE: 26 USC 
2632.>>  2632(b) is amended by striking ``with respect to a prior direct 
skip'' and inserting ``or subsection (c)(1)''.

    (c) <<NOTE: Applicability. 26 USC 2632 note.>>  Effective Dates.--
            (1) Deemed allocation.--Section 2632(c) of the Internal 
        Revenue Code of 1986 (as added by subsection (a)), and the 
        amendment made by subsection (b), shall apply to transfers 
        subject to chapter 11 or 12 made after December 31, 2000, and to 
        estate tax inclusion periods ending after December 31, 2000.
            (2) Retroactive allocations.--Section 2632(d) of the 
        Internal Revenue Code of 1986 (as added by subsection (a)) shall 
        apply to deaths of non-skip persons occurring after December 31, 
        2000.

SEC. 562. SEVERING OF TRUSTS.

    (a) In General.--Subsection (a) of section 2642 (relating to 
inclusion ratio) is amended by adding at the end the following new 
paragraph:
            ``(3) Severing of trusts.--
                    ``(A) In general.--If a trust is severed in a 
                qualified severance, the trusts resulting from such 
                severance shall be treated as separate trusts thereafter 
                for purposes of this chapter.
                    ``(B) Qualified severance.--For purposes of 
                subparagraph (A)--
                          ``(i) In general.--The term `qualified 
                      severance' means the division of a single trust 
                      and the creation (by any means available under the 
                      governing instrument or under local law) of two or 
                      more trusts if--
                                    ``(I) the single trust was divided 
                                on a fractional basis, and
                                    ``(II) the terms of the new trusts, 
                                in the aggregate, provide for the same 
                                succession of interests

[[Page 115 STAT. 90]]

                                of beneficiaries as are provided in the 
                                original trust.
                          ``(ii) Trusts with inclusion ratio greater 
                      than zero.--If a trust has an inclusion ratio of 
                      greater than zero and less than 1, a severance is 
                      a qualified severance only if the single trust is 
                      divided into two trusts, one of which receives a 
                      fractional share of the total value of all trust 
                      assets equal to the applicable fraction of the 
                      single trust immediately before the severance. In 
                      such case, the trust receiving such fractional 
                      share shall have an inclusion ratio of zero and 
                      the other trust shall have an inclusion ratio of 
                      1.
                          ``(iii) Regulations.--The term `qualified 
                      severance' includes any other severance permitted 
                      under regulations prescribed by the Secretary.
                    ``(C) Timing and manner of severances.--A severance 
                pursuant to this paragraph may be made at any 
                time. <<NOTE: Regulations.>>  The Secretary shall 
                prescribe by forms or regulations the manner in which 
                the qualified severance shall be reported to the 
                Secretary.''.

    (b) <<NOTE: Applicability. 26 USC 2642 note.>>  Effective Date.--The 
amendment made by this section shall apply to severances after December 
31, 2000.

SEC. 563. MODIFICATION OF CERTAIN VALUATION RULES.

    (a) Gifts for Which Gift Tax Return Filed or Deemed Allocation 
Made.--Paragraph (1) of section 2642(b) <<NOTE: 26 USC 2642.>>  
(relating to valuation rules, etc.) is amended to read as follows:
            ``(1) Gifts for which gift tax return filed or deemed 
        allocation made.--If the allocation of the GST exemption to any 
        transfers of property is made on a gift tax return filed on or 
        before the date prescribed by section 6075(b) for such transfer 
        or is deemed to be made under section 2632 (b)(1) or (c)(1)--
                    ``(A) the value of such property for purposes of 
                subsection (a) shall be its value as finally determined 
                for purposes of chapter 12 (within the meaning of 
                section 2001(f )(2)), or, in the case of an allocation 
                deemed to have been made at the close of an estate tax 
                inclusion period, its value at the time of the close of 
                the estate tax inclusion period, and
                    ``(B) such allocation shall be effective on and 
                after the date of such transfer, or, in the case of an 
                allocation deemed to have been made at the close of an 
                estate tax inclusion period, on and after the close of 
                such estate tax inclusion period.''.

    (b) Transfers at Death.--Subparagraph (A) of section 2642(b)(2) is 
amended to read as follows:
                    ``(A) Transfers at death.--If property is 
                transferred as a result of the death of the transferor, 
                the value of such property for purposes of subsection 
                (a) shall be its value as finally determined for 
                purposes of chapter 11; except that, if the requirements 
                prescribed by the Secretary respecting allocation of 
                post-death changes in value are not met, the value of 
                such property shall be determined as of the time of the 
                distribution concerned.''.

[[Page 115 STAT. 91]]

    (c) <<NOTE: Applicability. 26 USC 2642 note.>>  Effective Date.--The 
amendments made by this section shall apply to transfers subject to 
chapter 11 or 12 of the Internal Revenue Code of 1986 made after 
December 31, 2000.

SEC. 564. RELIEF PROVISIONS.

    (a) In General.--Section 2642 <<NOTE: 26 USC 2642.>>  is amended by 
adding at the end the following new subsection:

    ``(g) Relief Provisions.--
            ``(1) Relief from late elections.--
                    ``(A) <<NOTE: Regulations.>>  In general.--The 
                Secretary shall by regulation prescribe such 
                circumstances and procedures under which extensions of 
                time will be granted to make--
                          ``(i) an allocation of GST exemption described 
                      in paragraph (1) or (2) of subsection (b), and
                          ``(ii) an election under subsection (b)(3) or 
                      (c)(5) of section 2632.
                Such regulations shall include procedures for requesting 
                comparable relief with respect to transfers made before 
                the date of the enactment of this paragraph.
                    ``(B) Basis for determinations.--In determining 
                whether to grant relief under this paragraph, the 
                Secretary shall take into account all relevant 
                circumstances, including evidence of intent contained in 
                the trust instrument or instrument of transfer and such 
                other factors as the Secretary deems relevant. For 
                purposes of determining whether to grant relief under 
                this paragraph, the time for making the allocation (or 
                election) shall be treated as if not expressly 
                prescribed by statute.
            ``(2) Substantial compliance.--An allocation of GST 
        exemption under section 2632 that demonstrates an intent to have 
        the lowest possible inclusion ratio with respect to a transfer 
        or a trust shall be deemed to be an allocation of so much of the 
        transferor's unused GST exemption as produces the lowest 
        possible inclusion ratio. In determining whether there has been 
        substantial compliance, all relevant circumstances shall be 
        taken into account, including evidence of intent contained in 
        the trust instrument or instrument of transfer and such other 
        factors as the Secretary deems relevant.''.

    (b) <<NOTE: Applicability. 26 USC 2642 note.>>  Effective Dates.--
            (1) Relief from late elections.--Section 2642(g)(1) of the 
        Internal Revenue Code of 1986 (as added by subsection (a)) shall 
        apply to requests pending on, or filed after, December 31, 2000.
            (2) Substantial compliance.--Section 2642(g)(2) of such Code 
        (as so added) shall apply to transfers subject to chapter 11 or 
        12 of the Internal Revenue Code of 1986 made after December 31, 
        2000. No implication is intended with respect to the 
        availability of relief from late elections or the application of 
        a rule of substantial compliance on or before such date.

[[Page 115 STAT. 92]]

         Subtitle H--Extension of Time for Payment of Estate Tax

SEC. 571. INCREASE IN NUMBER OF ALLOWABLE PARTNERS AND SHAREHOLDERS IN 
            CLOSELY HELD BUSINESSES.

    (a) In General.--Paragraphs (1)(B)(ii), (1)(C)(ii), and 
(9)(B)(iii)(I) of section 6166(b) <<NOTE: 26 USC 6166.>>  (relating to 
definitions and special rules) are each amended by striking ``15'' and 
inserting ``45''.

    (b) <<NOTE: Applicability. 26 USC 6166 note.>>  Effective Date.--The 
amendments made by this section shall apply to estates of decedents 
dying after December 31, 2001.

SEC. 572. EXPANSION OF AVAILABILITY OF INSTALLMENT PAYMENT FOR ESTATES 
            WITH INTERESTS QUALIFYING LENDING AND FINANCE BUSINESSES.

    (a) In General.--Section 6166(b) (relating to definitions and 
special rules) is amended by adding at the end the following new 
paragraph:
            ``(10) Stock in qualifying lending and finance business 
        treated as stock in an active trade or business company.--
                    ``(A) In general.--If the executor elects the 
                benefits of this paragraph, then--
                          ``(i) Stock in qualifying lending and finance 
                      business treated as stock in an active trade or 
                      business company.--For purposes of this section, 
                      any asset used in a qualifying lending and finance 
                      business shall be treated as an asset which is 
                      used in carrying on a trade or business.
                          ``(ii) 5-year deferral for principal not to 
                      apply.--The executor shall be treated as having 
                      selected under subsection (a)(3) the date 
                      prescribed by section 6151(a).
                          ``(iii) 5 equal installments allowed.--For 
                      purposes of applying subsection (a)(1), `5' shall 
                      be substituted for `10'.
                    ``(B) Definitions.--For purposes of this paragraph--
                          ``(i) Qualifying lending and finance 
                      business.--The term `qualifying lending and 
                      finance business' means a lending and finance 
                      business, if--
                                    ``(I) based on all the facts and 
                                circumstances immediately before the 
                                date of the decedent's death, there was 
                                substantial activity with respect to the 
                                lending and finance business, or
                                    ``(II) during at least 3 of the 5 
                                taxable years ending before the date of 
                                the decedent's death, such business had 
                                at least 1 full-time employee 
                                substantially all of whose services were 
                                the active management of such business, 
                                10 full-time, nonowner employees 
                                substantially all of whose services were 
                                directly related to such business, and 
                                $5,000,000 in gross receipts from 
                                activities described in clause (ii).
                          ``(ii) Lending and finance business.--The term 
                      `lending and finance business' means a trade or 
                      business of--
                                    ``(I) making loans,

[[Page 115 STAT. 93]]

                                    ``(II) purchasing or discounting 
                                accounts receivable, notes, or 
                                installment obligations,
                                    ``(III) engaging in rental and 
                                leasing of real and tangible personal 
                                property, including entering into leases 
                                and purchasing, servicing, and disposing 
                                of leases and leased assets,
                                    ``(IV) rendering services or making 
                                facilities available in the ordinary 
                                course of a lending or finance business, 
                                and
                                    ``(V) rendering services or making 
                                facilities available in connection with 
                                activities described in subclauses (I) 
                                through (IV) carried on by the 
                                corporation rendering services or making 
                                facilities available, or another 
                                corporation which is a member of the 
                                same affiliated group (as defined in 
                                section 1504 without regard to section 
                                1504(b)(3)).
                          ``(iii) Limitation.--The term `qualifying 
                      lending and finance business' shall not include 
                      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 
                      before the date of the decedent's death.''.

    (b) <<NOTE: Applicability. 26 USC 6166 note.>>  Effective Date.--The 
amendment made by this section shall apply to estates of decedents dying 
after December 31, 2001.

SEC. 573. CLARIFICATION OF AVAILABILITY OF INSTALLMENT PAYMENT.

    (a) In General.--Subparagraph (B) of section <<NOTE: 26 USC 6166.>>  
6166(b)(8) (relating to all stock must be non-readily-tradable stock) is 
amended to read as follows:
                    ``(B) All stock must be non-readily-tradable 
                stock.--
                          ``(i) In general.--No stock shall be taken 
                      into account for purposes of applying this 
                      paragraph unless it is non-readily-tradable stock 
                      (within the meaning of paragraph (7)(B)).
                          ``(ii) Special application where only holding 
                      company stock is non-readily-tradable stock.--If 
                      the requirements of clause (i) are not met, but 
                      all of the stock of each holding company taken 
                      into account is non-readily-tradable, then this 
                      paragraph shall apply, but subsection (a)(1) shall 
                      be applied by substituting `5' for `10'.''.

    (b) <<NOTE: Applicability. 26 USC 6166 note.>>  Effective Date.--The 
amendment made by this section shall apply to estates of decedents dying 
after December 31, 2001.

                      Subtitle I--Other Provisions

SEC. <<NOTE: 26 USC 2032A note.>>  581. WAIVER OF STATUTE OF LIMITATION 
            FOR TAXES ON CERTAIN FARM VALUATIONS.

    If on the date of the enactment of this Act (or at any time within 1 
year after the date of the enactment) a refund or credit of any 
overpayment of tax resulting from the application of section

[[Page 115 STAT. 94]]

2032A(c)(7)(E) of the Internal Revenue Code of 1986 is barred by any law 
or rule of law, the refund or credit of such overpayment shall, 
nevertheless, be made or allowed if claim therefor is filed before the 
date 1 year after the date of the enactment of this Act.

   TITLE VI--PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS

               Subtitle A--Individual Retirement Accounts

SEC. 601. MODIFICATION OF IRA CONTRIBUTION LIMITS.

    (a) Increase in Contribution Limit.--
            (1) In general.--Paragraph (1)(A) of section <<NOTE: 26 USC 
        219.>>  219(b) (relating to maximum amount of deduction) is 
        amended by striking ``$2,000'' and inserting ``the deductible 
        amount''.
            (2) Deductible amount.--Section 219(b) is amended by adding 
        at the end the following new paragraph:
            ``(5) Deductible amount.--For purposes of paragraph (1)(A)--
                    ``(A) In general.--The deductible amount shall be 
                determined in accordance with the following table:

                ``For taxable years                       The deductible
                  beginning in:                             amount is:  
                    2002 through 2004........................... $3,000 
                    2005 through 2007........................... $4,000 
                    2008 and thereafter......................... $5,000.

                    ``(B) Catch-up contributions for individuals 50 or 
                older.--
                          ``(i) In general.--In the case of an 
                      individual who has attained the age of 50 before 
                      the close of the taxable year, the deductible 
                      amount for such taxable year shall be increased by 
                      the applicable amount.
                          ``(ii) Applicable amount.--For purposes of 
                      clause (i), the applicable amount shall be the 
                      amount determined in accordance with the following 
                      table:

                ``For taxable years                       The applicable
                  beginning in:                             amount is:  
                    2002 through 2005...........................   $500 
                    2006 and thereafter......................... $1,000.

                    ``(C) Cost-of-living adjustment.--
                          ``(i) In general.--In the case of any taxable 
                      year beginning in a calendar year after 2008, the 
                      $5,000 amount under subparagraph (A) 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 2007' for `calendar year 
                                1992' in subparagraph (B) thereof.
                          ``(ii) Rounding rules.--If any amount after 
                      adjustment under clause (i) is not a multiple of 
                      $500, such

[[Page 115 STAT. 95]]

                      amount shall be rounded to the next lower multiple 
                      of $500.''.

    (b) Conforming Amendments.--
            (1) Section 408(a)(1) <<NOTE: 26 USC 408.>>  is amended by 
        striking ``in excess of $2,000 on behalf of any individual'' and 
        inserting ``on behalf of any individual in excess of the amount 
        in effect for such taxable year under section 219(b)(1)(A)''.
            (2) Section 408(b)(2)(B) is amended by striking ``$2,000'' 
        and inserting ``the dollar amount in effect under section 
        219(b)(1)(A)''.
            (3) Section 408(b) is amended by striking ``$2,000'' in the 
        matter following paragraph (4) and inserting ``the dollar amount 
        in effect under section 219(b)(1)(A)''.
            (4) Section 408( j) is amended by striking ``$2,000''.
            (5) Section 408(p)(8) is amended by striking ``$2,000'' and 
        inserting ``the dollar amount in effect under section 
        219(b)(1)(A)''.

    (c) <<NOTE: Applicability. 26 USC 219 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2001.

SEC. 602. DEEMED IRAs UNDER EMPLOYER PLANS.

    (a) In General.--Section 408 (relating to individual retirement 
accounts) is amended by redesignating subsection (q) as subsection (r) 
and by inserting after subsection (p) the following new subsection:
    ``(q) Deemed IRAs Under Qualified Employer Plans.--
            ``(1) General rule.--If--
                    ``(A) a qualified employer plan elects to allow 
                employees to make voluntary employee contributions to a 
                separate account or annuity established under the plan, 
                and
                    ``(B) under the terms of the qualified employer 
                plan, such account or annuity meets the applicable 
                requirements of this section or section 408A for an 
                individual retirement account or annuity,
        then such account or annuity shall be treated for purposes of 
        this title in the same manner as an individual retirement plan 
        and not as a qualified employer plan (and contributions to such 
        account or annuity as contributions to an individual retirement 
        plan and not to the qualified employer plan). For purposes of 
        subparagraph (B), the requirements of subsection (a)(5) shall 
        not apply.
            ``(2) Special rules for qualified employer plans.--For 
        purposes of this title, a qualified employer plan shall not fail 
        to meet any requirement of this title solely by reason of 
        establishing and maintaining a program described in paragraph 
        (1).
            ``(3) Definitions.--For purposes of this subsection--
                    ``(A) Qualified employer plan.--The term `qualified 
                employer plan' has the meaning given such term by 
                section 72(p)(4); except such term shall not include a 
                government plan which is not a qualified plan unless the 
                plan is an eligible deferred compensation plan (as 
                defined in section 457(b)).
                    ``(B) Voluntary employee contribution.--The term 
                `voluntary employee contribution' means any contribution 
                (other than a mandatory contribution within the meaning 
                of section 411(c)(2)(C))--

[[Page 115 STAT. 96]]

                          ``(i) which is made by an individual as an 
                      employee under a qualified employer plan which 
                      allows employees to elect to make contributions 
                      described in paragraph (1), and
                          ``(ii) with respect to which the individual 
                      has designated the contribution as a contribution 
                      to which this subsection applies.''.

    (b) Amendment of ERISA.--
            (1) In general.--Section 4 of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1003) is amended by adding at 
        the end the following new subsection:

    ``(c) If a pension plan allows an employee to elect to make 
voluntary employee contributions to accounts and annuities as provided 
in section 408(q) of the Internal Revenue Code of 1986, such accounts 
and annuities (and contributions thereto) shall not be treated as part 
of such plan (or as a separate pension plan) for purposes of any 
provision of this title other than section 403(c), 404, or 405 (relating 
to exclusive benefit, and fiduciary and co-fiduciary 
responsibilities).''.
            (2) Conforming amendment.--Section 4(a) of such Act (29 
        U.S.C. 1003(a)) is amended by inserting ``or (c)'' after 
        ``subsection (b)''.

    (c) <<NOTE: Applicability. 26 USC 408 note.>>  Effective Date.--The 
amendments made by this section shall apply to plan years beginning 
after December 31, 2002.

                     Subtitle B--Expanding Coverage

SEC. 611. INCREASE IN BENEFIT AND CONTRIBUTION LIMITS.

    (a) Defined Benefit Plans.--
            (1) Dollar limit.--
                    (A) Subparagraph (A) of section 415(b)(1) <<NOTE: 26 
                USC 415.>>  (relating to limitation for defined benefit 
                plans) is amended by striking ``$90,000'' and inserting 
                ``$160,000''.
                    (B) Subparagraphs (C) and (D) of section 415(b)(2) 
                are each amended in the headings and the text, by 
                striking ``$90,000'' and inserting ``$160,000'',
                    (C) Paragraph (7) of section 415(b) (relating to 
                benefits under certain collectively bargained plans) is 
                amended by striking ``the greater of $68,212 or one-half 
                the amount otherwise applicable for such year under 
                paragraph (1)(A) for `$90,000' '' and inserting ``one-
                half the amount otherwise applicable for such year under 
                paragraph (1)(A) for `$160,000' ''.
            (2) Limit reduced when benefit begins before age 62.--
        Subparagraph (C) of section 415(b)(2) is amended by striking 
        ``the social security retirement age'' each place it appears in 
        the heading and text and inserting ``age 62'' and by striking 
        the second sentence.
            (3) Limit increased when benefit begins after age 65.--
        Subparagraph (D) of section 415(b)(2) is amended by striking 
        ``the social security retirement age'' each place it appears in 
        the heading and text and inserting ``age 65''.
            (4) Cost-of-living adjustments.--Subsection (d) of section 
        415 (related to cost-of-living adjustments) is amended--
                    (A) by striking ``$90,000'' in paragraph (1)(A) and 
                inserting ``$160,000''; and

[[Page 115 STAT. 97]]

                    (B) in paragraph (3)(A)--
                          (i) by striking ``$90,000'' in the heading and 
                      inserting ``$160,000''; and
                          (ii) by striking ``October 1, 1986'' and 
                      inserting ``July 1, 2001''.
            (5) Conforming amendments.--
                    (A) Section 415(b)(2) <<NOTE: 26 USC 415.>>  is 
                amended by striking subparagraph (F).
                    (B) Section 415(b)(9) is amended to read as follows:
            ``(9) Special rule for commercial airline pilots.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), in the case of any participant who is 
                a commercial airline pilot, if, as of the time of the 
                participant's retirement, regulations prescribed by the 
                Federal Aviation Administration require an individual to 
                separate from service as a commercial airline pilot 
                after attaining any age occurring on or after age 60 and 
                before age 62, paragraph (2)(C) shall be applied by 
                substituting such age for age 62.
                    ``(B) Individuals who separate from service before 
                age 60.--If a participant described in subparagraph (A) 
                separates from service before age 60, the rules of 
                paragraph (2)(C) shall apply.''.
                    (C) Section 415(b)(10)(C)(i) is amended by striking 
                ``applied without regard to paragraph (2)(F)''.

    (b) Defined Contribution Plans.--
            (1) Dollar limit.--Subparagraph (A) of section 415(c)(1) 
        (relating to limitation for defined contribution plans) is 
        amended by striking ``$30,000'' and inserting ``$40,000''.
            (2) Cost-of-living adjustments.--Subsection (d) of section 
        415 (related to cost-of-living adjustments) is amended--
                    (A) by striking ``$30,000'' in paragraph (1)(C) and 
                inserting ``$40,000''; and
                    (B) in paragraph (3)(D)--
                          (i) by striking ``$30,000'' in the heading and 
                      inserting ``$40,000''; and
                          (ii) by striking ``October 1, 1993'' and 
                      inserting ``July 1, 2001''.

    (c) Qualified Trusts.--
            (1) Compensation limit.--Sections 401(a)(17), 404(l), 
        408(k), and 505(b)(7) are each amended by striking ``$150,000'' 
        each place it appears and inserting ``$200,000''.
            (2) Base period and rounding of cost-of-living adjustment.--
        Subparagraph (B) of section 401(a)(17) is amended--
                    (A) by striking ``October 1, 1993'' and inserting 
                ``July 1, 2001''; and
                    (B) by striking ``$10,000'' both places it appears 
                and inserting ``$5,000''.

    (d) Elective Deferrals.--
            (1) In general.--Paragraph (1) of section 402(g) (relating 
        to limitation on exclusion for elective deferrals) is amended to 
        read as follows:
            ``(1) In general.--
                    ``(A) Limitation.--Notwithstanding subsections 
                (e)(3) and (h)(1)(B), the elective deferrals of any 
                individual for any taxable year shall be included in 
                such individual's

[[Page 115 STAT. 98]]

                gross income to the extent the amount of such deferrals 
                for the taxable year exceeds the applicable dollar 
                amount.
                    ``(B) Applicable dollar amount.--For purposes of 
                subparagraph (A), the applicable dollar amount shall be 
                the amount determined in accordance with the following 
                table:

                ``For taxable years                       The applicable
                  beginning in                            dollar amount:
                  calendar year:
                    2002........................................$11,000 
                    2003........................................$12,000 
                    2004........................................$13,000 
                    2005........................................$14,000 
                    2006 or thereafter.......................$15,000.''.

            (2) Cost-of-living adjustment.--Paragraph (5) of section 
        402(g) <<NOTE: 26 USC 402.>>  is amended to read as follows:
            ``(5) Cost-of-living adjustment.--In the case of taxable 
        years beginning after December 31, 2006, the Secretary shall 
        adjust the $15,000 amount under paragraph (1)(B) at the same 
        time and in the same manner as under section 415(d), except that 
        the base period shall be the calendar quarter beginning July 1, 
        2005, and any increase under this paragraph which is not a 
        multiple of $500 shall be rounded to the next lowest multiple of 
        $500.''.
            (3) Conforming amendments.--
                    (A) Section 402(g) (relating to limitation on 
                exclusion for elective deferrals), as amended by 
                paragraphs (1) and (2), is further amended by striking 
                paragraph (4) and redesignating paragraphs (5), (6), 
                (7), (8), and (9) as paragraphs (4), (5), (6), (7), and 
                (8), respectively.
                    (B) Paragraph (2) of section 457(c) is amended by 
                striking ``402(g)(8)(A)(iii)'' and inserting 
                ``402(g)(7)(A)(iii)''.
                    (C) Clause (iii) of section 501(c)(18)(D) is amended 
                by striking ``(other than paragraph (4) thereof )''.

    (e) Deferred Compensation Plans of State and Local Governments and 
Tax-Exempt Organizations.--
            (1) In general.--Section 457 (relating to deferred 
        compensation plans of State and local governments and tax-exempt 
        organizations) is amended--
                    (A) in subsections (b)(2)(A) and (c)(1) by striking 
                ``$7,500'' each place it appears and inserting ``the 
                applicable dollar amount''; and
                    (B) in subsection (b)(3)(A) by striking ``$15,000'' 
                and inserting ``twice the dollar amount in effect under 
                subsection (b)(2)(A)''.
            (2) Applicable dollar amount; cost-of-living adjustment.--
        Paragraph (15) of section 457(e) is amended to read as follows:
            ``(15) Applicable dollar amount.--
                    ``(A) In general.--The applicable dollar amount 
                shall be the amount determined in accordance with the 
                following table:

                ``For taxable years                       The applicable
                  beginning in                            dollar amount:
                  calendar year:
                    2002........................................$11,000 
                    2003........................................$12,000 
                    2004........................................$13,000 

[[Page 115 STAT. 99]]

                    2005........................................$14,000 
                    2006 or thereafter..........................$15,000.

                    ``(B) Cost-of-living adjustments.--In the case of 
                taxable years beginning after December 31, 2006, the 
                Secretary shall adjust the $15,000 amount under 
                subparagraph (A) at the same time and in the same manner 
                as under section 415(d), except that the base period 
                shall be the calendar quarter beginning July 1, 2005, 
                and any increase under this paragraph which is not a 
                multiple of $500 shall be rounded to the next lowest 
                multiple of $500.''.

    (f ) Simple Retirement Accounts.--
            (1) Limitation.--Clause (ii) of section 
        408(p)(2)(A) <<NOTE: 26 USC 408.>>  (relating to general rule 
        for qualified salary reduction arrangement) is amended by 
        striking ``$6,000'' and inserting ``the applicable dollar 
        amount''.
            (2) Applicable dollar amount.--Subparagraph (E) of 408(p)(2) 
        is amended to read as follows:
                    ``(E) Applicable dollar amount; cost-of-living 
                adjustment.--
                          ``(i) In general.--For purposes of 
                      subparagraph (A)(ii), the applicable dollar amount 
                      shall be the amount determined in accordance with 
                      the following table:

                ``For years                               The applicable
                  beginning in                            dollar amount:
                  calendar year:
                            2002................................ $7,000 
                            2003................................ $8,000 
                            2004................................ $9,000 
                            2005 or thereafter..................$10,000.

                          ``(ii) Cost-of-living adjustment.--In the case 
                      of a year beginning after December 31, 2005, the 
                      Secretary shall adjust the $10,000 amount under 
                      clause (i) at the same time and in the same manner 
                      as under section 415(d), except that the base 
                      period taken into account shall be the calendar 
                      quarter beginning July 1, 2004, and any increase 
                      under this subparagraph which is not a multiple of 
                      $500 shall be rounded to the next lower multiple 
                      of $500.''.
            (3) Conforming amendments.--
                    (A) Subclause (I) of section 401(k)(11)(B)(i) is 
                amended by striking ``$6,000'' and inserting ``the 
                amount in effect under section 408(p)(2)(A)(ii)''.
                    (B) Section 401(k)(11) is amended by striking 
                subparagraph (E).

    (g) Certain Compensation Limits.--
            (1) In general.--Subparagraph (A) of section 401(c)(2) 
        (defining earned income) is amended by adding at the end thereof 
        the following new sentence: ``For purposes of this part only 
        (other than sections 419 and 419A), this subparagraph shall be 
        applied as if the term `trade or business' for purposes of 
        section 1402 included service described in section 
        1402(c)(6).''.
            (2) Simple retirement accounts.--Clause (ii) of section 
        408(p)(6)(A) (defining self-employed) is amended by adding at 
        the end the following new sentence: ``The preceding sentence 
        shall be applied as if the term `trade or business' for purposes 
        of section 1402 included service described in section 
        1402(c)(6).''.

[[Page 115 STAT. 100]]

    (h) Rounding Rule Relating to Defined Benefit Plans and Defined 
Contribution Plans.--Paragraph (4) of section 415(d) <<NOTE: 26 USC 
415.>>  is amended to read as follows:
            ``(4) Rounding.--
                    ``(A) $160,000 amount.--Any increase under 
                subparagraph (A) of paragraph (1) which is not a 
                multiple of $5,000 shall be rounded to the next lowest 
                multiple of $5,000.
                    ``(B) $40,000 amount.--Any increase under 
                subparagraph (C) of paragraph (1) which is not a 
                multiple of $1,000 shall be rounded to the next lowest 
                multiple of $1,000.''.

    (i) Effective Dates.--
            (1) <<NOTE: Applicability. 26 USC 415 note.>>  In general.--
        The amendments made by this section shall apply to years 
        beginning after December 31, 2001.
            (2) Defined benefit plans.--The amendments made by 
        subsection (a) shall apply to years ending after December 31, 
        2001.

SEC. 612. PLAN LOANS FOR SUBCHAPTER S OWNERS, PARTNERS, AND SOLE 
            PROPRIETORS.

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

    (b) Amendment of ERISA.--Section 408(d)(2) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)(2)) is amended 
by adding at the end the following new subparagraph:
    ``(C) For purposes of paragraph (1)(A), the term `owner-employee' 
shall only include a person described in clause (ii) or (iii) of 
subparagraph (A).''.
    (c) <<NOTE: Applicability. 26 USC 4975 note.>>  Effective Date.--The 
amendment made by this section shall apply to years beginning after 
December 31, 2001.

SEC. 613. MODIFICATION OF TOP-HEAVY RULES.

    (a) Simplification of Definition of Key Employee.--
            (1) In general.--Section 416(i)(1)(A) (defining key 
        employee) is amended--
                    (A) by striking ``or any of the 4 preceding plan 
                years'' in the matter preceding clause (i);
                    (B) by striking clause (i) and inserting the 
                following:
                          ``(i) an officer of the employer having an 
                      annual compensation greater than $130,000,'';
                    (C) by striking clause (ii) and redesignating 
                clauses (iii) and (iv) as clauses (ii) and (iii), 
                respectively; and
                    (D) by striking the second sentence in the matter 
                following clause (iii), as redesignated by subparagraph 
                (C), and by inserting the following: ``in the case of 
                plan years beginning after December 31, 2002, the 
                $130,000 amount in clause (i) shall be adjusted at the 
                same time and in the same manner as under section 
                415(d), except that the base period shall be the 
                calendar quarter beginning July 1, 2001, and any 
                increase under this sentence which is not a multiple of 
                $5,000 shall be rounded to the next lower multiple of 
                $5,000.''.

[[Page 115 STAT. 101]]

            (2) Conforming amendment.--Section 
        416(i)(1)(B)(iii) <<NOTE: 26 USC 416.>>  is amended by striking 
        ``and subparagraph (A)(ii)''.

    (b) Matching Contributions Taken Into Account for Minimum 
Contribution Requirements.--Section 416(c)(2)(A) (relating to defined 
contribution plans) is amended by adding at the end the following: 
``Employer matching contributions (as defined in section 401(m)(4)(A)) 
shall be taken into account for purposes of this subparagraph (and any 
reduction under this sentence shall not be taken into account in 
determining whether section 401(k)(4)(A) applies).''.
    (c) Distributions During Last Year Before Determination Date Taken 
Into Account.--
            (1) In general.--Paragraph (3) of section 416(g) is amended 
        to read as follows:
            ``(3) Distributions during last year before determination 
        date taken into account.--
                    ``(A) In general.--For purposes of determining--
                          ``(i) the present value of the cumulative 
                      accrued benefit for any employee, or
                          ``(ii) the amount of the account of any 
                      employee,
                such present value or amount shall be increased by the 
                aggregate distributions made with respect to such 
                employee under the plan during the 1-year period ending 
                on the determination date. The preceding sentence shall 
                also apply to distributions under a terminated plan 
                which if it had not been terminated would have been 
                required to be included in an aggregation group.
                    ``(B) 5-year period in case of in-service 
                distribution.--In the case of any distribution made for 
                a reason other than separation from service, death, or 
                disability, subparagraph (A) shall be applied by 
                substituting `5-year period' for `1-year period'.''.
            (2) Benefits not taken into account.--Subparagraph (E) of 
        section 416(g)(4) is amended--
                    (A) by striking ``last 5 years'' in the heading and 
                inserting ``last year before determination date''; and
                    (B) by striking ``5-year period'' and inserting ``1-
                year period''.

    (d) Definition of Top-Heavy Plans.--Paragraph (4) of section 416(g) 
(relating to other special rules for top-heavy plans) is amended by 
adding at the end the following new subparagraph:
                    ``(H) Cash or deferred arrangements using 
                alternative methods of meeting nondiscrimination 
                requirements.--The term `top-heavy plan' shall not 
                include a plan which consists solely of--
                          ``(i) a cash or deferred arrangement which 
                      meets the requirements of section 401(k)(12), and
                          ``(ii) matching contributions with respect to 
                      which the requirements of section 401(m)(11) are 
                      met.
                If, but for this subparagraph, a plan would be treated 
                as a top-heavy plan because it is a member of an 
                aggregation group which is a top-heavy group, 
                contributions under the plan may be taken into account 
                in determining whether any other plan in the group meets 
                the requirements of subsection (c)(2).''.

[[Page 115 STAT. 102]]

    (e) Frozen Plan Exempt From Minimum Benefit Requirement.--
Subparagraph (C) of section 416(c)(1) (relating to defined benefit 
plans) is amended--
                    (A) by striking ``clause (ii)'' in clause (i) and 
                inserting ``clause (ii) or (iii)''; and
                    (B) by adding at the end the following:
                          ``(iii) Exception for frozen plan.--For 
                      purposes of determining an employee's years of 
                      service with the employer, any service with the 
                      employer shall be disregarded to the extent that 
                      such service occurs during a plan year when the 
                      plan benefits (within the meaning of section 
                      410(b)) no key employee or former key employee.''.

    (f ) <<NOTE: Applicability. 26 USC 416 note.>>  Effective Date.--The 
amendments made by this section shall apply to years beginning after 
December 31, 2001.

SEC. 614. ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF 
            DEDUCTION LIMITS.

    (a) In General.--Section 404 <<NOTE: 26 USC 404.>>  (relating to 
deduction for contributions of an employer to an employees' trust or 
annuity plan and compensation under a deferred payment plan) is amended 
by adding at the end the following new subsection:

    ``(n) Elective Deferrals Not Taken Into Account for Purposes of 
Deduction Limits.--Elective deferrals (as defined in section 402(g)(3)) 
shall not be subject to any limitation contained in paragraph (3), (7), 
or (9) of subsection (a), and such elective deferrals shall not be taken 
into account in applying any such limitation to any other 
contributions.''.
    (b) <<NOTE: Applicability. 26 USC 404 note.>>  Effective Date.--The 
amendment made by this section shall apply to years beginning after 
December 31, 2001.

SEC. 615. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED COMPENSATION 
            PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT 
            ORGANIZATIONS.

    (a) In General.--Subsection (c) of section 457 (relating to deferred 
compensation plans of State and local governments and tax-exempt 
organizations), as amended by section 611, is amended to read as 
follows:
    ``(c) Limitation.--The maximum amount of the compensation of any one 
individual which may be deferred under subsection (a) during any taxable 
year shall not exceed the amount in effect under subsection (b)(2)(A) 
(as modified by any adjustment provided under subsection (b)(3)).''.
    (b) <<NOTE: Applicability. 26 USC 457 note.>>  Effective Date.--The 
amendment made by subsection (a) shall apply to years beginning after 
December 31, 2001.

SEC. 616. DEDUCTION LIMITS.

    (a) Modification of Limits.--
            (1) Stock bonus and profit sharing trusts.--
                    (A) In general.--Subclause (I) of section 
                404(a)(3)(A)(i) (relating to stock bonus and profit 
                sharing trusts) is amended by striking ``15 percent'' 
                and inserting ``25 percent''.
                    (B) Conforming amendment.--Subparagraph (C) of 
                section 404(h)(1) is amended by striking ``15 percent'' 
                each place it appears and inserting ``25 percent''.
            (2) Defined contribution plans.--

[[Page 115 STAT. 103]]

                    (A) In general.--Clause (v) of section <<NOTE: 26 
                USC 404.>>  404(a)(3)(A) (relating to stock bonus and 
                profit sharing trusts) is amended to read as follows:
                          ``(v) Defined contribution plans subject to 
                      the funding standards.--Except as provided by the 
                      Secretary, a defined contribution plan which is 
                      subject to the funding standards of section 412 
                      shall be treated in the same manner as a stock 
                      bonus or profit-sharing plan for purposes of this 
                      subparagraph.''.
                    (B) Conforming amendments.--
                          (i) Section 404(a)(1)(A) is amended by 
                      inserting ``(other than a trust to which paragraph 
                      (3) applies)'' after ``pension trust''.
                          (ii) Section 404(h)(2) is amended by striking 
                      ``stock bonus or profit-sharing trust'' and 
                      inserting ``trust subject to subsection 
                      (a)(3)(A)''.
                          (iii) The heading of section 404(h)(2) is 
                      amended by striking ``stock bonus and profit-
                      sharing trust'' and inserting ``certain trusts''.

    (b) Compensation.--
            (1) In general.--Section 404(a) (relating to general rule) 
        is amended by adding at the end the following:
            ``(12) Definition of compensation.--For purposes of 
        paragraphs (3), (7), (8), and (9), the term `compensation' shall 
        include amounts treated as `participant's compensation' under 
        subparagraph (C) or (D) of section 415(c)(3).''.
            (2) Conforming amendments.--
                    (A) Subparagraph (B) of section 404(a)(3) is amended 
                by striking the last sentence thereof.
                    (B) Clause (i) of section 4972(c)(6)(B) is amended 
                by striking ``(within the meaning of section 404(a))'' 
                and inserting ``(within the meaning of section 404(a) 
                and as adjusted under section 404(a)(12))''.

    (c) <<NOTE: Applicability. 26 USC 404 note.>>  Effective Date.--The 
amendments made by this section shall apply to years beginning after 
December 31, 2001.

SEC. 617. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX ROTH 
            CONTRIBUTIONS.

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

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

    ``(a) General Rule.--If an applicable retirement plan includes a 
qualified Roth contribution program--
            ``(1) any designated Roth contribution made by an employee 
        pursuant to the program shall be treated as an elective deferral 
        for purposes of this chapter, except that such contribution 
        shall not be excludable from gross income, and
            ``(2) such plan (and any arrangement which is part of such 
        plan) shall not be treated as failing to meet any requirement of 
        this chapter solely by reason of including such program.

    ``(b) Qualified Roth Contribution Program.--For purposes of this 
section--
            ``(1) In general.--The term `qualified Roth contribution 
        program' means a program under which an employee may elect to 
        make designated Roth contributions in lieu of all or

[[Page 115 STAT. 104]]

        a portion of elective deferrals the employee is otherwise 
        eligible to make under the applicable retirement plan.
            ``(2) Separate accounting required.--A program shall not be 
        treated as a qualified Roth contribution program unless the 
        applicable retirement plan--
                    ``(A) establishes separate accounts (`designated 
                Roth accounts') for the designated Roth contributions of 
                each employee and any earnings properly allocable to the 
                contributions, and
                    ``(B) maintains separate recordkeeping with respect 
                to each account.

    ``(c) Definitions and Rules Relating to Designated Roth 
Contributions.--For purposes of this section--
            ``(1) Designated roth contribution.--The term `designated 
        Roth contribution' means any elective deferral which--
                    ``(A) is excludable from gross income of an employee 
                without regard to this section, and
                    ``(B) the employee designates (at such time and in 
                such manner as the Secretary may prescribe) as not being 
                so excludable.
            ``(2) Designation limits.--The amount of elective deferrals 
        which an employee may designate under paragraph (1) shall not 
        exceed the excess (if any) of--
                    ``(A) the maximum amount of elective deferrals 
                excludable from gross income of the employee for the 
                taxable year (without regard to this section), over
                    ``(B) the aggregate amount of elective deferrals of 
                the employee for the taxable year which the employee 
                does not designate under paragraph (1).
            ``(3) Rollover contributions.--
                    ``(A) In general.--A rollover contribution of any 
                payment or distribution from a designated Roth account 
                which is otherwise allowable under this chapter may be 
                made only if the contribution is to--
                          ``(i) another designated Roth account of the 
                      individual from whose account the payment or 
                      distribution was made, or
                          ``(ii) a Roth IRA of such individual.
                    ``(B) Coordination with limit.--Any rollover 
                contribution to a designated Roth account under 
                subparagraph (A) shall not be taken into account for 
                purposes of paragraph (1).

    ``(d) Distribution Rules.--For purposes of this title--
            ``(1) Exclusion.--Any qualified distribution from a 
        designated Roth account shall not be includible in gross income.
            ``(2) Qualified distribution.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `qualified distribution' 
                has the meaning given such term by section 408A(d)(2)(A) 
                (without regard to clause (iv) thereof ).
                    ``(B) Distributions within nonexclusion period.--A 
                payment or distribution from a designated Roth account 
                shall not be treated as a qualified distribution if such 
                payment or distribution is made within the 5-taxable-
                year period beginning with the earlier of--
                          ``(i) the first taxable year for which the 
                      individual made a designated Roth contribution to 
                      any designated

[[Page 115 STAT. 105]]

                      Roth account established for such individual under 
                      the same applicable retirement plan, or
                          ``(ii) if a rollover contribution was made to 
                      such designated Roth account from a designated 
                      Roth account previously established for such 
                      individual under another applicable retirement 
                      plan, the first taxable year for which the 
                      individual made a designated Roth contribution to 
                      such previously established account.
                    ``(C) Distributions of excess deferrals and 
                contributions and earnings thereon.--The term `qualified 
                distribution' shall not include any distribution of any 
                excess deferral under section 402(g)(2) or any excess 
                contribution under section 401(k)(8), and any income on 
                the excess deferral or contribution.
            ``(3) Treatment of distributions of certain excess 
        deferrals.--Notwithstanding section 72, if any excess deferral 
        under section 402(g)(2) attributable to a designated Roth 
        contribution is not distributed on or before the 1st April 15 
        following the close of the taxable year in which such excess 
        deferral is made, the amount of such excess deferral shall--
                    ``(A) not be treated as investment in the contract, 
                and
                    ``(B) be included in gross income for the taxable 
                year in which such excess is distributed.
            ``(4) Aggregation rules.--Section 72 shall be applied 
        separately with respect to distributions and payments from a 
        designated Roth account and other distributions and payments 
        from the plan.

    ``(e) Other Definitions.--For purposes of this section--
            ``(1) Applicable retirement plan.--The term `applicable 
        retirement plan' means--
                    ``(A) an employees' trust described in section 
                401(a) which is exempt from tax under section 501(a), 
                and
                    ``(B) a plan under which amounts are contributed by 
                an individual's employer for an annuity contract 
                described in section 403(b).
            ``(2) Elective deferral.--The term `elective deferral' means 
        any elective deferral described in subparagraph (A) or (C) of 
        section 402(g)(3).''.

    (b) Excess Deferrals.--Section 402(g) <<NOTE: 26 USC 402.>>  
(relating to limitation on exclusion for elective deferrals) is 
amended--
            (1) by adding at the end of paragraph (1)(A) (as added by 
        section 201(c)(1)) the following new sentence: ``The preceding 
        sentence shall not apply the portion of such excess as does not 
        exceed the designated Roth contributions of the individual for 
        the taxable year.''; and
            (2) by inserting ``(or would be included but for the last 
        sentence thereof )'' after ``paragraph (1)'' in paragraph 
        (2)(A).

    (c) Rollovers.--Subparagraph (B) of section 402(c)(8) is amended by 
adding at the end the following:
                ``If any portion of an eligible rollover distribution is 
                attributable to payments or distributions from a 
                designated Roth account (as defined in section 402A), an 
                eligible retirement plan with respect to such portion 
                shall include only another designated Roth account and a 
                Roth IRA.''.

    (d) Reporting Requirements.--

[[Page 115 STAT. 106]]

            (1) W-2 information.--Section 6051(a)(8) <<NOTE: 26 USC 
        6051.>>  is amended by inserting ``, including the amount of 
        designated Roth contributions (as defined in section 402A)'' 
        before the comma at the end.
            (2) Information.--Section 6047 is amended by redesignating 
        subsection (f ) as subsection (g) and by inserting after 
        subsection (e) the following new subsection:

    ``(f ) Designated Roth Contributions.--The Secretary shall require 
the plan administrator of each applicable retirement plan (as defined in 
section 402A) to make such returns and reports regarding designated Roth 
contributions (as defined in section 402A) to the Secretary, 
participants and beneficiaries of the plan, and such other persons as 
the Secretary may prescribe.''.
    (e) Conforming Amendments.--
            (1) Section 408A(e) is amended by adding after the first 
        sentence the following new sentence: ``Such term includes a 
        rollover contribution described in section 402A(c)(3)(A).''.
            (2) The table of sections for subpart A of part I of 
        subchapter D of chapter 1 is amended by inserting after the item 
        relating to section 402 the following new item:
                ``Sec. 402A. Optional treatment of elective deferrals as 
                                Roth contributions.''.

    (f ) <<NOTE: Applicability. 26 USC 402 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2005.

SEC. 618. NONREFUNDABLE CREDIT TO CERTAIN INDIVIDUALS FOR ELECTIVE 
            DEFERRALS AND IRA CONTRIBUTIONS.

    (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 25A the following new section:

``SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN 
            INDIVIDUALS.

    ``(a) Allowance of Credit.--In the case of an eligible individual, 
there shall be allowed as a credit against the tax imposed by this 
subtitle for the taxable year an amount equal to the applicable 
percentage of so much of the qualified retirement savings contributions 
of the eligible individual for the taxable year as do not exceed $2,000.
    ``(b) Applicable Percentage.--For purposes of this section, the 
applicable percentage is the percentage determined in accordance with 
the following table:


------------------------------------------------------------------------
                    Adjusted Gross Income
-------------------------------------------------------------
    Joint return           Head of a        All other cases   Applicable
---------------------      household     -------------------- percentage
                     --------------------
   Over     Not over    Over    Not over    Over    Not over
------------------------------------------------------------------------
           $30,000    ........  $22,500   ........  $15,000          50
 30,000     32,500     22,500    24,375    15,000    16,250          20
 32,500     50,000     24,375    37,500    16,250    25,000          10
 50,000    .........   37,500   ........   25,000   ........          0
------------------------------------------------------------------------


    ``(c) Eligible Individual.--For purposes of this section--
            ``(1) In general.--The term `eligible individual' means any 
        individual if such individual has attained the age of 18 as of 
        the close of the taxable year.

[[Page 115 STAT. 107]]

            ``(2) Dependents and full-time students not eligible.--The 
        term `eligible individual' shall not include--
                    ``(A) any individual with respect to whom a 
                deduction under section 151 is allowed to another 
                taxpayer for a taxable year beginning in the calendar 
                year in which such individual's taxable year begins, and
                    ``(B) any individual who is a student (as defined in 
                section 151(c)(4)).

    ``(d) Qualified Retirement Savings Contributions.--For purposes of 
this section--
            ``(1) In general.--The term `qualified retirement savings 
        contributions' means, with respect to any taxable year, the sum 
        of--
                    ``(A) the amount of the qualified retirement 
                contributions (as defined in section 219(e)) made by the 
                eligible individual,
                    ``(B) the amount of--
                          ``(i) any elective deferrals (as defined in 
                      section 402(g)(3)) of such individual, and
                          ``(ii) any elective deferral of compensation 
                      by such individual under an eligible deferred 
                      compensation plan (as defined in section 457(b)) 
                      of an eligible employer described in section 
                      457(e)(1)(A), and
                    ``(C) the amount of voluntary employee contributions 
                by such individual to any qualified retirement plan (as 
                defined in section 4974(c)).
            ``(2) Reduction for certain distributions.--
                    ``(A) In general.--The qualified retirement savings 
                contributions determined under paragraph (1) shall be 
                reduced (but not below zero) by the sum of--
                          ``(i) any distribution from a qualified 
                      retirement plan (as defined in section 4974(c)), 
                      or from an eligible deferred compensation plan (as 
                      defined in section 457(b)), received by the 
                      individual during the testing period which is 
                      includible in gross income, and
                          ``(ii) any distribution from a Roth IRA or a 
                      Roth account received by the individual during the 
                      testing period which is not a qualified rollover 
                      contribution (as defined in section 408A(e)) to a 
                      Roth IRA or a rollover under section 402(c)(8)(B) 
                      to a Roth account.
                    ``(B) Testing period.--For purposes of subparagraph 
                (A), the testing period, with respect to a taxable year, 
                is the period which includes--
                          ``(i) such taxable year,
                          ``(ii) the 2 preceding taxable years, and
                          ``(iii) the period after such taxable year and 
                      before the due date (including extensions) for 
                      filing the return of tax for such taxable year.
                    ``(C) Excepted distributions.--There shall not be 
                taken into account under subparagraph (A)--
                          ``(i) any distribution referred to in section 
                      72(p), 401(k)(8), 401(m)(6), 402(g)(2), 404(k), or 
                      408(d)(4), and
                          ``(ii) any distribution to which section 
                      408A(d)(3) applies.
                    ``(D) Treatment of distributions received by spouse 
                of individual.--For purposes of determining 
                distributions received by an individual under 
                subparagraph

[[Page 115 STAT. 108]]

                (A) for any taxable year, any distribution received by 
                the spouse of such individual shall be treated as 
                received by such individual if such individual and 
                spouse file a joint return for such taxable year and for 
                the taxable year during which the spouse receives the 
                distribution.

    ``(e) Adjusted Gross Income.--For purposes of this section, adjusted 
gross income shall be determined without regard to sections 911, 931, 
and 933.
    ``(f ) Investment in the Contract.--Notwithstanding any other 
provision of law, a qualified retirement savings contribution shall not 
fail to be included in determining the investment in the contract for 
purposes of section 72 by reason of the credit under this section.
    ``(g) Termination.--This section shall not apply to taxable years 
beginning after December 31, 2006.''.
    (b) Credit Allowed Against Regular Tax and Alternative Minimum 
Tax.--
            (1) In general.--Section 25B, <<NOTE: 26 USC 25B.>>  as 
        added by subsection (a), is amended by inserting after 
        subsection (f ) the following new subsection:

    ``(g) Limitation Based on Amount of Tax.--The credit allowed under 
subsection (a) for the 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 this subpart 
        (other than this section and section 23) and section 27 for the 
        taxable year.''.
            (2) Conforming amendments.--
                    (A) Section 24(b)(3)(B), as amended by sections 
                201(b) and 203(d), is amended by striking ``section 23'' 
                and inserting ``sections 23 and 25B''.
                    (B) Section 25(e)(1)(C), as amended by section 
                201(b), is amended by inserting ``25B,'' after ``24,''.
                    (C) Section 26(a)(1), as amended by sections 201(b) 
                and 203, is amended by striking ``and 24'' and inserting 
                ``, 24, and 25B''.
                    (D) Section 904(h), as amended by sections 201(b) 
                and 203, is amended by striking ``and 24'' and inserting 
                ``, 24, and 25B''.
                    (E) Section 1400C(d), as amended by sections 201(b) 
                and 203, is amended by striking ``and 24'' and inserting 
                ``, 24, and 25B''.

    (c) Conforming Amendment.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1, as amended by section 432, is 
amended by inserting after the item relating to section 25A the 
following new item:
                ``Sec. 25B. Elective deferrals and IRA contributions by 
                                certain individuals.''.

    (d) <<NOTE: Applicability. 26 USC 24 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2001.

SEC. 619. CREDIT FOR PENSION PLAN STARTUP COSTS OF SMALL EMPLOYERS.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits) is amended by adding at the end 
the following new section:

[[Page 115 STAT. 109]]

``SEC. 45E. SMALL EMPLOYER PENSION PLAN STARTUP COSTS.

    ``(a) General Rule.--For purposes of section 38, in the case of an 
eligible employer, the small employer pension plan startup cost credit 
determined under this section for any taxable year is an amount equal to 
50 percent of the qualified startup costs paid or incurred by the 
taxpayer during the taxable year.
    ``(b) Dollar Limitation.--The amount of the credit determined under 
this section for any taxable year shall not exceed--
            ``(1) $500 for the first credit year and each of the 2 
        taxable years immediately following the first credit year, and
            ``(2) zero for any other taxable year.

    ``(c) Eligible Employer.--For purposes of this section--
            ``(1) In general.--The term `eligible employer' has the 
        meaning given such term by section 408(p)(2)(C)(i).
            ``(2) Requirement for new qualified employer plans.--Such 
        term shall not include an employer if, during the 3-taxable year 
        period immediately preceding the 1st taxable year for which the 
        credit under this section is otherwise allowable for a qualified 
        employer plan of the employer, the employer or any member of any 
        controlled group including the employer (or any predecessor of 
        either) established or maintained a qualified employer plan with 
        respect to which contributions were made, or benefits were 
        accrued, for substantially the same employees as are in the 
        qualified employer plan.

    ``(d) Other Definitions.--For purposes of this section--
            ``(1) Qualified startup costs.--
                    ``(A) In general.--The term `qualified startup 
                costs' means any ordinary and necessary expenses of an 
                eligible employer which are paid or incurred in 
                connection with--
                          ``(i) the establishment or administration of 
                      an eligible employer plan, or
                          ``(ii) the retirement-related education of 
                      employees with respect to such plan.
                    ``(B) Plan must have at least 1 participant.--Such 
                term shall not include any expense in connection with a 
                plan that does not have at least 1 employee eligible to 
                participate who is not a highly compensated employee.
            ``(2) Eligible employer plan.--The term `eligible employer 
        plan' means a qualified employer plan within the meaning of 
        section 4972(d).
            ``(3) First credit year.--The term `first credit year' 
        means--
                    ``(A) the taxable year which includes the date that 
                the eligible employer plan to which such costs relate 
                becomes effective, or
                    ``(B) at the election of the eligible employer, the 
                taxable year preceding the taxable year referred to in 
                subparagraph (A).

    ``(e) Special Rules.--For purposes of this section--
            ``(1) Aggregation rules.--All persons treated as a single 
        employer under subsection (a) or (b) of section 52, or 
        subsection (n) or (o) of section 414, shall be treated as one 
        person. All eligible employer plans shall be treated as 1 
        eligible employer plan.
            ``(2) Disallowance of deduction.--No deduction shall be 
        allowed for that portion of the qualified startup costs paid

[[Page 115 STAT. 110]]

        or incurred for the taxable year which is equal to the credit 
        determined under subsection (a).
            ``(3) Election not to claim credit.--This section shall not 
        apply to a taxpayer for any taxable year if such taxpayer elects 
        to have this section not apply for such taxable year.''.

    (b) Credit Allowed as Part of General Business Credit.--Section 
38(b) <<NOTE: 26 USC 38.>>  (defining current year business credit) is 
amended by striking ``plus'' at the end of paragraph (12), by striking 
the period at the end of paragraph (13) and inserting ``, plus'', and by 
adding at the end the following new paragraph:
            ``(14) in the case of an eligible employer (as defined in 
        section 45E(c)), the small employer pension plan startup cost 
        credit determined under section 45E(a).''.

    (c) Conforming Amendments.--
            (1) Section 39(d) is amended by adding at the end the 
        following new paragraph:
            ``(10) No carryback of small employer pension plan startup 
        cost credit before january 1, 2002.--No portion of the unused 
        business credit for any taxable year which is attributable to 
        the small employer pension plan startup cost credit determined 
        under section 45E may be carried back to a taxable year 
        beginning before January 1, 2002.''.
            (2) Subsection (c) of section 196 is amended by striking 
        ``and'' at the end of paragraph (8), by striking the period at 
        the end of paragraph (9) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(10) the small employer pension plan startup cost credit 
        determined under section 45E(a).''.
            (3) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1 is amended by adding at the end the 
        following new item:
                ``Sec. 45E. Small employer pension plan startup 
                                costs.''.

    (d) <<NOTE: Applicability. 26 USC 38 note.>>  Effective Date.--The 
amendments made by this section shall apply to costs paid or incurred in 
taxable years beginning after December 31, 2001, with respect to 
qualified employer plans established after such date.

SEC. 620. <<NOTE: 26 USC 7801 note.>>  ELIMINATION OF USER FEE FOR 
            REQUESTS TO IRS REGARDING PENSION PLANS.

    (a) Elimination of Certain User Fees.--The Secretary of the Treasury 
or the Secretary's delegate shall not require payment of user fees under 
the program established under section 10511 of the Revenue Act of 1987 
for requests to the Internal Revenue Service for determination letters 
with respect to the qualified status of a pension benefit plan 
maintained solely by one or more eligible employers or any trust which 
is part of the plan. The preceding sentence shall not apply to any 
request--
            (1) made after the later of--
                    (A) the fifth plan year the pension benefit plan is 
                in existence; or
                    (B) the end of any remedial amendment period with 
                respect to the plan beginning within the first 5 plan 
                years; or
            (2) made by the sponsor of any prototype or similar plan 
        which the sponsor intends to market to participating employers.

[[Page 115 STAT. 111]]

    (b) Pension Benefit Plan.--For purposes of this section, the term 
``pension benefit plan'' means a pension, profit-sharing, stock bonus, 
annuity, or employee stock ownership plan.
    (c) Eligible Employer.--For purposes of this section, the term 
``eligible employer'' means an eligible employer (as defined in section 
408(p)(2)(C)(i)(I) of the Internal Revenue Code of 1986) which has at 
least one employee who is not a highly compensated employee (as defined 
in section 414(q)) and is participating in the plan. The determination 
of whether an employer is an eligible employer under this section shall 
be made as of the date of the request described in subsection (a).
    (d) Determination of Average Fees Charged.--For purposes of any 
determination of average fees charged, any request to which subsection 
(a) applies shall not be taken into account.
    (e) <<NOTE: Applicability.>>  Effective Date.--The provisions of 
this section shall apply with respect to requests made after December 
31, 2001.

SEC. 621. TREATMENT OF NONRESIDENT ALIENS ENGAGED IN INTERNATIONAL 
            TRANSPORTATION SERVICES.

    (a) Exclusion From Income Sourcing Rules.--The second sentence of 
section 861(a)(3) <<NOTE: 26 USC 861.>>  (relating to gross income from 
sources within the United States) is amended by striking ``except for 
purposes of sections 79 and 105 and subchapter D,''.

    (b) <<NOTE: Applicability. 26 USC 861 note.>>  Effective Date.--The 
amendment made by subsection (a) shall apply to remuneration for 
services performed in plan years beginning after December 31, 2001.

                Subtitle C--Enhancing Fairness for Women

SEC. 631. CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR OVER.

    (a) In General.--Section 414 (relating to definitions and special 
rules) is amended by adding at the end the following new subsection:
    ``(v) Catch-up Contributions for Individuals Age 50 or Over.--
            ``(1) In general.--An applicable employer plan shall not be 
        treated as failing to meet any requirement of this title solely 
        because the plan permits an eligible participant to make 
        additional elective deferrals in any plan year.
            ``(2) Limitation on amount of additional deferrals.--
                    ``(A) In general.--A plan shall not permit 
                additional elective deferrals under paragraph (1) for 
                any year in an amount greater than the lesser of--
                          ``(i) the applicable dollar amount, or
                          ``(ii) the excess (if any) of--
                                    ``(I) the participant's compensation 
                                (as defined in section 415(c)(3)) for 
                                the year, over
                                    ``(II) any other elective deferrals 
                                of the participant for such year which 
                                are made without regard to this 
                                subsection.
                    ``(B) Applicable dollar amount.--For purposes of 
                this paragraph--
                          ``(i) In the case of an applicable employer 
                      plan other than a plan described in section 
                      401(k)(11) or

[[Page 115 STAT. 112]]

                      408(p), the applicable dollar amount shall be 
                      determined in accordance with the following table:

``For taxable years           The applicable............................
beginning in:                 dollar amount is:.........................
2002                                                             $1,000 
2003                                                             $2,000 
2004                                                             $3,000 
2005                                                             $4,000 
2006 and thereafter                                              $5,000.

                          ``(ii) In the case of an applicable employer 
                      plan described in section 401(k)(11) or 408(p), 
                      the applicable dollar amount shall be determined 
                      in accordance with the following table:

``For taxable years           The applicable............................
beginning in:                 dollar amount is:.........................
2002                                                               $500 
2003                                                             $1,000 
2004                                                             $1,500 
2005                                                             $2,000 
2006 and thereafter                                              $2,500.

                    ``(C) Cost-of-living adjustment.--In the case of a 
                year beginning after December 31, 2006, the Secretary 
                shall adjust annually the $5,000 amount in subparagraph 
                (B)(i) and the $2,500 amount in subparagraph (B)(ii) for 
                increases in the cost-of-living at the same time and in 
                the same manner as adjustments under section 415(d); 
                except that the base period taken into account shall be 
                the calendar quarter beginning July 1, 2005, and any 
                increase under this subparagraph which is not a multiple 
                of $500 shall be rounded to the next lower multiple of 
                $500.''.
            ``(3) Treatment of contributions.--In the case of any 
        contribution to a plan under paragraph (1)--
                    ``(A) such contribution shall not, with respect to 
                the year in which the contribution is made--
                          ``(i) be subject to any otherwise applicable 
                      limitation contained in section 402(g), 402(h), 
                      403(b), 404(a), 404(h), 408(k), 408(p), 415, or 
                      457, or
                          ``(ii) be taken into account in applying such 
                      limitations to other contributions or benefits 
                      under such plan or any other such plan, and
                    ``(B) except as provided in paragraph (4), such plan 
                shall not be treated as failing to meet the requirements 
                of section 401(a)(4), 401(a)(26), 401(k)(3), 401(k)(11), 
                401(k)(12), 403(b)(12), 408(k), 408(p), 408B, 410(b), or 
                416 by reason of the making of (or the right to make) 
                such contribution.
            ``(4) Application of nondiscrimination rules.--
                    ``(A) In general.--An applicable employer plan shall 
                be treated as failing to meet the nondiscrimination 
                requirements under section 401(a)(4) with respect to 
                benefits, rights, and features unless the plan allows 
                all eligible participants to make the same election with 
                respect to the additional elective deferrals under this 
                subsection.

[[Page 115 STAT. 113]]

                    ``(B) Aggregation.--For purposes of subparagraph 
                (A), all plans maintained by employers who are treated 
                as a single employer under subsection (b), (c), (m), or 
                (o) of section 414 shall be treated as 1 plan.
            ``(5) Eligible participant.--For purposes of this 
        subsection, the term `eligible participant' means, with respect 
        to any plan year, a participant in a plan--
                    ``(A) who has attained the age of 50 before the 
                close of the plan year, and
                    ``(B) with respect to whom no other elective 
                deferrals may (without regard to this subsection) be 
                made to the plan for the plan year by reason of the 
                application of any limitation or other restriction 
                described in paragraph (3) or comparable limitation or 
                restriction contained in the terms of the plan.
            ``(6) Other definitions and rules.--For purposes of this 
        subsection--
                    ``(A) Applicable employer plan.--The term 
                `applicable employer plan' means--
                          ``(i) an employees' trust described in section 
                      401(a) which is exempt from tax under section 
                      501(a),
                          ``(ii) a plan under which amounts are 
                      contributed by an individual's employer for an 
                      annuity contract described in section 403(b),
                          ``(iii) an eligible deferred compensation plan 
                      under section 457 of an eligible employer 
                      described in section 457(e)(1)(A), and
                          ``(iv) an arrangement meeting the requirements 
                      of section 408 (k) or (p).
                    ``(B) Elective deferral.--The term `elective 
                deferral' has the meaning given such term by subsection 
                (u)(2)(C).
                    ``(C) Exception for section 457 plans.--This 
                subsection shall not apply to an applicable employer 
                plan described in subparagraph (A)(iii) for any year to 
                which section 457(b)(3) applies.''.

    (b) <<NOTE: Effective date. 26 USC 414 note.>>  Effective Date.--The 
amendment made by this section shall apply to contributions in taxable 
years beginning after December 31, 2001.

SEC. 632. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF EMPLOYEES TO DEFINED 
            CONTRIBUTION PLANS.

    (a) Equitable Treatment.--
            (1) In general.--Subparagraph (B) of section <<NOTE: 26 USC 
        415.>>  415(c)(1) (relating to limitation for defined 
        contribution plans) is amended by striking ``25 percent'' and 
        inserting ``100 percent''.
            (2) Application to section 403(b).--Section 403(b) is 
        amended--
                    (A) by striking ``the exclusion allowance for such 
                taxable year'' in paragraph (1) and inserting ``the 
                applicable limit under section 415'',
                    (B) by striking paragraph (2), and
                    (C) by inserting ``or any amount received by a 
                former employee after the fifth taxable year following 
                the taxable year in which such employee was terminated'' 
                before the period at the end of the second sentence of 
                paragraph (3).
            (3) Conforming amendments.--

[[Page 115 STAT. 114]]

                    (A) Subsection (f ) of section 72 <<NOTE: 26 USC 
                72.>>  is amended by striking ``section 
                403(b)(2)(D)(iii))'' and inserting ``section 
                403(b)(2)(D)(iii), as in effect before the enactment of 
                the Economic Growth and Tax Relief Reconciliation Act of 
                2001''.
                    (B) Section 404(a)(10)(B) is amended by striking ``, 
                the exclusion allowance under section 403(b)(2),''.
                    (C) Section 415(a)(2) is amended by striking ``, and 
                the amount of the contribution for such portion shall 
                reduce the exclusion allowance as provided in section 
                403(b)(2)''.
                    (D) Section 415(c)(3) is amended by adding at the 
                end the following new subparagraph:
                    ``(E) Annuity contracts.--In the case of an annuity 
                contract described in section 403(b), the term 
                `participant's compensation' means the participant's 
                includible compensation determined under section 
                403(b)(3).''.
                    (E) Section 415(c) is amended by striking paragraph 
                (4).
                    (F) Section 415(c)(7) is amended to read as follows:
            ``(7) Certain contributions by church plans not treated as 
        exceeding limit.--
                    ``(A) In general.--Notwithstanding any other 
                provision of this subsection, at the election of a 
                participant who is an employee of a church or a 
                convention or association of churches, including an 
                organization described in section 414(e)(3)(B)(ii), 
                contributions and other additions for an annuity 
                contract or retirement income account described in 
                section 403(b) with respect to such participant, when 
                expressed as an annual addition to such participant's 
                account, shall be treated as not exceeding the 
                limitation of paragraph (1) if such annual addition is 
                not in excess of $10,000.
                    ``(B) $40,000 aggregate limitation.--The total 
                amount of additions with respect to any participant 
                which may be taken into account for purposes of this 
                subparagraph for all years may not exceed $40,000.
                    ``(C) Annual addition.--For purposes of this 
                paragraph, the term `annual addition' has the meaning 
                given such term by paragraph (2).''.
                    (G) Subparagraph (B) of section 402(g)(7) (as 
                redesignated by section 611(c)(3)) is amended by 
                inserting before the period at the end the following: 
                ``(as in effect before the enactment of the Economic 
                Growth and Tax Relief Reconciliation Act of 2001''.
                    (H) Section 664(g) is amended--
                          (i) in paragraph (3)(E) by striking 
                      ``limitations under section 415(c)'' and inserting 
                      ``applicable limitation under paragraph (7)'', and
                          (ii) by adding at the end the following new 
                      paragraph:
            ``(7) Applicable limitation.--
                    ``(A) In general.--For purposes of paragraph (3)(E), 
                the applicable limitation under this paragraph with 
                respect to a participant is an amount equal to the 
                lesser of--
                          ``(i) $30,000, or
                          ``(ii) 25 percent of the participant's 
                      compensation (as defined in section 415(c)(3)).

[[Page 115 STAT. 115]]

                    ``(B) Cost-of-living adjustment.--The Secretary 
                shall adjust annually the $30,000 amount under 
                subparagraph (A)(i) at the same time and in the same 
                manner as under section 415(d), except that the base 
                period shall be the calendar quarter beginning October 
                1, 1993, and any increase under this subparagraph which 
                is not a multiple of $5,000 shall be rounded to the next 
                lowest multiple of $5,000.''.
            (4) <<NOTE: Applicability. 26 USC 72 note.>>  Effective 
        date.--The amendments made by this subsection shall apply to 
        years beginning after December 31, 2001.

    (b) Special Rules for Sections 403(b) and 408.--
            (1) In general.--Subsection (k) of section 415 <<NOTE: 26 
        USC 415.>>  is amended by adding at the end the following new 
        paragraph:
            ``(4) Special rules for sections 403(b) and 408.--For 
        purposes of this section, any annuity contract described in 
        section 403(b) for the benefit of a participant shall be treated 
        as a defined contribution plan maintained by each employer with 
        respect to which the participant has the control required under 
        subsection (b) or (c) of section 414 (as modified by subsection 
        (h)). For purposes of this section, any contribution by an 
        employer to a simplified employee pension plan for an individual 
        for a taxable year shall be treated as an employer contribution 
        to a defined contribution plan for such individual for such 
        year.''.
            (2) <<NOTE: 26 USC 415 note.>>  Effective date.--
                    (A) <<NOTE: Applicability.>>  In general.--The 
                amendment made by paragraph (1) shall apply to 
                limitation years beginning after December 31, 1999.
                    (B) Exclusion allowance.--Effective for limitation 
                years beginning in 2000, in the case of any annuity 
                contract described in section 403(b) of the Internal 
                Revenue Code of 1986, the amount of the contribution 
                disqualified by reason of section 415(g) of such Code 
                shall reduce the exclusion allowance as provided in 
                section 403(b)(2) of such Code.
            (3) <<NOTE: 26 USC 403 note.>>  Election to modify section 
        403(b) exclusion allowance to conform to section 415 
        modification.--In the case of taxable years beginning after 
        December 31, 1999, and before January 1, 2002, a plan may 
        disregard the requirement in the regulations regarding the 
        exclusion allowance under section 403(b)(2) of the Internal 
        Revenue Code of 1986 that contributions to a defined benefit 
        pension plan be treated as previously excluded amounts for 
        purposes of the exclusion allowance.

    (c) Deferred Compensation Plans of State and Local Governments and 
Tax-Exempt Organizations.--
            (1) In general.--Subparagraph (B) of section 457(b)(2) 
        (relating to salary limitation on eligible deferred compensation 
        plans) is amended by striking ``33\1/3\ percent'' and inserting 
        ``100 percent''.
            (2) <<NOTE: Applicability. 26 USC 457 note.>>  Effective 
        date.--The amendment made by this subsection shall apply to 
        years beginning after December 31, 2001.

SEC. 633. FASTER VESTING OF CERTAIN EMPLOYER MATCHING CONTRIBUTIONS.

    (a) In General.--Section 411(a) (relating to minimum vesting 
standards) is amended--

[[Page 115 STAT. 116]]

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

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

    (b) Amendment of ERISA.--Section 203(a) of the Employee Retirement 
Income Security Act of 1974 (29 U.S.C. 1053(a)) is amended--
            (1) in paragraph (2), by striking ``A plan'' and inserting 
        ``Except as provided in paragraph (4), a plan'', and
            (2) by adding at the end the following:
            ``(4) In the case of matching contributions (as defined in 
        section 401(m)(4)(A) of the Internal Revenue Code of 1986), 
        paragraph (2) shall be applied--
                    ``(A) by substituting `3 years' for `5 years' in 
                subparagraph (A), and
                    ``(B) by substituting the following table for the 
                table contained in subparagraph (B):

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

    (c) <<NOTE: 26 USC 411 note.>>  Effective Dates.--
            (1) <<NOTE: Applicability.>>  In general.--Except as 
        provided in paragraph (2), the amendments made by this section 
        shall apply to contributions for plan years beginning after 
        December 31, 2001.
            (2) Collective bargaining agreements.--In the case of a plan 
        maintained pursuant to one or more collective bargaining 
        agreements between employee representatives and one or more 
        employers ratified by the date of the enactment of this Act, the 
        amendments made by this section shall not apply to contributions 
        on behalf of employees covered by any such agreement for plan 
        years beginning before the earlier of--
                    (A) the later of--
                          (i) the date on which the last of such 
                      collective bargaining agreements terminates 
                      (determined without regard to any extension 
                      thereof on or after such date of the enactment); 
                      or
                          (ii) January 1, 2002; or
                    (B) January 1, 2006.
            (3) Service required.--With respect to any plan, the 
        amendments made by this section shall not apply to any employee 
        before the date that such employee has 1 hour of

[[Page 115 STAT. 117]]

        service under such plan in any plan year to which the amendments 
        made by this section apply.

SEC. 634. MODIFICATION TO MINIMUM DISTRIBUTION RULES.

    The Secretary of the Treasury shall modify the life expectancy 
tables under the regulations relating to minimum distribution 
requirements under sections 401(a)(9), 408(a)(6) and (b)(3), 403(b)(10), 
and 457(d)(2) of the Internal Revenue Code to reflect current life 
expectancy.

SEC. 635. CLARIFICATION OF TAX TREATMENT OF DIVISION OF SECTION 457 PLAN 
            BENEFITS UPON DIVORCE.

    (a) In General.--Section 414(p)(11) <<NOTE: 26 USC 414.>>  (relating 
to application of rules to governmental and church plans) is amended--
            (1) by inserting ``or an eligible deferred compensation plan 
        (within the meaning of section 457(b))'' after ``subsection 
        (e))''; and
            (2) in the heading, by striking ``governmental and church 
        plans'' and inserting ``certain other plans''.

    (b) Waiver of Certain Distribution Requirements.--Paragraph (10) of 
section 414(p) is amended by striking ``and section 409(d)'' and 
inserting ``section 409(d), and section 457(d)''.
    (c) Tax Treatment of Payments From a Section 457 Plan.--Subsection 
(p) of section 414 is amended by redesignating paragraph (12) as 
paragraph (13) and inserting after paragraph (11) the following new 
paragraph:
            ``(12) Tax treatment of payments from a section 457 plan.--
        If a distribution or payment from an eligible deferred 
        compensation plan described in section 457(b) is made pursuant 
        to a qualified domestic relations order, rules similar to the 
        rules of section 402(e)(1)(A) shall apply to such distribution 
        or payment.''.

    (d) <<NOTE: Applicability. 26 USC 414 note.>>  Effective Date.--The 
amendment made by this section shall apply to transfers, distributions, 
and payments made after December 31, 2001.

SEC. 636. PROVISIONS RELATING TO HARDSHIP DISTRIBUTIONS.

    (a) Safe Harbor Relief.--
            (1) In general.--The Secretary of the Treasury shall revise 
        the regulations relating to hardship distributions under section 
        401(k)(2)(B)(i)(IV) of the Internal Revenue Code of 1986 to 
        provide that the period an employee is prohibited from making 
        elective and employee contributions in order for a distribution 
        to be deemed necessary to satisfy financial need shall be equal 
        to 6 months.
            (2) <<NOTE: Applicability.>>  Effective date.--The revised 
        regulations under this subsection shall apply to years beginning 
        after December 31, 2001.

    (b) Hardship Distributions Not Treated as Eligible Rollover 
Distributions.--
            (1) Modification of definition of eligible rollover.--
        Subparagraph (C) of section 402(c)(4) (relating to eligible 
        rollover distribution) is amended to read as follows:
                    ``(C) any distribution which is made upon hardship 
                of the employee.''.
            (2) <<NOTE: Applicability. 26 USC 402 note.>>  Effective 
        date.--The amendment made by this subsection shall apply to 
        distributions made after December 31, 2001.

[[Page 115 STAT. 118]]

SEC. 637. WAIVER OF TAX ON NONDEDUCTIBLE CONTRIBUTIONS FOR DOMESTIC OR 
            SIMILAR WORKERS.

    (a) In General.--Section 4972(c)(6) <<NOTE: 26 USC 4972.>>  
(relating to exceptions to nondeductible contributions), as amended by 
section 616, is amended by striking ``and'' at the end of subparagraph 
(A), by striking the period and inserting ``, or'' at the end of 
subparagraph (B), and by inserting after subparagraph (B) the following 
new subparagraph:
                    ``(C) so much of the contributions to a simple 
                retirement account (within the meaning of section 
                408(p)) or a simple plan (within the meaning of section 
                401(k)(11)) which are not deductible when contributed 
                solely because such contributions are not made in 
                connection with a trade or business of the employer.''.

    (b) Exclusion of Certain Contributions.--Section 4972(c)(6), as 
amended by subsection (a), is amended by adding at the end the following 
new sentence: ``Subparagraph (C) shall not apply to contributions made 
on behalf of the employer or a member of the employer's family (as 
defined in section 447(e)(1)).''.
    (c) <<NOTE: 26 USC 4972 note.>>  No Inference.--Nothing in the 
amendments made by this section shall be construed to infer the proper 
treatment of nondeductible contributions under the laws in effect before 
such amendments.

    (d) <<NOTE: Applicability. 26 USC 4972 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2001.

           Subtitle D--Increasing Portability for Participants

SEC. 641. ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS.

    (a) Rollovers From and to Section 457 Plans.--
            (1) Rollovers from section 457 plans.--
                    (A) In general.--Section 457(e) (relating to other 
                definitions and special rules) is amended by adding at 
                the end the following:
            ``(16) Rollover amounts.--
                    ``(A) General rule.--In the case of an eligible 
                deferred compensation plan established and maintained by 
                an employer described in subsection (e)(1)(A), if--
                          ``(i) any portion of the balance to the credit 
                      of an employee in such plan is paid to such 
                      employee in an eligible rollover distribution 
                      (within the meaning of section 402(c)(4)),
                          ``(ii) the employee transfers any portion of 
                      the property such employee receives in such 
                      distribution to an eligible retirement plan 
                      described in section 402(c)(8)(B), and
                          ``(iii) in the case of a distribution of 
                      property other than money, the amount so 
                      transferred consists of the property distributed,
                then such distribution (to the extent so transferred) 
                shall not be includible in gross income for the taxable 
                year in which paid.
                    ``(B) Certain rules made applicable.--The rules of 
                paragraphs (2) through (7) and (9) of section 402(c) and

[[Page 115 STAT. 119]]

                section 402(f ) shall apply for purposes of subparagraph 
                (A).
                    ``(C) Reporting.--Rollovers under this paragraph 
                shall be reported to the Secretary in the same manner as 
                rollovers from qualified retirement plans (as defined in 
                section 4974(c)).''.
                    (B) Deferral limit determined without regard to 
                rollover amounts.--Section 457(b)(2) <<NOTE: 26 USC 
                457.>>  (defining eligible deferred compensation plan) 
                is amended by inserting ``(other than rollover 
                amounts)'' after ``taxable year''.
                    (C) Direct rollover.--Paragraph (1) of section 
                457(d) is amended by striking ``and'' at the end of 
                subparagraph (A), by striking the period at the end of 
                subparagraph (B) and inserting ``, and'', and by 
                inserting after subparagraph (B) the following:
                    ``(C) in the case of a plan maintained by an 
                employer described in subsection (e)(1)(A), the plan 
                meets requirements similar to the requirements of 
                section 401(a)(31).
        Any amount transferred in a direct trustee-to-trustee transfer 
        in accordance with section 401(a)(31) shall not be includible in 
        gross income for the taxable year of transfer.''.
                    (D) Withholding.--
                          (i) Paragraph (12) of section 3401(a) is 
                      amended by adding at the end the following:
                    ``(E) under or to an eligible deferred compensation 
                plan which, at the time of such payment, is a plan 
                described in section 457(b) which is maintained by an 
                eligible employer described in section 457(e)(1)(A), 
                or''.
                          (ii) Paragraph (3) of section 3405(c) is 
                      amended to read as follows:
            ``(3) Eligible rollover distribution.--For purposes of this 
        subsection, the term `eligible rollover distribution' has the 
        meaning given such term by section 402(f )(2)(A).''.
                          (iii) Liability for withholding.--Subparagraph 
                      (B) of section 3405(d)(2) is amended by striking 
                      ``or'' at the end of clause (ii), by striking the 
                      period at the end of clause (iii) and inserting 
                      ``, or'', and by adding at the end the following:
                          ``(iv) section 457(b) and which is maintained 
                      by an eligible employer described in section 
                      457(e)(1)(A).''.
            (2) Rollovers to section 457 plans.--
                    (A) In general.--Section 402(c)(8)(B) (defining 
                eligible retirement plan) is amended by striking ``and'' 
                at the end of clause (iii), by striking the period at 
                the end of clause (iv) and inserting ``, and'', and by 
                inserting after clause (iv) the following new clause:
                          ``(v) an eligible deferred compensation plan 
                      described in section 457(b) which is maintained by 
                      an eligible employer described in section 
                      457(e)(1)(A).''.
                    (B) Separate accounting.--Section 402(c) is amended 
                by adding at the end the following new paragraph:
            ``(10) Separate accounting.--Unless a plan described in 
        clause (v) of paragraph (8)(B) agrees to separately account for 
        amounts rolled into such plan from eligible retirement plans not 
        described in such clause, the plan described in such clause may 
        not accept transfers or rollovers from such retirement plans.''.

[[Page 115 STAT. 120]]

                    (C) 10 percent additional tax.--Subsection (t) of 
                section 72 (relating to 10-percent additional tax on 
                early distributions from qualified retirement plans) is 
                amended by adding at the end the following new 
                paragraph:
            ``(9) Special rule for rollovers to section 457 plans.--For 
        purposes of this subsection, a distribution from an eligible 
        deferred compensation plan (as defined in section 457(b)) of an 
        eligible employer described in section 457(e)(1)(A) shall be 
        treated as a distribution from a qualified retirement plan 
        described in 4974(c)(1) to the extent that such distribution is 
        attributable to an amount transferred to an eligible deferred 
        compensation plan from a qualified retirement plan (as defined 
        in section 4974(c)).''.

    (b) Allowance of Rollovers From and To 403(b) Plans.--
            (1) Rollovers from section 403(b) plans.--Section 
        403(b)(8)(A)(ii) <<NOTE: 26 USC 403.>>  (relating to rollover 
        amounts) is amended by striking ``such distribution'' and all 
        that follows and inserting ``such distribution to an eligible 
        retirement plan described in section 402(c)(8)(B), and''.
            (2) Rollovers to section 403(b) plans.--Section 402(c)(8)(B) 
        (defining eligible retirement plan), as amended by subsection 
        (a), is amended by striking ``and'' at the end of clause (iv), 
        by striking the period at the end of clause (v) and inserting 
        ``, and'', and by inserting after clause (v) the following new 
        clause:
                          ``(vi) an annuity contract described in 
                      section 403(b).''.

    (c) Expanded Explanation to Recipients of Rollover Distributions.--
Paragraph (1) of section 402(f ) (relating to written explanation to 
recipients of distributions eligible for rollover treatment) is amended 
by striking ``and'' at the end of subparagraph (C), by striking the 
period at the end of subparagraph (D) and inserting ``, and'', and by 
adding at the end the following new subparagraph:
                    ``(E) of the provisions under which distributions 
                from the eligible retirement plan receiving the 
                distribution may be subject to restrictions and tax 
                consequences which are different from those applicable 
                to distributions from the plan making such 
                distribution.''.

    (d) Spousal Rollovers.--Section 402(c)(9) (relating to rollover 
where spouse receives distribution after death of employee) is amended 
by striking ``; except that'' and all that follows up to the end period.
    (e) Conforming Amendments.--
            (1) Section 72(o)(4) is amended by striking ``and 
        408(d)(3)'' and inserting ``403(b)(8), 408(d)(3), and 
        457(e)(16)''.
            (2) Section 219(d)(2) is amended by striking ``or 
        408(d)(3)'' and inserting ``408(d)(3), or 457(e)(16)''.
            (3) Section 401(a)(31)(B) is amended by striking ``and 
        403(a)(4)'' and inserting ``, 403(a)(4), 403(b)(8), and 
        457(e)(16)''.
            (4) Subparagraph (A) of section 402(f )(2) is amended by 
        striking ``or paragraph (4) of section 403(a)'' and inserting 
        ``, paragraph (4) of section 403(a), subparagraph (A) of section 
        403(b)(8), or subparagraph (A) of section 457(e)(16)''.
            (5) Paragraph (1) of section 402(f ) is amended by striking 
        ``from an eligible retirement plan''.

[[Page 115 STAT. 121]]

            (6) Subparagraphs (A) and (B) of section 402(f 
        )(1) <<NOTE: 26 USC 402.>>  are amended by striking ``another 
        eligible retirement plan'' and inserting ``an eligible 
        retirement plan''.
            (7) Subparagraph (B) of section 403(b)(8) is amended to read 
        as follows:
                    ``(B) Certain rules made applicable.--The rules of 
                paragraphs (2) through (7) and (9) of section 402(c) and 
                section 402(f ) shall apply for purposes of subparagraph 
                (A), except that section 402(f ) shall be applied to the 
                payor in lieu of the plan administrator.''.
            (8) Section 408(a)(1) is amended by striking ``or 
        403(b)(8),'' and inserting ``403(b)(8), or 457(e)(16)''.
            (9) Subparagraphs (A) and (B) of section 415(b)(2) are each 
        amended by striking ``and 408(d)(3)'' and inserting ``403(b)(8), 
        408(d)(3), and 457(e)(16)''.
            (10) Section 415(c)(2) is amended by striking ``and 
        408(d)(3)'' and inserting ``408(d)(3), and 457(e)(16)''.
            (11) Section 4973(b)(1)(A) is amended by striking ``or 
        408(d)(3)'' and inserting ``408(d)(3), or 457(e)(16)''.

    (f ) <<NOTE: 26 USC 402 note.>>  Effective Date; Special Rule.--
            (1) <<NOTE: Applicability.>>  Effective date.--The 
        amendments made by this section shall apply to distributions 
        after December 31, 2001.
            (2) Reasonable notice.--No penalty shall be imposed on a 
        plan for the failure to provide the information required by the 
        amendment made by subsection (c) with respect to any 
        distribution made before the date that is 90 days after the date 
        on which the Secretary of the Treasury issues a safe harbor 
        rollover notice after the date of the enactment of this Act, if 
        the administrator of such plan makes a reasonable attempt to 
        comply with such requirement.
            (3) Special rule.--Notwithstanding any other provision of 
        law, subsections (h)(3) and (h)(5) of section 1122 of the Tax 
        Reform Act of 1986 shall not apply to any distribution from an 
        eligible retirement plan (as defined in clause (iii) or (iv) of 
        section 402(c)(8)(B) of the Internal Revenue Code of 1986) on 
        behalf of an individual if there was a rollover to such plan on 
        behalf of such individual which is permitted solely by reason of 
        any amendment made by this section.

SEC. 642. ROLLOVERS OF IRAS INTO WORKPLACE RETIREMENT PLANS.

    (a) In General.--Subparagraph (A) of section 408(d)(3) (relating to 
rollover amounts) is amended by adding ``or'' at the end of clause (i), 
by striking clauses (ii) and (iii), and by adding at the end the 
following:
                          ``(ii) <<NOTE: Deadline.>>  the entire amount 
                      received (including money and any other property) 
                      is paid into an eligible retirement plan for the 
                      benefit of such individual not later than the 60th 
                      day after the date on which the payment or 
                      distribution is received, except that the maximum 
                      amount which may be paid into such plan may not 
                      exceed the portion of the amount received which is 
                      includible in gross income (determined without 
                      regard to this paragraph).
                For purposes of clause (ii), the term `eligible 
                retirement plan' means an eligible retirement plan 
                described in clause (iii), (iv), (v), or (vi) of section 
                402(c)(8)(B).''.

    (b) Conforming Amendments.--

[[Page 115 STAT. 122]]

            (1) Paragraph (1) of section 403(b) <<NOTE: 26 USC 403.>>  
        is amended by striking ``section 408(d)(3)(A)(iii)'' and 
        inserting ``section 408(d)(3)(A)(ii)''.
            (2) Clause (i) of section 408(d)(3)(D) is amended by 
        striking ``(i), (ii), or (iii)'' and inserting ``(i) or (ii)''.
            (3) Subparagraph (G) of section 408(d)(3) is amended to read 
        as follows:
                    ``(G) Simple retirement accounts.--In the case of 
                any payment or distribution out of a simple retirement 
                account (as defined in subsection (p)) to which section 
                72(t)(6) applies, this paragraph shall not apply unless 
                such payment or distribution is paid into another simple 
                retirement account.''.

    (c) <<NOTE: 26 USC 408 note.>>  Effective Date; Special Rule.--
            (1) <<NOTE: Applicability.>>  Effective date.--The 
        amendments made by this section shall apply to distributions 
        after December 31, 2001.
            (2) Special rule.--Notwithstanding any other provision of 
        law, subsections (h)(3) and (h)(5) of section 1122 of the Tax 
        Reform Act of 1986 shall not apply to any distribution from an 
        eligible retirement plan (as defined in clause (iii) or (iv) of 
        section 402(c)(8)(B) of the Internal Revenue Code of 1986) on 
        behalf of an individual if there was a rollover to such plan on 
        behalf of such individual which is permitted solely by reason of 
        the amendments made by this section.

SEC. 643. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.

    (a) Rollovers From Exempt Trusts.--Paragraph (2) of section 402(c) 
(relating to maximum amount which may be rolled over) is amended by 
adding at the end the following: ``The preceding sentence shall not 
apply to such distribution to the extent--
                    ``(A) such portion is transferred in a direct 
                trustee-to-trustee transfer to a qualified trust which 
                is part of a plan which is a defined contribution plan 
                and which agrees to separately account for amounts so 
                transferred, including separately accounting for the 
                portion of such distribution which is includible in 
                gross income and the portion of such distribution which 
                is not so includible, or
                    ``(B) such portion is transferred to an eligible 
                retirement plan described in clause (i) or (ii) of 
                paragraph (8)(B).''.

    (b) Optional Direct Transfer of Eligible Rollover Distributions.--
Subparagraph (B) of section 401(a)(31) (relating to limitation) is 
amended by adding at the end the following: ``The preceding sentence 
shall not apply to such distribution if the plan to which such 
distribution is transferred--
                          ``(i) agrees to separately account for amounts 
                      so transferred, including separately accounting 
                      for the portion of such distribution which is 
                      includible in gross income and the portion of such 
                      distribution which is not so includible, or
                          ``(ii) is an eligible retirement plan 
                      described in clause (i) or (ii) of section 
                      402(c)(8)(B).''.

    (c) Rules for Applying Section 72 to IRAs.--Paragraph (3) of section 
408(d) (relating to special rules for applying section 72) is amended by 
inserting at the end the following:
                    ``(H) Application of section 72.--
                          ``(i) In general.--If--

[[Page 115 STAT. 123]]

                                    ``(I) a distribution is made from an 
                                individual retirement plan, and
                                    ``(II) a rollover contribution is 
                                made to an eligible retirement plan 
                                described in section 402(c)(8)(B)(iii), 
                                (iv), (v), or (vi) with respect to all 
                                or part of such distribution,
                      then, notwithstanding paragraph (2), the rules of 
                      clause (ii) shall apply for purposes of applying 
                      section 72.
                          ``(ii) Applicable rules.--In the case of a 
                      distribution described in clause (i)--
                                    ``(I) section 72 shall be applied 
                                separately to such distribution,
                                    ``(II) notwithstanding the pro rata 
                                allocation of income on, and investment 
                                in, the contract to distributions under 
                                section 72, the portion of such 
                                distribution rolled over to an eligible 
                                retirement plan described in clause (i) 
                                shall be treated as from income on the 
                                contract (to the extent of the aggregate 
                                income on the contract from all 
                                individual retirement plans of the 
                                distributee), and
                                    ``(III) appropriate adjustments 
                                shall be made in applying section 72 to 
                                other distributions in such taxable year 
                                and subsequent taxable years.''.

    (d) <<NOTE: Applicability. 26 USC 401 note.>>  Effective Date.--The 
amendments made by this section shall apply to distributions made after 
December 31, 2001.

SEC. 644. HARDSHIP EXCEPTION TO 60-DAY RULE.

    (a) Exempt Trusts.--Paragraph (3) of section 402(c) (relating to 
transfer must be made within 60 days of receipt) is amended to read as 
follows:
            ``(3) Transfer must be made within 60 days of receipt.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), paragraph (1) shall not apply to any 
                transfer of a distribution made after the 60th day 
                following the day on which the distributee received the 
                property distributed.
                    ``(B) Hardship exception.--The Secretary may waive 
                the 60-day requirement under subparagraph (A) where the 
                failure to waive such requirement would be against 
                equity or good conscience, including casualty, disaster, 
                or other events beyond the reasonable control of the 
                individual subject to such requirement.''.

    (b) IRAs.--Paragraph (3) of section 408(d) <<NOTE: 26 USC 408.>>  
(relating to rollover contributions), as amended by section 643, is 
amended by adding after subparagraph (H) the following new subparagraph:
                    ``(I) Waiver of 60-day requirement.--The Secretary 
                may waive the 60-day requirement under subparagraphs (A) 
                and (D) where the failure to waive such requirement 
                would be against equity or good conscience, including 
                casualty, disaster, or other events beyond the 
                reasonable control of the individual subject to such 
                requirement.''.

    (c) <<NOTE: 26 USC 402 note.>>  Effective Date.--The amendments made 
by this section shall apply to distributions after December 31, 2001.

SEC. 645. TREATMENT OF FORMS OF DISTRIBUTION.

    (a) Plan Transfers.--
            (1) Amendment of internal revenue code.--Paragraph (6) of 
        section 411(d) (relating to accrued benefit not to be

[[Page 115 STAT. 124]]

        decreased by amendment) is amended by adding at the end the 
        following:
                    ``(D) Plan transfers.--
                          ``(i) In general.--A defined contribution plan 
                      (in this subparagraph referred to as the 
                      `transferee plan') shall not be treated as failing 
                      to meet the requirements of this subsection merely 
                      because the transferee plan does not provide some 
                      or all of the forms of distribution previously 
                      available under another defined contribution plan 
                      (in this subparagraph referred to as the 
                      `transferor plan') to the extent that--
                                    ``(I) the forms of distribution 
                                previously available under the 
                                transferor plan applied to the account 
                                of a participant or beneficiary under 
                                the transferor plan that was transferred 
                                from the transferor plan to the 
                                transferee plan pursuant to a direct 
                                transfer rather than pursuant to a 
                                distribution from the transferor plan,
                                    ``(II) the terms of both the 
                                transferor plan and the transferee plan 
                                authorize the transfer described in 
                                subclause (I),
                                    ``(III) the transfer described in 
                                subclause (I) was made pursuant to a 
                                voluntary election by the participant or 
                                beneficiary whose account was 
                                transferred to the transferee plan,
                                    ``(IV) the election described in 
                                subclause (III) was made after the 
                                participant or beneficiary received a 
                                notice describing the consequences of 
                                making the election, and
                                    ``(V) the transferee plan allows the 
                                participant or beneficiary described in 
                                subclause (III) to receive any 
                                distribution to which the participant or 
                                beneficiary is entitled under the 
                                transferee plan in the form of a single 
                                sum distribution.
                          ``(ii) Special rule for mergers, etc.--Clause 
                      (i) shall apply to plan mergers and other 
                      transactions having the effect of a direct 
                      transfer, including consolidations of benefits 
                      attributable to different employers within a 
                      multiple employer plan.
                    ``(E) Elimination of form of distribution.--Except 
                to the extent provided in regulations, a defined 
                contribution plan shall not be treated as failing to 
                meet the requirements of this section merely because of 
                the elimination of a form of distribution previously 
                available thereunder. This subparagraph shall not apply 
                to the elimination of a form of distribution with 
                respect to any participant unless--
                          ``(i) a single sum payment is available to 
                      such participant at the same time or times as the 
                      form of distribution being eliminated, and
                          ``(ii) such single sum payment is based on the 
                      same or greater portion of the participant's 
                      account as the form of distribution being 
                      eliminated.''.
            (2) Amendment of erisa.--Section 204(g) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 1054(g)) is 
        amended by adding at the end the following:

[[Page 115 STAT. 125]]

    ``(4)(A) A defined contribution plan (in this subparagraph referred 
to as the `transferee plan') shall not be treated as failing to meet the 
requirements of this subsection merely because the transferee plan does 
not provide some or all of the forms of distribution previously 
available under another defined contribution plan (in this subparagraph 
referred to as the `transferor plan') to the extent that--
            ``(i) the forms of distribution previously available under 
        the transferor plan applied to the account of a participant or 
        beneficiary under the transferor plan that was transferred from 
        the transferor plan to the transferee plan pursuant to a direct 
        transfer rather than pursuant to a distribution from the 
        transferor plan;
            ``(ii) the terms of both the transferor plan and the 
        transferee plan authorize the transfer described in clause (i);
            ``(iii) the transfer described in clause (i) was made 
        pursuant to a voluntary election by the participant or 
        beneficiary whose account was transferred to the transferee 
        plan;
            ``(iv) the election described in clause (iii) was made after 
        the participant or beneficiary received a notice describing the 
        consequences of making the election; and
            ``(v) the transferee plan allows the participant or 
        beneficiary described in clause (iii) to receive any 
        distribution to which the participant or beneficiary is entitled 
        under the transferee plan in the form of a single sum 
        distribution.

    ``(B) Subparagraph (A) shall apply to plan mergers and other 
transactions having the effect of a direct transfer, including 
consolidations of benefits attributable to different employers within a 
multiple employer plan.
    ``(5) Except to the extent provided in regulations promulgated by 
the Secretary of the Treasury, a defined contribution plan shall not be 
treated as failing to meet the requirements of this subsection merely 
because of the elimination of a form of distribution previously 
available thereunder. This paragraph shall not apply to the elimination 
of a form of distribution with respect to any participant unless--
            ``(A) a single sum payment is available to such participant 
        at the same time or times as the form of distribution being 
        eliminated; and
            ``(B) such single sum payment is based on the same or 
        greater portion of the participant's account as the form of 
        distribution being eliminated.''.
            (3) <<NOTE: Applicability. 26 USC 411 note.>>  Effective 
        date.--The amendments made by this subsection shall apply to 
        years beginning after December 31, 2001.

    (b) Regulations.--
            (1) Amendment of internal revenue code.--Paragraph (6)(B) of 
        section 411(d) (relating to accrued benefit not to be decreased 
        by amendment) is amended by inserting after the second sentence 
        the following: ``The Secretary shall by regulations provide that 
        this subparagraph shall not apply to any plan amendment which 
        reduces or eliminates benefits or subsidies which create 
        significant burdens or complexities for the plan and plan 
        participants, unless such amendment adversely affects the rights 
        of any participant in a more than de minimis manner.''.
            (2) Amendment of erisa.--Section 204(g)(2) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C.

[[Page 115 STAT. 126]]

        1054(g)(2)) is amended by inserting after the second sentence 
        the following: ``The Secretary of the Treasury shall by 
        regulations provide that this paragraph shall not apply to any 
        plan amendment which reduces or eliminates benefits or subsidies 
        which create significant burdens or complexities for the plan 
        and plan participants, unless such amendment adversely affects 
        the rights of any participant in a more than de minimis 
        manner.''.
            (3) Secretary directed.--Not <<NOTE: Deadline. 26 USC 411 
        note.>>  later than December 31, 2003, the Secretary of the 
        Treasury is directed to issue regulations under section 
        411(d)(6) of the Internal Revenue Code of 1986 and section 
        204(g) of the Employee Retirement Income Security Act of 1974, 
        including the regulations required by the amendment made by this 
        subsection. <<NOTE: Effective date. Applicability.>>  Such 
        regulations shall apply to plan years beginning after December 
        31, 2003, or such earlier date as is specified by the Secretary 
        of the Treasury.

SEC. 646. RATIONALIZATION OF RESTRICTIONS ON DISTRIBUTIONS.

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

    (b) <<NOTE: 26 USC 401 note.>>  Effective Date.--The amendments made 
by this section shall apply to distributions after December 31, 2001.

[[Page 115 STAT. 127]]

SEC. 647. PURCHASE OF SERVICE CREDIT IN GOVERNMENTAL DEFINED BENEFIT 
            PLANS.

    (a) Section 403(b) Plans.--Subsection (b) of section 403 <<NOTE: 26 
USC 403.>>  is amended by adding at the end the following new paragraph:
            ``(13) Trustee-to-trustee transfers to purchase permissive 
        service credit.--No amount shall be includible in gross income 
        by reason of a direct trustee-to-trustee transfer to a defined 
        benefit governmental plan (as defined in section 414(d)) if such 
        transfer is--
                    ``(A) for the purchase of permissive service credit 
                (as defined in section 415(n)(3)(A)) under such plan, or
                    ``(B) a repayment to which section 415 does not 
                apply by reason of subsection (k)(3) thereof.''.

    (b) Section 457 Plans.--Subsection (e) of section 457, as amended by 
section 641, is amended by adding after paragraph (16) the following new 
paragraph:
            ``(17) Trustee-to-trustee transfers to purchase permissive 
        service credit.--No amount shall be includible in gross income 
        by reason of a direct trustee-to-trustee transfer to a defined 
        benefit governmental plan (as defined in section 414(d)) if such 
        transfer is--
                    ``(A) for the purchase of permissive service credit 
                (as defined in section 415(n)(3)(A)) under such plan, or
                    ``(B) a repayment to which section 415 does not 
                apply by reason of subsection (k)(3) thereof.''.

    (c) <<NOTE: Applicability. 26 USC 403 note.>>  Effective Date.--The 
amendments made by this section shall apply to trustee-to-trustee 
transfers after December 31, 2001.

SEC. 648. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES OF CASH-OUT 
            AMOUNTS.

    (a) Qualified Plans.--
            (1) Amendment of internal revenue code.--Section 411(a)(11) 
        (relating to restrictions on certain mandatory distributions) is 
        amended by adding at the end the following:
                    ``(D) Special rule for rollover contributions.--A 
                plan shall not fail to meet the requirements of this 
                paragraph if, under the terms of the plan, the present 
                value of the nonforfeitable accrued benefit is 
                determined without regard to that portion of such 
                benefit which is attributable to rollover contributions 
                (and earnings allocable thereto). For purposes of this 
                subparagraph, the term `rollover contributions' means 
                any rollover contribution under sections 402(c), 
                403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 
                457(e)(16).''.
            (2) Amendment of erisa.--Section 203(e) of the Employee 
        Retirement Income Security Act of 1974 (29 U.S.C. 1053(c)) is 
        amended by adding at the end the following:

    ``(4) A plan shall not fail to meet the requirements of this 
subsection if, under the terms of the plan, the present value of the 
nonforfeitable accrued benefit is determined without regard to that 
portion of such benefit which is attributable to rollover contributions 
(and earnings allocable thereto). For purposes of this subparagraph, the 
term `rollover contributions' means any rollover contribution under 
sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) 
of the Internal Revenue Code of 1986.''.

[[Page 115 STAT. 128]]

    (b) Eligible Deferred Compensation Plans.--Clause (i) of section 
457(e)(9)(A) <<NOTE: 26 USC 457.>>  is amended by striking ``such 
amount'' and inserting ``the portion of such amount which is not 
attributable to rollover contributions (as defined in section 
411(a)(11)(D))''.

    (c) <<NOTE: Applicability. 26 USC 411 note.>>  Effective Date.--The 
amendments made by this section shall apply to distributions after 
December 31, 2001.

SEC. 649. MINIMUM DISTRIBUTION AND INCLUSION REQUIREMENTS FOR SECTION 
            457 PLANS.

    (a) Minimum Distribution Requirements.--Paragraph (2) of section 
457(d) (relating to distribution requirements) is amended to read as 
follows:
            ``(2) Minimum distribution requirements.--A plan meets the 
        minimum distribution requirements of this paragraph if such plan 
        meets the requirements of section 401(a)(9).''.

    (b) Inclusion in Gross Income.--
            (1) Year of inclusion.--Subsection (a) of section 457 
        (relating to year of inclusion in gross income) is amended to 
        read as follows:

    ``(a) Year of Inclusion in Gross Income.--
            ``(1) In general.--Any amount of compensation deferred under 
        an eligible deferred compensation plan, and any income 
        attributable to the amounts so deferred, shall be includible in 
        gross income only for the taxable year in which such 
        compensation or other income--
                    ``(A) is paid to the participant or other 
                beneficiary, in the case of a plan of an eligible 
                employer described in subsection (e)(1)(A), and
                    ``(B) is paid or otherwise made available to the 
                participant or other beneficiary, in the case of a plan 
                of an eligible employer described in subsection 
                (e)(1)(B).
            ``(2) Special rule for rollover amounts.--To the extent 
        provided in section 72(t)(9), section 72(t) shall apply to any 
        amount includible in gross income under this subsection.''.
            (2) Conforming amendments.--
                    (A) So much of paragraph (9) of section 457(e) as 
                precedes subparagraph (A) is amended to read as follows:
            ``(9) Benefits of tax exempt organization plans not treated 
        as made available by reason of certain elections, etc.--In the 
        case of an eligible deferred compensation plan of an employer 
        described in subsection (e)(1)(B)--''.
                    (B) Section 457(d) is amended by adding at the end 
                the following new paragraph:
            ``(3) Special rule for government plan.--An eligible 
        deferred compensation plan of an employer described in 
        subsection (e)(1)(A) shall not be treated as failing to meet the 
        requirements of this subsection solely by reason of making a 
        distribution described in subsection (e)(9)(A).''.

    (c) <<NOTE: Applicability. 26 USC 457 note.>>  Effective Date.--The 
amendments made by subsections (a) and (b) shall apply to distributions 
after December 31, 2001.

[[Page 115 STAT. 129]]

       Subtitle E--Strengthening Pension Security and Enforcement

                       PART I--GENERAL PROVISIONS

SEC. 651. REPEAL OF 160 PERCENT OF CURRENT LIABILITY FUNDING LIMIT.

    (a) Amendments to Internal Revenue Code.--Section 
412(c)(7) <<NOTE: 26 USC 412.>>  (relating to full-funding limitation) 
is amended--
            (1) by striking ``the applicable percentage'' in 
        subparagraph (A)(i)(I) and inserting ``in the case of plan years 
        beginning before January 1, 2004, the applicable percentage''; 
        and
            (2) by amending subparagraph (F) to read as follows:
                    ``(F) Applicable percentage.--For purposes of 
                subparagraph (A)(i)(I), the applicable percentage shall 
                be determined in accordance with the following table:

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

    (b) Amendment of ERISA.--Section 302(c)(7) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7)) is 
amended--
            (1) by striking ``the applicable percentage'' in 
        subparagraph (A)(i)(I) and inserting ``in the case of plan years 
        beginning before January 1, 2004, the applicable percentage'', 
        and
            (2) by amending subparagraph (F) to read as follows:
                    ``(F) Applicable percentage.--For purposes of 
                subparagraph (A)(i)(I), the applicable percentage shall 
                be determined in accordance with the following table:

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

    (c) <<NOTE: Applicability. 26 USC 412 note.>>  Effective Date.--The 
amendments made by this section shall apply to plan years beginning 
after December 31, 2001.

SEC. 652. MAXIMUM CONTRIBUTION DEDUCTION RULES MODIFIED AND APPLIED TO 
            ALL DEFINED BENEFIT PLANS.

    (a) In General.--Subparagraph (D) of section 404(a)(1) (relating to 
special rule in case of certain plans) is amended to read as follows:
                    ``(D) Special rule in case of certain plans.--
                          ``(i) In general.--In the case of any defined 
                      benefit plan, except as provided in regulations, 
                      the maximum amount deductible under the 
                      limitations of this paragraph shall not be less 
                      than the unfunded current liability determined 
                      under section 412(l).
                          ``(ii) Plans with 100 or less participants.--
                      For purposes of this subparagraph, in the case of 
                      a plan which has 100 or less participants for the 
                      plan year, unfunded current liability shall not 
                      include the liability attributable to benefit 
                      increases for highly compensated employees (as 
                      defined in section 414(q)) resulting from a plan 
                      amendment which is made or

[[Page 115 STAT. 130]]

                      becomes effective, whichever is later, within the 
                      last 2 years.
                          ``(iii) Rule for determining number of 
                      participants.--For purposes of determining the 
                      number of plan participants, all defined benefit 
                      plans maintained by the same employer (or any 
                      member of such employer's controlled group (within 
                      the meaning of section 412(l)(8)(C))) shall be 
                      treated as one plan, but only employees of such 
                      member or employer shall be taken into account.
                          ``(iv) Plans maintained by professional 
                      service employers.--In the case of a plan which, 
                      subject to section 4041 of the Employee Retirement 
                      Income Security Act of 1974, terminates during the 
                      plan year, clause (i) shall be applied by 
                      substituting for unfunded current liability the 
                      amount required to make the plan sufficient for 
                      benefit liabilities (within the meaning of section 
                      4041(d) of such Act).''.

    (b) Conforming Amendment.--Paragraph (6) of section 
4972(c), <<NOTE: 26 USC 4972.>>  as amended by sections 616 and 637, is 
amended--
            (1) by striking subparagraph (A) and redesignating 
        subparagraphs (B) and (C) as subparagraphs (A) and (B), 
        respectively,
            (2) by striking the first sentence following subparagraph 
        (B) (as so redesignated),
            (3) by striking ``subparagraph (B)'' in the next to last 
        sentence and inserting ``subparagraph (A)'', and
            (4) by striking ``Subparagraph (C)'' in the last sentence 
        and inserting ``Subparagraph (B)''.

    (c) <<NOTE: Applicability. 26 USC 404 note.>>  Effective Date.--The 
amendments made by this section shall apply to plan years beginning 
after December 31, 2001.

SEC. 653. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING.

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

    (b) <<NOTE: Applicability. 26 USC 4972 note.>>  Effective Date.--The 
amendment made by this section shall apply to years beginning after 
December 31, 2001.

SEC. 654. TREATMENT OF MULTIEMPLOYER PLANS UNDER SECTION 415.

    (a) Compensation Limit.--
            (1) In general.--Paragraph (11) of section 415(b) (relating 
        to limitation for defined benefit plans) is amended to read as 
        follows:

[[Page 115 STAT. 131]]

            ``(11) Special limitation rule for governmental and 
        multiemployer plans.--In the case of a governmental plan (as 
        defined in section 414(d)) or a multiemployer plan (as defined 
        in section 414(f )), subparagraph (B) of paragraph (1) shall not 
        apply.''.
            (2) Conforming amendment.--Section 415(b)(7) <<NOTE: 26 USC 
        415.>>  (relating to benefits under certain collectively 
        bargained plans) is amended by inserting ``(other than a 
        multiemployer plan)'' after ``defined benefit plan'' in the 
        matter preceding subparagraph (A).

    (b) Combining and Aggregation of Plans.--
            (1) Combining of plans.--Subsection (f ) of section 415 
        (relating to combining of plans) is amended by adding at the end 
        the following:
            ``(3) Exception for multiemployer plans.--Notwithstanding 
        paragraph (1) and subsection (g), a multiemployer plan (as 
        defined in section 414(f )) shall not be combined or 
        aggregated--
                    ``(A) with any other plan which is not a 
                multiemployer plan for purposes of applying subsection 
                (b)(1)(B) to such other plan, or
                    ``(B) with any other multiemployer plan for purposes 
                of applying the limitations established in this 
                section.''.
            (2) Conforming amendment for aggregation of plans.--
        Subsection (g) of section 415 (relating to aggregation of plans) 
        is amended by striking ``The Secretary'' and inserting ``Except 
        as provided in subsection (f )(3), the Secretary''.

    (c) <<NOTE: Applicability. 26 USC 415 note.>>  Effective Date.--The 
amendments made by this section shall apply to years beginning after 
December 31, 2001.

SEC. 655. PROTECTION OF INVESTMENT OF EMPLOYEE CONTRIBUTIONS TO 401(k) 
            PLANS.

    (a) In General.--Section 1524(b) of the Taxpayer Relief Act of 1997 
is amended to read as follows: <<NOTE: 29 USC 1107 note.>> 

    ``(b) Effective Date.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to elective 
        deferrals for plan years beginning after December 31, 1998.
            ``(2) Nonapplication to previously acquired property.--The 
        amendments made by this section shall not apply to any elective 
        deferral which is invested in assets consisting of qualifying 
        employer securities, qualifying employer real property, or both, 
        if such assets were acquired before January 1, 1999.''.

    (b) <<NOTE: 29 USC 1107 note.>>  Effective Date.--The amendment made 
by this section shall apply as if included in the provision of the 
Taxpayer Relief Act of 1997 to which it relates.

SEC. 656. PROHIBITED ALLOCATIONS OF STOCK IN S CORPORATION ESOP.

    (a) In General.--Section 409 (relating to qualifications for tax 
credit employee stock ownership plans) is amended by redesignating 
subsection (p) as subsection (q) and by inserting after subsection (o) 
the following new subsection:
    ``(p) Prohibited Allocations of Securities in an S Corporation.--

[[Page 115 STAT. 132]]

            ``(1) In general.--An employee stock ownership plan holding 
        employer securities consisting of stock in an S corporation 
        shall provide that no portion of the assets of the plan 
        attributable to (or allocable in lieu of ) such employer 
        securities may, during a nonallocation year, accrue (or be 
        allocated directly or indirectly under any plan of the employer 
        meeting the requirements of section 401(a)) for the benefit of 
        any disqualified person.
            ``(2) Failure to meet requirements.--
                    ``(A) In general.--If a plan fails to meet the 
                requirements of paragraph (1), the plan shall be treated 
                as having distributed to any disqualified person the 
                amount allocated to the account of such person in 
                violation of paragraph (1) at the time of such 
                allocation.
                    ``(B) Cross reference.--
                  ``For excise tax relating to violations of paragraph 
                (1) and ownership of synthetic equity, see section 
                4979A.

            ``(3) Nonallocation year.--For purposes of this subsection--
                    ``(A) In general.--The term `nonallocation year' 
                means any plan year of an employee stock ownership plan 
                if, at any time during such plan year--
                          ``(i) such plan holds employer securities 
                      consisting of stock in an S corporation, and
                          ``(ii) disqualified persons own at least 50 
                      percent of the number of shares of stock in the S 
                      corporation.
                    ``(B) Attribution rules.--For purposes of 
                subparagraph (A)--
                          ``(i) <<NOTE: Applicability.>>  In general.--
                      The rules of section 318(a) shall apply for 
                      purposes of determining ownership, except that--
                                    ``(I) in applying paragraph (1) 
                                thereof, the members of an individual's 
                                family shall include members of the 
                                family described in paragraph (4)(D), 
                                and
                                    ``(II) paragraph (4) thereof shall 
                                not apply.
                          ``(ii) Deemed-owned shares.--Notwithstanding 
                      the employee trust exception in section 
                      318(a)(2)(B)(i), an individual shall be treated as 
                      owning deemed-owned shares of the individual.
                Solely for purposes of applying paragraph (5), this 
                subparagraph shall be applied after the attribution 
                rules of paragraph (5) have been applied.
            ``(4) Disqualified person.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `disqualified person' 
                means any person if--
                          ``(i) the aggregate number of deemed-owned 
                      shares of such person and the members of such 
                      person's family is at least 20 percent of the 
                      number of deemed-owned shares of stock in the S 
                      corporation, or
                          ``(ii) in the case of a person not described 
                      in clause (i), the number of deemed-owned shares 
                      of such person is at least 10 percent of the 
                      number of deemed-owned shares of stock in such 
                      corporation.
                    ``(B) Treatment of family members.--In the case of a 
                disqualified person described in subparagraph (A)(i), 
                any

[[Page 115 STAT. 133]]

                member of such person's family with deemed-owned shares 
                shall be treated as a disqualified person if not 
                otherwise treated as a disqualified person under 
                subparagraph (A).
                    ``(C) Deemed-owned shares.--
                          ``(i) In general.--The term `deemed-owned 
                      shares' means, with respect to any person--
                                    ``(I) the stock in the S corporation 
                                constituting employer securities of an 
                                employee stock ownership plan which is 
                                allocated to such person under the plan, 
                                and
                                    ``(II) such person's share of the 
                                stock in such corporation which is held 
                                by such plan but which is not allocated 
                                under the plan to participants.
                          ``(ii) Person's share of unallocated stock.--
                      For purposes of clause (i)(II), a person's share 
                      of unallocated S corporation stock held by such 
                      plan is the amount of the unallocated stock which 
                      would be allocated to such person if the 
                      unallocated stock were allocated to all 
                      participants in the same proportions as the most 
                      recent stock allocation under the plan.
                    ``(D) Member of family.--For purposes of this 
                paragraph, the term `member of the family' means, with 
                respect to any individual--
                          ``(i) the spouse of the individual,
                          ``(ii) an ancestor or lineal descendant of the 
                      individual or the individual's spouse,
                          ``(iii) a brother or sister of the individual 
                      or the individual's spouse and any lineal 
                      descendant of the brother or sister, and
                          ``(iv) the spouse of any individual described 
                      in clause (ii) or (iii).
                A spouse of an individual who is legally separated from 
                such individual under a decree of divorce or separate 
                maintenance shall not be treated as such individual's 
                spouse for purposes of this subparagraph.
            ``(5) Treatment of synthetic equity.--For purposes of 
        paragraphs (3) and (4), in the case of a person who owns 
        synthetic equity in the S corporation, except to the extent 
        provided in regulations, the shares of stock in such corporation 
        on which such synthetic equity is based shall be treated as 
        outstanding stock in such corporation and deemed-owned shares of 
        such person if such treatment of synthetic equity of 1 or more 
        such persons results in--
                    ``(A) the treatment of any person as a disqualified 
                person, or
                    ``(B) the treatment of any year as a nonallocation 
                year.
        For purposes of this paragraph, synthetic equity shall be 
        treated as owned by a person in the same manner as stock is 
        treated as owned by a person under the rules of paragraphs (2) 
        and (3) of section 318(a). If, without regard to this paragraph, 
        a person is treated as a disqualified person or a year is 
        treated as a nonallocation year, this paragraph shall not be 
        construed to result in the person or year not being so treated.
            ``(6) Definitions.--For purposes of this subsection--
                    ``(A) Employee stock ownership plan.--The term 
                `employee stock ownership plan' has the meaning given 
                such term by section 4975(e)(7).

[[Page 115 STAT. 134]]

                    ``(B) Employer securities.--The term `employer 
                security' has the meaning given such term by section 
                409(l).
                    ``(C) Synthetic equity.--The term `synthetic equity' 
                means any stock option, warrant, restricted stock, 
                deferred issuance stock right, or similar interest or 
                right that gives the holder the right to acquire or 
                receive stock of the S corporation in the future. Except 
                to the extent provided in regulations, synthetic equity 
                also includes a stock appreciation right, phantom stock 
                unit, or similar right to a future cash payment based on 
                the value of such stock or appreciation in such value.
            ``(7) Regulations and guidance.--
                    ``(A) In general.--The Secretary shall prescribe 
                such regulations as may be necessary to carry out the 
                purposes of this subsection.
                    ``(B) Avoidance or evasion.--The Secretary may, by 
                regulation or other guidance of general applicability, 
                provide that a nonallocation year occurs in any case in 
                which the principal purpose of the ownership structure 
                of an S corporation constitutes an avoidance or evasion 
                of this subsection.''.

    (b) Coordination With Section 4975(e)(7).--The last sentence of 
section 4975(e)(7) <<NOTE: 26 USC 4975.>>  (defining employee stock 
ownership plan) is amended by inserting ``, section 409(p),'' after 
``409(n)''.

    (c) Excise Tax.--
            (1) Application of tax.--Subsection (a) of section 4979A 
        (relating to tax on certain prohibited allocations of employer 
        securities) is amended--
                    (A) by striking ``or'' at the end of paragraph (1), 
                and
                    (B) by striking all that follows paragraph (2) and 
                inserting the following:
            ``(3) there is any allocation of employer securities which 
        violates the provisions of section 409(p), or a nonallocation 
        year described in subsection (e)(2)(C) with respect to an 
        employee stock ownership plan, or
            ``(4) any synthetic equity is owned by a disqualified person 
        in any nonallocation year,

there is hereby imposed a tax on such allocation or ownership equal to 
50 percent of the amount involved.''.
            (2) Liability.--Section 4979A(c) (defining liability for 
        tax) is amended to read as follows:

    ``(c) Liability for Tax.--The tax imposed by this section shall be 
paid--
            ``(1) in the case of an allocation referred to in paragraph 
        (1) or (2) of subsection (a), by--
                    ``(A) the employer sponsoring such plan, or
                    ``(B) 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), 
        and
            ``(2) in the case of an allocation or ownership referred to 
        in paragraph (3) or (4) of subsection (a), by the S corporation 
        the stock in which was so allocated or owned.''.
            (3) Definitions.--Section 4979A(e) (relating to definitions) 
        is amended to read as follows:

    ``(e) Definitions and Special Rules.--For purposes of this section--

[[Page 115 STAT. 135]]

            ``(1) Definitions.--Except as provided in paragraph (2), 
        terms used in this section have the same respective meanings as 
        when used in sections 409 and 4978.
            ``(2) Special rules relating to tax imposed by reason of 
        paragraph (3) or (4) of subsection (a).--
                    ``(A) Prohibited allocations.--The amount involved 
                with respect to any tax imposed by reason of subsection 
                (a)(3) is the amount allocated to the account of any 
                person in violation of section 409(p)(1).
                    ``(B) Synthetic equity.--The amount involved with 
                respect to any tax imposed by reason of subsection 
                (a)(4) is the value of the shares on which the synthetic 
                equity is based.
                    ``(C) Special rule during first nonallocation 
                year.--For purposes of subparagraph (A), the amount 
                involved for the first nonallocation year of any 
                employee stock ownership plan shall be determined by 
                taking into account the total value of all the deemed-
                owned shares of all disqualified persons with respect to 
                such plan.
                    ``(D) Statute of limitations.--The statutory period 
                for the assessment of any tax imposed by this section by 
                reason of paragraph (3) or (4) of subsection (a) shall 
                not expire before the date which is 3 years from the 
                later of--
                          ``(i) the allocation or ownership referred to 
                      in such paragraph giving rise to such tax, or
                          ``(ii) the date on which the Secretary is 
                      notified of such allocation or ownership.''.

    (d) <<NOTE: Applicability. 26 USC 409 note.>>  Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to plan years beginning after December 31, 2004.
            (2) Exception for certain plans.--In the case of any--
                    (A) employee stock ownership plan established after 
                March 14, 2001, or
                    (B) employee stock ownership plan established on or 
                before such date if employer securities held by the plan 
                consist of stock in a corporation with respect to which 
                an election under section 1362(a) of the Internal 
                Revenue Code of 1986 is not in effect on such date,
        the amendments made by this section shall apply to plan years 
        ending after March 14, 2001.

SEC. 657. AUTOMATIC ROLLOVERS OF CERTAIN MANDATORY DISTRIBUTIONS.

    (a) Direct Transfers of Mandatory Distributions.--
            (1) In general.--Section 401(a)(31) <<NOTE: 26 USC 401.>>  
        (relating to optional direct transfer of eligible rollover 
        distributions), as amended by section 643, is amended by 
        redesignating subparagraphs (B), (C), and (D) as subparagraphs 
        (C), (D), and (E), respectively, and by inserting after 
        subparagraph (A) the following new subparagraph:
                    ``(B) Certain mandatory distributions.--
                          ``(i) In general.--In case of a trust which is 
                      part of an eligible plan, such trust shall not 
                      constitute a qualified trust under this section 
                      unless the plan of which such trust is a part 
                      provides that if--

[[Page 115 STAT. 136]]

                                    ``(I) a distribution described in 
                                clause (ii) in excess of $1,000 is made, 
                                and
                                    ``(II) the distributee does not make 
                                an election under subparagraph (A) and 
                                does not elect to receive the 
                                distribution directly,
                      the plan administrator shall make such transfer to 
                      an individual retirement plan of a designated 
                      trustee or issuer and shall notify the distributee 
                      in writing (either separately or as part of the 
                      notice under section 402(f )) that the 
                      distribution may be transferred to another 
                      individual retirement plan.
                          ``(ii) Eligible plan.--For purposes of clause 
                      (i), the term `eligible plan' means a plan which 
                      provides that any nonforfeitable accrued benefit 
                      for which the present value (as determined under 
                      section 411(a)(11)) does not exceed $5,000 shall 
                      be immediately distributed to the participant.''.
            (2) Conforming amendments.--
                    (A) The heading of section 401(a)(31) is amended by 
                striking ``Optional direct'' and inserting ``Direct''.
                    (B) Section 401(a)(31)(C), as redesignated by 
                paragraph (1), is amended by striking ``Subparagraph 
                (A)'' and inserting ``Subparagraphs (A) and (B)''.

    (b) Notice Requirement.--Subparagraph (A) of section 402(f )(1) is 
amended by inserting before the comma at the end the following: ``and 
that the automatic distribution by direct transfer applies to certain 
distributions in accordance with section 401(a)(31)(B)''.
    (c) Fiduciary Rules.--
            (1) In general.--Section 404(c) of the Employee Retirement 
        Income Security Act of 1974 (29 U.S.C. 1104(c)) is amended by 
        adding at the end the following new paragraph:
            ``(3) In the case of a pension plan which makes a transfer 
        to an individual retirement account or annuity of a designated 
        trustee or issuer under section 401(a)(31)(B) of the Internal 
        Revenue Code of 1986, the participant or beneficiary shall, for 
        purposes of paragraph (1), be treated as exercising control over 
        the assets in the account or annuity upon--
                    ``(A) the earlier of the earlier of--
                          ``(i) a rollover of all or a portion of the 
                      amount to another individual retirement account or 
                      annuity; or
                          ``(ii) one year after the transfer is made; or
                    ``(B) if the transfer is made in a manner consistent 
                with guidance provided by the Secretary.''.
            (2) <<NOTE: 26 USC 401 note.>>  Regulations.--
                    (A) Automatic <<NOTE: Deadline.>>  rollover safe 
                harbor.--Not later than 3 years after the date of 
                enactment of this Act, the Secretary of Labor shall 
                prescribe regulations providing for safe harbors under 
                which the designation of an institution and investment 
                of funds in accordance with section 401(a)(31)(B) of the 
                Internal Revenue Code of 1986 is deemed to satisfy the 
                fiduciary requirements of section 404(a) of the Employee 
                Retirement Income Security Act of 1974 (29 U.S.C. 
                1104(a)).
                    (B) Use of low-cost individual retirement plans.--
                The Secretary of the Treasury and the Secretary of Labor

[[Page 115 STAT. 137]]

                may provide, and shall give consideration to providing, 
                special relief with respect to the use of low-cost 
                individual retirement plans for purposes of transfers 
                under section 401(a)(31)(B) of the Internal Revenue Code 
                of 1986 and for other uses that promote the preservation 
                of assets for retirement income purposes.

    (d) <<NOTE: Applicability. 26 USC 401 note.>>  Effective Date.--The 
amendments made by this section shall apply to distributions made after 
final regulations implementing subsection (c)(2)(A) are prescribed.

SEC. <<NOTE: 26 USC 404 note.>>  658. CLARIFICATION OF TREATMENT OF 
            CONTRIBUTIONS TO MULTIEMPLOYER PLAN.

    (a) Not Considered Method of Accounting.--For purposes of section 
446 of the Internal Revenue Code of 1986, a determination under section 
404(a)(6) of such Code regarding the taxable year with respect to which 
a contribution to a multiemployer pension plan is deemed made shall not 
be treated as a method of accounting of the taxpayer. No deduction shall 
be allowed for any taxable year for any contribution to a multiemployer 
pension plan with respect to which a deduction was previously allowed.
    (b) Regulations.--The Secretary of the Treasury shall promulgate 
such regulations as necessary to clarify that a taxpayer shall not be 
allowed an aggregate amount of deductions for contributions to a 
multiemployer pension plan which exceeds the amount of such 
contributions made or deemed made under section 404(a)(6) of the 
Internal Revenue Code of 1986 to such plan.
    (c) Effective Date.--Subsection (a), and any regulations promulgated 
under subsection (b), shall be effective for years ending after the date 
of the enactment of this Act.

 PART II--TREATMENT OF PLAN AMENDMENTS REDUCING FUTURE BENEFIT ACCRUALS

SEC. 659. EXCISE TAX ON FAILURE TO PROVIDE NOTICE BY DEFINED BENEFIT 
            PLANS SIGNIFICANTLY REDUCING FUTURE BENEFIT ACCRUALS.

    (a) Amendment of Internal Revenue Code.--
            (1) In general.--Chapter 43 (relating to qualified pension, 
        etc., plans) is amended by adding at the end the following new 
        section:

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

    ``(a) Imposition of Tax.--There is hereby imposed a tax on the 
failure of any applicable pension plan to meet the requirements of 
subsection (e) with respect to any applicable individual.
    ``(b) Amount of Tax.--
            ``(1) In general.--The amount of the tax imposed by 
        subsection (a) on any failure with respect to any applicable 
        individual shall be $100 for each day in the noncompliance 
        period with respect to such failure.
            ``(2) Noncompliance period.--For purposes of this section, 
        the term `noncompliance period' means, with respect to any 
        failure, the period beginning on the date the failure first 
        occurs and ending on the date the notice to which the failure 
        relates is provided or the failure is otherwise corrected.

    ``(c) Limitations on Amount of Tax.--

[[Page 115 STAT. 138]]

            ``(1) Tax not to apply where failure not discovered and 
        reasonable diligence exercised.--No tax shall be imposed by 
        subsection (a) on any failure during any period for which it is 
        established to the satisfaction of the Secretary that any person 
        subject to liability for the tax under subsection (d) did not 
        know that the failure existed and exercised reasonable diligence 
        to meet the requirements of subsection (e).
            ``(2) Tax not to apply to failures corrected within 30 
        days.--No tax shall be imposed by subsection (a) on any failure 
        if--
                    ``(A) any person subject to liability for the tax 
                under subsection (d) exercised reasonable diligence to 
                meet the requirements of subsection (e), and
                    ``(B) such person provides the notice described in 
                subsection (e) during the 30-day period beginning on the 
                first date such person knew, or exercising reasonable 
                diligence would have known, that such failure existed.
            ``(3) Overall limitation for unintentional failures.--
                    ``(A) In general.--If the person subject to 
                liability for tax under subsection (d) exercised 
                reasonable diligence to meet the requirements of 
                subsection (e), the tax imposed by subsection (a) for 
                failures during the taxable year of the employer (or, in 
                the case of a multiemployer plan, the taxable year of 
                the trust forming part of the plan) shall not exceed 
                $500,000. For purposes of the preceding sentence, all 
                multiemployer plans of which the same trust forms a part 
                shall be treated as 1 plan.
                    ``(B) Taxable years in the case of certain 
                controlled groups.--For purposes of this paragraph, if 
                all persons who are treated as a single employer for 
                purposes of this section do not have the same taxable 
                year, the taxable years taken into account shall be 
                determined under principles similar to the principles of 
                section 1561.
            ``(4) Waiver by secretary.--In the case of a failure which 
        is due to reasonable cause and not to willful neglect, the 
        Secretary may waive part or all of the tax imposed by subsection 
        (a) to the extent that the payment of such tax would be 
        excessive or otherwise inequitable relative to the failure 
        involved.

    ``(d) Liability for Tax.--The following shall be liable for the tax 
imposed by subsection (a):
            ``(1) In the case of a plan other than a multiemployer plan, 
        the employer.
            ``(2) In the case of a multiemployer plan, the plan.

    ``(e) Notice Requirements for Plans Significantly Reducing Benefit 
Accruals.--
            ``(1) In general.--If an applicable pension plan is amended 
        to provide for a significant reduction in the rate of future 
        benefit accrual, the plan administrator shall provide written 
        notice to each applicable individual (and to each employee 
        organization representing applicable individuals).
            ``(2) Notice.--The notice required by paragraph (1) shall be 
        written in a manner calculated to be understood by the average 
        plan participant and shall provide sufficient information (as 
        determined in accordance with regulations prescribed by the 
        Secretary) to allow applicable individuals to understand the 
        effect of the plan amendment. The Secretary may provide

[[Page 115 STAT. 139]]

        a simplified form of notice for, or exempt from any notice 
        requirement, a plan--
                    ``(A) which has fewer than 100 participants who have 
                accrued a benefit under the plan, or
                    ``(B) which offers participants the option to choose 
                between the new benefit formula and the old benefit 
                formula.
            ``(3) Timing of notice.--Except as provided in regulations, 
        the notice required by paragraph (1) shall be provided within a 
        reasonable time before the effective date of the plan amendment.
            ``(4) Designees.--Any notice under paragraph (1) may be 
        provided to a person designated, in writing, by the person to 
        which it would otherwise be provided.
            ``(5) Notice before adoption of amendment.--A plan shall not 
        be treated as failing to meet the requirements of paragraph (1) 
        merely because notice is provided before the adoption of the 
        plan amendment if no material modification of the amendment 
        occurs before the amendment is adopted.

    ``(f ) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Applicable individual.--The term `applicable 
        individual' means, with respect to any plan amendment--
                    ``(A) each participant in the plan, and
                    ``(B) any beneficiary who is an alternate payee 
                (within the meaning of section 414(p)(8)) under an 
                applicable qualified domestic relations order (within 
                the meaning of section 414(p)(1)(A)),
        whose rate of future benefit accrual under the plan may 
        reasonably be expected to be significantly reduced by such plan 
        amendment.
            ``(2) Applicable pension plan.--The term `applicable pension 
        plan' means--
                    ``(A) any defined benefit plan, or
                    ``(B) an individual account plan which is subject to 
                the funding standards of section 412.
        Such term shall not include a governmental plan (within the 
        meaning of section 414(d)) or a church plan (within the meaning 
        of section 414(e)) with respect to which the election provided 
        by section 410(d) has not been made.
            ``(3) Early retirement.--A plan amendment which eliminates 
        or significantly reduces any early retirement benefit or 
        retirement-type subsidy (within the meaning of section 
        411(d)(6)(B)(i)) shall be treated as having the effect of 
        significantly reducing the rate of future benefit accrual.

    ``(g) New Technologies.--The Secretary may by regulations allow any 
notice under subsection (e) to be provided by using new technologies.''.
            (2) Clerical amendment.--The table of sections for chapter 
        43 is amended by adding at the end the following new item:
                 ``Sec. 4980F. Failure of applicable plans reducing 
                                benefit accruals to satisfy notice 
                                requirements.''.

    (b) Amendment of ERISA.--Subsection (h) of section 204 of the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1054) is 
amended to read as follows:

[[Page 115 STAT. 140]]

    ``(h)(1) An applicable pension plan may not be amended so as to 
provide for a significant reduction in the rate of future benefit 
accrual unless the plan administrator provides the notice described in 
paragraph (2) to each applicable individual (and to each employee 
organization representing applicable individuals).
    ``(2) The notice required by paragraph (1) shall be written in a 
manner calculated to be understood by the average plan participant and 
shall provide sufficient information (as determined in accordance with 
regulations prescribed by the Secretary of the Treasury) to allow 
applicable individuals to understand the effect of the plan amendment. 
The Secretary of the Treasury may provide a simplified form of notice 
for, or exempt from any notice requirement, a plan--
            ``(A) which has fewer than 100 participants who have accrued 
        a benefit under the plan, or
            ``(B) which offers participants the option to choose between 
        the new benefit formula and the old benefit formula.

    ``(3) Except as provided in regulations prescribed by the Secretary 
of the Treasury, the notice required by paragraph (1) shall be provided 
within a reasonable time before the effective date of the plan 
amendment.
    ``(4) Any notice under paragraph (1) may be provided to a person 
designated, in writing, by the person to which it would otherwise be 
provided.
    ``(5) A plan shall not be treated as failing to meet the 
requirements of paragraph (1) merely because notice is provided before 
the adoption of the plan amendment if no material modification of the 
amendment occurs before the amendment is adopted.
    ``(6)(A) In the case of any egregious failure to meet any 
requirement of this subsection with respect to any plan amendment, the 
provisions of the applicable pension plan shall be applied as if such 
plan amendment entitled all applicable individuals to the greater of--
            ``(i) the benefits to which they would have been entitled 
        without regard to such amendment, or
            ``(ii) the benefits under the plan with regard to such 
        amendment.

    ``(B) For purposes of subparagraph (A), there is an egregious 
failure to meet the requirements of this subsection if such failure is 
within the control of the plan sponsor and is--
            ``(i) an intentional failure (including any failure to 
        promptly provide the required notice or information after the 
        plan administrator discovers an unintentional failure to meet 
        the requirements of this subsection),
            ``(ii) a failure to provide most of the individuals with 
        most of the information they are entitled to receive under this 
        subsection, or
            ``(iii) a failure which is determined to be egregious under 
        regulations prescribed by the Secretary of the Treasury.

    ``(7) The Secretary of the Treasury may by regulations allow any 
notice under this subsection to be provided by using new technologies.
    ``(8) For purposes of this subsection--
            ``(A) The term `applicable individual' means, with respect 
        to any plan amendment--
                    ``(i) each participant in the plan; and

[[Page 115 STAT. 141]]

                    ``(ii) any beneficiary who is an alternate payee 
                (within the meaning of section 206(d)(3)(K)) under an 
                applicable qualified domestic relations order (within 
                the meaning of section 206(d)(3)(B)(i)),
        whose rate of future benefit accrual under the plan may 
        reasonably be expected to be significantly reduced by such plan 
        amendment.
            ``(B) The term `applicable pension plan' means--
                    ``(i) any defined benefit plan; or
                    ``(ii) an individual account plan which is subject 
                to the funding standards of section 412 of the Internal 
                Revenue Code of 1986.

    ``(9) For purposes of this subsection, a plan amendment which 
eliminates or significantly reduces any early retirement benefit or 
retirement-type subsidy (within the meaning of subsection (g)(2)(A)) 
shall be treated as having the effect of significantly reducing the rate 
of future benefit accrual.''.
    (c) <<NOTE: 26 USC 4980F note. Applicability.>>  Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to plan amendments taking effect on or after the date of 
        the enactment of this Act.
            (2) Transition.--Until such time as the Secretary of the 
        Treasury issues regulations under sections 4980F(e)(2) and (3) 
        of the Internal Revenue Code of 1986, and section 204(h) of the 
        Employee Retirement Income Security Act of 1974, as added by the 
        amendments made by this section, a plan shall be treated as 
        meeting the requirements of such sections if it makes a good 
        faith effort to comply with such requirements.
            (3) Special notice rule.--
                    (A) In general.--The period for providing any notice 
                required by the amendments made by this section shall 
                not end before the date which is 3 months after the date 
                of the enactment of this Act.
                    (B) Reasonable notice.--The amendments made by this 
                section shall not apply to any plan amendment taking 
                effect on or after the date of the enactment of this Act 
                if, before April 25, 2001, notice was provided to 
                participants and beneficiaries adversely affected by the 
                plan amendment (or their representatives) which was 
                reasonably expected to notify them of the nature and 
                effective date of the plan amendment.

                 Subtitle F--Reducing Regulatory Burdens

SEC. 661. MODIFICATION OF TIMING OF PLAN VALUATIONS.

    (a) In General.--Paragraph (9) of section 412(c) <<NOTE: 26 USC 
412.>>  (relating to annual valuation) is amended to read as follows:
            ``(9) Annual valuation.--
                    ``(A) In general.--For purposes of this section, a 
                determination of experience gains and losses and a 
                valuation of the plan's liability shall be made not less 
                frequently than once every year, except that such 
                determination shall be made more frequently to the 
                extent required in particular cases under regulations 
                prescribed by the Secretary.
                    ``(B) Valuation date.--

[[Page 115 STAT. 142]]

                          ``(i) Current year.--Except as provided in 
                      clause (ii), the valuation referred to in 
                      subparagraph (A) shall be made as of a date within 
                      the plan year to which the valuation refers or 
                      within one month prior to the beginning of such 
                      year.
                          ``(ii) Use of prior year valuation.--The 
                      valuation referred to in subparagraph (A) may be 
                      made as of a date within the plan year prior to 
                      the year to which the valuation refers if, as of 
                      such date, the value of the assets of the plan are 
                      not less than 125 percent of the plan's current 
                      liability (as defined in paragraph (7)(B)).
                          ``(iii) Adjustments.--Information under clause 
                      (ii) shall, in accordance with regulations, be 
                      actuarially adjusted to reflect significant 
                      differences in participants.''.

    (b) Amendment of ERISA.--Paragraph (9) of section 302(c) of the 
Employee Retirement Income Security Act of 1974 <<NOTE: 29 USC 1082.>>  
(29 U.S.C. 1053(c)) is amended--
            (1) by inserting ``(A)'' after ``(9)'', and
            (2) by adding at the end the following:

    ``(B)(i) Except as provided in clause (ii), the valuation referred 
to in subparagraph (A) shall be made as of a date within the plan year 
to which the valuation refers or within one month prior to the beginning 
of such year.
    ``(ii) The valuation referred to in subparagraph (A) may be made as 
of a date within the plan year prior to the year to which the valuation 
refers if, as of such date, the value of the assets of the plan are not 
less than 125 percent of the plan's current liability (as defined in 
paragraph (7)(B)).
    ``(iii) Information under clause (ii) shall, in accordance with 
regulations, be actuarially adjusted to reflect significant differences 
in participants.''.
    (c) <<NOTE: Applicability. 26 USC 412 note.>>  Effective Date.--The 
amendments made by this section shall apply to plan years beginning 
after December 31, 2001.

SEC. 662. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF DIVIDEND 
            DEDUCTION.

    (a) In General.--Section 404(k)(2)(A) (defining applicable 
dividends) is amended by striking ``or'' at the end of clause (ii), by 
redesignating clause (iii) as clause (iv), and by inserting after clause 
(ii) the following new clause:
                          ``(iii) is, at the election of such 
                      participants or their beneficiaries--
                                    ``(I) payable as provided in clause 
                                (i) or (ii), or
                                    ``(II) paid to the plan and 
                                reinvested in qualifying employer 
                                securities, or''.

    (b) Standards for Disallowance.--Section 404(k)(5)(A) (relating to 
disallowance of deduction) is amended by inserting ``avoidance or'' 
before ``evasion''.
    (c) <<NOTE: Applicability. 26 USC 404 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2001.

SEC. 663. REPEAL OF TRANSITION RULE RELATING TO CERTAIN HIGHLY 
            COMPENSATED EMPLOYEES.

    (a) In General.--Paragraph (4) of section 1114(c) of the Tax Reform 
Act of <<NOTE: 26 USC 414 note.>>  1986 is hereby repealed.

[[Page 115 STAT. 143]]

    (b) <<NOTE: Applicability. 26 USC 414 note.>>  Effective Date.--The 
repeal made by subsection (a) shall apply to plan years beginning after 
December 31, 2001.

SEC. 664. EMPLOYEES OF TAX-EXEMPT ENTITIES.

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

    (b) Effective Date.--The modification required by subsection (a) 
shall apply as of the same date set forth in section 1426(b) of the 
Small Business Job Protection Act of 1996.

SEC. 665. CLARIFICATION OF TREATMENT OF EMPLOYER-PROVIDED RETIREMENT 
            ADVICE.

    (a) In General.--Subsection (a) of section 132 (relating to 
exclusion from gross income) is amended by striking ``or'' at the end of 
paragraph (5), by striking the period at the end of paragraph (6) and 
inserting ``, or'', and by adding at the end the following new 
paragraph:
            ``(7) qualified retirement planning services.''.

    (b) Qualified Retirement Planning Services Defined.--Section 132 is 
amended by redesignating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following:
    ``(m) Qualified Retirement Planning Services.--
            ``(1) In general.--For purposes of this section, the term 
        `qualified retirement planning services' means any retirement 
        planning advice or information provided to an employee and his 
        spouse by an employer maintaining a qualified employer plan.
            ``(2) Nondiscrimination rule.--Subsection (a)(7) shall apply 
        in the case of highly compensated employees only if such 
        services are available on substantially the same terms to each 
        member of the group of employees normally provided education and 
        information regarding the employer's qualified employer plan.
            ``(3) Qualified employer plan.--For purposes of this 
        subsection, the term `qualified employer plan' means a plan, 
        contract, pension, or account described in section 219(g)(5).''.

    (c) <<NOTE: Applicability. 26 USC 132 note.>>  Effective Date.--The 
amendments made by this section shall apply to years beginning after 
December 31, 2001.

SEC. 666. REPEAL OF THE MULTIPLE USE TEST.

    (a) In General.--Paragraph (9) of section 401(m) is amended to read 
as follows:
            ``(9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the purposes

[[Page 115 STAT. 144]]

        of this subsection and subsection (k), including regulations 
        permitting appropriate aggregation of plans and 
        contributions.''.

    (b) <<NOTE: Applicability. 26 USC 401 note.>>  Effective Date.--The 
amendment made by this section shall apply to years beginning after 
December 31, 2001.

                  Subtitle G--Miscellaneous Provisions

SEC. 671. TAX TREATMENT AND INFORMATION REQUIREMENTS OF ALASKA NATIVE 
            SETTLEMENT TRUSTS.

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

``SEC. 646. TAX TREATMENT OF ELECTING ALASKA NATIVE SETTLEMENT TRUSTS.

    ``(a) In General.--If an election under this section is in effect 
with respect to any Settlement Trust, the provisions of this section 
shall apply in determining the income tax treatment of the Settlement 
Trust and its beneficiaries with respect to the Settlement Trust.
    ``(b) Taxation of Income of Trust.--Except as provided in subsection 
(f )(1)(B)(ii)--
            ``(1) In general.--There is hereby imposed on the taxable 
        income of an electing Settlement Trust, other than its net 
        capital gain, a tax at the lowest rate specified in section 
        1(c).
            ``(2) Capital gain.--In the case of an electing Settlement 
        Trust with a net capital gain for the taxable year, a tax is 
        hereby imposed on such gain at the rate of tax which would apply 
        to such gain if the taxpayer were subject to a tax on its other 
        taxable income at only the lowest rate specified in section 
        1(c).

Any such tax shall be in lieu of the income tax otherwise imposed by 
this chapter on such income or gain.
    ``(c) One-Time Election.--
            ``(1) In general.--A Settlement Trust may elect to have the 
        provisions of this section apply to the trust and its 
        beneficiaries.
            ``(2) Time and method of election.--An election under 
        paragraph (1) shall be made by the trustee of such trust--
                    ``(A) on or before the due date (including 
                extensions) for filing the Settlement Trust's return of 
                tax for the first taxable year of such trust ending 
                after the date of the enactment of this section, and
                    ``(B) by attaching to such return of tax a statement 
                specifically providing for such election.
            ``(3) Period election in effect.--Except as provided in 
        subsection (f ), an election under this subsection--
                    ``(A) shall apply to the first taxable year 
                described in paragraph (2)(A) and all subsequent taxable 
                years, and
                    ``(B) may not be revoked once it is made.

    ``(d) Contributions to Trust.--
            ``(1) Beneficiaries of electing trust not taxed on 
        contributions.--In the case of an electing Settlement Trust, no 
        amount shall be includible in the gross income of a beneficiary 
        of such trust by reason of a contribution to such trust.

[[Page 115 STAT. 145]]

            ``(2) Earnings and profits.--The earnings and profits of the 
        sponsoring Native Corporation shall not be reduced on account of 
        any contribution to such Settlement Trust.

    ``(e) Tax Treatment of Distributions to Beneficiaries.--Amounts 
distributed by an electing Settlement Trust during any taxable year 
shall be considered as having the following characteristics in the hands 
of the recipient beneficiary:
            ``(1) First, as amounts excludable from gross income for the 
        taxable year to the extent of the taxable income of such trust 
        for such taxable year (decreased by any income tax paid by the 
        trust with respect to the income) plus any amount excluded from 
        gross income of the trust under section 103.
            ``(2) Second, as amounts excludable from gross income to the 
        extent of the amount described in paragraph (1) for all taxable 
        years for which an election is in effect under subsection (c) 
        with respect to the trust, and not previously taken into account 
        under paragraph (1).
            ``(3) Third, as amounts distributed by the sponsoring Native 
        Corporation with respect to its stock (within the meaning of 
        section 301(a)) during such taxable year and taxable to the 
        recipient beneficiary as amounts described in section 301(c)(1), 
        to the extent of current or accumulated earnings and profits of 
        the sponsoring Native Corporation as of the close of such 
        taxable year after proper adjustment is made for all 
        distributions made by the sponsoring Native Corporation during 
        such taxable year.
            ``(4) Fourth, as amounts distributed by the trust in excess 
        of the distributable net income of such trust for such taxable 
        year.

Amounts distributed to which paragraph (3) applies shall not be treated 
as a corporate distribution subject to section 311(b), and for purposes 
of determining the amount of a distribution for purposes of paragraph 
(3) and the basis to the recipients, section 643(e) and not section 301 
(b) or (d) shall apply.
    ``(f ) Special Rules Where Transfer Restrictions Modified.--
            ``(1) Transfer of beneficial interests.--If, at any time, a 
        beneficial interest in an electing Settlement Trust may be 
        disposed of to a person in a manner which would not be permitted 
        by section 7(h) of the Alaska Native Claims Settlement Act (43 
        U.S.C. 1606(h)) if such interest were Settlement Common Stock--
                    ``(A) no election may be made under subsection (c) 
                with respect to such trust, and
                    ``(B) if such an election is in effect as of such 
                time--
                          ``(i) such election shall cease to apply as of 
                      the first day of the taxable year in which such 
                      disposition is first permitted,
                          ``(ii) the provisions of this section shall 
                      not apply to such trust for such taxable year and 
                      all taxable years thereafter, and
                          ``(iii) the distributable net income of such 
                      trust shall be increased by the current or 
                      accumulated earnings and profits of the sponsoring 
                      Native Corporation as of the close of such taxable 
                      year after proper adjustment is made for all 
                      distributions made by the

[[Page 115 STAT. 146]]

                      sponsoring Native Corporation during such taxable 
                      year.
        In no event shall the increase under clause (iii) exceed the 
        fair market value of the trust's assets as of the date the 
        beneficial interest of the trust first becomes so disposable. 
        The earnings and profits of the sponsoring Native Corporation 
        shall be adjusted as of the last day of such taxable year by the 
        amount of earnings and profits so included in the distributable 
        net income of the trust.
            ``(2) Stock in corporation.--If--
                    ``(A) stock in the sponsoring Native Corporation may 
                be disposed of to a person in a manner which would not 
                be permitted by section 7(h) of the Alaska Native Claims 
                Settlement Act (43 U.S.C. 1606(h)) if such stock were 
                Settlement Common Stock, and
                    ``(B) at any time after such disposition of stock is 
                first permitted, such corporation transfers assets to a 
                Settlement Trust,
        paragraph (1)(B) shall be applied to such trust on and after the 
        date of the transfer in the same manner as if the trust 
        permitted dispositions of beneficial interests in the trust in a 
        manner not permitted by such section 7(h).
            ``(3) Certain distributions.--For purposes of this section, 
        the surrender of an interest in a Native Corporation or an 
        electing Settlement Trust in order to accomplish the whole or 
        partial redemption of the interest of a shareholder or 
        beneficiary in such corporation or trust, or to accomplish the 
        whole or partial liquidation of such corporation or trust, shall 
        be deemed to be a transfer permitted by section 7(h) of the 
        Alaska Native Claims Settlement Act.

    ``(g) Taxable Income.--For purposes of this title, the taxable 
income of an electing Settlement Trust shall be determined under section 
641(b) without regard to any deduction under section 651 or 661.
    ``(h) Definitions.--For purposes of this section--
            ``(1) Electing settlement trust.--The term `electing 
        Settlement Trust' means a Settlement Trust which has made the 
        election, effective for a taxable year, described in subsection 
        (c).
            ``(2) Native corporation.--The term `Native Corporation' has 
        the meaning given such term by section 3(m) of the Alaska Native 
        Claims Settlement Act (43 U.S.C. 1602(m)).
            ``(3) Settlement common stock.--The term `Settlement Common 
        Stock' has the meaning given such term by section 3(p) of the 
        Alaska Native Claims Settlement Act (43 U.S.C. 1602(p)).
            ``(4) Settlement trust.--The term `Settlement Trust' means a 
        trust that constitutes a settlement trust under section 3(t) of 
        the Alaska Native Claims Settlement Act (43 U.S.C. 1602(t)).
            ``(5) Sponsoring native corporation.--The term `sponsoring 
        Native Corporation' means the Native Corporation which transfers 
        assets to an electing Settlement Trust.

    ``(i) Special Loss Disallowance Rule.--Any loss that would otherwise 
be recognized by a shareholder upon a disposition of a share of stock of 
a sponsoring Native Corporation shall be reduced (but not below zero) by 
the per share loss adjustment factor. The

[[Page 115 STAT. 147]]

per share loss adjustment factor shall be the aggregate of all 
contributions to all electing Settlement Trusts sponsored by such Native 
Corporation made on or after the first day each trust is treated as an 
electing Settlement Trust expressed on a per share basis and determined 
as of the day of each such contribution.
    ``( j) Cross Reference.--
                  ``For information required with respect to electing 
                Settlement Trusts and sponsoring Native Corporations, 
                see section 6039H.''.

    (b) Reporting.--Subpart A of part III of subchapter A of chapter 61 
of subtitle F (relating to information concerning persons subject to 
special provisions) is amended by inserting after section 6039G the 
following new section:

``SEC. 6039H. INFORMATION WITH RESPECT TO ALASKA NATIVE SETTLEMENT 
            TRUSTS AND SPONSORING NATIVE CORPORATIONS.

    ``(a) Requirement.--The fiduciary of an electing Settlement Trust 
(as defined in section 646(h)(1)) shall include with the return of 
income of the trust a statement containing the information required 
under subsection (c).
    ``(b) Application With Other Requirements.--The filing of any 
statement under this section shall be in lieu of the reporting 
requirements under section 6034A to furnish any statement to a 
beneficiary regarding amounts distributed to such beneficiary (and such 
other reporting rules as the Secretary deems appropriate).
    ``(c) Required Information.--The information required under this 
subsection shall include--
            ``(1) the amount of distributions made during the taxable 
        year to each beneficiary,
            ``(2) the treatment of such distribution under the 
        applicable provision of section 646, including the amount that 
        is excludable from the recipient beneficiary's gross income 
        under section 646, and
            ``(3) the amount (if any) of any distribution during such 
        year that is deemed to have been made by the sponsoring Native 
        Corporation (as defined in section 646(h)(5)).

    ``(d) Sponsoring Native Corporation.--
            ``(1) In general.--The electing Settlement Trust shall, on 
        or before the date on which the statement under subsection (a) 
        is required to be filed, furnish such statement to the 
        sponsoring Native Corporation (as so defined).
            ``(2) Distributees.--The sponsoring Native Corporation shall 
        furnish each recipient of a distribution described in section 
        646(e)(3) a statement containing the amount deemed to have been 
        distributed to such recipient by such corporation for the 
        taxable year.''.

    (c) Clerical Amendment.--
            (1) The table of sections for subpart A of part I of 
        subchapter J of chapter 1 of such Code is amended by adding at 
        the end the following new item:
                ``Sec. 646. Tax treatment of electing Alaska Native 
                                Settlement Trusts.''.

            (2) The table of sections for subpart A of part III of 
        subchapter A of chapter 61 of subtitle F of such Code is amended

[[Page 115 STAT. 148]]

        by inserting after the item relating to section 6039G the 
        following new item:
                ``Sec. 6039H. Information with respect to Alaska Native 
                                Settlement Trusts and sponsoring Native 
                                Corporations.''.

    (d) <<NOTE: Applicability. 26 USC 646 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years ending 
after the date of the enactment of this Act and to contributions made to 
electing Settlement Trusts for such year or any subsequent year.

                   TITLE VII--ALTERNATIVE MINIMUM TAX

SEC. 701. INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION.

    (a) In General.--
            (1) Subparagraph (A) of section 55(d)(1) (relating to 
        exemption amount for taxpayers other than corporations) is 
        amended by striking ``$45,000'' and inserting ``$45,000 ($49,000 
        in the case of taxable years beginning in 2001, 2002, 2003, and 
        2004)''.
            (2) Subparagraph (B) of section 55(d)(1) (relating to 
        exemption amount for taxpayers other than corporations) is 
        amended by striking ``$33,750'' and inserting ``$33,750 ($35,750 
        in the case of taxable years beginning in 2001, 2002, 2003, and 
        2004)''.

    (b) Conforming Amendments.--
            (1) Paragraph (1) of section 55(d) is amended by striking 
        ``and'' at the end of subparagraph (B), by striking subparagraph 
        (C), and by inserting after subparagraph (B) the following new 
        subparagraphs:
                    ``(C) 50 percent of the dollar amount applicable 
                under paragraph (1)(A) in the case of a married 
                individual who files a separate return, and
                    ``(D) $22,500 in the case of an estate or trust.''.
            (2) Subparagraph (C) of section 55(d)(3) is amended by 
        striking ``paragraph (1)(C)'' and inserting ``subparagraph (C) 
        or (D) of paragraph (1)''.
            (3) The last sentence of section 55(d)(3) is amended--
                    (A) by striking ``paragraph (1)(C)(i)'' and 
                inserting ``paragraph (1)(C)''; and
                    (B) by striking ``$165,000 or (ii) $22,500'' and 
                inserting ``the minimum amount of such income (as so 
                determined) for which the exemption amount under 
                paragraph (1)(C) is zero, or (ii) such exemption amount 
                (determined without regard to this paragraph)''.

    (c) <<NOTE: Applicability. 26 USC 55 note.>>  Effective Date.--The 
amendments made by this section shall apply to taxable years beginning 
after December 31, 2000.

                      TITLE VIII--OTHER PROVISIONS

SEC. 801. <<NOTE: 26 USC 6655 note.>>  TIME FOR PAYMENT OF CORPORATE 
            ESTIMATED TAXES.

    Notwithstanding section 6655 of the Internal Revenue Code of 1986--
            (1) 100 percent of the amount of any required installment of 
        corporate estimated tax which is otherwise due in September 2001 
        shall not be due until October 1, 2001; and

[[Page 115 STAT. 149]]

            (2) 20 percent of the amount of any required installment of 
        corporate estimated tax which is otherwise due in September 2004 
        shall not be due until October 1, 2004.

SEC. 802. EXPANSION OF AUTHORITY TO POSTPONE CERTAIN TAX-RELATED 
            DEADLINES BY REASON OF PRESIDENTIALLY DECLARED DISASTER.

    (a) In General.--Section 7508A(a) (relating to authority to postpone 
certain tax-related deadlines by reason of presidentially declared 
disaster) is amended by striking ``90 days'' and inserting ``120 days''.
    (b) <<NOTE: 26 USC 7508A note.>>  Effective Date.--The amendment 
made by this section shall take effect on the date of enactment of this 
Act.

SEC. 803. <<NOTE: 26 USC note prec. 101.>>  NO FEDERAL INCOME TAX ON 
            RESTITUTION RECEIVED BY VICTIMS OF THE NAZI REGIME OR THEIR 
            HEIRS OR ESTATES.

    (a) In General.--For purposes of the Internal Revenue Code of 1986, 
any excludable restitution payments received by an eligible individual 
(or the individual's heirs or estate) and any excludable interest--
            (1) shall not be included in gross income; and
            (2) shall not be taken into account for purposes of applying 
        any provision of such Code which takes into account excludable 
        income in computing adjusted gross income, including section 86 
        of such Code (relating to taxation of Social Security benefits).

For purposes of such Code, the basis of any property received by an 
eligible individual (or the individual's heirs or estate) as part of an 
excludable restitution payment shall be the fair market value of such 
property as of the time of the receipt.
    (b) Eligible Individual.--For purposes of this section, the term 
``eligible individual'' means a person who was persecuted on the basis 
of race, religion, physical or mental disability, or sexual orientation 
by Nazi Germany, any other Axis regime, or any other Nazi-controlled or 
Nazi-allied country.
    (c) Excludable Restitution Payment.--For purposes of this section, 
the term ``excludable restitution payment'' means any payment or 
distribution to an individual (or the individual's heirs or estate) 
which--
            (1) is payable by reason of the individual's status as an 
        eligible individual, including any amount payable by any foreign 
        country, the United States of America, or any other foreign or 
        domestic entity, or a fund established by any such country or 
        entity, any amount payable as a result of a final resolution of 
        a legal action, and any amount payable under a law providing for 
        payments or restitution of property;
            (2) constitutes the direct or indirect return of, or 
        compensation or reparation for, assets stolen or hidden from, or 
        otherwise lost to, the individual before, during, or immediately 
        after World War II by reason of the individual's status as an 
        eligible individual, including any proceeds of insurance under 
        policies issued on eligible individuals by European insurance 
        companies immediately before and during World War II; or
            (3) consists of interest which is payable as part of any 
        payment or distribution described in paragraph (1) or (2).

    (d) Excludable Interest.--For purposes of this section, the term 
``excludable interest'' means any interest earned by--

[[Page 115 STAT. 150]]

            (1) escrow accounts or settlement funds established pursuant 
        to the settlement of the action entitled ``In re: Holocaust 
        Victim Assets Litigation,'' (E.D.N.Y.) C.A. No. 96-4849,
            (2) funds to benefit eligible individuals or their heirs 
        created by the International Commission on Holocaust Insurance 
        Claims as a result of the Agreement between the Government of 
        the United States of America and the Government of the Federal 
        Republic of Germany concerning the Foundation ``Remembrance, 
        Responsibility, and Future,'' dated July 17, 2000, or
            (3) similar funds subject to the administration of the 
        United States courts created to provide excludable restitution 
        payments to eligible individuals (or eligible individuals' heirs 
        or estates).

    (e) Effective Date.--
            (1) In general.--This section shall apply to any amount 
        received on or after January 1, 2000.
            (2) No inference.--Nothing in this Act shall be construed to 
        create any inference with respect to the proper tax treatment of 
        any amount received before January 1, 2000.

           TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

SEC. 901. SUNSET OF PROVISIONS OF ACT. <<NOTE: 26 USC 1 note.>> 

    (a) In General.--All provisions of, and amendments made by, this Act 
shall not apply--
            (1) to taxable, plan, or limitation years beginning after 
        December 31, 2010, or
            (2) in the case of title V, to estates of decedents dying, 
        gifts made, or generation skipping transfers, after December 31, 
        2010.

    (b) Application of Certain Laws.--The Internal Revenue Code of 1986 
and the Employee Retirement Income Security Act of 1974 shall be applied 
and administered to years, estates, gifts, and transfers described in 
subsection (a) as if the provisions and amendments described in 
subsection (a) had never been enacted.

    Approved June 7, 2001.

LEGISLATIVE HISTORY--H.R. 1836:
---------------------------------------------------------------------------

HOUSE REPORTS: No. 107-84 (Comm. of Conference).
CONGRESSIONAL RECORD, Vol. 147 (2001):
            May 16, considered and passed House.
            May 17, 21-23, considered and passed Senate, amended.
            May 25, House agreed to conference report.
            May 26, Senate agreed to conference report.
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 37 (2001):
            June 7, Presidential remarks.

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